San Beda Tax Reviewer 2012

EXECUTIVE COMMITTEE:
MIKHAIL MAVERICK TUMACDER overall chairperson, ARTHUR JOHN ARONGAT chairperson for academics, JASSEN RALPH LEE
chairperson for hotel operations, KIMBERLY JOY BARAOIDAN vice-chairperson for operations, KATRINA AYN AYZA FALLORINA CUE
vice-chairperson for secretariat, IAN MICHEL GEONANGA vice-chairperson for finance, JOSE ANGELO DAVID vice-chairperson for
electronic data processing, IAN LUIS AGUILA vice-chairperson for logistics

SUBJECT COMMITTEE:
RAHABANSA DAGALANGIT subject chair, ARIANNE MALABANAN assistant subject chair, ARMIDA GERONIMO edp, DIANA
FAJARDO general principles, AVRIL ELAINE GAMBOA income taxation, MADONNA LYN CASARES tax administration and
enforcement, BRYANT CANASA value-added tax, SHERWIN MARASIGAN transfer taxes, APRIL MANUEL and GABRIEL GUY
OLANDESCA nirc remedies, ARNALDO MALABANAN JR. court of tax appeals, JOSE MARI ANGELO DIONIO real property and local
taxation, RAY ANN CO tariff and customs laws

MEMBERS:
Baby Perian Arcega, Ethel Joy Arriola, Adrian Aumentado, Paula Tricia Bagnes , Benedicto Beley, Jingle Chua, Luis Voltaire
Formilleza, Aiza Gonzales, Roniel Muoz, Gerwin Panghulan, Maria Katrina Rivera, April Salamatin, Eve Hazel Santos, Salvador
Andrew Tugade, Neo Valerio, and Janice Ivy Valparaiso
General Principles | TAXATION LAW

DEFINITION

TAXATION is the power by which the
sovereign, through its law-making body, raises
revenue to defray the necessary expenses of
the government. It is merely a way of
apportioning the costs of government among
those who in some measure are privileged to
enjoy its benefits and must bear its burdens
(51 Am. Jur. 34)

It being inherent to the State, no constitutional
conferment is necessary for its exercise. The
Constitution merely provides the limitations on
how the same will be exercised (Recalde, A
Treatise on Tax Principles and Remedies,
p.1).

Two Concepts of Taxation
1. Power to tax.
2. The act or process by which the taxing
power is exercised.

PURPOSES AND OBJECTIVES

A. Revenue to raise revenue to support the
existence of State and to enable the State
to promote the general welfare and
protection of its citizens.

B. Non-Revenue/Sumptuary Purposes
(PR
2
EP)
1. Promotion of General Welfare
taxation may be used as an implement
of police power in order to promote the
general welfare of the people.

Illustration: In the case of Lutz v.
Araneta (G.R. No. L-7859, December
22, 1955), the Supreme Court upheld
the validity of the Sugar Adjustment
Act, which imposed a tax on milled
sugar since the purpose of the law
was to strengthen an industry that is
so undeniably vital to the economic
sugar industry.

2. Regulation - as in case of taxes levied
on excises or privileges like those
imposed on tobacco and alcoholic
products, or amusement places like
night clubs, cabarets, cockpits, etc.
Illustration: In Caltex Philippines v.
COA (G.R. No. 92585, May 8, 1992) ,
it was held that taxes may also be
imposed for a regulatory purpose as,
for instance, in the rehabilitation and
stabilization of threatened industry
which is affected with public interest,
like the oil industry.

3. Reduction of social inequality also
known as compensatory purpose. This
is made possible through the
progressive system of taxation in the
Philippines which prevents the undue
concentration of wealth in the hands of
few individuals. Progressivity is based
on the principle that those who are
able to pay more should shoulder the
bigger portion of the tax burden.
Illustration: Present rates on income,
estate, and gift taxes

4. Encourage economic growth In the
realm of tax exemptions and tax
reliefs, the purpose is to grant
incentives or exemptions to encourage
investments and thereby promote
economic growth.

5. Protectionism In case of foreign
importations, protective tariffs and
customs are imposed for the benefit of
local industries.

THEORY AND BASES OF TAXATION
A. Life-blood theory - without taxes, the
government would be paralyzed for lack of
motive power to activate and operate it.
Hence, despite the natural reluctance to
surrender part of ones earned income to
the taxing authorities, every person who is
able must contribute his share in the
POWER OF TAXATION

San Beda College of Law
2012 CENTRALIZED BAR OPERATIONS
2
TAXATION LAW | General Principles
running of the government. (CIR v. Algue,
G.R. No. L-28896, Feb. 17, 1988)

B. Necessity Theory the existence of the
government is a necessity. It cannot
continue without a means to pay its
expenses and therefore has a right to
compel all citizens and property within its
power to contribute.

C. Benefits-Protection/Reciprocity Theory
(Doctrine of Symbiotic Relationship) -
The State demands and receives taxes
from the subjects of taxation within its
jurisdiction so that it may be enabled to
carry its mandate into effect and perform
the functions of Government, and the
citizen pays from his property the portion
demanded in order that he may, by means
thereof, be secured in the enjoyment of
the benefits of organized society.

This theory spawned the DOCTRINE OF
SYMBIOTIC RELATIONSHIP: Taxes are
what we pay for civilized society. Without
taxes, the government would be paralyzed
for lack of motive power to activate and
operate it. Hence, despite the natural
reluctance to surrender part of one's hard-
earned income to the taxing authorities,
every person who is able must contribute
his share in the burden of running 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 material and moral values.
(CIR v. Algue, supra)

Thus, the taxpayer cannot question the
validity of the tax law on the ground that
payment of such tax will render him
impoverished, or lessen his financial or
social standing, because the obligation to
pay taxes is involuntary and compulsory,
in exchange for the protection and benefits
he receives from the government.

Special benefits to taxpayers are not
required. A person cannot object to or
resist the payment of taxes solely because
no personal benefit to him can be pointed
out arising from the tax. (Aban, Law on
Basic Taxation in the Philippines, citing
Lorenzo v. Posadas, etc., 64 Phil. 353)

CHARACTERISTICS OF A SOUND TAX
SYSTEM (FAT)
1. Fiscal Adequacy sources of
government revenue must be sufficient to
meet government expenditures and other
public needs. Neither an excess nor a
deficiency of revenue vis--vis the needs
of government would be in keeping with
the principle.
2. Administrative Feasibility tax laws
must be capable of being effectively
enforced with the least inconvenience to
the taxpayer.
3. Theoretical Justice a sound tax system
must be based on the taxpayers ability to
pay (Ability to Pay Theory). Our laws
mandate that taxes must be reasonable,
fair, just, and conscionable. The
Constitution provides that taxation must be
uniform and equitable and that the State
must evolve a progressive system of
taxation.

Will a violation of these principles
invalidate a tax law?

It depends. A tax law will retain its validity
even if it is not in consonance with the
principles of fiscal adequacy and
administrative feasibility because the
Constitution does not expressly require so.
These principles are only design to make our
tax system sound. However, if a tax laws runs
contrary to the principle of theoretical justice,
such violation will render the law
unconstitutional considering that under the
Constitution, the rule of taxation should be
uniform and equitable. (Sec.28(1), Art. VI,
1987 Constitution)

Broad spectrum of taxation - it is supreme,
plenary, all encompassing, unlimited,
awesome, pierces all kinds of properties,
rights and activities, subject to the no-
injunction rule and it is the power of destroy.

I. Inherent Attribute of Sovereignty
The moment the State exists, the power to
tax automatically exists.
A. Basis: Life blood theory

B. Manifestations:
1. Imposition even in the absence of
constitutional grant;
2. States right to select objects and
subjects of taxation;
3. Rule: No injunction to enjoin
collection of taxes (see Court of Tax
Appeals chapter, p. 261 for further
discussion of the No Injunction
Rule);
NATURE OF THE TAXING POWER

3

4. Rule: Taxes could not be the
subject of set-off or compensation;
(see Domingo v. Garlitos, p. 8 for
lone exception)
5. Taxation is an unlimited or plenary
power.

C. Distinction between National
Government and Local Government
Unit (LGU)
1. National Government - inherent
2. Local Government Unit - not
inherent since it is merely an agency
instituted by the State for the
purpose of carrying out in detail the
objects of the government; can only
impose taxes when there is:
a. Constitutional Grant
b. Legislative Grant

D. Grant of Taxing Power of LGU
Constitutional Grant
Power is derived from Article X,
Section 5 of the 1987 Constitution,
which is self-executing.
The taxing power of the
Autonomous Regions is conferred
by Congress through law. Art. X No.
2, Sec. 20 of the Constitution which
is a non-self-executing provision.
Thus the power is granted by
Congress because said provision
requires an enabling law.

II. Legislative in Character
A. Basis: Taxes are a grant of the
people who are taxed, and the grant
must be made by the immediate
representatives of the people. And
where the people have laid the power,
there it must remain and be
exercised. (1 Cooley Taxation, 3
rd

ed., p.43)

B. Scope of Legislative Power
1. Determine:(SM PARKS)
a. Subjects of taxation (persons,
property, occupation, excises
or privileges to be taxed,
provided they are within the
taxing jurisdiction);
b. Method of collection;
c. Purposes for which taxes shall
be levied provided they are for
public purposes;
d. Apportionment of the tax
(whether the tax shall be of
general application or limited
to a particular locality, or partly
general and partly local);
e. Amount or Rate of tax;
f. Kind of tax to be collected;
and
g. Situs of taxation .

2. Grant tax exemption or
condonations; and
3. Specify or provide for the
administrative as well as judicial
remedies that either the
government or the taxpayers may
avail themselves improper
implementation of the tax measure
(Petron v. Pililla, G.R. No. 158881,
April 16, 2008)

Note: As a general rule, the power to tax
is plenary and unlimited in its range,
acknowledging in its very nature no limits,
so that the principal check against its
abuse is to be found only in the
responsibility of the legislature (which
imposes the tax) to its constituency who
are to pay it. Nevertheless, it is
circumscribed by constitutional limitations.
At the same time, like any other statute,
tax legislation carries a presumption of
constitutionality. (CREBA Inc. v. Romulo,
G.R. No. 160756, March 9, 2010)

Is the Power to Tax the Power to
Destroy?
Two Views:
1. U.S. Chief Justice Marshall in
McCulloch v. Maryland (4 Wheat, 316
4 L ed. 579, 607) opined that the
power to tax involves the power to
destroy. 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 the support of the
government.
2. Justice Holmes declared in Panhandle
Oil Co. v. Mississippi (277 US 218)
that the power to tax is not the power
to destroy while this court sits.

Reconciliation of the two views:

Marshalls view refers to a valid tax while
the Holmes view refers to an invalid tax.

The imposition of a valid tax could not be
judicially restrained merely because it
would prejudice taxpayers property.

An illegal tax could be judicially declared
invalid and should not work to prejudice a
taxpayers property.

4
The power to tax includes the power to
destroy if it is used validly as an implement
of the police power in discouraging and in
effect, ultimately prohibiting certain things
or enterprises inimical to the public
welfare. But where the power to tax is
used solely for the purpose of raising
revenues, the modern view is that it
cannot be allowed to confiscate or destroy.
If this is sought to be done, the tax may be
successfully attacked as an
unconstitutional exercise of the discretion
usually vested in the legislature in
ascertain the amount of the tax. (Cruz,
Constitutional Law, 2002, p. 88)

The power to tax is sometimes called the
power to destroy. Therefore, it should be
exercised with caution to minimize injury to
the proprietary rights of a taxpayer. (Roxas
v. CTA, G.R. L-25043, April 26, 1968)

Comparison of Power of Taxation with
Other Inherent Powers
Taxation
Police
Power
Eminent
Domain
Purpose
To raise
revenue
To promote
public welfare
through
regulations
To facilitate the
taking of
private
property for
public use
Amount of Exaction
No limit, but
as much as
possible,
must be equal
to the needs
of Govt. in
order to avoid
a deficit
scenario for
the State.
Limited to the
cost of
regulation,
issuance of
the license or
surveillance
(fee)
No amount
imposed but
rather the
owner is paid
the market
value of the
property taken
Benefits Received
No special or
direct benefit
is received by
the taxpayer;
merely
general
benefit of
protection
No direct
benefit is
received; a
healthy
economic
standard of
society is
attained
A direct benefit
results in the
form of just
compensation
to the property
owner
Non-Impairment of Contracts
Contracts
may not be
impaired
Contracts
may be
impaired
Contracts may
be impaired
Transfer of Property Rights
Taxes paid
become part
of public
funds
No transfer
but only
restraint in its
exercise
Transfer is
effected in
favor of the
State
Taxation
Police
Power
Eminent
Domain
Scope
All persons,
property and
excises
All persons,
property,
rights and
privileges
Only upon a
particular
property
Who Exercises the Power
May be
exercised
only by the
government
or its political
subdivisions
May be
exercised
only by the
government
or its political
subdivisions

May be:
a) Exercised
by the
government or
its political
subdivisions;
b) Granted to
public service
companies or
public utilities

Taxes are the enforced proportional
contributions from persons and property levied
by the law-making body of the State by virtue
of its sovereignty for the support of the
government and for public needs. (1 Cooley
62)

The term "tax" frequently applies to all kinds of
exactions of monies which become public
funds. It is often loosely used to include levies
for revenue as well as levies for regulatory
purposes such that license fees are frequently
called taxes although license fee is a legal
concept distinguishable from tax: the former is
imposed in the exercise of police power
primarily for purposes of regulation, while the
latter is imposed under the taxing power
primarily for purposes of raising revenues.
(Progressive Development Corp. v. Quezon
City, G.R. No. L-36081, April 24, 1989).

Essential Characteristics (SLEP
6
)
1. It is imposed by the State which has
jurisdiction over the person, property, or
excises;
2. It is levied by the Law-making (legislative)
body of the state;
3. It is an Enforced contribution not
dependent on the will of the person taxed,
not a contract but a positive act of the
government;
4. It is generally Payable in money
Generally, it is a pecuniary burden payable
in money, but backpay certificates may be
used in payment of tax. (Borja v. Gella,
G.R. No. L-18330 July 31, 1963)
Rationale: the taxpayer is not allowed to
settle his tax liability by conveying property
TAXES

5

in view of the problem of assigning value
to such property;
5. It is Proportionate in character taxes
must be based on ability to pay in
accordance with the constitutional
mandate to Congress to evolve a
progressive system of taxation;
6. It is levied on Persons, property, and
excise;
7. It is levied for Public purpose/s;
8. It is paid at regular Periods or intervals;
9. It is Personal to the taxpayer.

Examples:
1. Restitution by the heirs in case of
estate tax deficiency. (Sec. 91(c),
NIRC)
2. A corporation's tax delinquency cannot
be enforced against its stockholders.

Exception: 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.

Requisites of a Valid Tax (JAPUL)
1. That either the person or property taxed
be within the Jurisdiction of the taxing
authority;
2. That the Assessment and collection of
certain kinds of taxes guarantee against
injustice to individuals, especially by
providing notice and opportunity for
hearing;
3. That it should be for a Public purpose;
4. The rule of taxation shall be Uniform;
5. The tax must not impinge on the inherent
and Constitutional Limitations on the
power of taxation

Classification of Taxes

I. As to subject matter
A. Personal, poll or capitation tax of
a fixed amount imposed upon persons
residing within a specified territory,
whether citizens or not, without regard
to their property, occupation or
business in which they may be
engaged (e.g. Community tax).
B. Property tax imposed on property,
whether real or personal, in proportion
either to its value or some other
reasonable rule of apportionment (e.g.
Real property tax).
C. Excise or Privilege charge imposed
upon the performance of an act, the
enjoyment of a privilege or engaging
in an occupation, profession or
business (e.g. donors tax, estate tax,
VAT, income tax).

II. As to who bears the burden and
incidence
A. Direct tax which is exacted from
the very persons who are primarily
liable to pay them; the taxpayer
cannot shift the burden of its payment
to another. The liability for the
payment of the tax (incidence), as
well as the impact (or burden) of the
tax, falls on the same person (e.g.
income tax, community tax).

B. Indirect tax wherein the incidence
or liability for the payment falls on
one person but the burden can be
shifted or passed on to another (e.g.
VAT, percentage tax).

The Constitution does not prohibit the
imposition of indirect taxes like the VAT.
The Constitution has been interpreted to
mean simply that direct taxes are to be
preferred and as much as possible,
indirect taxes should be minimized
(Tolentino v. Secretary of Finance, G.R.
No. 115455, October 30, 1995).

The imposition of indirect taxes is NOT a
violation of the principle that taxes are
personal liabilities, the payment of which
cannot be transferred to another person.
When the seller passes on the tax to his
buyer, he is only shifting the tax burden
(not the liability to pay it) to the purchaser
as part of the costs of the goods sold or
services rendered. (Aban, Law of Basic
Taxation in the Philippines, p. 24)

III. As to purpose
A. General, fiscal or revenue tax
imposed for the general or ordinary
purposes of the Government, to raise
revenue for governmental needs.
(e.g. income tax)
B. Special, regulatory or sumptuary
tax imposed for a special purpose, to
achieve some social or economic
ends irrespective of whether revenue
is actually raised or not. (e.g.
countervailing and dumping duties
under the TCC)

IV. As to how amount is determined
A. Specific tax of a fixed amount
imposed by the head or number or by

6
some standard of weight or
measurement; it requires no
valuation other than a listing or
classification of the objects to be
taxed. (e.g. tax on fermented liquors,
cigars, distilled spirits)

B. Ad Valorem (Value) tax of a fixed
portion of the value of the property
with respect to which the tax is
assessed; it requires the intervention
of assessors or appraisers to
estimate the value of such property
before the amount due from each
taxpayer can be determined. (e.g.
real property tax)

V. As to taxing authority
A. National levied by the National
Government. (e.g. NIRC taxes,
customs duties)
B. Local or Municipal levied by the
local government (e.g. Real property
tax, occupation tax)

VI. As to rate
A. Progressive or graduated the tax
rate increases as the tax base or
bracket increases. (e.g. income tax
on individuals, estate tax and donors
tax)
B. Regressive the tax rate decreases
as the tax base increases.
C. Proportionate tax rate is based on
a fixed percentage of the amount of
the property, receipts or other bases
to be taxed. (e.g. real property tax,
VAT and 3% percentage tax)

Distinctions of Tax from Other
Impositions

I. Tax vs. Debt
Taxes Debt
Basis
Based on law
Based on contract or
judgment
Failure to Pay
Failure to pay tax
(other than poll tax)
may result in
imprisonment.
No imprisonment for
non-payment of debt
Mode of Payment
Generally payable in
money
Payable in money,
property, or service.
Assignability

Not assignable

Assignable
Taxes Debt
Payment
Not subject to
compensation or set-
off (see Domingo v.
Garlitos, p. 8)
May be subject to
compensation or set-
off
Interest

Tax does not draw
interest unless
delinquent
Debt draws interest if
stipulated or delayed
Authority
Imposed by public
authority
Imposed by private
individuals
Prescription
Determined by NIRC
Determined by Civil
Code

II. Tax vs. Toll
Taxes Toll
Definition
Demand of sovereignty
for the purpose of
raising public revenue
Demand of
ownershipan amount
charged for the cost
and maintenance of
property used
Purpose
Taxes are levied for
the support of the
government
Tolls are compensation
for the use of anothers
property
Determination of Amount
The amount of tax is
determined by the
sovereign
The amount of the toll
is determined by the
cost of the property or
of the improvement
Who may impose
May only be imposed
by the State
Imposed by the
government or private
individual.

III. Tax vs. Special Assessment
Taxes
Special
Assessments
Definition
Imposed only on
persons, properties,
and excises

Special levy on the
lands comprised within
the territorial
jurisdiction of a
province, city, or
municipality specially
benefited by the public
works projects or
improvements funded
by the LGU concerned

Subject
Taxes are levied on
land, persons,
property, income,
business, etc.
Levied on land
Liability
Personal liability of the

7

Taxes
Special
Assessments
taxpayer Cannot be made a
personal liability of the
person assessed
Basis
Based on necessity
and partially on
benefits
Based solely on
benefits
Application
General application

Special application
only as to a particular
time and place

IV. Tax vs. License fee
Tax License Fee
Basis
Based on the power of
taxation
Based on police power
Purpose
Purpose is revenue Purpose is regulation
Limitation on Amount
Amount is unlimited
Amount is limited to
the cost of:
1. Issuance of
license
2. Inspection and
surveillance
When paid
Normally paid the start
of business
Normally paid before
the commencement of
business
Surrender
Taxes, being the
lifeblood of the State,
cannot be surrendered
except for lawful
consideration
License fee may be
with or without
consideration
Effect of non-payment
Non-payment does not
make the business
illegal but may be
ground for criminal
prosecution
Non-payment makes
the business illegal.

If the generating of revenue is the primary
purpose and regulation is merely incidental,
the imposition is a tax; but if regulation is the
primary purpose, the fact that incidental
revenue is also obtained does not make the
imposition a tax (Progressive Development
Corp. v. Quezon City, G.R. No. L-36081, April
24, 1989).

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 (PAL v. Edu, G.R. L-
41383, August 15, 1988).

It is possible for an exaction to be both tax and
regulation. License fees are looked to as a
source of revenue as well as a means of
regulation (Sonzinky v. U.S., 300 U.S. 506)
This is true, for example, of automobile license
fees (ibid.)

Importance of Distinction of Tax from Fee:
1. The government instrumentality that
imposes the exaction may have no
authority to collect the tax but is authorized
to collect the fees.

3. The person, who is required to pay the
exaction, may be exempt from tax but not
from the payment of fees.
3. For income tax purposes, the tax, not fees,
may be claimed as income tax deduction.
(Recalde, A Treatise on Tax Principles
and Remedies, pp.7-9).

V. Tax vs. Penalty
Tax Penalty
Definition
Enforced proportional
contributions from
persons and property
Sanction imposed as a
punishment for
violation of law or acts
deemed injurious;
violation of tax laws
may give rise to
imposition of penalty
Purpose
Intended to raise
revenue
Designed to regulate
conduct
Authority
May be imposed only
by the government
May be imposed by
the:
1. Government
2. Private individuals
or entities

VI. Tax vs. Tariff
Tax Tariff
All embracing term to
include various kinds
of enforced
contributions upon
persons for the
attainment of public
purposes
A kind of tax imposed
on articles which are
traded internationally

VII. Tax vs. Compromise Penalty
Tax
Compromise
Penalty
Basic imposition on
persons, property, and
excises
Collected as a
compromise in cases
involving violations of
the Tax Code, rules or

8
regulations.

VIII. Tax vs. Subsidy
Tax Subsidy
Levied by the law-
making body of the
State for the support of
the government and for
public needs.
A legislative grant of
money in aid of a
private enterprise
deemed to promote
the public welfare.

IX. Tax vs. Revenue
Tax Revenue
A source of revenue of
the government
A broad term that
includes not only taxes
but income from other
sources as well.

Special Principles in Taxation

I. Doctrine of Equitable Recoupment -
Where the refund of a tax illegally or
erroneously collected or overpaid by a
taxpayer is barred by prescription, a tax
presently being assessed against a
taxpayer may be recouped or set-off
against the tax whose refund is not barred
by prescription.
This is a case where the taxpayer has a
claim for refund but he was not able to file a
written claim due to lapse of the
prescription period within which to make a
refund is allowed. Under this doctrine, the
taxpayer is allowed to credit such refund to
his existing tax liability.

Note: Equitable recoupment is allowed
only in common law countries, not in the
Philippines. This rule is absolute, there is
no exception at all.

Rationale: If allowed, both the collecting
agency and the taxpayer might be tempted
to delay and neglect the pursuit of their
respective claims within the period
prescribed by law

II. Compensation or Set-off Compensation
shall take place when two persons, in their
own right, are creditors and debtors of each
other (Article 1278, New Civil Code).

This presupposes mutual obligations
between the parties, and that they are
mutual creditors and debtors of each other.

In taxation, the concept of setoff arises
where a taxpayer is liable to pay tax but the
government, for one reason or another, is
indebted to the said taxpayer.

Rule: No set-off is admissible against the
demands for taxes levied for general or
local governmental purposes.

Rationale: Taxes are not in the nature of
contracts between the parties but grow out
of duty to, and are positive acts of the
government to the making and enforcing of
which, the personal consent of the
individual taxpayer is not required.
(Republic v. Mambulao, G.R. No. L-17725
February 28, 1962).

Exception: Compensation was allowed in
one exceptional case where the Supreme
Court held that the doctrine of set-off may
be applied. (Domingo v. Garlitos, G.R. No.
L-18849, June 29, 1963),

Reason: Compensation was recognized in
this case because both the claim of the
Government for inheritance tax and the
claim of the estate for services rendered
have already become overdue and
demandable and fully liquidated. Further,
an amount for the claim of the estate had
already been appropriated by the
Government by virtue of a law, R.A. 2700
(General Appropriations Act of 1960).

There can be legal compensation for tax
purposes as long as all the requisites under
Article 1279 of the Civil Code are present.
The claims of the taxpayer and the
Government in such case must be brought
before a court where the aforementioned
claims must be pleaded and proved. If all
the requisites under Article 1279 are
present, then there is no reason why the
court cannot declare set-off. (Recalde, A
Treatise on Tax Principles and Remedies,
p.32).

III. Taxpayers Suit
A taxpayer has the right to file an action to
question the validity, or constitutionality, of
a statute or law.

The right is based on the fact that
expenditure of public funds by an officer for
the purpose of administering or
implementing an invalid or unconstitutional
law is a misapplication of such funds.

It is only when an act complained of, which
may include a legislative enactment,
directly involves the illegal disbursement of

9

public funds derived from taxation that the
taxpayers suit may be allowed (Vitug and
Acosta, Tax Law and Jurisprudence citing
Pascual v. Secretary of Public Works, G.R.
No. L-10405, December 29, 1960).

Requisites of a Taxpayers Suit
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. Petitioner is directly affected by the
alleged act (Mamba v. Lara, G.R. No.
165109, December 14, 2009).

In Mamba v. Lara, although the
construction of the town center would be
primarily sourced from the proceeds of the
bonds, which respondents insist are not
taxpayer's money, a government support
in the amount of P187 million would still be
spent for paying the interest of the bonds.
Records also show that the governor
requested the Sanggunian to appropriate
an amount of P25 million for the interest of
the bond. Clearly, the first requisite has
been met.

As to the second requisite, the court, in
recent cases, has relaxed the stringent
"direct injury test" bearing in mind that
locus standi is a procedural technicality. In
cases where serious legal issues were
raised or where public expenditures of
millions of pesos were involved, the court
did not hesitate to give standing to
taxpayers. The Court finds no reason to
deviate from the jurisprudential trend. The
amount involved in this case is substantial.
Under the various agreements ratified by
the Sanggunian, the province would incur
costs totalling P231,908,232.39.

IV. Rule of NO Estoppel Against the
Government
Rule: The Government is not estopped by
the mistakes or errors of its agents;
erroneous application and enforcement of
law by public officers do not bar the
subsequent correct application of statutes
(E. Rodriguez, Inc. v. Collector, G.R. No.
L-23041, July 31, 1969).

Rationale: Upon taxation depends the
Governments ability to serve 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. (Recalde, A Treatise on Tax
Principles and Remedies, p.33).

Exception: In the interest of justice and
fair play, as where injustice will result to
the taxpayer (See CIR v. CA, G.R. No.
117982, Feb. 6, 1997; CIR v. CA, G.R. No.
107135, Feb. 3, 1999).

The Commissioner is precluded from
adopting a position inconsistent with the
one previously taken where injustice would
result therefrom or where there has been a
misrepresentation to the taxpayer.
(Balmaceda v. Corominas and Co., Inc.,
G.R. No. L-21971, September 5, 1975)

The power to tax is the strongest of all the
powers of government. Nevertheless, effective
limitations thereon may be imposed by the
people through their constitution. Accordingly,
no matter how broad and encompassing the
power of taxation, it is still subject to inherent
and constitutional limitations.

I. Inherent Limitations they proceed
from the very nature of the taxing power
itself. They are otherwise known as
elements or characteristics of taxation.
(SPINE)
A. Territoriality or Situs
B. Public Purpose
C. International Comity
D. Non-delegability of the taxing power
E. Exemption of the Government

A violation of the inherent limitations
constitutes taking without due process of
law. (Vitug and Acosta, Tax Law and
Jurisprudence, p.4, citing Pepsi Cola v.
Municipality of Tanauan, G.R. No. L-31156
February 27, 1976)

II. Constitutional Limitations
restrictions imposed by the Constitution.

A. General or indirect
1. Due process requirement;
2. Equality of taxation and
requirement of uniformity and
equitability of taxation;
3. Freedom of speech and
expression;
4. Freedom of religion;
LIMITATIONS OF TAXATION

10
5. No taking of private property
without just compensation;
6. Non-impairment of obligations of
contract;
7. Law-making process;
8. Presidential power to grant
reprieves, commutations and
pardons, and remit fines and
forfeitures after conviction by final
judgment.

B. Specific or direct
1. Uniformity and equitablility;
2. Progressive system of taxation;
3. Non-imprisonment for non-
payment of poll tax;
4. Origin of revenue or tariff bills;
5. Veto power of the President;
6. Delegated authority of President
to impose tariff rates, import and
export quotas, tonnage and
wharfage dues;
7. Tax exemption of charitable
institutions, churches and
parsonages or convents
appurtenant thereto, mosques,
non-profit cemeteries and all
lands, buildings and
improvements actually, directly,
and exclusively used for religious,
charitable or educational
purposes;
8. Voting requirement;
9. No use of public money or
property for religious purposes;
10. Prohibition on use of tax levied for
special purpose or special
assessments;
11. Supreme Courts power to review
judgments or orders of lower
courts;
12. Grant of authority to LGUs;
13. Tax exemption granted to
nonstock, non-profit educational
institutions;

INHERENT LIMITATIONS (PINGS)
A. Territoriality or Situs of Taxation
Situs of taxation or place of taxation.
It is the place or authority that has the right
to impose and collect taxes (CIR v.
Marubeni Corp., G.R. No. 137377, Dec.
18, 2001).

Rule: A state may not tax property lying
outside its borders or lay an excise or
privilege tax upon the exercise or
enjoyment of a right or privilege derived
from the laws of another state and therein
exercised or enjoyed (51 Am. Jur. 87-88).

Rationale:
1. Taxation is an act of sovereignty
which could only be exercised within a
countrys territorial limits.
2. This is the result of the concept that
taxes are paid for the protection and
services provided by the taxing
authority which could not be provided
outside the territorial boundaries of the
taxing state (Benefits-Protection
Theory).

Exceptions:
1. Where tax laws operate outside
territorial jurisdiction.
Example: Taxation of resident citizens
and domestic corporations on their
income from sources without the
Philippines.
2. Where tax laws do not operate within
the territorial jurisdiction of the state.
a. When exempted by treaty
obligations;
b. When exempted by international
comity.

Factors that Determine Situs: (K-
PRICE)
1. Kind or classification of the tax being
levied
2. Situs of the thing or Property taxed
3. Citizenship of the taxpayer
4. Residence of the taxpayer
5. Source of the Income taxed
6. Situs of the Excise, privilege, business
or occupation being taxed

Situs of Subjects of Tax
1. Persons poll, capitation or community
taxes are based upon the residence of the
taxpayer, regardless of the source of
income or location of the property of the
taxpayer.

2. Property
a. Real property Lex rei sitae or lex
situs (where the property is located).

b. Tangible personal property where
the property is physically located
although the owner resides in another
jurisdiction (51 Am. Jur. 467).

c. Intangible Personal Property
i. General Rule: Mobilia sequuntur
personam (movables follow the
person). The situs is the domicile
of the owner.

11

ii. Exceptions:
When the property has acquired
a business situs in another
jurisdiction; or
When the law provides for the
situs of the subject of tax (e.g.,
see Sec. 104, NIRC)

d. Income Factors that determine the
situs of income tax: (see Sec. 23,
NIRC)
i. Nationality or citizenship of the
taxpayer;
ii. Residence or domicile of the
taxpayer; and
iii. Source of the income

e. Excise or Privilege (upon the
performance of an act or the
engaging in an occupation) -
depends upon the place where the act
is performed or occupation is engaged
in (not upon the domicile of the person
subject to the excise nor upon the
physical location of the property and in
connection with the act or occupation
taxed) (Allied Thread v. City Mayor of
Manila, G.R. No.40296, Nov. 21,
1984)

f. Gratuitous Transfer the
transmission of property from a donor
to a donee, or from a decedent to his
heirs may be subject to taxation in the
state where the transferor is (was) a
citizen or resident, or where the
property is located in case of a non
resident.

B. Public Purpose
Public purpose embraces not merely direct
public benefit advantage but also indirect
public benefit. (Cruz, Constitutional Law,
2002)

The power to determine public purpose is
a legislative prerogative.

The proceeds of the tax must be used for:
1. The support of the State; or
2. Some recognized object of
government or directly to promote the
welfare of the community. (Vitug and
Acosta, Tax Law and Jurisprudence,
p.5)
The legislature is without power to
appropriate public revenues for
anything but a public purpose.
(Sababan, Taxation Law Review,
p.5)
It is the essential character of the
direct object of the expenditure
which must determine its validity.
Incidental advantage to the public
or the State, which results from
the promotion of private interests,
does not justify their aid by the
use of public money (Pascual v.
Secretary of Public Works, G.R.
No. L-10405, December 29, 1960)

Tests to Determine Public Purpose
1. Duty Test whether the thing to be
furthered by the appropriation of public
revenue is something which is the
duty of the State as a government to
provide.
2. Promotion of General Welfare Test
whether the proceeds of the tax will
directly promote the welfare of the
community in equal measure. (Aban,
Law of Basic Taxation, pp.53-54)

Cases of Public Purpose
1. Public improvement
2. Unemployment relief
3. Buildings and roads/infrastructure
4. Subsidies for local police forces under
R.A. 6142
5. Industries classified as indispensable
under P.D. 1987 (An Act Creating the
Videogram Regulatory Board)
6. Construction of home sites
7. Promotion of science and invention
8. Upliftment of the underprivileged
9. Rehabilitation of the sugar industry
10. Pensions to deserving retirees
11. Oil industry's protection
12. Socialized housing
13. Educational subsidy

C. International Comity
Basis: Sec. 2, Art. II, 1987 Constitution
which provides that the Philippines adopts
the generally-accepted principle of
international law as part of the law of the
land.

Comity the respect accorded by nations
to each other because they are sovereign
equals.

If a tax law is passed imposing taxes on
the income of foreign ambassadors or
imposing real property tax upon foreign
embassies, this is not a valid law because
the imposition is in violation of the
universal principles of international law.

12
Bases of the rule:
1. In par parem non habet imperium - as
between equals there is no sovereign
(Doctrine of Sovereign Equality).
2. The rule of international law that a
foreign government may not be sued
without its consent. Thus, it would be
useless to impose a tax which could
not be collected
3. The concept that when a foreign
sovereign enters the territorial
jurisdiction of another, it does not
subject itself to the jurisdiction of the
other.

D. Non-Delegation of Taxing Power

Rule: Delegata potestas non potest
delegari. (A delegated power cannot be
further delegated.) Since the power of
taxation is a power that is exercised by
Congress as delegates of the people, then
as a general rule, Congress could not re-
delegate this delegated power.

Exceptions:
1. Local governments power of taxation
2. When allowed by the constitution
(TEE)
Delegation of Tariff powers by
Congress to the President under
the flexible tariff clause. (Sec.
28(2), Art. VI, 1987 Constitution)
Delegation of Emergency powers
to the President (Sec. 23(2), Art.
VI, 1987 Constitution)
Delegation to the President to
enter into Executive agreements,
and to ratify treaties which may
contain tax exemption provisions
subject to the concurrence by the
Senate in the ratification made by
the President;
3. When the delegation relates merely to
administrative implementation that
may call for some degree of
discretionary powers under a set of
sufficient standards expressed by law
or implied from the policy and
purposes of the act.

Limitations of the exceptions
1. The delegation shall not contravene
any constitutional provisions or the
inherent limitations
2. The delegation is effected either by
the Constitution or by validly enacted
legislative measures or statutes. And
3. The delegated levy power, except
when the delegation is by an express
provision of the constitution itself,
should only be in favor of the local
legislative body of the local or
municipal government concerned.

Stages/Aspects of a System of Taxation
1. Tax legislation (levy) This refers to
the enactment of a law by Congress
authorizing the imposition of tax.
a. Determination of the subject of
taxation
b. Determination of the purposes for
which taxes shall be levied;
c. Fixing the rate of taxation;
d. Rules of taxation in general
(manner, means and agencies of
collection)

2. Tax administration This is the act
of administration and implementation
of the tax law by executive through its
administrative agencies.
a. Assessment;
b. Collection;

3. Payment This is the act of
compliance by the taxpayer, including
such options, schemes or remedies as
may be legally available to him.

Rule:
a. If what is delegated is tax
legislation, the delegation is
invalid;
b. If what is delegated is tax
administration, the delegation is
valid.

E. Exemption of the Government
Rule: Properties of the national
government as well as those of the local
government units are NOT subject to tax,
otherwise it will result in the absurd
situation of the government taking money
from one pocket and putting it in another
(Cooley on Taxation, Sec. 621, 4th ed. as
cited in Board of Assessment Appeals of
Laguna v. CTA, G.R. No. L-18125, May
31, 1963).

As a matter of PUBLIC POLICY, property
of the State and of its municipal
subdivisions devoted to government uses
and purposes is generally deemed to be
exempt from taxation although no express

13

provision in the law is made therefore (51
Am. Jur. 503).

As a rule, agencies performing
governmental functions are tax exempt
unless expressly taxed. On the other
hand, agencies performing proprietary
functions are subject to tax unless
expressly exempted. GOCC perform
proprietary functions hence are subject to
taxation, except:
1. GSIS
2. SSS
3. PHIC
4. PCSO

Instrumentality of the National
Government is exempt from real property
tax.

Example:
Manila International Airport Authority
(MIAA)
Philippine Fisheries Development
Authority (PFDA)

The Supreme Court held in Manila
International Airport Authority v. Court of
Appeals (G.R. No. 155650, July 20, 2006)
that the real properties of MIAA are owned
by the national government and thus
exempt from real estate tax. It considered
MIAA as a government instrumentality
under Sec. 133(o) of the LGC which
provides that exercise of the taxing
powersshall not extend to the levy of :
taxes, fees or charges of any kind on the
National government, its agencies and
instrumentalities and local government
units.

Note: See case of Mactan Cebu
International Authority v. Marcos (G.R. No.
120082, September 11, 1996) where
MCIAA was considered as a GOCC and
thus not tax exempt.

This has been echoed in the case of Phil.
Fisheries Development Authority v. The
Municipality of Navotas (G.R. No. 150301,
October 2, 2007) wherein the SC ruled
that PFDA, being an instrumentality if the
national government, is exempt from real
property tax. (Dimaampao, Tax Principles
and Remedies, pp.55-56)

Other reasons for the rule:
1. So that the functions of the
government shall not be unduly
impeded (51 Am. Jur. 550-51)
2. To reduce the amount of money that
has to be handled by the government
in the course of its operations
(Maceda v. Macaraig, G.R. No. 88291,
June 8, 1993).

HOWEVER, the Constitution is silent on
whether Congress is prohibited from
taxing the properties of the agencies of the
government. Therefore, nothing can
prevent Congress from decreeing that
even instrumentalities or agencies of the
government performing governmental
functions may be subject to tax. (MCIAA v.
Marcos, G.R. No. 120082, Sept. 11, 1996)

Pursuant to the provisions of the
NIRC, the National Government may
levy income tax upon corporations,
agencies and instrumentalities owned
or controlled by the government
subject to exceptions as provided
therein (Sec. 27(C). However, under
Sec. 32(B)(7)(b), NIRC, income
derived by the government from any
public utility and from the exercise of
any essential governmental functions
are exempt from income tax.

UNLESS OTHERWISE PROVIDED
BY LAW, the exemption applies only
to government entities through which
the government immediately and
directly exercises its government
powers. (Infantry Post Exchange v.
Posadas, G.R. No. 33403, Sept. 4,
1930)

CONSTITUTIONAL LIMITATIONS
A. General or Indirect Constitutional
Limitations
1. Due Process Clause (Sec. 1, Art. III,
1987 Constitution)

Any deprivation is with due process
if it is done:
a. Under the authority of a law that is
valid or under the Constitution
itself, and that it must be
reasonable, fair and just
(Substantive Due Process); and
b. After compliance with fair and
reasonable methods of procedure
prescribed by law, with notice or
hearing, or at least an opportunity
to be heard whenever necessary
(Procedural Due Process).

Must the adverse party always be
notified?

14
No. As a rule, notice and hearing or the
opportunity be heard is necessary only
when expressly required by law. Where
there is no such requirement, notice and
the opportunity to be heard are
dispensable.

Due process in taxation REQUIRES:
a. Tax must be for a public purpose;
b. Imposed within territorial jurisdiction;
c. No arbitrariness or oppression in
assessment or collection.

Due process in taxation DOES NOT
REQUIRE:
a. Determination through judicial inquiry
of the property subject to tax or the
amount of tax to be imposed;
b. Notice and hearing as of amount of
the tax or the manner of
apportionment.

Where the due process clause is invoked,
considering that it is not a fixed rule but
rather a broad standard, there is a need
for proof of such persuasive character.
The taxing power has authority to make
reasonable classifications for purposes of
taxation. Inequalities resulting from a
singling out of one particular class for
taxation or exemption do not infringe any
constitutional limitation. The real estate
industry is, by itself, a class and can be
validly treated differently from other
business enterprises. (Chamber of Real
Estate and Builders' Associations, Inc. v.
The Hon. Executive Secretary Alberto
Romulo, G.R. No. 160756, March 9, 2010)

Illustration of violations of the due
process clause:
a. If the tax amounts to a confiscation of
property
b. If the subject of confiscation is outside
the jurisdiction of the taxing authority
c. If the law is imposed for a purpose
other than a public purpose
d. If the law which is applied retroactively
imposes unjust and oppressive taxes
e. Where the law is in violation of
inherent limitations

2. Equal Protection Clause (Sec. 1, Art.
III, 1987 Constitution)
Equal protection neither requires
equal rates of taxation on different
classes of property, nor prohibits
unequal taxation so long as the
inequality is not based upon
arbitrary classification. It merely
requires that all persons (or
property, of the same class)
subjected to such legislation shall
be treated alike, under like
circumstances and conditions,
both in the privileges conferred
and in the liabilities imposed
(Cooley, cited in Sison, Jr. v.
Ancheta, G.R. No. 59431 July 25,
1984).
The equal protection clause
may be VIOLATED IN TWO
WAYS:
a. When classification is made
where there should be none
(i.e. where classification does
not rest upon substantial
differences); and
b. When classification is called
for (i.e., when substantial
distinctions exist but no
corresponding classification is
made on the basis thereof.)
(Villegas v. Hiu Chiong Tsai
Pao Ho, G.R. No. L-29646,
November 10, 1978)
The power to select subjects of
taxation and apportion the public
burden among them includes the
power to make classifications. For
the classification to be valid, the
following REQUISITES must
concur:
a. It must be based on
substantial distinctions;
b. It must apply both to present
and future conditions;
c. It must be germane to the
purposes of the law; and
d. It must apply equally to all
members of the same class
(Ormoc Sugar Company v.
Treasurer of Ormoc, G.R. No.
23794, February 17, 1968).

Vertical Equity vs. Horizontal Equity
Vertical equity connotes a
difference in the tax treatment
between those who are financially
well-off and those who have
relatively less.
Horizontal equity implies that
those who are similarly situated in
life should be taxed similarly.

3. Freedom of the Press (Sec. 4, Art.
III, 1987 Constitution)
There is curtailment of press
freedom and freedom of thought
and expression if a tax is levied in

15

order to suppress this basic right
and impose a prior restraint.
(Tolentino v. Secretary of Finance,
Supra)

In the case of Grossjean v.
American Press (297 U.S. 233,
1936), it was held that
the separate sales tax on
newspapers with circulation of
over 20,000 imposed was a
deliberate and calculated device in
the guise of tax to limit the
circulation of information to which
the public is entitled in virtue of the
Constitutional guarantees.

In People v. Korins (385 N.Y.S.
2D 474 [1976]), the U.S. Supreme
Court held that to apply an
ordinance requiring a business
license to be obtained before a
person could sell newspapers in
the streets would be to impose a
prior restraint on press freedom
because a newspaper is not in the
same category as a pineapple or a
soap powder, or a pair of shoes
whose sale may be conditioned on
the possession of a business
license.
However, if the fee imposed is not
for the exercise of a privilege but
only for the purpose of defraying
part of the cost of registration, the
Constitution is not violated.

In Tolentino E-VAT case, it was
held that the requirement to pay
P1,000 (now P500) as annual
registration fee on all persons
subject to VAT is not imposed for
the exercise of a privilege but only
for the purpose of defraying part of
the cost of registration. It is thus, a
mere administrative fee, one not
imposed on the exercise of a
privilege, much less a
constitutional right.

4. Religious Freedom (Sec. 5, Art. III,
1987 Constitution)
This provision contains three
clauses: (1) the non-
establishment clause; (2) freedom
to choose religion clause and (3)
the free exercise clause. The
latter is the basis of tax
exemptions granted to religious
institutions. The first covers the
prohibition to establish a national
or official religion since in that
case, there would be an
appropriation from taxes paid by
the people.
A municipal LICENSE TAX on the
sale of bibles and religious articles
by a non-stock, non-profit
missionary organization at minimal
profit constitutes curtailment of
religious freedom and worship
which is guaranteed by the
Constitution. (American Bible
Society v. City of Manila, G.R. No.
L-9637, April 30, 1957)
Not every imposition of tax
constitutes curtailment of religious
freedom:

In the Tolentino E-VAT case, the
Court held that: What has been
said above also disposes of the
allegations of the PBS that the
publication or importation of books
and religious articles, as well as
their printing and publication,
likewise violates freedom of
thought and conscience. For as
the U.S. Supreme Court
unanimously held in Jimmy
Swaggart Ministries v. Board of
Equalization (493 U.S. 378
[1978]), the Free Exercise of
Religion Clause does not prohibit
imposing a generally applicable
sales and use tax on the sale of
religious materials by a religious
organization.

In the case of Tolentino v. Sec. of
Finance, the Supreme Court
distinguished between a license
tax and a revenue tax. Under
the American Bible Society case,
that was a license tax; the VAT
under R.A. 7716 is a revenue tax.

Rules on Income of Religious
Organizations (Sec. 30 (E), NIRC)

Rule: Income Exempt from Taxation
if:
a. Non-stock corporation;
b. Organized and operated
exclusively for religious,
charitable, scientific, athletic or
cultural, and social welfare
purposes;

16
c. No part of the income inures to the
benefit of any member, organizer,
or any specific person.

Exception: Income of Such
Organizations Taxable if Realized
from:
a. Productive use of property, real or
personal (i.e. rents, dividends,
interests)
b. Profitable Business Pursuits

Note: Regardless of the disposition
made of such income.

5. No taking of private property
without just compensation (Sec. 9,
Art. III, 1987 Constitution)

6. Non-impairment Clause
To impair the obligation of a contract
is to alter or change the terms or effect
of the contract, and thus in
contemplation of law, to weaken the
position or rights of one or all of the
parties to it.

Rule: The power to tax is pursuant to
law, therefore, the obligation to pay
taxes is imposed by law, thus the non-
impairment clause does not apply.

Instance when the non impairment
clause becomes a limitation to the
power to tax?
When the taxpayer enters into a
agreement with the government. In
this instance, the obligation to pay the
tax is now based on the contract
between the taxpayer and the
government pursuant to their
compromise agreement.

Rationale: When the State grants an
exemption on the basis of a contract,
consideration is presumed to be paid
to the State, and the public is
supposed to receive the whole
equivalent therefrom.
The non-impairment clause
applies to the power of taxation
but not to police power and
eminent domain.

Note: It applies only where one
party is the Government and the
other party, a private individual.
(Sababan, Taxation Law Reviewer
2008 ed., p.13)
Examples:
a. When a tax exemption based
on a contract is revoked by a
later taxing statute
(Cassanova v. Hord, G.R. No.
3473, March 22, 1907);
b. Application of the non-
impairment clause depends
on how the exemption was
granted.
When the exemption is bilaterally
agreed upon between the
government and the taxpayer it
cannot be withdrawn without
violating the non-impairment
clause.
When it is unilaterally granted by
law and the same is withdrawn by
virtue of another law no
violation.
When the exemption is granted
under a franchise may be
revoked because under the
Constitution, a franchise is
subject to amendment, alteration,
or repeal by Congress when the
common good so requires. (Sec.
11, Art. XII, 1987 Constitution)

7. Law-making Process
Bill should embrace only one
subject expressed in the title
thereof;
Three (3) readings on three
separate days;
Printed copies in final form
distributed three days before
passage.

8. Presidential power to grant
reprieves, commutations and
pardons and remit fines and
forfeitures after conviction by final
judgment.

B. Specific or Direct Constitutional
Limitation

1. Taxation shall be uniform and
equitable (Sec. 28(1), Art. VI 1987
Constitution)
a. Uniformity all taxable articles or
properties of the same class shall
be taxed at the same rate. (City of
Baguio v. De Leon, G.R. No.
24756, October 31, 1968);

Uniformity, not equality
Rationale: the imposition of a
single tax upon all persons,
properties or transactions would

17

result in inequality. It is manifestly
impractical.
b. Different articles or other subjects
may be taxed at different rates
provided that the rate is uniform
on the same class everywhere.
(De Villata v. Standley G.R. No.
8154 December 20, 1915);
c. Equitability requires that the
apportionment of the tax should
consider the taxpayers ability to
shoulder the tax burden, usually
measured in terms of wealth, and,
if warranted, on the basis of the
benefits he receives from the
government.
d. Taxation may be uniform but
inequitable where the amount is
excessive or unreasonable.

2. Progressive System of Taxation
(Sec. 28(1), Art. VI, 1987 Constitution)
a. A Progressive System of
Taxation means that as the
resources of the taxpayer become
higher, his tax rate likewise
increases.
b. It is based on the ability to pay
and in implementation of the
social justice principle that the
more affluent should contribute
more for the communitys benefit,
and is best exemplified by the
increase of income tax rate as net
taxable income increases.
c. The Constitution does not really
prohibit regressive taxes. What it
simply provides is that Congress
shall evolve a progressive system
of taxation. This is a mere
directive upon Congress, not a
justiciable right. (Tolentino v.
Secretary of Finance, G.R. No.
115455, August 25, 1994)
d. In case of VAT, it is an antithesis
of progressive taxation. By its
very nature, it is regressive. The
principle of progressive taxation
has no relation with the VAT
System inasmuch as the VAT paid
by the consumer or business for
every goods bought or services
enjoyed is the same regardless of
income.

3. Non-imprisonment for non-payment
of poll tax (Sec. 20, Art. III, 1987
Constitution)
a. Poll Tax tax imposed on a per
head basis. The present poll tax
is the community tax.
b. One cannot be imprisoned for
non-payment of poll tax because
payment thereof is not mandatory.
c. While a person may not be
imprisoned for non-payment of
poll tax, he may be imprisoned for
non-payment of other kinds of
taxes where the law so expressly
so provides.

4. Origin of Revenue or Tariff Bills
(Sec. 24, Art. VI, 1987 Constitution)
a. It is not the law but the revenue
bill which is required by the
Constitution to originate
exclusively in the House of
Representatives. A bill originating
in the House may undergo such
extensive changes in the Senate
that the result may be a rewriting
of the whole.
b. The Constitution simply means
that the initiative for filing the bills
must come from the House, on the
theory that, elected as they are
from the districts, the members of
the House can be expected to be
more sensitive to the local needs
and problems (Tolentino v.
Secretary of Finance, supra).

5. Veto Power of the President (Sec.
27(2), Art. VI, 1987 Constitution)
Any particular item or items in an:
a. Appropriation bill;
b. Revenue bill;
c. Tariff bill.
Shall NOT affect item/(s) to which
he does not object

6. Delegated authority of President to
impose tariff rates, import and
export quotas, tonnage and
wharfage dues (Sec. 28 par. 2, Art.
VI, 1987 Constitution)

Flexible Tariff Clause
The Congress may, by law, authorize
the President to fix within specified
limits, and subject to such limitations
and restrictions as it may impose, tariff
rates, import and export quotas,
tonnage and wharfage dues, and
other duties or imposts within the
framework of the national
development program of the

18
Government. (Sec. 28 par. 2, Art. VI,
1987 Constitution)

7. Tax exemption of charitable
institutions, churches and
parsonages or convents
appurtenant thereto, mosques, non-
profit cemeteries and all lands,
buildings and improvements
actually, directly, and exclusively
used for religious, charitable or
educational purposes;
a. Section 28(3), Art. VI, 1987
Constitution, exempts religious
and educational institutions from
real estate tax.
b. Test of Exemption: It is the use
of the property, and not
ownership.
c. Nature of Use: The properties
must be actually, directly and
exclusively used for the purposes
mentioned.
d. Exclusive is defined as
possessed and enjoyed to the
exclusion of others; debarred from
participation or enjoyment; and
exclusively is defined, in a
manner to exclude; as enjoying a
privilege exclusively. If real
property is used for one or more
commercial purposes, it is not
exclusively used for the exempted
purposes but is subject to
taxation. The words dominant
use or principal use cannot be
substituted for the words used
exclusively without doing violence
to the Constitutions and the law.
Solely is synonymous with
exclusively. (Lung Center of the
Philippines v. Quezon City, G.R.
No. 144104, June 29, 2004)

Note: The term extends to
facilities which are incidental to or
reasonably necessary for the
accomplishment of said purposes.
(Abra Valley College v. Aquino,
G.R. No. L-39086, June 15, 1988).

8. Voting Requirement for Tax
Exemption
a. Rationale: To prevent
indiscriminate grant of tax
exemptions.
b. The phrase a majority of all the
members of the Congress
means at least plus 1 of ALL
the members voting separately.
c. In granting tax exemptions, an
absolute majority of the members
of Congress is required, while in
cases of withdrawal of such tax
exemption, a RELATIVE
MAJORITY is sufficient.

Rationale: Taxation is the rule
and exemption is the exception.
Thus, the law makes it easier, by
requiring a smaller number of
votes, to withdraw exemption
compared to its grant.

d. Tax amnesties, condonations and
refunds are in the nature of tax
exemptions, such being the case,
a law granting them requires the
vote of an absolute majority.
e. A constitutional grant of exemption
may be selfexecuting or may
require an act of Congress for its
operation. Where a Constitutional
provision granting an exemption is
self-executing, the legislature can
neither add nor detract from it. It
may, however, prescribe a
procedure to determine whether a
claimant is entitled to the
Constitutional exemption.

9. No use of public money or property
for religious purposes (par. 3, Sec.
28, 1987 Constitution)

Except: If a priest is assigned to
armed forces, penal institutions,
government orphanages or
leprosarium.

10. Prohibition on use of tax levied for
special purpose or special
assessments (par.3 Sec. 29, Art. VI,
1987 Constitution)
Money collected on tax levied for
special purpose to be used only
for such purpose.
The balance, if any, shall accrue
to the general fund.

11. Supreme Courts power to review
courts (Sec. 5(b), Art. VIII, 1987
Constitution)
The Supreme Court can review
courts in all cases involving:
a. The legality of any tax, impost,
assessment, or toll;

19

b. The legality any penalty
imposed in relation to the
above;
Under the Principle of Judicial
Non-Interference, the courts
cannot inquire into the wisdom of
a taxing act, UNLESS there is a
violation of constitutional
limitations or restrictions.

12. Grant of Authority to Local
Government Units
Each local government unit shall
have the power to create its own
sources of revenues and to levy
taxes, fees and charges subject to
such guidelines and limitations as
the Congress may provide,
consistent with the basic policy of
local autonomy. Such taxes, fees,
and charges shall accrue
exclusively to the local
governments. (Sec. 5, Art. X, 1987
Constitution)
Local government units shall have
a just share, as determined by
law, in the national taxes which
shall be automatically released to
them. (Sec. 6, ibid.)
Local governments shall be
entitled to an equitable share in
the proceeds of the utilization and
development of the national
wealth within their respective
areas, in the manner provided by
law, including sharing the same
with the inhabitants by way of
direct benefits. (Sec. 7, ibid)

13. Tax exemption granted to non-
stock, non-profit educational
institutions

Constitutional and statutory
provisions
All revenues and assets of non-
stock, non-profit educational
institutions used actually, directly,
and exclusively for educational
purposes shall be exempt from
taxes and duties. (Sec. 4(3), Art.
XIV, 1987 Constitution)

Notes:
a. See Section 30, NIRC last
paragraph. Note that its
provisions, particularly the phrase
regardless of disposition made of
such income is in conflict with
Sec. 4(3), Art. XIV, 1987
Constitution.
b. This conflict, however, has already
been settled. Section 1 of DOF
Order No. 149-95, which amended
DOF Order No. 92-88 and DOF
Order No. 137-87, provides that
these non-stock, non-profit
educational institutions shall be
subject to internal revenue taxes
on income from trade, business or
other activity the conduct of which
is NOT RELATED to the exercise
or performance by such
educational institution of its
educational purpose of function.
Proprietary educational
institutions, including those
cooperatively owned, MAY
likewise be entitled to such
exemptions subject to limitation:
a. Provided by law
b. Provisions for reinvestments
All grants, endowments,
donations, or contributions used
actually, directly, and exclusively
for educational purposes shall be
exempt from tax. (Sec. 4(4), ibid.)

Article XIV and Article VI compared
Art. XIV, Sec. 4(3) Art. VI, Sec. 28(3)
Grantee
Non-stock, non-profit
educational institution
Religious, educational,
charitable
Taxes Covered
1. Income tax
2. Custom duties,
3. Property tax (DECS
Order No. 137-87)
Property

Summary of Rules on Exemption of
Assets and Revenues
a. Non-stock, Non-Profit Educational
Institution whose income is actually,
directly, and exclusively used for
educational purposes
EXEMPT (See Sec. 30(H), NIRC)
Rationale: Constitutional
provision is self-executing.
b. Proprietary Educational Institution
TAXABLE under Sec 27(B), NIRC

Predominance theory - if the
predominant income (more than
50%) comes from school related
activities, the 10% tax on taxable
income applies. Conversely, it is
subject to 30% tax if its gross
income from unrelated trade,

20
business or activity exceeds 50%
of its the total gross income.
Rationale: Constitutional
provision used the word MAY,
which gives Congress discretion
to grant tax exemption.

c. Grants, Endowments, Donations or
Contributions used actually, directly
and exclusively for educational
purposes to:
TAXABLE: Proprietary
EXEMPT : Non-Stock, non-profit

DEFINITION
Taxing the same person [same subject or
object] twice by the same jurisdiction over the
same thing (Victoria Milling v. Mun. of Victoria,
Negros Occidental, G.R. No. L-21183, Sept.
27, 1968).

According to the Supreme Court there is no
constitutional prohibition against double
taxation in the Philippines (Villanueva v. City of
Iloilo, G.R. No. L-26521, December 28, 1968).
It is something not favored, but is nevertheless
permissible.

KINDS OF DOUBLE TAXATION
A. Direct Duplicate Taxation / Obnoxious
(Strict sense) The objectionable kind or
double taxation in its prohibited sense.
This violates the equal protection clause of
the Constitution, and is prohibited.
Double taxation means taxing the same
property twice when it should be taxed
only once; that is, taxing the same
person twice by the same jurisdiction for
the same thing. It is obnoxious when the
taxpayer is taxed twice, when it should be
but once. Otherwise described as direct
duplicate taxation. (The City of Manila,
Liberty M. Toledo In Her Capacity as the
Treasurer of Manila v. Coca-Cola Bottlers
Philippines, Inc., G.R. No. 181845, August
4, 2009.)

Elements:
1. The same property or subject matter is
taxed twice when it should be taxed
only once;
2. Both taxes are levied for the same
purpose;
3. Imposed by the same taxing authority;
a. Within the same jurisdiction;
b. During the same taxing period;
c. Covering the same kind or
character of tax (Villanueva v. City
of Iloilo, supra)

B. Indirect Duplicate Taxation (Broad
sense) The permissible kind of double
taxation, this arises in the absence of one
or more of the above-mentioned elements
of direct double taxation.

There is no double taxation if the tax is
levied by the LGU and another by the
national government. The two (2) are
different taxing Authorities. (Pepsi-Cola
Bottling Co. v. Municipality of Tanauan,
Leyte, G.R. L-31156, February 27, 1976

Examples of Indirect Duplicate
Taxation:
1. A tax upon a corporation for its
property and upon its shareholders for
their shares.
2. A tax upon the same property
imposed by two different states.
3. A tax on a mortgage as personal
property and upon the mortgaged
property as real estate.

C. International Juridical Double Taxation
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. (Commissioner v. SC
Johnson & Sons, Inc., G.R. No.127105,
June 25, 1999).

This double taxation usually takes place
when a person is a resident of the first
contracting State and derives income
from, or owns capital in the second
contracting State and both States
impose taxes on such income or capital.
In order to eliminate double taxation, a
tax treaty is entered into by the two
contracting States.
International juridical double taxation
only occurs when the State of residence
of the taxpayer imposes tax on the
income of said taxpayer from sources
within and without their State. There is
no international juridical double taxation
if the citizens or nationals are only taxed
on their income from sources within.
See Section 23, NIRC: Except for
income earned by resident citizens and
domestic corporations, only income from
DOUBLE TAXATION

21

Philippine sources is taxable by the
government.

D. Local Double Taxation- the imposition of
taxes of similar nature both by the national
government and the local government unit
where the object of tax is located
(Recalde, A Treatise on Tax Principles
and Remedies, p.79).

The Phil. tax system provides for certain
schemes in order to avoid or minimize the
harsh or burdensome effects of double
taxation. The means, however, depend on
whether there is international double
taxation or local double taxation. (ibid,
p.75).

METHODS OF REDUCING THE RIGORS OF
DOUBLE TAXATION (CD RET)
1. Tax Credits an amount subtracted from
an individuals or entitys tax liability to
arrive at the total tax liability.
2. Tax Deductions tax write-off or
reduction in the gross amount on which a
tax is calculated.
(refer to illustration of Tax Credit v.
Deduction, last page of this section)
3. Reduction of the Philippine income tax
rate
Example: Tax Sparing Rule the dividend
earned by a non-resident foreign
corporation (NRFC) within the Phil. is
reduced by imposing a lower rate of 15%
(in lieu of the 30%), on the condition that
the country to which the NRFC is
domiciled shall allow a credit against the
tax due from the NRFC, which taxes are
deemed to have been paid in the Phil.
(Sec.28 [B] [5] b) (CIR v. Procter &
Gamble G.R. No 66838 December 2,
1991)
4. Tax Exemptions a grant of immunity to
particular persons or corporations from the
obligation to pay taxes.
5. Tax Treaties Agreement between two
countries specifying what items of income
will be taxed by the authorities of the
country where the income is earned.

METHODS RESORTED TO BY A TAX
TREATY IN ORDER TO ELIMINATE
DOUBLE TAXATION:
First method: An exclusive right to tax is
conferred in one of the contracting states;
however, for other items of income or capital,
both states are given the right to tax although
the amount of tax that may be imposed by the
state of source is limited.

Second method: The state of source is given
a full or limited right to tax together with the
state of residence. In this case, the treaty
makes it incumbent upon the state of
residence to allow relief in order to avoid
double taxation.

There are 2 ways under the 2nd method:
1. The exemption method the income or
capital which is taxable in the state of
source or situs is exempted in the state of
residence, although in some instances it
may be taken into account in determining
the rate of tax applicable to the taxpayers
remaining income or capital. (This may be
done using the tax deduction method
which allows foreign income taxes to be
deducted from gross income, in effect
exempting the payment from being further
taxed.) The focus here is on the income or
capital itself.

2. The credit method although the income
or capital which is taxed in the state of
source is still taxable in the state of
residence, the tax paid in the former is
credited against the tax levied in the latter.
(CIR v. S.C Johnson and Son, G.R.
No.127105, June 25,1999) The focus is on
the tax.

Most Favored Nation Clause in Tax Treaties
The purpose of the most favored nation clause
is to grant to the contracting party treatment
not less favorable than that which has been or
may be granted to the MOST FAVORED
among other countries. The most favored
nation clause is intended to establish the
principle of equality of international treatment
by providing that the citizens or subjects of the
contracting nations may enjoy the privileges
accorded by either party to those of the most
favored nation.

6 FORMS OF BASIC ESCAPE FROM
TAXATION:

1. Shifting - The transfer of the burden of
tax by the original payer or the one on
whom the tax was assessed (impact of
taxation/statutory taxpayer) or imposed to
FORMS OF ESCAPE
FROM TAXATION

22
another or someone else (incidence of
taxation).

Direct tax cannot be shifted a tax
cannot be shifted when it is purely
personal or when it has no relation to
any business dealings of the taxpayer.
(Schultz and Harris, American Public
Finance)
Impact of Taxation point on which
tax is originally imposed or the one on
whom the tax is formally assessed.
Incidence of Taxation point on
which the tax burden finally rests or
settles down.

Illustration: Value added tax. The
seller is required by law to pay tax, but
the burden is actually shifted or
passed on to the buyer.

Kinds of shifting
a. Forward shifting when the burden
of tax is transferred from a factor of
production through the factors of
distribution until it finally settles on the
ultimate purchaser or consumer
b. Backward shifting when the
burden is transferred from the
consumer through the factors of
distribution to the factors of production
c. Onward shifting when the tax is
shifted 2 or more times either forward
or backward

2. Capitalization The reduction in the
price of the taxed object equal to the
capitalized value of future taxes which the
purchaser expects to be called upon to
pay.

3. Transformation The manufacturer
or producer upon whom the tax has been
imposed, fearing the loss of his market if
he should add the tax to the price, pays
the tax and endeavors to recoup himself
by improving his process of production,
thereby producing his units at a lower cost.

4. Tax Exemption - is the grant of
immunity to particular persons or
corporations or to persons or corporations
of a particular class from a tax which
persons or corporations generally within
the same state or taxing district are
obliged to pay. (51 Am. Jur. 503)

Principle of Strictissimi J uris
Laws granting tax exemption are
construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption
is the exception. The law does not look
with favor on tax exemptions and that he
who would seek to be thus privileged must
justify it by words too plain to be mistaken
and too categorical to be misinterpreted
(SeaLand Service v. CA, G.R. No. 57828
June 14, 1993).

Rationale for the Application of
Strictissimi J uris
1. Lifeblood theory
2. To minimize differential treatment and
foster impartiality, fairness and
equality of treatment among taxpayers
(Maceda v. Macaraig, G.R. No. 88291,
June 8, 1993).
3. Taxation is a high prerogative of
sovereignty whose relinquishment is
never presumed (Luzon Stevedoring
v. CA, G.R. No 58897, Dec. 3, 1987)

Exceptions to the Application of
Strictissimi J uris
1. When the statute granting exemption
provides for liberal construction
thereof
2. In case of special taxes relating to
special cases and affecting only
special classes of persons
3. If exemptions refer to the public
property
4. In cases of exemptions granted to
religious, charitable and educational
institutions or their property
5. In cases of exemptions in favor of the
government, its political subdivisions
or instrumentalities
6. If there is an express mention or if the
taxpayer falls within the purview of the
exemption by clear legislative intent.
(CIR v. Arnoldus Carpentry Shop,
Inc., G.R. No. 71122, March 25, 1988)

Kinds of Tax Exemption
1. Express expressly granted by
organic or statute law
2. Implied whenever particular
persons, properties or excises are
deemed exempt as they fall outside
the scope of the taxing provision itself
3. Contractual tax exemption in
consideration of a contractual
agreement with the government.

23

Revocation of Tax Exemptions
Since taxation is the rule and exemption is
the exception, the exemption may thus be
withdrawn at the pleasure of the taxing
authority. (Mactan Cebu Intl Airport
Authority v. Marcos, supra)

Restrictions on Revocation
1. Nonimpairment clause Where the
exemption was granted to private
parties based on material
consideration of a mutual nature, it
then becomes contractual and is
covered by the non-impairment clause
of the Constitution.
2. Adherence to form If the tax
exemption is granted by the
Constitution, its revocation may be
effected through constitutional
amendment only.
3. Where the tax exemption grant is in
the form of a special law and not by a
general law even if the terms of the
general act are broad enough to
include the codes in the general law
unless there is manifest intent to
repeal or alter the special law.
(Province of Misamis Oriental v.
Cagayan Electric Power & Light Co.
Inc., G.R. No. 45355, Jan. 12, 1990)

Nature of Tax Refunds
Tax refunds are in the nature of tax
exemptions. They are regarded as in
derogation of sovereign authority and to
be construed strictissimi juris against the
person or entity claiming the exemption.
The burden of proof is upon him who
claims the exemption in his favor and he
must be able to justify his claim by the
clearest grant of organic or statute law
(CIR v. Court of Appeals, G.R. No.
104151, March 10, 1995)

Nature of Tax Amnesty
1. General or intentional overlooking by
the State of its authority to impose
penalties on persons otherwise guilty
of evasion or violation of a revenue or
tax law.
2. Partakes of an absolute forgiveness or
waiver of the government of its right to
collect.
3. To give tax evaders, who wish to
relent and are willing to reform a
chance to do so.

Rules on Tax Amnesty
a. Tax amnesty
a. Like tax exemption, it is never
favored nor presumed
b. construed strictly against the
taxpayer (must show complete
compliance with the law)

b. The government is not estopped from
questioning the tax liability even if
amnesty tax payments were already
received.

Rationale: Erroneous application and
enforcement of the law by public
officers do not block subsequent
correct application of the statute. The
government is never estopped by
mistakes or errors of its agents.

Note: There could be no tax amnesty
granted by the President of the
Philippines because the same is in the
nature of tax exemption which could
be granted only by a concurrence of
Congress.

Basis: Lifeblood Theory

c. Defense of tax amnesty, like insanity,
is a personal defense.

Rationale: Relates to the
circumstances of a particular accused
and not the character of the acts
charged in the information.

5. Tax Avoidance also called tax
minimization. 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.
Tax avoidance is the tax saving device
within the means sanctioned by law.
This method should be used by the
taxpayer in good faith and at arms
length. (CIR v. Estate of Benigno Toda
Jr.,G.R. No. 30554, Feb.28, 1983)
A taxpayer has legal right to decrease
the amount of what would otherwise
be his taxes or altogether avoid them
by means which the law permits.
(Delpher Trades v. IAC, G.R. No.
69259, Jan. 26, 1988)
Example: Availing of all deductions
allowed by law or refraining from
engaging in activities subject to tax.

(see p. 26 for illustrative example of
difference between tax credit and
avoidance)

24

6. Tax Evasion an illegal means of
escaping taxation. It connotes fraud
through the use of pretenses and
forbidden devices to lessen or defeat
taxes. (Yutivo Sons Hardware v. CTA,
G.R. No. L-13203, January 28, 1961)

A scheme used outside of those lawful
means and when availed of, it usually
subjects the taxpayer to (further or
additional) civil or criminal liabilities. (CIR
v. Estate of Benigno Toda Jr., G.R. No.
78583, March 26, 1990.)

Factors of Tax Evasion (ESC)
1. The End to be achieved, i.e. payment
of less than that known by the
taxpayer to be legally due, or paying
no tax when it is shown that the tax is
due.
2. An accompanying State of mind which
is described as being evil, in bad faith,
willful, or deliberate and not
coincidental.
3. A Course of action which is unlawful.

Proof of tax evasion
a. Failure to declare for taxation
purposes true and actual income
derived from business for 2
consecutive years. (Republic v.
Gonzales, G.R. No. L-17962, April 30,
1965)
b. Substantial under-declaration of
income in the tax returns of the
taxpayer for 4 consecutive years
coupled with intentional overstatement
of deductions. (CIR v. Reyes, Nos.
G.R. L-11534 and G.R. L-11558,
November 25, 1958)

Tax Avoidance Tax Evasion
Validity
Legal and not subject
to criminal penalty
Illegal and subject to
criminal penalty
Effect
Minimization of taxes
Almost always results in
the absence of tax
payments

NATURE OF TAX LAWS
1. Not political in character; effective even
under belligerent occupation (Hilado v.
CIR, G.R. No. L-9408, October 31, 1956)
2. Civil in nature, not subject to ex post facto
law prohibitions;
3. Not penal in character.

CONSTRUCTION OF TAX LAWS
1. Tax laws are prospective in operation
(subject to exceptions).
2. Legislative intention must be considered
Tax statutes are to receive a reasonable
construction with a view to carrying out
their purpose and intent (51 Am. Jur. 361).
3. Where there is doubt In every case of
doubt, in tax statutes imposing payment of
tax, laws are construed strictly against the
government and liberally in favor of the
taxpayer (Manila. Railroad v. Collector of
Customs, G.R. No. 10214, Nov. 4, 1915).
Taxes, being burdens, are not to be
presumed beyond what the statute
expressly and clearly declares.
4. Where language is plain Rule of strict
construction against the government does
not apply where the language of the tax
law is plain and there is no doubt as to the
legislative intent (51 Am. Jur. 368). The
words employed are to be given their
ordinary meaning.
5. Where taxpayer claims exemption
Exemptions are construed strictly against
the one who asserts the claim of
exemption. Public purpose is always
presumed.
6. Provisions of the taxing act are not to be
extended by implication.
7. Tax laws are special laws and prevail over
general laws.

Hornbrook Doctrine - the interpretation of
tax laws that (a) statute will not be construed
as imposing a tax unless it does so clearly,
expressly, and unambiguously. x x x (A) tax
cannot be imposed without clear and express
words for that purpose. Accordingly, the
general rule of requiring adherence to the
letter in construing statutes applies with
peculiar strictness to tax laws and the
provisions of a taxing act are not to be
extended by implication. Parenthetically, in
answering the question of who is subject to tax
statutes, it is basic that in case of doubt, such
statutes are to be construed most strongly
against the government and in favor of the
subjects or citizens because burdens are not
to be imposed nor presumed to be imposed
beyond what statutes expressly and clearly
import. (CIR v. CA, G.R. No. 115349, April 18,
1997)

APPLICATION OF TAX LAWS
Rule: Tax laws are prospective in operation.
TAX LAWS

25

Exception: While it is not favored, a statute
may nevertheless operate retroactively
provided it is expressly declared or is clearly
the legislative intent (Cebu Portland Cement v.
CIR, G.R. No. 18649, Feb. 27, 1965).

APPLICATION OF TAX RULINGS (Sec. 246,
NIRC)
Rule: Any revocation, modification or reversal
of any of the rules and regulations
promulgated (in accordance with the
preceding Sections) or any of the rulings or
circulars promulgated by the CIR shall not be
given retroactive application if the revocation,
modification or reversal will be prejudicial to
the taxpayers.

Exceptions to non-retroactive application
of tax rulings to taxpayers:
1. Where the taxpayer deliberately misstates
or omits material facts from his return or
any document required of him by the BIR;
2. Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the ruling is based, or
3. Where the taxpayer acted in bad faith

KINDS OF PROVISIONS OF TAX LAWS
1. Mandatory those provisions intended for
the security of the citizens or which are
designed to insure equality of taxation or
certainty as to the nature and amount of
each persons tax.
2. Directory those provisions designed
merely for the information or direction of
officers or to secure methodical and
systematic modes of proceedings.

Importance of Distinction
The omission to follow mandatory provisions
renders invalid the act or proceeding to which
it relates while the omission to follow directory
provisions does not involve such
consequence.

SOURCES OF TAX LAWS
1. Constitution
2. Legislation or statutes, including
presidential decrees and executive orders
on taxation and tax ordinances, tax
treaties and conventions with foreign
countries
3. Contemporaneous Construction by
Executive or Administrative Officers,
including Revenue Regulations by the
Department of Finance and Administrative
issuances by the BIR or the BOC.
4. Administrative rules and regulations,
rulings and opinions of tax officials
particularly the CIR, including opinions of
the Secretary of Justice
5. Judicial Decisions decisions of the
Supreme Court applying or interpreting
existing tax laws are binding on all
subordinate courts and have the force and
effect of law. They form part of the legal
system of the Philippines (Art. 8, Civil
Code). They constitute evidence of what
the law means (People v. Licera, G.R. No.
L-39990, July 22, 1975).

26

Illustration:

The amount of foreign income taxes paid incurred by a resident citizen may be claimed as a tax credit
or deduction from gross income, at the option of the taxpayer (Sec. 34 (C) of NIRC).

Given:

Tax Deduction Tax Credit

Gross Income P500,000.00 P500,000.00
Less:
Deductions excluding
foreign income tax paid
P100,000.00 P100,000.00
Foreign income tax paid P 50,000.00 -----------------------
Personal exemptions P 50,000.00 P 50,000.00

Net Income:

P300,000.00
P350,000.00
Tax Liability: P 45,000.00
Tax Liability before credit: P80,000.00
Less: Tax Credit P50,000.00
Tax Liability: P30,000.00

Rate:
Over P250,000.00 but not over P500,000.00
= P50,000.00 + 30% of the excess over P250,000.00

P50,000.00 P500,000.00
P15,000.00 (30% of P500,000.00 P 15,000.00 (30% of P100,000.00)
= P45,000.00 P 80,000.00

Note:
This is also an illustration of tax avoidance, if the taxpayer chose the tax credit he will be liable only for
P30,000.00 compared to P45,0000.00 if the taxpayer chose tax deduction

TAX CREDIT V. TAX DEDUCTION

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