PLM Tax 1 SY 2019-2020

Atty. Peter M. Manzano

Part I. General Principles of Taxation

A. Definition, Concept and Purposes of Taxation

Definition and Concept of Taxation

1. It is the act of laying a tax, i.e., the process or means by which the
sovereign, through its law-making body, raises income to defray the
necessary expenses of government. It is merely a way of
apportioning the cost of government among those who in some
measure are privileged to enjoy its benefits and must, therefore, bear
its burdens.

2. As a power, it refers to the inherent power of the State to demand

enforced contributions for public purpose or purposes.

Purposes of Taxation

1. Revenue-raising purpose; and

2. Non-revenue/special or regulatory purpose.

Revenue Raising Purpose –

The primary purpose of taxation is to provide funds or property with

which to promote the general welfare and protection of its citizens.
Fees may be properly regarded as taxes even though they also
serve as an instrument of regulation.

Note: 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.
Non-Revenue/Special or Regulatory Purpose –

Taxation is often employed as a device for regulation by means of

which certain effects or conditions envisioned by governments may
be achieved. These regulatory purposes are also known as
“sumptuary”. Thus, taxation can:

a. Strengthen anemic enterprises or provide incentive to greater

production through grant of tax exemptions or the creation of
conditions conducive to their growth.

b. Protect local industries against foreign competition by imposing

additional taxes on imported goods, or encourage foreign trade by
providing tax incentives on imported goods.

c. Be a bargaining tool by setting tariff rates first at a relatively high

level before trade negotiations are entered into with another
country.

d. Halt inflation in periods of prosperity to curb spending power; ward

off depression in periods of slump to expand business.

e. Reduce inequalities in wealth and incomes, as for instance, the

estate, donor's and income taxes, their payers being the recipients
of unearned wealth or mostly in the higher income brackets.

f. Be levied to promote science and invention or to finance

educational activities or to improve the efficiency of local police
forces in the maintenance of peace and order through grant of
subsidy.

g. Taxes may be an implement of the police power to promote the

general welfare.
Lutz v. Araneta (GR No. L-7859, 22 December 1955)

Issue: Validity of the Sugar Adjustment Act

SC Decision: The Sugar Adjustment Act is a law enacted primarily

under the police power of the State and designed to obtain a
readjustment of the benefits derived by people interested in the
sugar industry as well as to rehabilitate and stabilize the industry
which constitutes one of the great sources of the country's wealth
and, therefore, affects a great portion of the population of the
country.

Taxes may be levied with a regulatory purpose to provide means for

rehabilitation and stabilization of a threatened industry which is
imbued with public interest as to be within the police power of the
State.

As long as a tax is for a public purpose, its validity is not affected by

collateral purposes or motives of the legislature in imposing the levy,
or by the fact that it has a regulatory effect or it discourages or even
definitely deters the activities taxed. The principle applies even
though the revenue obtained from the tax appears very negligible
or the revenue purpose is only secondary.

B. Nature and Characteristics of Taxation

1. It is inherent in sovereignty.

2. It is essentially a legislative function.

3. It is subject to constitutional and inherent limitations.

4. It is levied for a public purpose.

5. It is territorial.

6. It is subject to international comity.

Taxation is Inherent in Sovereignty –

The power of taxation is an inherent attribute or incident of

sovereignty. It is a power emanating from necessity. It is a necessary
burden to preserve the State's sovereignty and a means to give the
citizenry an army to resist an aggression, a navy to defend its shores
from invasion, a corps of civil servants to serve, public improvement
designed 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. It is essential to the existence of
every government.

Question: Can a state without a constitution exercise the power of

taxation?

Answer: Yes. The state’s power of taxation exists apart from

constitutions and without being expressly conferred by the people.
Constitutional provisions relating to the power of taxation do not
operate as grants of the power to the government. They merely
constitute limitations upon a power which would otherwise be
practically without limit. While the power to tax may not be expressly
provided for in our Constitution, its existence is recognized by the
provisions relating to taxation.

Essentially Taxation is a Legislative function –

The power to tax is peculiarly and exclusively legislative and cannot

be exercised by the executive or judicial branch of the government.
Hence, only Congress, our national legislative body, can impose
taxes. The levy of a tax, however, may also be made by a local
legislative body subject to such limitations as may be provided by
law.

Question: Various departments and offices under Executive branch

as well as the courts and tribunals under the Judicial branch impose
fees and charges. Are these impositions not violative of the principle
that taxation is the exclusive power of the Legislative branch of
government?

Answer: No. The fees and charges imposed and collected by the
Executive and Judicial branches of the government are not taxes
but regulatory fees. For as long as the purpose of the such
impositions are not to raise revenues but are only to cover the
expenses for the regulatory purpose or service rendered, they are
not considered as taxes. Such fees and charges, however, must be
reasonably commensurate to the cost of providing the public
service.

Subject to Constitutional and Inherent Limitations –

These limitations are those provided in the fundamental law or

implied therefrom, while the rest spring from the nature of the taxing
power itself although they may or may not be provided in the
Constitution.

Levy for Public Purpose –

Under this concept, the impelling reason for the imposition of the tax
must be the welfare of the public, in general. This follows that the
proceeds from such imposition shall inure to the benefit of the public.

Question: Does a tax law have to have a direct benefit to the public
at large?

Answer: No. In the case of Lutz vs. Araneta, a certain imposition was
successfully passed for the purpose of upholding the welfare of the
sugar industry. It was questioned on the ground that there is no
public purpose since the sugar industry does not allegedly represent
the public. The issue was resolved in favor of the validity of the
imposition.

While sugar industry does not represent the entire public as the
proceeds would not add to the general budget of the national
government, nevertheless, the industry itself admits of a public
nature whose circumstances and effects directly affect the public.
The requirement of direct purpose does not admit of a direct public
benefit from the imposition.

Territorial Jurisdiction –

This relates to the area of jurisdiction and responsibility of a particular

state. Independent states’ power of taxation is generally confined
only within its jurisdiction to give due respect and as courtesy to
other states. A state, as a rule, can only impose and implement tax
laws and rules within its jurisdiction in accordance with its wishes.
Outside its jurisdiction, it is without power to do so. However, it can
impose a tax on citizens or entities of other states doing a trade or
business or deriving income within the jurisdiction of its state.

Subject to International Comity –

This refers to the friendly interaction and participation of the state

with different states. This adheres to some amount of submission and
compliance of certain international rules and covenants for mutual
benefits and enjoyment of the states and its inhabitants. Bilateral
agreements, conventions and international treaties fall under this
category.

International law is distinct from international comity. The latter which

comprises legally non-binding practices adopted by states for
reasons of courtesy.

C. Power of Taxation as distinguished from Police Power and Power of

Eminent Domain

1. As to Concept of Power

a. Taxation: It is the power to enforce contribution to raise

government funds.

b. Police Power: It is the power to make and implement laws for

 the general welfare.

c. Eminent Domain: It is the power to take private property for

public use with just compensation.

2. As to Authority Which Exercises the Power

a. Taxation: It is exercised only by the government or its political

subdivisions.

b. Police Power: It is exercised only by the government or its

political subdivisions.

c. Eminent Domain: May be granted to public service or public

utility companies.

3. As to Purpose of Power

a. Taxation: The property (generally in the form of money) is taken

for the support of the government.

b. Police Power: The use of the property regulated, or the property

is taken or destroyed to promote the general welfare; thus, it is not
compensable.

c. Eminent Domain: The private property is taken for public use or

benefit; thus, it must be compensated.

4. As to Person Affected

a. Taxation: It operates upon a community or a class of entities or

individuals.

b. Police Power: It operates upon a community or a class of

entities or individuals.

c. Eminent Domain: It operates on a entity or an individual as the

 owner of particular private property.

5. As to Effect of the Exercise of Power

a. Taxation: The money contributed in the concept of taxes

becomes part of the public funds.

b. Police Power: There is no transfer of title or right over a property;

at most there is restraint on the injurious use of property.

c. Eminent Domain: There is a transfer of the right to property

whether it be of ownership or a lesser right (e.g. possession).

6. As to Benefits Received

a. Taxation: It is assumed that the person affected received the

equivalent of the tax in the form of protection and benefits he
receives from the government.

b. Police Power: The person affected receives no direct benefit

but only such as may arise from the maintenance of a healthy
economic standard of society.

c. Eminent Domain: The person affected receives the market value

of the property expropriated or taken from him.

7. As to the Amount of Imposition

a. Taxation: There is generally no limit on the amount of tax that

may be imposed.

b. Police Power: The amount imposed should not be more than

sufficient to cover the cost of the license and the necessary
expenses of the regulation as nearly as may be estimated.

c. Eminent Domain: There is no amount imposed but the owner is

paid the market value of the property taken.
8. As to Importance of Power

a. Taxation: It is inseparable to the existence of a nation – it

supports police power and eminent domain.

b. Police Power: It is for the protection, safety and welfare of

society.

c. Eminent Domain: Common necessities and interest of the

community transcend individual rights in property.

9. As to Power’s Relationship to the Constitution

a. Taxation: It is subject to certain constitutional and inherent

limitations, including the prohibition against the impairment of the
obligation of contracts.

b. Police Power: It is relatively free from constitutional limitations

and is superior to the impairment provisions as the welfare of the
State is superior to any private contract.

c. Eminent Domain: Like the power of taxation, it is also inferior to

the impairment of the obligation of contracts so that the
government cannot expropriate property which under a contract
it had previously bound itself to purchase from the other
contracting party.

10. As to Limitation of the Power

a. Taxation: Its constraints are its Constitutional and inherent

limitations.

b. Police Power: It is limited to the demand for public interest and

due process.

c. Eminent Domain: It is bound by public purpose and just

 compensation.

D. Theory and Basis of Taxation

1. Lifeblood Theory

2. Necessity Theory

3. Benefits-Protection Theory (Symbiotic Relationship)

4. Jurisdiction over Subject and Objects

Lifeblood Theory –

Taxes are the lifeblood of the government and their prompt and
certain availability is an imperious need. Taxes are the lifeblood of
the government and so should be collected without unnecessary
hindrance. It is said that taxes are what we pay for civilized society.
Without taxes, the government would be paralyzed for lack of the
motive power to activate and operate it

Necessity Theory –

The power of taxation proceeds upon theory that the existence of

government is a necessity; that is cannot continue without means to
pay its expenses; and that for those means it has the right to compel
all citizens and property within its limits to contribute.

The power to tax, an inherent prerogative, has to be availed of to

assure the performance of vital state functions. It is the source of the
bulk of public funds. The obligation to pay taxes rests upon the
necessity of money for the support of the state. For this reason, no
one is allowed to object to or resist the payment of taxes solely
because no personal benefit to him can be pointed out.

Benefits-Protection Theory (Symbiotic Relationship) –

This principle serves as the basis of taxation and is founded on the
reciprocal duties of protection and support between the State and
its inhabitants.

Despite the natural reluctance to surrender part of one's hard

earned income to the taxing authorities, every person who is able to
must contribute his share in the running of the government. The
government for its part is expected to respond in the form of
tangible and intangible benefits intended to improve the lives of the
people and enhance their moral and material values. This symbiotic
relationship is the rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method of exaction by those in
the seat of power.

Jurisdiction over Subject and Objects (Territorial) –

The limited powers of sovereignty are confined to the subjects and

objects within the respective spheres of governmental control. Thus,
while the State can tax all persons subject to its jurisdiction for all their
property left by them within its jurisdiction, yet its taxing power
necessarily stops at the state boundary lines. The State’s power of
taxation is limited within its territorial jurisdiction. It cannot reach over
into another jurisdiction to seize upon person or property for purposes
of taxation.

E. Principles of Sound Tax System

3 Principles –

1. Fiscal Adequacy

2. Administrative Feasibility

3. Theoretical Justice

Fiscal adequacy –
The sources of tax revenue should coincide with, and approximate
the needs of, government expenditures. The revenue should be
elastic or capable of expanding or contracting annually in response
to variations in public expenditures.

Administrative Feasibility –

Tax laws should be capable of convenient, just and effective

administration. Each tax should be capable of uniform enforcement
by government officials, convenient as to the time, place, and
manner of payment, and not unduly burdensome upon, or
discouraging to business activity.

Theoretical Justice or Equality –

The tax burden should be in proportion to the taxpayer’s ability to

pay. This is the so-called ability to pay principle. Taxation should be
uniform as well as equitable.

Case: Congress passed a tax law which to the mind Atty. Rivera is
contrary to the principles of a sound tax system. Atty. Rivera went to
the Supreme Court to question the legality of the tax law.

Question: May a tax law be rendered null and void if it was passed in
violation of the principles of a sound tax system?

Answer: No. The non-observance of the principles of a sound tax

system will not necessarily render the tax imposed invalid except to
the extent that those tax laws or regulations are in violation of
specific constitutional limitations like due process, equal protection,
non-impairment of obligations and contracts, freedom of religion,
non-payment of poll tax, etc.

F. Scope and Limitations of Taxation

Scope of Legislature’s Taxing Power

The taxing power of the legislature extends to the following:

1. the nature or kind of tax to be collected;

2. the object or purpose for which the tax shall be levied;

3. the extent or amount or rate of tax to be collected;

4. the coverage or the persons, property, or occupation to be taxed;

5. the apportionment of the tax whether it is general or limited to a

particular locality or partly general or partly local;

6. the method of collection; and

7. the situs or place of taxation.

Note: The power to tax carries with it the power to grant exemption.

Sison vs. Ancheta (25 July 1984)

Facts: Congress passed Batas Pambansa Blg. 135 amending Section

21 of the Tax Code of 1977, which provides for rates of tax on citizens
or residents. Sison, as a taxpayer alleges that he would be unduly
discriminated against by the imposition of higher rates of tax upon
his income arising from the exercise of his profession vis-a-vis those
which are imposed upon fixed income or salaried individual
taxpayers. He characterizes the above section as arbitrary
amounting to class legislation, oppressive and capricious in
character there is a transgression of both the equal protection and
due process clauses of the Constitution as well as of the rule
requiring uniformity in taxation.

Issue: Whether the imposition of a higher tax rate on taxable net

income derived from business or profession than on compensation is
constitutionally infirm.
Ruling: No. BP Blg. 135 is a valid tax law. Taxpayers may be classified
into different categories. It is enough that the classification must rest
upon substantial distinctions that make real differences. The
discernible basis of classification is the susceptibility of the income to
the application of generalized rules removing all deductible items for
all taxpayers within the class and fixing a set of reduced tax rates to
be applied to all of them. Taxpayers who are recipients of
compensation income are set apart as a class. As there is practically
no overhead expense, these taxpayers are not entitled to make
deductions for income tax purposes because they are in the same
situation more or less. On the other hand, in the case of professionals
in the practice of their calling and businessmen, there is no uniformity
in the costs or expenses necessary to produce their income. It would
not be just then to disregard the disparities by giving all of them zero
deduction and indiscriminately impose on all alike the same tax
rates on the basis of gross income. There is ample justification for BP
Blg. 35 to adopt the gross system of income taxation to
compensation income, while continuing the system of net income
taxation as regards professional and business income.

Limitations to the Power of Taxation

1. Inherent Limitations (Characteristics of Taxation)

2. Constitutional Limitations

Inherent Limitations –

a. Taxation is for Public Purpose

b. Taxation is Inherently Legislative

c. Taxation is Territorial

d. Taxation is subject to International Comity

e. Exemption of Government Entities, Agencies, and

 Instrumentalities from Taxation

Note: They are called inherent limitations as they are limitations that
exist despite the absence of an express constitutional provision
thereon.

Taxation is for Public Purpose –

The power of the legislature to appropriate public funds is correlative

to its power to tax and as such the power of taxation may only be
exercised for public purpose; the revenues collected from taxation
should be devoted to a public purpose.

Taxation is Inherently Legislative –

General Rule: The power tax is inherently and purely legislative in

character and may not be delegated.

Exceptions:

(1) Delegation to the Local Governments – by express provision of

the Constitution, the LGUs are now given direct authority to levy
taxes, fees, and other charges.

(2) Delegation to the President – (a) delegation of tariff powers; (b)

Delegation of emergency powers; (c) Delegation to the President to
enter into executive agreements and to ratify tax treaties subject to
concurrence of the Senate.

Taxation is Territorial –

General Rule: The taxing power may only be exercised only on

persons, property or businesses within the jurisdiction of the taxing
authority.

Exceptions to the Territorial Rule:

(1) where tax laws operate outside territorial jurisdiction, as in the
taxation of resident citizens on their incomes abroad;

(2) Where tax laws do not operate within the territorial jurisdiction of
the state, as when they are exempted by virtue of treaty obligations
or when exempted by international comity.
Taxation is subject to International Comity –

Comity is respect accorded by every nation to each other as co-

equals such that the property or income of a foreign state or
government may not be subject to tax by another state.

Exemption of Government Entities, Agencies, and

Instrumentalities from Taxation –

General Rule: The State may not be subject to taxation. By express

provisions of the Local Government Code, LGUs may not levy taxes,
fees or other charges of any kind on the National Government, its
agencies, and instrumentalities.

Exception:

The State may tax itself including its political subdivisions (e.g. –
GOCCs are now subject to tax as their exemptions from local taxes
have been withdrawn under the Local Government Code)

Constitutional Limitations –

a. Provisions Directly Affecting Taxation

b. Provisions Indirectly Affecting Taxation

Provisions Directly Affecting Taxation –

(1) Prohibition against imprisonment for non-payment of poll tax

(2) Uniformity, equitability and progressive system of taxation

(3) Grant by Congress of authority to the President to fix tariff rates,
import and export quotas, etc.

(4) President’s power to impose flexible tariff rates

(5) Prohibition against taxation of religious, charitable entities, and

educational entities

(6) Exemptions from real property taxes on charitable institutions,

churches, parsonages or convents appurtenant thereto, mosques,
non-profit cemeteries, and all lands, buildings, and improvements
actually, directly, and exclusively used for religious, charitable, and
educational purposes

(7) Exemption from taxes and duties of all revenues and assets of
non-stock, non-profit educational institutions used actually, directly,
and exclusively for educational purposes (Sec. 4 (3), Art. XIV)

(8) Majority vote of all the Members of Congress required for law
granting tax exemption

(9) Treatment of tax levied for special purpose as a special fund and
to be used for such special purpose only

(10) President’s veto power on any particular item or items in an

appropriation, revenue, tariff bills

(11) Non-impairment of jurisdiction of the Supreme Court over cases

involving the legality of any tax, impost, assessment, or toll, or any
penalty imposed in relation thereto

(12) Grant of power to the local government units to create its own
sources of revenue and to levy taxes subject to Congressional
limitations

(13) No appropriation or use of public money for religious purposes

(14) All appropriations, revenue or tariff bills shall originate exclusively
from the House of Representatives, but the Senate may propose or
concur with amendments

Provisions Indirectly Affecting Taxation –

(1) Due process

(2) Equal protection

(3) Religious freedom

(4) Non-impairment of obligations of contracts

G. Situs of Taxation

Meaning –

The situs of taxation literally means the place of taxation. It is the

place or authority that has the right to impose and collect taxes.

Basis or Determinants of the Situs of Taxation

1. The symbiotic relationship of the taxing authority and the taxpayer;

2. The jurisdiction, State or political unit that gives protection has the
right to demand support.

Effect of Multiplicity of Situs of Taxation

Due to the variance in the concept of “domicile” for tax purposes

and considering the multiple relationships that may arise with respect
to intangible property and the use to which the property may have
been devoted, all of which may receive the protection of the laws
of jurisdictions other than the domicile of the owner, the same
income or intangible property may be subject to taxation in several
taxing jurisdictions.

How Multiplicity of Situs of Taxation is Addressed

The taxing jurisdiction may:

1. provide for exemptions or allowance of deduction or tax credit for

foreign taxes; and/or

2. enter into tax treatise with other jurisdictions/States.

Situs of Income Tax –

a. From sources within the Philippines: all kinds of taxpayers are

subject to income tax on income derived from sources within the
Philippines;

b. From sources without the Philippines: only resident citizens and

domestic corporations are subject to income tax on income derived
from sources without the Philippines;

c. Income partly within and partly without the Philippines: taxable

income attributable to sources within the Philippines and without
may be determined by processes or formulas of general
apportionment prescribed by the Secretary of Finance.

Situs of Property Taxes –

a. Taxes on Real Property: the situs of taxes on real property is where

the property is located (lex situs)

b. Taxes on Personal Property:

(1) If the personal property is tangible: the situs is where the property
is physically located although the owner resides in another
jurisdiction.
(2) If the personal property is intangible:

General rule: the situs is the domicile of the owner

(mobiliasequunturpersonam)

Exceptions:

(a) where the intangible personal property has acquired a business

situs in another jurisdiction;

(b) where the law provides for the situs of the subject of the tax

Situs of Excise Taxes –

Excise taxes or privilege taxes are taxes imposed on the

performance of an act, the enjoyment of a right or privilege, or the
engagement in an occupation.

Thus, the situs of excise taxes is where the transaction was

performed, or where the right, privilege, or occupation was
exercised as this is the place which gives protection to the business
or occupation.

Situs of Transfer Tax –

a. Estate Tax:

(1) For citizens (resident or non-resident) and resident aliens, they

are taxed wherever their properties and assets are located;

(2) For non-resident aliens, they are taxed on their properties

located in the Philippines.

b. Donor’s Tax: Same rule applies as that of estate tax

Situs of Business Tax –

a. Sale of real property: the situs is where the real property is located

b. Sale of personal property: the situs is where the sale is perfected

and consummated.

c. VAT: the situs is the place where the transaction is made; (1) For
sale goods – it is the place where the goods are sold and consumed;
(2) For sale of services – it is where the service is to be performed.

H. Stages Of Taxation

3 Stages of Taxation –

1. Levy – it is the enactment of a law by Congress imposing a tax

2. Assessment and Collection – it is the act of administration and

implementation of the tax law by the executive department through
the administrative agencies

3. Payment – it is the act of compliance by the taxpayer including

whatever remedies are available to him under the law

4. Refund – technically, it is not a stage of taxation, but a remedy

available to a taxpayer which seeks to return excess of tax withheld
from, collected from, or erroneously paid by a taxpayer.

I. Definition, Nature, and Characteristics of Taxes

Taxes, defined. –

They 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.

Characteristics / Essential Elements of a Tax

1. It is an enforced contribution;
2. It is generally paid in money;
3. It is proportional in character, since it is based on one’s ability to
pay;
4. It is levied on persons, property, or exercise of a right or privilege;
5. It is levied by the State having jurisdiction;
6. It is levied by the legislature;
7. It is levied for a public purpose; and
8. It is paid at regular periods or intervals.

J. Requisites of a Valid Tax

1. It must be imposed within the jurisdiction of the taxing authority

(principle of territoriality);
2. It must be for a public purpose;
3. It must not go beyond its inherent limitations; and
4. It must not violate its constitutional limitations.

K. Tax as Distinguished from Other Forms of Exactions

1. Tariff, Customs Duties

2. Toll
3. License fee
4. Special assessment
5. Debt
6. Penalty
7. Subsidy
8. Revenues

Tax versus Tariff, Customs Duties –

A tax is an all embracing term and is broad enough to include

various kinds of enforced contributions imposed upon persons for the
attainment of public purposes.

A tariff is synonymous to “duties”. Tariff may also refer to a list or

schedule of articles on which a duty is imposed upon the importation
into the country.
Customs duties and fees are those charged upon commodities on
their being imported into or exported outside the country.

Tax versus Toll –

(a) As to definition. – A tax is an enforced contribution from persons

and properties; a toll is a sum of money for the use of something, a
consideration which is paid for the use of a property which is of a
public nature.

(b) As to basis. – A tax is a demand of sovereignty; a toll is a demand

of proprietorship.

(c) As to amount. – A tax has no limit as to the amount imposed; the

amount of toll imposed depends upon the cost of construction or
maintenance of the public improvement used.

(d) As to the imposing authority. – A tax may be imposed only by the

government; a toll may be imposed by the government or private
individuals or entities.

Tax versus License Fee –

(a) As to purpose. – A tax is imposed for revenue purposes; a license

fee is imposed for regulatory purpose.

(b) As to basis of imposition. – A tax is imposed under the State’s

power of taxation; a license fee is imposed under the police power
of the State.

(c) As to the amount imposed. – There is no limit as to the tax

imposed; the amount of license fee that can be collected is limited
to the cost of the license and the expenses of police surveillance
and regulation.

(d) As to time of payment. – A tax is normally paid after the start of

business; a license fee is paid before the commencement of the
business.

(e) As to the effect of non-payment. – The failure to pay a tax does

not make the business illegal; the failure to pay the license fee
makes the business illegal.

Question: What is the importance of knowing whether an imposition

is a tax or a license fee?

Answer: It is necessary to determine whether an imposition is a tax or

a license fee since there are certain limitations that apply only to
one and not to the other.

Thus, an exemption from taxes may not include an exemption from

license fees. Furthermore, if it is a tax measure, then such imposition
must comply with the requisites of a valid tax.

3 Types of License Fees

(1) License fee for the regulation of useful occupation or enterprises;

(2) License fee for the regulation or restriction of non-useful

occupation or enterprise; and

(3) License fee for revenue only (technically a license tax)

License Fee versus License Tax

License tax has the purpose of raising revenues. In contrast, a license

fee is imposed in the exercise of police power for purposes of
regulation.

Note: Unfortunately “license tax” has been used indiscriminately to

refer to impositions exacted for the exercise of various privileges or
activities. In the same manner “license fees” are also commonly
called taxes.
Amount of Imposition Determinative of a License Fee

Rule: The amount of exaction for a license fee must only be of

sufficient amount to include the cost of licensing, regulating, and
surveillance.

Exception: In the case of license fees for non-useful occupations,

wider discretion as to the amount imposed is given to municipal
corporations and the exaction may be a large amount without
necessarily making it a tax considering that they are authorized to
enact ordinances to provide for the health and safety and promote
the morality, peace, and general welfare of its inhabitants (e.g.
license fees for the operation of entertainment clubs, and massage
parlors that are fronts for prostitution).

Compañia General v. City of Manila (29 June 1963)

Facts: The City of Manila passed an ordinance which subjected

Compana General (Tabacalera) to pay license fees for the authority
to conduct or engage in the sale of alcoholic beverages, or liquors.
The City of Manila also passed an ordinance which also subjected
Tabacalera to pay sales tax for its liquor sales. Initially, Tabacalera
paid both license fees and sales tax. Later, Tabacalera claimed tax
refund for the payments of sales tax on the ground that subjecting
Tabacalera of a license fee and sales tax was a form of double
taxation.

Issues:

(1) May Tabacalera be subjected to both license fee and sales tax?
(2) Is Tabacalera being subjected to double taxation?

Rulings:
(1) Yes. Tabacalera may be subjected to both license fee and sales
tax. The municipal license fee is imposed for the privilege to engage
in the business of selling liquor or alcoholic beverages pursuant to its
power to fix license fees on, and regulate, the sale of intoxicating
liquors, whether imported or locally manufactured. The license fees
imposed by it are essentially for purposes of regulation. On the other
hand, the imposition of sales taxes on the sales of general
merchandise, wholesale or retail, and are revenue measures
enacted by the Municipal Board of Manila by virtue of its power to
tax dealers for the sale of such merchandise.

(2) There is no double taxation. The claim that Tabacalera is being

subjected to double taxation is more apparent than real. The license
fee being collected is for the privilege of engaging in the sale of
liquor, a calling in which, not anyone or anybody, may freely
engage, considering that the sale of liquor indiscriminately may
endanger public health and morals. On the other hand, the sales tax
imposed is a tax for revenue purposes based on the sales made of
the same article or merchandise. Both a license fee and a tax may
be imposed on the same business or occupation, or for selling the
same article, this not being in violation of the rule against double
taxation, the other being for the purpose of regulation.

Progressive Development Corp. v. Quezon City (24 April 1989)

Facts: The Quezon City Government passed an ordinance which

subjected Progressive Development Corporation (PDC), owner and
operator of a public market known as the "Farmers Market &
Shopping Center" for supervision fee based on its gross receipts from
stall rentals. PDC contested the validity of the "supervision fee"
collected from rentals, being a return from capital invested in the
construction of the Farmers Market, as it practically operates as a tax
on income, one of those expressly excepted from the LGU’s taxing
authority, and thus beyond the latter's competence.

Issue: Whether the “supervision fee” imposed by Quezon City on PDC

on its gross receipts of stall rentals partakes of the nature of an
income tax or of a license fee.
Ruling: The license fee imposed by the QC Government constitutes,
not a tax on income, but rather a license fee for the regulation of the
business in which PDC is engaged. While it is true that the amount
imposed by the questioned ordinance may be considered in
determining whether the exaction is really one for revenue or
prohibition, it nevertheless will be presumed to be reasonable. In this
case, there is no proof that the imposition is unreasonably large and
excessive and so grossly disproportionate to the costs of the
regulatory service being performed by the LGU as to characterize
the imposition as exclusively a revenue measure. LGUs are allowed
wide discretion in determining the rates of imposable license fees
even in cases of purely police power measures.

Tax versus Special Assessment –

(a) As to definition. – A tax is an enforced proportional contribution

from persons and property; a special assessment is an enforced
proportional contribution from owners of lands especially or
peculiarly benefited by public improvements.

(b) As to basis of imposition. – A tax is based on necessity; a special

assessment is based wholly on benefits received by the taxpayer.

(c) As to subject. – A tax is levied on persons, property, and acts; a

special assessment is levied only on land.

(d) As to scope. – A tax has a general application; a special

assessment is exceptional both as to time and place of application.

(e) As to the person liable. – A tax is a personal liability of the

taxpayer; a special assessment is not a personal liability of the person
assessed considering that his liability is limited only to the land
involved.

Tax versus Debt –

(a) As to basis of imposition: A tax is based on law; a debt is based

on contract or judgment.

(b) As to effect of non-payment: For non-payment of a tax, the

taxpayer may be imprisoned; for non-payment of a debt, no
taxpayer may be imprisoned as provided in Section 20, Article III of
the 1987 Philippine Constitution

(c) As to mode of payment: Taxes are generally paid in money;

debts may be payable in money, property and services.

(d) As to assignability. – Taxes are not assignable; debts may be

assigned.

(e) As to interest. – Taxes do not draw interest unless it is delinquent;

Debts can draw interest if it is stipulated or delayed.

(f) As to Authority. – A tax may be imposed only by public authority;

a debt can be imposed by a private individuals.

(g) As to Prescription. – The prescriptive periods for tax are

determined under the NIRC; The prescriptive periods for debts are
determined under the Civil Code.

Tax versus Penalty –

(a) As to definition. – A tax is an enforced proportional contributions

from persons and property; a penalty is a sanction imposed as
punishment for violation of a law or acts deemed injurious. Any
violation of tax laws may give rise to the imposition of penalty.

(b) As to purpose. – A tax is intended to raise revenues; a penalty is

designed to regulate conduct.

(c) As to the imposing Authority. – A tax may be imposed only by the

government; a penalty may be imposed both by the government or
by private individuals or entities.
Tax versus Subsidy –

A subsidy is a legislative grant of money in aid of a private enterprise

deemed to promote a public welfare. It is not a tax although it may
be necessary to raise the money to pay the subsidy by means of a
tax.

Tax versus Revenue –

A revenue is a broad term that includes not only taxes but income
from other sources as well. It is the amount of money that is brought
into the government by its business activities (e.g. PAGCOR and
other GOCCs)

L. Kinds of Taxes

1. As to object

a. Personal, capitation, or poll tax

b. Property tax
c. Privilege tax

Personal, Capitation, Poll Tax –

It is a tax of a fixed amount imposed upon all persons of a certain

class within the jurisdiction of the taxing power without regard to the
amount of their property or the occupations of businesses in which
they may be engaged (example: community tax).

Property Tax –

It is a tax assessed on all property or all property of a certain class

within the jurisdiction of the taxing power (example: real estate tax)

Excise Tax or Privilege Tax –

It is a tax laid upon the privilege of engaging in business or pursuing

an occupation, calling, and profession (example: value-added-tax)

Note: The “excise taxes” on the goods identified in the NIRC are
technically property taxes, not excise taxes insofar as the “object” of
taxation is concerned.

2. As to burden or incidence

a. Direct
b. Indirect

Direct Tax –

It is a tax where BOTH the initial tax liability (impact of taxation) as

well as ultimate burden (incidence of taxation) of the tax falls on the
same person (examples: income tax, estate tax, donor’s tax,
documentary stamp tax)

Indirect Tax –

It is a tax where the liability falls on one person (impact of taxation)

but the burden thereof may be SHIFTED OR PASSED ON to another
(incidence of taxation) (example: value added tax)

3. As to tax rates

a. Specific
b. Ad valorem
c. Mixed

Specific Tax –

It is a tax which imposes fixed monetary amount of tax per quantity,

volume, or weight of the products taxed.
(example: tax on distilled spirits)

Ad Valorem Tax –
It is a tax that is levied as a percentage of the price or the value of
the article or thing subject of taxation.
(example: real estate tax)

Mixed –

It is a combination of an ad valorem and specific tax. Mixed systems

can give preference to more ad valorem or to more specific taxes
depending on the desired effects (example: RA 10351, Sin Tax Law –
Excise Tax on Alcohol and Tobacco Products)

4. As to purposes

a. General, fiscal, or revenue

b. Special, regulatory, or sumptuary

General or Fiscal or Revenue –

These are taxes levied for the general or ordinary purposes of

Government which is to raise revenues (example: income tax, value-
added tax)

Special, Regulatory, or Sumptuary –

These are taxes levied for a special purpose as to regulate a certain

activity or protect a certain industry (example: protective tariffs,
customs and duties).

5. As to scope or authority to impose –

a. National Tax (internal revenue taxes)

b. Local Tax (real property tax, municipal business tax)

National Taxes –

These are taxes imposed by the national government. (example: the

taxes imposed under the NIRC)

Local Taxes –

These are taxes imposed by the local government units. (example:

business taxes and real property taxes)

6. As to graduation

a. Progressive
b. Regressive
c. Proportionate

Progressive Tax –

It is a tax imposed where the tax rate increases as the tax base
increases (example: Income Tax)

Regressive Tax –

It is a tax imposed where the tax rate decreases as the tax base
increases (example: VAT)

Proportionate Tax –

It is a tax imposed where the tax rates are fixed in amounts or in

percentage on a flat base (example: real estate tax)
Note: Mixed Progressive and Regressive Tax Rates

The tax rates are partly progressive and partly regressive.

M. Sources of Tax Laws

1. The 1987 Philippine Constitution

2. The NIRC, as amended
3. The Customs Modernization and Tariff Act
4. The Local Government Code
5. Local Tax Ordinances
6. Presidential Decrees and Executive Orders
7. Case laws (Decisions of the CTA and the Supreme Court)
8. BIR Rulings and Regulations
9. International treaties and agreements

N. Construction and Interpretation of –

1. Tax Laws
2. Tax Exemption and Tax Exclusion
3. Tax Rules and Regulations
4. Penal Provisions of Tax Laws
5. Non-retroactive Application to Taxpayer

Construction and Interpretation of Tax Laws –

General Rule: Tax laws are construed strictly against the government
and liberally in favor of the taxpayer.

No person or property is subject to taxation unless within the terms or

plain import of a taxing statute. Taxes, being burdens, they are not to
be presumed beyond what the statute expressly and clearly
declares.

Note: Tax statutes offering rewards are liberally construed in favor of

informers.

Case: Congress passed a law imposing a special tax to individuals

engaged in rice trading to raise funds for the agriculture
development projects of the government. BIR assessed Magsasaka
Corporation, a company engaged in rice trading in Nueva Ecija, of
said special tax.

Question: Is Magsasaka Corporation subject to the said special tax

as a rice trader?
Answer: No. A tax payable by “individuals” does not apply to
“corporations.” Since the law apply only to individuals, Magsasaka
Corporation, being a juridical person, may not be subject to such
tax.

Exceptions: The rule of strict construction as against the government

is not applicable where –

(1) the language of the statute is plain and there is no doubt as to

the legislative intent. In such case, the words employed are to be
given their ordinary meaning.

(2) the taxpayer claims exemption from the tax.

Case: Strong lobbying from the various rice traders in the Philippines
led to Congress passing a law exempting all persons engaged in rice
trading from income tax. Magsasaka Corporation went to BIR for a
ruling that it is entitled to said income tax exemption. BIR issued a
ruling denying Magsasaka Corporation of said tax exemption as it
only applies to individuals and not to corporations engaged in rice
trading.

Question: Is Magsasaka Corporation entitled to the tax exemption?

Answer: Yes. Magsaka Corporation is entitled to the tax exemption.

The word “person” as used by Congress in granting the tax
exemption clearly indicates that the tax applies to both natural and
juridical persons.

Case: Noel Tuliro failed to file his income tax return and to pay his
income tax for 2017. BIR assessed Mr. Tuliro of his unpaid income
taxes for 2017 as well as interests and surcharges. Mr. Tuliro paid his
income tax for 2017 but took exemption on the surcharges claiming
good faith – that his accountant failed to file his income tax return
and pay his taxes as the accountant got sick and forgot all about it.
Question: May Mr. Tuliro use good faith as an excuse or a defense for
the non-payment of the surcharges and interests?

Answer: No. The good faith of Mr. Tuliro is not a sufficient justification
for exemption from the payment of surcharges and interests
imposed by the law for failing to pay tax within the period required
by law. Tax statutes are to receive a reasonable construction or
interpretation with a view to carrying out their purpose and intent.
They should not be construed as to permit the taxpayer easily to
evade the payment of tax.

Exceptions When Good Faith May Used as a Defense: (Note:only for

the non-imposition of surcharges and interest)

(a) Good faith and honest belief that one is not subject to tax on the
basis of previous interpretation of government agencies tasked to
implement the tax law are sufficient justification to delete the
imposition of surcharges and interest (Michel J. Lhuillier Pawnshop,
Inc. vs CIR (2006).

(b) Good faith can still be ascribed to the entity that fails to pay its
taxes by reason of a particular novel issue of taxation before that
issue is resolved for the first time by the Court (H.Tambunting
Pawnshop, Inc. v. CIR (2009).

Question: May good faith be used as a defense by a taxpayer who

based his non-payment of taxes on opinion issued by the Philippine
Bureau of Local Government and Finance (“BLGF”)?

Answer: No. In the case of City of Iloilo vs. Smart Communications,

Inc. (2009), the Supreme Court held that the interpretation rendered
by the Philippine Bureau of Local Government and Finance (“BLGF”)
was not found to be authoritative or persuasive. Thus taxpayers
should take special care not to rely on findings of agencies that are
not empowered to interpret local tax laws, such as that of the BLGF.
Question: Which rulings can serve as sufficient rulings or basis which
taxpayers may rely on?

Answer: Examples of what would serve as sufficient basis are rulings

of the (1) Commissioner of Internal Revenue and (2) the Court of Tax
Appeals.

Construction and Interpretation of Tax Exemption and Tax Exclusion –

General Rule: In the construction of tax statutes, exemptions are not

favored and are construed strictissimi juris against the taxpayer.

(a) Taxation is the rule and exemption 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.”

(b) Tax exemptions must be shown to exist clearly and categorically,

and supported by clear legal provisions.

(c) Claims for an exemption must be able to point out some

provision of law creating the right, and cannot be allowed to exist
upon a mere vague implication or inference.

Question: How are claims for refunds treated for purposes of

statutory construction?

Answer: Refunds are in the nature of exemption. Thus, claims for

refunds must be construed strictly against the grantee/ taxpayer.

Exceptions to the Strict Interpretation against the TP Rule on Tax

Exemptions:

(1) When the law itself expressly provides for a liberal construction,
that is, in case of doubt, it shall be resolved in favor of exemption;
(2) When the exemption is in favor of the government itself or its
agencies, or of religious, charitable, and educational institutions
because the general rule is that they are exempt from tax.

(3) When the exemption is granted under special circumstances to

special classes of persons.

(4) If there is an express mention or if the taxpayer falls within the

purview of the exemption by clear legislative intent.

Construction and Interpretation of Tax Rules and Regulations –

General Rule: As tax rules and regulations have the force and effect
of tax law, they are construed strictly against the government and
liberally in favor of the taxpayer.

Note: The Secretary of Finance, upon recommendation of the

Commissioner of Internal Revenue, shall promulgate all needful rules
and regulations (Revenue Regulations) for the effective
enforcement of the provisions of the NIRC.

The NIRC authorizes the CIR to interpret tax laws, subject to review by
the Secretary of Finance. Likewise, the BIR has the power of
subordinate legislation to aid in the implementation of tax laws
(Revenue Memorandum Order, Revenue Memorandum Circulars,
Revenue Administrative Orders, etc.)

Requisites for Validity and Effectivity of Regulations –

(a) They must be reasonable;

(b) They are issued within the authority conferred;

(c) They are not contrary to law and the Constitution; and

(d) They must be published.

Construction and Interpretation of Penal Provisions of Tax Laws –

General Rule: Tax laws are not penal in character, although

violations of tax laws carry penal provisions. Thus, the penal provisions
of a tax law are strictly construed against the State and liberally in
favor of the taxpayer.

Non-retroactive Application to Taxpayer –

General Rule: Tax laws are prospective in nature. Thus, tax laws, rules
and regulations have no retroactive application to taxpayers.

Exception: Tax laws may be applied retroactively if the law expressly

provides and of its application will not be prejudicial to the taxpayer
or a violation of the taxpayer’s right to due process.

Exception to the Exception: A retroactive application may be

allowed even if it is prejudicial to the taxpayer in the following cases:

(a) Where the taxpayer deliberately misstates or omits material facts

from his return or any document required of him by the BIR;

(b) Where the facts subsequently gathered by the BIR are materially
different from the facts on which the ruling is based; or

(c) When the taxpayer acted in bad faith.

O. Doctrines In Taxation

1. Prospectivity of Tax Laws

General Rule: The rule under Art. 4 of the Civil Code which provides
that laws shall have prospective application applies to tax laws.

Exception: Tax laws may be applied retroactively if -

(1) the law expressly provides; and

(2) its application will not be prejudicial to the taxpayer or a violation
of the taxpayer’s right to due process.

2. Imprescriptibility of Tax Laws

General Rule: Tax laws are imprescriptible.

Exception: The statute of limitations or periods of assessments and

collection of taxes may be provided for by law like those periods
provided in the NIRC, the Local Government Code and other tax
laws.

Construction and Interpretation of Statute of Limitations

The law on prescription being a remedial measure is liberally

construed in order to afford such protection to the taxpayer.

The reason why tax laws provide for prescription is to give taxpayers
peace of mind, that is, to safeguard them from unreasonable
examination, investigation, or assessment.

Case: CIR vs Standard Chartered Bank (July 29, 2015)

Facts: On June 24, 2004 the BIR assessed Standard Chartered Bank
(SCB) for deficiency taxes for taxable year 1998. SCB protested the
assessment on the ground that the BIR’s right to assess SCB for the
alleged deficient taxes was already barred by prescription. SCB
claims that the waivers of Statute of Limitations executed by the
parties, for the purpose of justifying the extension of period to assess
SCB, failed to strictly comply and conform with the provisions of
Revenue RMO No. 20-90. SCB claims that BIR’s Formal Letter of
Demand and Assessment Notices are void for having been issued
beyond the reglementary period.

Issue: Whether the government’s right to assess SCB has prescribed

for BIR’s failure to comply with the provisions of RMO No. 20-90 on the
proper execution of waivers of prescription.

Ruling: Prescription has already set in. The period for BIR to assess and
collect an internal revenue tax is limited only to 3 years under
Section 203 of the NIRC, except when extended to by the parties by
executing a valid waiver under Sec. 222 of the NIRC and under RMO
20-90. In this case, the waivers were executed after the 3 year period
of assessment has expired. The waivers, therefore, are void and
ineffectual as there was nothing to extend. The purpose of the
provision on prescription is to give taxpayers peace of mind, to
safeguard them from unreasonable examination, investigation, or
assessment. The law on prescription, being a remedial measure,
should be liberally construed in order to afford such protection.

3. Double Taxation

Concept of Double Taxation

It means taxing twice the same taxpayer for the same tax period
upon the same thing or activity, when it should be taxed but once,
for the same purpose and with the same kind or character of tax.

Kinds of Double Taxation:

a. Strict or Narrow sense (Direct Duplicate Taxation)

b. Broad sense (Indirect Duplicate Taxation)

Strict or Narrow sense (Direct Duplicate Taxation) –

(1) the same property must be taxed twice when it should be taxed
once;
(2) both taxes must be imposed on the same property or subject
matter;
(3) for the same purpose;
(4) by the same State, Government, or taxing authority;
(5) within the same territory, jurisdiction or taxing district;
(6) during the same taxing period; and
(7) of the same kind or character of tax.

Broad sense (Indirect Duplicate Taxation) –

There is double taxation in the broad sense or there is indirect

duplicate taxation if any of the elements for direct duplicate
taxation is absent. It extends to all cases in which there is a burden of
two or more pecuniary impositions.

Example: Income tax upon the income gained on the same

property imposed by two different states.

Case: Villanueva vs City of Iloilo (Dec. 28, 1968)

Facts: The City of Iloilo passed an ordinance subjecting a municipal

license tax on persons engaged in operating tenement houses. The
Villanuevas as owners of 4 tenement houses containing 34
apartments contested the validity of the ordinance claiming that the
ordinance is a form of a property tax or a real estate tax. Since this is
another form of a property tax which tax the Villanuevas are already
subjected to in the form of real estate tax, it is, thus, illegal as it
constitutes double taxation.

Issue: Is the ordinance void as it imposes double taxation?

Answer: There is no double taxation (i.e., direct duplicate taxation).

The tax imposed by the ordinance does not possess the attributes of
a real estate tax or property tax. It is not a tax on the land on which
the tenement houses are erected. It is not a fixed proportion of the
assessed value of the tenement houses, and does not require the
intervention of assessors or appraisers. The ordinance is a municipal
license tax that is imposed on the operation of tenement houses
which is a form of business or calling. Clearly, the subject matter of
the license tax is different from a property tax as it is an imposition on
the right to use or dispose of property, to pursue a business, calling,
occupation, or to exercise a privilege (excise tax).
Case: CIR vs Bank of Commerce (June 08, 2005)

Facts: Bank of Commerce paid 5% gross receipts on its passive

income in the form of interests or discounts from its investments in
government securities and private commercial papers. Included
therein were the bank’s passive income from the said investments
which had already been subjected to a final tax of 20%. The bank
filed an administrative claim for refund with the CIR claiming that it
had overpaid its gross receipts as a result of double taxation.

Issue: Is there double taxation (direct duplicate taxation)?

Ruling: There is none. Double taxation means taxing the same
property twice when it should be taxed only once. Otherwise
described as "direct duplicate taxation" the two taxes must be
imposed on the same subject matter, for the same purpose, by the
same taxing authority, within the same jurisdiction, during the same
taxing period; and they must be of the same kind or character.

In this case, there is no direct duplicate taxation for the following 3

reasons:

(1) First, the taxes are imposed on two different subject matters. The
subject matter of the FWT is the passive income generated in the
form of interest on deposits and yield on deposit substitutes, while the
subject matter of the GRT is the privilege of engaging in the business
of banking.

(2) Second, although both taxes are national in scope, the taxing
periods they affect are different. The FWT is deducted and withheld
as soon as the income is earned, and is paid after
every calendar quarter in which it is earned. On the other hand, the
GRT is neither deducted nor withheld, but is paid only after every
taxable quarter in which it is earned.
(3) Third, these two taxes are of different kinds or characters. The FWT
is an income tax subject to withholding, while the GRT is a
percentage tax not subject to withholding.

Constitutionality of Double Taxation

There is no constitutional prohibition against double taxation in the

Philippines. It is something not favored, but is permissible, provided
some other constitutional requirement is not thereby violated. As
long as the tax law follows the constitutional rule on uniformity, there
can be no valid objection to taxing the same income, business or
property twice. Double taxation, standing alone and not being
forbidden by our fundamental law, is not a valid defense against the
legality of a tax measure. But from it might emanate such defenses
against taxation as oppressiveness and inequality of the tax.

Unconstitutional Double Taxation

Double taxation in its narrow or strict sense (direct duplicate) is

undoubtedly unconstitutional, but that in the broader sense is not
necessarily so. Where double taxation in its narrow or strict sense
occurs, the taxpayer may seek relief under the uniformity rule or the
equal protection guarantee.

Modes of Eliminating Double Taxation:

(1) Allowing reciprocal exemption either by law or by treaty;

(2) Allowance of tax credit for foreign taxes paid;

(3) Allowance of deductions such as for foreign taxes paid, and

vanishing deductions in estate tax; and

(4) Reduction of Philippine tax rate.

4. “Power to Tax Involves Power to Destroy” – Justice Marshall versus
“The power to tax is not the power to destroy while this court sits” –
Justice Holmes.

“Power to Tax Involves Power to Destroy”, J. Marshall –

Taxation is a destructive power which interferes with the personal

and property rights of the people and takes from them a portion of
their property for support of the government. Therefore, it should be
exercised with caution to minimize injury to the property rights of a
taxpayer. And in order to maintain the general public’s trust and
confidence in government, this power must be exercised fairly,
equitably, uniformly, and not treacherously lest it “kills the hen that
lays the golden egg”. However, for as long as a tax is validly passed,
it cannot be judicially restrained merely because it would prejudice
the taxpayer’s right to property.

“The power to tax is not the power to destroy while this court sits”, J.
Holmes –

If a tax law is passed in violation of the inherent and constitutional

limitations of a tax law, the courts may come in to declare them void
in order to protect the taxpayer’s right to property.

5. Escape from Taxation

Forms of Escape from Taxation –

1. Tax Shifting;
2. Tax Capitalization;
3. Tax Transformation;
4. Tax Avoidance;
5. Tax Evasion; and
6. Tax Exemption.

Tax Shifting, definition. –

It is the transfer of the burden of a tax by the original payer or the
one on whom the tax was assessed or imposed to someone else.

What is transferred is not the payment of the tax but the burden of
the tax.

Ways of shifting the tax burden:

(a) Forward shifting;

(b) Backward shifting; and
(c) Onward shifting.

Forward Shifting. –

This happens when the burden of the tax is transferred from a factor
of production through the factors of distribution until it finally settles
on the ultimate purchaser or consumer.

Here, the tax burden is shifted to the consumer through increase in

selling prices. For instance when the government increases the
amount of tax levied on products such as beer or cigarettes
companies increase prices of these goods.

Backward Shifting. –

This happens when the burden of the tax is transferred from the
consumer or purchaser through the factors of distribution to the
factor of production.

This occurs when a producer of a taxed commodity transfers the

money burden of tax to the supplier of factors of production, who in
turn is paid a lower price for the factors of production.

Example: Farmers are at times paid lower prices for their produce
when a tax is imposed on the processor of the produce.
Onward shifting. –
This happens when the tax is shifted two or more times either forward
or backward.

Illustration:

Japan Tobacco Inc. manufactures tobacco products. Congress

increased the rate of taxes on tobacco cigarettes. If JTI decides to
increase the price of its tobacco cigarettes to pass on the increased
tax burden to the consumers, there is forward shifting. If JTI decides
to lower the price it pays to tobacco farmers for the purchase of
their tobacco leaves, there is backward shifting. If JTI buys its
tobacco leaves from traders and pays the traders lower price and in
turn the traders pay the tobacco farmers lower price for their
tobacco leaves, there is onward shifting.

Question: What are the taxes that CAN be shifted?

Answer: All indirect taxes can be shifted. (e.g. – VAT)

Question: What are the taxes that cannot be shifted?

Answer: All direct taxes cannot be shifted. (e.g. – Estate Tax,

Community tax) since the tax is purely personal as when it has no
relation to any business dealings of the taxpayer. Here, the initial
taxpayer is also the tax-bearer so that the impact of the tax is
immediately followed by the incidence of taxation without the
intermediate process of shifting.

Impact of Taxation versus 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, the subject of tax, is the
person who must pay the tax to the government.

Incidence of taxation is that 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.
Relationship of 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.

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.

Example: VAT - the impact of VAT is on the seller who shifts the
burden to the customer who finally bears the incidence of the tax.

Tax Avoidance (Tax Minimization) –

Tax avoidance is the exploitation by the taxpayer of legally

permissible alternative tax rates or methods of assessing taxable
property or income in order to avoid or reduce tax liability. It is
politely called “tax minimization” and is not punishable by law.

Example: A person refrains from engaging in some activity or

enjoying some privilege in order to avoid the incidence of taxation
or to lower his tax bracket for a taxable year. A businessman may
change his business residence to avoid or lessen the rate of business
tax imposed on his business.

Tax Evasion (Tax Dodging) –

Tax evasion is the use by the taxpayer of illegal or fraudulent means

to avoid, defeat or lessen the payment of taxes and when
employed, it subjects the taxpayer to civil or criminal liabilities. It is
also known as “tax dodging.”

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

deliberate reduction of income that has been received; fraudulent
bloating of expenses to increase deductions and reduce taxable
income.
Elements of Tax Evasion:

(1) the end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-payment of tax
when it is shown that a tax is due;

(2) an accompanying state of mind which is described as being

“evil,” in “bad faith,” “willful,” or “deliberate and not accidental”;
and

(3) a course of action or failure of action which is unlawful.

Question: Is fraud required to be proved by direct evidence for a

case of tax evasion to prosper?

Answer: No. Since fraud is a state of mind, it need not be proved by

direct evidence but may be inferred from the circumstances of the
case, as in the following:

(1) The failure of the taxpayer to declare for taxation purposes his
true and actual income derived from his business for two
consecutive years has been held as an indication of his fraudulent
intent to cheat the government of its due taxes; or

(2) The substantial under-declaration of income in the income tax

returns of the taxpayer for 4 consecutive years coupled with his
intentional overstatement of deductions justifies the finding of fraud.

Case: Republic vs. Gonzales (April 30, 1965)

Facts: Since 1946 Gonzales has been a private concessionaire

supplying furniture in the Clark Field Air base. He filed his income tax
returns for the years 1946 and 1947. However, the BIR discovered that
for the years 1946 and 1947, the total sales reported by Gonzales for
the two tax years was underdeclared. BIR sued Gonzales and the
latter was ordered to pay the government deficiency income taxes
for the years 1946 and 1947 plus the 50% surcharge and 1% monthly
interest until the whole amount is fully paid. Gonzales contested the
surcharge imposed as according to him, the facts do not support
the finding of fraud.

Issue: Is there fraud on the part of Gonzales when he underdeclared

his sales as to make him liable for surcharges?
Ruling: Yes, Gonzales is guilty of fraud. Since fraud is a state of mind,
it need not be proved by direct evidence but may be inferred from
the circumstances of the case. The failure of Gonzales to declare for
taxation purposes his true and actual income derived from his
furniture business at the Clark Field Air Base for two consecutive years
is an indication of his fraudulent intent to cheat the Government of
its due taxes.

Question: Is there any quantifiable indicator that there is an

apparent tax evasion?

Answer: Yes. The NIRC provides that a return is prima facie fraudulent
if there is –

(a) substantial under-declaration of sales, receipts or income; or

(b) substantial overstatement of deductions.

Question: When is there “substantial under-declaration” or

“substantial overstatement”?

Answer:

(1) there is substantial under-declaration if there is failure to report

sales, receipts or income exceeding 30% of that declared per return.

(2) there is substantial overstatement of deductions if the taxpayer

claims deductions in an amount exceeding 30% of actual
deductions.

Question: What are the legal consequences of tax evasion?

Answer: On top of the taxpayer’s tax liabilities, tax evasion has the
following legal consequences:

(1) the period to assess the taxpayer is 10 years from the discovery of
fraud;

(2) a surcharge of 50% of the tax or of the deficiency tax;

(3) 20% per annum interest; and

(4) imprisonment in case of conviction plus fine.

6. Tax Exemption

Definition. –

It is the grant of immunity to particular persons or corporations or to

person or corporations of a particular class from a tax which persons
and corporations generally within the same state or taxing district
are obliged to pay.

It is an immunity or privilege; it is freedom from a financial charge or

burden to which others are subjected.

Taxation Is The Rule; Exemption Is The Exception

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.” If not expressly mentioned in
the law, it must at least be within its purview by clear legislative
intent.

Nature of Tax Exemption. –

(a) It is a mere personal privilege which cannot be assigned or

transferred without the consent of the Legislature. The legislative
consent to the transfer may be given either in the original act
granting the exemption or in a subsequent law.

(b) It implies a waiver on the part of the government of its right to

collect taxes due to it, and, in this sense, is prejudicial thereto.
Hence, it exists only by virtue of an express grant and must be strictly
construed against the taxpayer.

(c) The exemption is based on a valid distinction and not necessarily

discriminatory, provided it has reasonable foundation or rational
basis. Where, however, no valid distinction exists, the exemption may
be challenged as violative of the equal protection guarantee or the
uniformity rule.

Revocability of Tax Exemption

General Rule: Since it is a mere privilege it is revocable by the

government. Thus, an exemption provided for in a franchise (other
than a legislative franchise), may be repealed or amended.

Exception: If the exemption found in a contract is protected under

the non-impairment clause of the Constitution. Necessarily, the
contract must contain the essential elements of a contract.

Note: A legislative franchise (not an ordinary franchise) is in the

nature of a contract, thus, may not be revoked.
Principles of Tax Exemption

(1) They are not presumed.

(2) When granted, they are strictly construed against the taxpayer.

(3) They are highly disfavored and may almost be said “to be directly
contrary to the intention of tax laws.”

Kinds of Tax Exemption:

(1) Express
(2) Implied

(3) Contractual

Express or Affirmative –

It exists when certain persons, property, or transactions are, by

express provision, exempted from all or certain taxes, either entirely
or in part. This exemption may be made by provisions of the
Constitution, statutes, treaties, ordinances, franchises, or contracts.

Implied or Exemption by Omission –

This occurs when a tax is levied on certain classes without

mentioning the other classes. Every tax statute, in a very real sense,
makes exemptions since all those not mentioned are deemed
exempted.

The omission may be either accidental or intentional. Exemptions are

not presumed, however, when public property is involved,
exemption is the rule, and taxation is the exception.

Contractual (technically, an “express exemption”) –

The legislature may make a valid contract with a taxpayer in respect

to granting an exemption from taxation. Such contract can be
enforced against the State at the instance of the taxpayer. This
includes those agreed to by the taxing authority in contracts, such as
those contained in government bonds or debentures (bonds that
are not secured by specific property or collateral but backed by the
full faith and credit of the government) lawfully entered into by them
under enabling laws in which the government, acting in its private
capacity, sheds its cloak of authority and waives its governmental
immunity.
Note: These contractual tax exemptions are not to be confused with
tax exemptions granted under franchises. A franchise (other than a
legislative franchise) partakes the nature of a grant which is beyond
the purview of the non-impairment clause of the Constitution.

Rationale of Tax Exemption –

It rests upon the theory that such exemption will benefit the body of
the people, and not upon any idea of lessening the burden of the
individual owners of the property. It supports the presumption that
the public interest or benefit will be subserved is sufficient to offset
the monetary loss entailed in the grant of the exemption.

Thus, where the exemption serves the public, and not a private
interest, it cannot be regarded as a gift or donation of public funds
to, or in aid of, the individual, association or corporation in whose
favor the exemption is declared.

Grounds or Basis for Tax Exemption:

(1) It may be based on contract, e.g. found in the Charter of the

corporation, in which case the public, represented by the
government, is supposed to receive a full equivalent therefor;

(2) It may be based on some ground of public policy, such as, for
example to encourage new and necessary industries; and

(3) It may be created in a treaty on grounds of reciprocity or to

lessen the rigors of international or multiple taxation which occurs
where there are many taxing jurisdictions, as in the taxation of
income and intangible personal property.

Question: Is equity a ground for tax exemption?

Answer: No. Equity is not a ground for tax exemption. The fact that
one person may not have been required to pay his taxes does not
exempt another from the payment of his legal taxes, or legally entitle
him to a refund of any taxes which he has paid. Exemption from tax
is allowable only if there is clear provision therefor.

Note: While equity cannot be used as a basis or justification for tax

exemption, a law may validly authorize the condonation of taxes on
equitable grounds.

7. Doctrine of Equitable Recoupment –

It is a doctrine that allows a claim for refund barred by prescription to

offset unsettled tax liabilities. It is a special, judicially created remedy
grounded solely in equity.

Question: Is this doctrine of recoupment applicable in the

Philippines?

Answer: No. While this doctrine finds application in the United States
and other common law countries, it has none under the Philippine
tax system.

Thus, in the case of Collector vs. University of Santo Tomas (104

Phil. 1062), the Supreme Court altogether rejected the doctrine of
equitable recoupment saying that it was not convinced of the
wisdom and propriety thereof, and that it may work to tempt both
the collecting agency and the taxpayer to delay and neglect their
respective pursuits of legal actions within the periods set by law.

8. Compensation and Set-off. –

1. Taxes for Debts

General Rule: Taxes cannot be the subject of set-off or

compensation debts for the following reasons:

(a) The government and the taxpayer are not mutually creditors and
debtors of each other. The payment of taxes is not a contractual
obligation but arises out of a duty to pay. Obligations in the nature of
debts are due to the government in its corporate capacity, while
taxes are due to the government in its sovereign capacity;

(b) This would adversely affect the revenue system of the

government (note: “lifeblood doctrine”)

Exception: Where both claims of the government and the taxpayer

against each other have already become due and demandable as
well as fully liquidated. Compensation takes place by operation of
law under Articles 1279 and 1290 of the NCC, and both debts are
extinguished to the concurrent amount.

Thus, a taxpayer who has been assessed municipal taxes may assign
in favor of the municipality a final judgment obtained by him against
said municipality to cover the assessment.
Case: Domingo vs. Garlitos, et al. (June 29, 1963)

Facts: By virtue of a final and executory order, the estate of the

Walter Scott Price is ordered to pay the government the amount of
P40,058.55 by way of estate and inheritance taxes, charges and
penalties. A writ of execution was filed seeking to enforce said order
against the estate. However, the government is at the same time
indebted to the estate under administration in the amount of
P262,200.00.

Issue: May compensation take place in this case? May the claim by
the government against the estate be deducted from its debt to the
estate?

Ruling: Yes. the claim of the estate against the government has
been recognized and has already been appropriated for the
purpose by a corresponding law (Rep. Act No. 2700). Both the claim
of the government for inheritance taxes and the claim of the
intestate for services rendered have already become overdue and
demandable is well as fully liquidated. Compensation, therefore,
takes place by operation of law, in accordance with the provisions
of Articles 1279 and 1290 of the Civil Code, and both debts are
extinguished to the concurrent amount.

2. Taxes for Taxes

General Rule: Taxes cannot be the subject of set-off or

compensation of excess taxes paid by the taxpayer to the
government.

However, the Commissioner of Internal Revenue is authorized by law

to grant refund or credit of taxes erroneously or illegally paid.

9. Compromise & Amnesty

Compromise, defined. –

It is a contract whereby the parties, by making reciprocal

concessions avoid litigation or put an end to one already
commenced. It involves a reduction of the taxpayer’s liability.

Requisites of a Tax Compromise:

(a) The taxpayer must have a tax liability;

(b) There must be an offer (by the taxpayer or Commissioner) of an

amount to be paid by the taxpayer; and

(c) There must be acceptance (by the Commissioner or the

taxpayer, as the case may be) of the offer in settlement of the
original claim.

Note: Generally, 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.

Compromise under the NIRC, CMTA and the LGC –

1. Under the NIRC, the BIR Commissioner is expressly authorized to
enter, under certain conditions, into a compromise of both the civil
and criminal liabilities (except when already filed in court) of the
taxpayer.

2. Under the CMTA, the power of the BOC Commissioner to enter

into compromise is limited to cases involving imposition of fines,
surcharges and forfeitures which compromise is subject to the
approval of the Secretary of Finance.

3. Under the LGC, however, there are no provisions that allow the
compromise of the local taxes, though the tax (not criminal) liability is
not prohibited from being compromised under Arts. 2034 and 2035
Civil Code; unfortunately, there is no specific authority given to any
public official to execute any compromise.Considering, however,
that the power to impose local taxes are delegated to the legislative
bodies of the LGUs, any compromise involving local taxes may be
entered into by the LGU concerned by virtue of a local ordinance
allowing the same, and further identifying the local official who may
be authorized to enter into such compromise.

Tax Amnesty, defined. –

A tax amnesty partakes of an absolute forgiveness or waiver by the

Government of its right to collect what otherwise would be due it. It
provides tax evaders, who wish to relent and are willing to reform a
chance to do so and become a part of the new society with a
clean slate.

A tax amnesty, much like a tax exemption, is not favored or

presumed in law. If granted, the terms of the amnesty, must be
construed strictly against the taxpayer and liberally in favor of the
taxing authority.

Tax Amnesty versus Tax Exemption –

Tax amnesty is immunity from all criminal and civil obligations arising
from non-payment of taxes. It is a general pardon given to all
taxpayers. It applies to past tax periods, hence of retroactive
application.

Tax exemption is an immunity from all civil liability only. It is an

immunity or privilege, a freedom from a charge or burden of which
others are subjected. Tax exemptions are generally prospective in
application unless otherwise expressly applied retroactively.

10. Taxpayer’s Suit, definition. –

A "taxpayer's suit" refers to a case where the act complained of

directly involves the illegal disbursement of public funds derived from
taxation.

A taxpayer is allowed to sue where there is an assertion that public

funds are illegally disbursed or used for an illegal purpose, or that
public funds are wasted through the enforcement of an invalid or
unconstitutional law.

Citizen’s Suit


Concerned citizens can bring suits if the constitutional question they

raise is of "transcendental importance" that it must be settled early. In
a citizen's suit, the person complaining must allege that he has been
or is about to be denied some right or privilege to which he is lawfully
entitled or that he is about to be subjected to some burdens or
penalties by reason of the statute or act complained of.

Plaintiff in Taxpayer's Suit versus the Plaintiff in Citizen's Suit

In the former, the plaintiff is affected by the expenditure of public

funds, while in the latter, he is but the mere instrument of the public
concern.

Note: Public actions now allow both "citizen" and "taxpayer"

standings.
Requisites for Challenging the Constitutionality of a Tax Measure or
Act of Taxing Authority under a Taxpayer’s Suit

1. Concept of Locus Standi as Applied in Taxation

2. Doctrine of Transcendental Importance

3. Doctrine of Ripeness for Judicial Determination

Concept of Locus Standi as Applied in Taxation


Locus Standi –

The doctrine of locus standi is the right of appearance in a court of

justice. The doctrine requires a litigant to have a material interest in
the outcome of a case.

Locus Standi in Private Suits versus Locus Standi in Public Suits

(1) In private suits, locus standi requires a litigant to be a "real party in

interest" which is defined as "the party who stands to be benefited or
injured by the judgment in the suit or the party entitled to the avails
of the suit."

(2) In public suits, the "direct injury test" is applied to determine locus
standi. Thus, a person who wants to impugn the validity of a statute
must have a personal and substantial interest in the case such that
he has sustained, or will sustain direct injury as a result.

Note: The "direct injury test" in public suits is similar to the "real party in
interest" rule for private suits under Sec. 2, Rule 3 of the 1997 Rules of
Civil Procedure.

Locus Standi As Applied to Taxation

A taxpayer is allowed to sue where there is a claim that public funds
are illegally disbursed, or that the public money is being deflected to
any improper purpose, or that there is wastage of public funds
through the enforcement of an invalid or unconstitutional law. He
must show that the act complained of directly involves the illegal
disbursement of public funds derived from taxation. Moreover, the
taxpayer must prove that he has sufficient interest in preventing the
illegal expenditure of money raised by taxation and that he will
sustain a direct injury because of the enforcement of the questioned
statute or contract.

2 Requisites for a Taxpayer’s Suit to Prosper

1. public funds derived from taxation are disbursed by a political

subdivision or instrumentality and in doing so, a law is violated or
some irregularity is committed; and

2. the petitioner is directly affected by the alleged act.

Doctrine of Transcendental Importance –

It is a doctrine or principle which the Supreme Court, in the exercise

of its sound discretion brushes aside the procedural barrier of locus
standi and takes cognizance of a petition in cases where a
petitioner is able to craft an issue of transcendental importance or
when paramount public interest is involved.

Factors to Consider In Determining whether a matter is of

Transcendental Importance:

(1) the character of the funds or other assets involved in the case;

(2) the presence of a clear case of disregard of a constitutional or

statutory prohibition by the public respondent agency or
instrumentality of the government; and
(3) the lack of any other party with a more direct and specific
interest in the questions being raised.

The “direct injury test” versus the “doctrine of transcendental

importance” –

The “direct injury test” is not absolutely required in a taxpayer’s suit.

This test has been relaxed considering that a strict application of the
"direct injury" test may hamper public interest in cases of
"transcendental importance" or with "far reaching implications." Even
if there is no direct injury, the liberal policy on locus standi must apply
on issues that raise not only the constitutionality of a tax law but,
more importantly, the use of taxes for public purpose. The doctrine of
standing, being a mere procedural technicality, should be waived to
adequately rule on an important constitutional issue.

Ripeness for Judicial Determination, defined. –

It means that:

(1) litigation is inevitable; or

(2) there is no adequate relief available in any other form or

proceeding as when administrative remedies have been exhausted.