2010 Taxation Review by Domondon 1

PRIMUS PRE-BAR REVIEW DIVISION

BAR STAR NOTES

TAXATION
VER. 2010.08.12
copyrighted 2010

Prepared by Prof. Abelardo T. Domondon

(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.). Lawyer-CPA-
Customs Broker, Management Consultant, Professor of Law and Pre-Bar Reviewer)

How to use the BAR STAR NOTES. The BAR STAR NOTES in the form of
questions and answers as well as textual discussion were specially prepared by Prof.
Domondon for the exclusive use of Bar Reviewees who attended the 2010 Wrap-
Up Lectures on TAXATION conducted by Primus Information, Center, Inc., and the Bar
Reviewees of various law schools and Review Centers where he was invited to lecture
on Taxation. Included in the presentation are doctrines contained in Supreme Court
decisions up to April 2010.

The purpose of the BAR STAR NOTES is to provide the Bar Reviewee with a
handy review material which serves as memory-joggers for the September 12, 2010 Bar
Examinations in Taxation. The author tries to second guess what would be included in
the Bar Exams using statistical analysis. The actual Bar questions may not be formulated
in the same manner as the BAR STAR NOTES. However, the doctrines tested in the
Bar would in all probability be included in these Notes.

If pressed for time, the author suggests that the reader should focus his attention
on the following:
 Nice to know
Should know
Must know and master
It is further suggested that the reader should merely browse those without stars.

The BAR STAR NOTES in TAXATION is the 4th in the series of Bar Star Notes
the author has prepared for all the eight Bar subjects. The other Bar Star Notes
may be availed of by enrolling in the 2010 Wrap-Up lectures conducted by PRIMUS
INFORMATION CENTER, INC.Please feel free to call Baby, Tel. No. 816-07-68 or 817-
84-49; Leon, Mobile No. 0917-793-6169; Atty. Celia, Mobile No. 0917-790-8406, or
Venny, Mobile No. 0917-337-6479.

WARNING:

These materials are copyrighted and/or based on the writers books on Taxation
and future revisions. It is prohibited to reproduce any part of these Notes in any form or
any means, electronic or mechanical, including photocopying without the written
permission of the author. These materials are authorized for the use only of PRIMUS
Reviewees and others who attended the authors lectures on Taxation. Unauthorized
users shall not be prosecuted but SHALL BE SUBJECT TO THE LAW
OF KARMASUCH THAT THEY WILL NEVER PASS THE BAR OR WOULD BE
UNHAPPY IN LIFE for stealing the intellectual property of the author.

THE BEST OF LUCK AND ADVANCE CONGRATULATIONS

TAXATION

GENERAL PRINCIPLES OF TAXATION

TAXATION, IN GENERAL

1. State briefly and concisely the nature of taxation. Alternatively, define

taxation.
SUGGESTED ANSWER: The inherent power of the sovereign exercised through the
legislature to impose burdens upon subjects and objects within its jurisdiction for the
purpose of raising revenues to carry out the legitimate objects of government.

2. What is the nature of the States power to tax ? Explain briefly.

SUGGESTED ANSWER: The nature of the states power to tax is two-fold. It is
both an inherent power and a legislative power. It is inherent in nature
being an attribute of sovereignty. This is so, because without the taxes, the states
existence would be imperiled. There is thus, no need for a constitutional grant for the
state to exercise this
power. It
is a legislative power because it involves the promulgation of rules. Taxation is a set of
rules, how much is the tax to be paid, who pays the tax, to whom it should be paid, and
when the tax should be paid.
3. What is the underlying theory of taxation ? Explain briefly.
SUGGESTED ANSWER: Taxes are the lifeblood of the nation. Without
revenue raised from taxation, the government will not survive, resulting in detriment to
society. Without taxes, the government would be paralyzed for lack of motive power to
activate and operate it. (Commissioner of Internal Revenue v. Algue, Inc. et al., 158
SCRA 8, 16-17)
4. Marshall said that, the power to tax involves the power to
destroy. On the other hand, Holmes stated that the power to tax is not the
power to destroy while the court sits.
 Reconcile the
statements. In the alternative, what
are the implications that flow from the above statements
? SUGGESTED ANSWERS: Marshalls view refers
to a valid tax while the Holmes view refers to an invalid
tax. a. The imposition of a valid tax could not be
judicially restrained merely because it would prejudice taxpayers
property. b. An illegal tax could be judicially declared invalid
and should not work to prejudice a taxpayers property.
5. Discuss briefly the basis/bases, or rationale of
taxation. SUGGESTED
ANSWER: a. Reciprocal duties of protection and support between
the state and its citizens and residents. Also called symbiotic relation between
the state and its citizens.
b. Jurisdiction by the state over persons and property within its
territory.
6. Discuss briefly but comprehensively the objectives or purposes of
taxation.
SUGGESTED ANSWER: The purposes or objectives of taxation are the
following: a.
The primary
purpose: 1) Revenue
purpose. b. The secondary
purposes 1) Sumptuary or
regulatory purpose. 2) Compensatory
purpose. 3) To implement the power
of eminent domain.

7. Distinguish a tax from a license fee. SUGGESTED

ANSWER: The following are the distinctions: a. Purpose: Tax imposed for
revenue while license fee for regulation. Tax for general public purposes while license
fee for regulatory purposes
only. b. Basis: Tax
imposed under power of taxation while license fee under police
power. c. Amount:
In taxation, no limit as to amount while license fee limited to cost of the license and the
expenses of police surveillance and
regulation.
d. Time of payment: Taxes normally paid after commencement of business while
license fee before. e. Effect of payment: Failure to pay a tax
does not make the business illegal while failure to pay license fee makes business
illegal. f. Surrender: Taxes, being the lifeblood of the state, cannot be
surrendered except for lawful consideration while a license fee may be surrendered with
or without consideration. (Cooley on Taxation, pp. 1137-1138; Pacific Commercial
Company v. Romualdez, et al., 49 Phil. 924)
8. How may the power to tax be utilized to carry out the social justice
program of our government ? SUGGESTED ANSWER: The
compensatory purpose of taxation is to implement the social justice provisions of the
constitution through the progressive system of taxation, which would result to equal
distribution of wealth, etc.
Progressive income taxes alleviate the margin between rich and poor. (Southern
Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et
al., G. R. No. 158540, August 3, 2005)
In recent years, the increasing social challenges of the times expanded the scope
of the state activity, and taxation has become a tool to realize social justice and the
equitable distribution of wealth, economic progress and the protection of local industries
as well as public welfare and similar objectives. (Batangas Power Corporation v.
Batangas City, et al., G. R. No. 152675, and companion case, April 28, 2004
citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)

9. Explain the sumptuary purpose of taxation.

 SUGGESTED ANSWER: The sumptuary purpose of taxation is to promote the
general welfare and to protect the health, safety or morals of the inhabitants. It is in the joint
exercise of the power of taxation and police power where regulatory taxes are collected.
Taxation may be made the implement of the states police power. The motivation
behind many taxation measures is the implementation of police power goals. [Southern
Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et
al., G. R. No. 158540, August 3, 2005) The reader should note that the August 3,
2005 Southern Cross case is the decision on the motion for reconsideration of the July 8,
2004 Southern Cross decision.
The so-called sin taxes on alcohol and tobacco manufacturers help dissuade the
consumers from excessive intake of these potentially harmful products. (Southern Cross
Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R.
No. 158540, August 3, 2005)

10. Taxation distinguished from police power. Taxation is distinguishable

from police power as to the means employed to implement these public goals. Those
doctrines that are unique to taxation arose from peculiar considerations such as those
especially punitive effects (Southern Cross Cement Corporation v. Cement Manufacturers
Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) as the power to
tax involves the power to destroy and the belief that taxes are lifeblood of the state. (Ibid.)
taxes being the lifeblood of the government, their prompt and certain availability is of the
essence.
These considerations necessitated the evolution of taxation as a distinct legal
concept from police power. (Ibid.)

11. How the power of taxation may be used to implement power of

eminent domain. Tax measures are but enforced contributions exacted on pain of penal
sanctions and clearly imposed for public purpose. In most recent years, the power to tax
has indeed become a most effective tool to realize social justice, public welfare, and the
equitable distribution of wealth. (Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, G.R. No. 159647, April 16, 2005)
 Establishments granting the 20% senior citizens discount may claim the discounts
granted to senior citizens as tax deduction based on the net cost of the goods sold or
services rendered: Provided, That the cost of the discount shall be allowed as deduction
from gross income for the same taxable year that the discount is granted. Provided,
further, That the total amount of the claimed tax deduction net of value added tax if
applicable, shall be included in their gross sales receipts for tax purposes and shall be
subject to proper documentation and to the provisions of the National Internal Revenue
Code, as amended. [M.E. Holding Corporation v. Court of Appeals, et al., G.R. No.
160193, March 3, 2008 citing Expanded Senior Citizens Act of 2003, Sec. 4 (a)]

12. What are the three basic principles of a sound tax system? Explain
each briefly. SUGGESTED ANSWER: The canons of
a sound tax system, also known as the characteristics or, principles of a sound tax
system, are used as a criteria in order to determine whether a tax system is able to meet
the purposes or objectives of taxation. They are:
a. Fiscal adequacy.
b. Administrative feasibility.
c. Theoretical justice.

13. What are the elements or characteristics of a tax ? SUGGESTED

ANSWER: a. Enforced contribution.
b. Generally payable in money.
c. Proportionate in character.
d. Levied on persons, property or exercise of a right or privilege.
e. Levied by the state having jurisdiction.
f. Levied by the legislature.
g. Levied for a public purpose.
h. Paid at regular periods or intervals.
 14. State the requisites of a valid tax. SUGGESTED
ANSWER: a. A valid tax should be
within the jurisdiction of the taxing authority.
b. That the assessment and collection of certain kinds (The same as the
inherent limitations of the power of taxation) should be for a public purpose.
c. The rule of taxation should be uniform.
d. That either the person or property of taxes guarantees against
injustice to individuals, especially by way or notice and opportunity for hearing be
provided.
e. The tax must not impinge on the inherent and Constitutional limitations on
the power of
taxation.
15. What are the classes or kinds
of taxes according to the subject matter or object
? SUGGESTED
ANSWER: a. Personal, poll or
capitalization imposed on all residents, whether citizen or not. Example Community
Tax.
b. Property - Imposed on property. Example Real property
tax.
c. Excise imposed upon the performance of an act, the enjoyment of a privilege
or the engaging in an occupation. Example income tax, estate tax.
16. What are the kinds of taxes classified as to who bears the burden
? Explain each briefly. SUGGESTED ANSWER: Based on the
possibility of shifting the incidence of taxation, or as to who shall bear the burden of
taxation, taxes may be classified into:
a. Direct taxes. Those that are extracted from the very person who, it is
intended or desired, should pay them (Commissioner of Internal Revenue v. Philippine
Long Distance Telephone Company, G. R. No. 140230, December 15, 2005); they are
impositions for which a taxpayer is directly liable on the transaction or business he is
engaged in, (Commissioner of Internal Revenue v. Philippine Long Distance Telephone
Company, supra) which liability cannot be shifted or transferred to another. Example
income tax, estate tax, donors tax, etc.
b. Indirect taxes are those that are demanded in the first instance, from, or
are paid by, one person in the expectation and intention that he can shift the burden to
(Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company,
supra) to someone else not as a tax but as part of the purchase price. (Commissioner, of
Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No.
152609, June 29, 2005 citing various cases and authorities) Example value added tax
(VAT), documentary stamp tax, excise tax, percentage tax, etc.

17. Silkair (Singapore) PTE, Ltd., an international carrier, purchased

aviation gas from Petron Corporation, which it uses for its operations. It now claims
for refund or tax credit for the excise taxes it paid claiming that it is exempt from the
payment of excise taxes under the provisions of Sec. 135 of the NIRC of 1997 which
provides that petroleum products are exempt from excise taxes when sold
to Exempt entities or agencies covered by tax treaties, conventions, and other
international agreements for their use and consumption: Provided, however, That the
country of said foreign international carrier or exempt entities or agencies exempts from
similar taxes petroleum products sold to Philippine carriers, entities or agencies
Silkair further anchors its claim on Article 4(2) of the Air Transport
Agreement between the Government of the Republic of the Philippines and the
Government of the Republic of Singapore (Air Transport Agreement between RP
and Singapore) which reads: Fuel, lubricants, spare parts, regular equipment and
aircraft stores introduced into, or taken on board aircraft in the territory of one Contracting
party by, or on behalf of, a designated airline of the other Contracting Party and intended
solely for use in the operation of the agreed services shall, with the exception of charges
corresponding to the service performed, be exempt from the same customs duties,
inspection fees and other duties or taxes imposed in the territories of the first Contracting
Party , even when these supplies are to be used on the parts of the journey performed
over the territory of the Contracting Party in which they are introduced into or taken on
board. The materials referred to above may be required to be kept under customs
supervision and control.
Silkair likewise argues that it is exempt from indirect taxes because the Air
Transport Agreement between RP and Singapore grants exemption from the same
customs duties, inspection fees and other duties or taxes imposed in the territory
of the first Contracting Party. It invokes Maceda v. Macaraig, Jr., G.R. No. 88291,
May 31, 1991, 197 SCRA 771.which upheld the claim for tax credit or refund by the
National Power Corporation (NPC) on the ground that the NPC is exempt even from
the payment of indirect taxes.
Is Silkair entitled to the tax refund or credit it seeks ? Reason out your
answer.
SUGGESTED ANSWER: Silkair is not entitled to tax refund or credit for the
following reasons:
a. The excise tax on aviation fuel is an indirect tax. The proper party to
question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom
the tax is imposed by law and who paid the same even if he shifts the burden thereof to
another. (Philippine Geothermal, Inc. v. Commissioner of Internal Revenue, G.R. No.
154028, July 29, 2005, 465 SCRA 308, 317-318) The NIRC provides that the excise
tax should be paid by the manufacturer or producer before removal of domestic products
from place of production. Thus, Petron Corporation, not Silkair, is the statutory taxpayer
which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article
4(2) of the Air Transport Agreement between RP and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax, the additional
amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay
as a purchaser. [Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, 127
Phil. 461, 470 (1967)]
b. Silkair could not seek refuge under Maceda v. Macaraig, Jr., G.R. No.
88291, May 31, 1991, 197 SCRA 771.which upheld the claim for tax credit or refund by
the National Power Corporation (NPC) on the ground that the NPC is exempt even from
the payment of indirect taxes.
 In Commissioner of Internal Revenue v. Philippine Long Distance Telephone
Company, G.R. No. 140230, December 15, 2005, 478 SCRA 61 the Supreme Court
clarified the ruling in Maceda v. Macaraig, Jr., viz: It may be so that in Maceda vs.
Macaraig, Jr., the Court held that an exemption from all taxes granted to the National
Power Corporation (NPC) under its charter includes both direct and indirect taxes.
An exemption from all taxes excludes indirect taxes, unless the exempting
statute, like NPCs charter, is so couched as to include indirect tax from the exemption.
The amendment under Republic Act No. 6395 enumerated the details covered by NPCs
exemption. Subsequently, P.D. 380, made even more specific the details of the
exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum
products used in its operation. Presidential Decree No. 938 [NPCs amended charter]
amended the tax exemption by simplifying the same law in general terms. It succinctly
exempts NPC from all forms of taxes, duties, fees The use of the phrase all forms
of taxes demonstrates the intention of the law to give NPC all the tax exemptions it has
been enjoying before.
The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2)
of the Air Transport Agreement between RP and Singapore cannot, without a clear
showing of legislative intent, be construed as including indirect taxes. Statutes granting
tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in
favor of the taxing authority, and if an exemption is found to exist, it must not be enlarged
by construction. (Silkair (Singapore) PTE, Ltd., v. Commissioner of Internal Revenue, G.R.
No. 173594, February 6, 2008)

18. What are the different kinds of taxes classified as to purpose

? SUGGESTED
ANSWER: a. General, fiscal or
revenue imposed for the purpose of raising public funds for the service of the
government. b. Special or regulatory imposed primarily for
the regulation of useful or non-useful occupation or enterprises and secondarily only for
the raising of public funds.
LIMITATIONS OR RESTRICTIONS ON THE POWER

1. Purpose for the limitations on the power of taxation.

The inherent and constitutional limitations to the power of taxation are safeguards which
would prevent abuse in the exercise of this otherwise unlimited and plenary power.
The limitations also serve as a standard to measure the validity of a tax law or the
act of a taxing authority. A violation of the limitations serves to invalidate a tax law or act
in the exercise of the power to tax.

INHERENT LIMITATIONS

1. What are the inherent limitations on the power of taxation ?

SUGGESTED ANSWERS:
a. Public purpose. The revenues collected from taxation should be devoted
to a public purpose.
b. No improper delegation of legislative authority to tax. Only the legislature
can exercise the power of taxes unless the same is delegated to some other governmental
body by the constitution or through a law which does not violate any provision of the
constitution.
c. Territoriality. The taxing power should be exercised only within territorial
boundaries of the taxing authority.
d. Recognition of government exemptions; and
e. Observance of the principle of comity. Comity is the respect accorded by
nations to each other because they are equals. On the other hand taxation is an act of
sovereign. Thus, the power should be imposed upon equals out of respect.
Some authorities include no double taxation.

2. What are the principles to consider in the determination of whether

tax revenues are devoted for a public purpose ?
SUGGESTED ANSWER:
 a. The tax revenues are for a public purpose if utilized for the benefit of the
community in general. An alternative meaning is that tax proceeds should be utilized
only to attain the objectives of government.
b. Inequalities resulting from the singling out of one particular class for
taxation or exemption infringe no constitutional limitation.
REASON: It is inherent in the power to tax that the legislature is free to select the
subjects of taxation.
BASIS: The lifeblood theory.
c. An individual taxpayer need not derive direct benefits from the
tax.
REASON: The paramount consideration is the welfare of the greater portion of
the population.
d. A tax may be imposed, not so much for revenue purposes, but
under police power for the general welfare of the community. This would still be for a
public purpose.
e. Public purpose continually expanding. Areas formerly left to
private initiative now lose their boundaries and may be undertaken by the government if
it is to meet the increasing social challenges of the times.
f. Tax revenue must not be used for purely private purposes or for
the exclusive benefit of private persons.
g. Private persons may be benefited but such benefit should be merely
incidental as its main object is the benefit of the community in general.
h. Determined at the time of enactment of tax law and not at the time of
implementation.
i. There is a presumption of public purpose even if the tax law does not
specifically provide for its purpose. (Santos & Co., v. Municipality of Meycauayan, et al.,
94 Phil. 1047)
j. Public use is no longer confined to the traditional notion of use by the public
but held synonymous with public interest, public benefit, public welfare, and public
convenience. (Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, G.R. No. 159647, April 16, 2005)
 3. A law was enacted imposing a tax on manufacturers of coconut oil, the
proceeds of which are to be used exclusively for the protection and promotion of
the coconut industry, namely, to improve the working conditions in coconut mills
and to conduct research on the use of coconut oil for motor fuel. Some of the
manufacturers of coconut oil challenge the validity of the law, contending that the
tax is to be used for a private purpose, and therefore, the law violates the rule that
public revenues shall not be appropriated for anything but a public
purpose. Decide with reason.
SUGGESTED ANSWER: The levy is for a public purpose. It cannot be denied
that the coconut industry is one of the major industries supporting the national
economy. It is, therefore, the states concern to make it a strong and secure source not
only of the livelihood of the significant segment of the population, but also
of export earnings, the sustained growth of which is one of the imperatives of
economic growth. (Philippine Coconut Producers Federation, Inc. (Cocofed v.
Presidential Commission on Good Government, 178 SCRA 236, 252)

4. Requisites for taxpayers, concerned citizens, voters or legislators to

have locus standi to sue.
a. In general, the case should involve constitutional issues. (David, et al., v.
President Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)
b. For taxpayers, there must be a showing:
1) That tax money is being extracted and spent in violation of
specific constitutional protections against abuses of legislative power. (Flast v.
Cohen, 392 U.S. 83)
2) That public money is being deflected to
any improper purpose (Pascual v. Secretary of Public Works, 110 Phil.
33) or a claim of illegal disbursement of public funds or that the tax measure is
unconstitutional. (David, supra)
3) A taxpayer is allowed to sue where there is a claim that public
funds are illegally disbursed, or that public money is being deflected to any improper
purpose, or that there is a wastage of public funds through the enforcement
of an invalid or unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919,
February 14, 2007; Garcia v. Enriquez, Jr. G.R. No. 112655 December
9, 1993, Minute Resolution)
A taxpayers suit is properly brought only when there is an
exercise of the spending or taxing power of Congress. (Automotive Industry
Workers Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al., G. R.
No. 157509, January 18, 2005 citing Gonzales v. Narvasa, G. R.
No. 140835, August 14, 2000, 337 SCRA 733, 741)
c. For voters, there must be a showing of obvious interest in the validity of
the election law in question.
d. For concerned citizens, there must be a showing that the issues raised
are of transcendental importance which must be settled early.
e. For legislators, there must be a claim that the official action complained of
infringes upon their prerogatives as legislators. (David, et al., v. President Gloria
Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)

5. Only those directly affected have locus standi to impugn the alleged
encroachment by the executive department into the legislative domain of
Congress.
a. Only those who shall be directly affected by such executive encroachment,
such as for example employees who would find themselves subject to disciplinary powers
that may be imposed under the questioned Executive Order as they have a direct and
specific interest in raising the substantive issue therein (Automotive Industry Workers
Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al., G. R. No. 157509, January 18, 2005)
or employees who are going to be demoted, transferred or otherwise affected by any
personnel action subject o the rule on exhaustion of administrative remedies.
b. Moreover, and if at all, only Congress, can claim any injury from the alleged
executive encroachment of the legislative function to amend, modify and/or repeal laws.
(Automotive Industry Workers Alliance (AIWA),etc., et al., supra, citing Gonzales v.
Narvasa, G. R. No. 140835, August 14,2000, 337 SCRA 733, 741)
 6. Locus standi being merely a matter of procedure, have been waived in
certain instances where a party who is not personally injured may be allowed to
bring suit. The following are examples of instances where suits have been brought by
parties who have not have been personally injured by the operation of a law or any other
government act but by concerned citizens, taxpayers or voters who actually sue in the
public interest:
a. Taxpayers suits to question contracts entered into by the national
government or government-owned or controlled corporations allegedly in contravention of
the law.
b. A taxpayer is allowed to sue where there is a claim that public funds are
illegally disbursed, or that public money is being deflected to any improper purpose, or that
there is a wastage of public funds through the enforcement of an invalid or unconstitutional
law. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)

7. The VAT law provides that, the President, upon the recommendation of
the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-
added tax to twelve percent (12%) after any of the following conditions have been
satisfied. (i) value-added tax collection as a percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or (ii) national
government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 %).
Was there an invalid delegation of legislative power ?
SUGGESTED ANSWER: No. There is no undue delegation of legislative power
but only of the discretion as to the execution of the law. This is constitutionally permissible.
Congress does not abdicate its functions or unduly delegate power when it describes
what job must be done, who must do it, and what is the scope of his authority. In the above
case the Secretary of Finance becomes merely the agent of the legislative department, to
determine and declare the even upon which its expressed will takes place. The President
cannot set aside the findings of the Secretary of Finance, who is not under the conditions
acting as the execute alter ego or subordinate. . [Abakada Guro Party List (etc.) v. Ermita,
etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing various
cases]]

8. Instances of proper delegation: When taxing power could be

delegated: Exceptions to the rule on non-delegation:
a. Delegation of tariff powers by Congress to the President under the flexible
tariff clause, Section 28 (2), Article VI of the Constitution.
b. Delegation of emergency powers to the President under Section 23 (2) of
Article VI of the Constitution.
c. The delegation to the President of the Philippines 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.
d. Delegation to the people at large.
e. Delegation to administrative bodies [Abakada Guro Party List (Formerly
AASJS), etc., v, Ermita, et al., G. R. No.168056, September 1, 2005], which is referred to
as subordinate legislation.
In this instance, there is a requirement that the law is complete in all aspects so
what is delegated is merely the implementation of the law or there exists sufficiently
determinate standards to guide the delegate and prevent a total transference of the taxing
power.

9. Paradigm shift from exclusive Congressional power to direct grant

of taxing power to local legislative bodies. The power to tax is no longer vested
exclusively on Congress; local legislative bodies are now given direct authority to levy
taxes, fees and other charges pursuant to Article X, section 5 of the 1987
Constitution. (Batangas Power Corporation v. Batangas City, et al. G. R. No. 152675, and
companion case, April 28, 2004 citing National Power Corporation v. City of
Cabanatuan, G. R. No. 149110, April 9, 2003)
Local government legislation, is not regarded as a transfer of general legislative
power, but rather as the grant of authority to prescribe local regulations, according to
immemorial practice, subject, of course, to the interposition of the superior in cases of
necessity. (People v. Vera, 65 Phil. 56)

10. Taxing power of the local government is limited. The taxing power of
local governments is limited in the sense that Congress can enact legislation granting tax
exemptions.
While the system of local government taxation has changed with the onset of the
1987 Constitution, the power of local government units to tax is still limited.
While the power to tax by local governments may be exercised by local legislative
bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct
authority conferred by Section 5, Article X of the Constitution, the basic doctrine on local
taxation remains essentially the same, the power to tax is [still] primarily vested in the
Congress. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169 in turn
referring to Mactan Cebu International Airport Authority, v. Marcos, G.R. No.
120082, September 11, 1996, 261 SCRA 667, 680)

11. Further amplification by Bernas of the local governments power to

tax. What is the effect of Section 5 on the fiscal position of municipal
corporations? Section 5 does not change the doctrine that municipal corporations do not
possess inherent powers of taxation. What it does is to confer municipal corporations a
general power to levy taxes and otherwise create sources of revenue. They no longer
have to wait for a statutory grant of these powers. The power of the legislative authority
relative to the fiscal powers of local governments has been reduced to the authority to
impose limitations on municipal powers. Moreover, these limitations must be consistent
with the basic policy of local autonomy. The important legal effect of Section 5 is thus to
reverse the principle that doubts are resolved against municipal
corporations. Henceforth, in interpreting statutory provisions on municipal fiscal powers,
doubts will be resolved in favor of municipal corporations. It is understood, however, that
taxes imposed by local government must be for a public purpose, uniform within a locality,
must not be confiscatory, and must be within the jurisdiction of the local unit to pass.
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October
6, 2008 citing City Government of Quezon City, et al. v. Bayan Telecommunications,
Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169)

12. Reconciliation of the local governments authority to tax and the

Congressional general taxing power. Congress has the inherent power to tax, which
includes the power to grant tax exemptions. On the other hand, the power of local
governments, such as provinces and cities for example Quezon City, to tax is prescribed
by Section 151 in relation to Section 137 of the LGC which expressly provides that
notwithstanding any exemption granted by any law or other special law, the City or a
province may impose a franchise tax. It must be noted that Section 137 of the LGC does
not prohibit grant of future exemptions.
The Supreme Court in a series of cases has sustained the power of Congress to
grant tax exemptions over and above the power of the local governments delegated
power to tax. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No.
166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 16)
qIndeed, the grant of taxing powers to local government units under the
Constitution and the LGC does not affect the power of Congress to grant exemptions to
certain persons, pursuant to a declared national policy. The legal effect of the
constitutional grant to local governments simply means that in interpreting statutory
provisions on municipal taxing powers, doubts must be resolved in favor of municipal
corporations. [Ibid., referring to Philippine Long Distance Telephone Company, Inc.
(PLDT) vs. City of Davao]

13. General principles of income taxation in the Philippines or the

source rule of income taxation as provided in the NIRC of 1997.
a. A citizen of the Philippines residing therein is taxable on all income derived from
sources withinand without the Philippines;
 b. A nonresident citizen is taxable only on income derived from
sources within the Philippines;
c. An individual citizen of the Philippines who is working and deriving income
abroad as anoverseas contract worker is taxable only on income from
sources within the Philippines: Provided, That a seaman who is a citizen of the
Philippines and who receives compensation for services rendered abroad as a member
of the complement of a vessel engaged exclusively in international trade shall be treated
as an overseas contract worker;
d. An alien individual, whether a resident or not of the Philippines, is
taxable only onincome derived from sources within the Philippines;
e. A domestic corporation is taxable on all income derived from
sources within and without the Philippines; and
f. A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the
Philippines. (Sec. 23, NIRC of 1997, emphasis supplied)

14. Juliane a non-resident alien appointed as a commission agent by a

domestic corporation with a sales commission of 10% all sales actually concluded
and collected through her efforts. The local company withheld the amount of
P107,000 from her sales commission and remitted the same to the BIR.
She filed a claim for refund alleging that her sales commission is not taxable
because the same was a compensation for her services rendered in Germany and
therefore considered as income from sources outside the Philippines.
Is her contention correct ?
SUGGESTED ANSWER: Yes. The important factor which determines the source
of income of personal services is not the residence of the payor, or the place where the
contract for service is entered into, or the place of payment, but the place where the
services were actually performed.
Since the activity of securing the sales were in Germany, then the income did not
originate from sources from within the Philippines. (Commissioner of Internal Revenue v.
Baier-Nickel, G. R. No. 153793, August 29, 2006)
 15. Ensite, Ltd.. is a Canadian corporation not doing business in the
Philippines. It holds 40% of the shares of Philippine Stamping Plant, Inc.,., a
Philippine company while the 60% is owned by Fred Corporation, a Filipino-owned
Philippine corporation. Ensite Co. also owns 100% of the shares of Susanto Co.,
an Indonesian company which has a duly licensed Philippine branch. Due to
worldwide restructuring of the Ensite Ltd.,. group, Ensite Ltd.,. decided to sell all
its shares in Philippine Stamping Plant, Inc. and Susanto Co. The negotiations for
the buy-out and the signing of the Agreement of Sale were all done in the
Philippines. The Agreement provides that the purchase price will be paid to Ensite
Ltds bank account in the U.S. and that title to the Philippine Stamping Plant,
Inc. and Susanto Co. shall be transferred to General Co., in Toronto Canada where
stock certificates will be delivered. General Co. seeks your advice as to whether or
not it will subject the payments of the purchase price to withholding tax. Explain
your advice. SUGGESTED ANSWER: The payments of the purchase
price will be subject to withholding tax. Considering that all the activities (sales) occurred
within the Philippines, the income is considered as income from within, subject to
Philippine income taxation. Ensite, Ltd. being a foreign corporation is to be taxed on its
income derived from sources within the
Philippines.
16.
Ensite, Ltd. is a Canadian corporation, which has a duly licensed Philippine branch
engage in trading activities in the Philippines. Ensite, Ltd.. also invested directly
in 40% of the shares ofstock of Philippine Stamping Plant, Inc.., a Philippine
corporation. These shares are booked in the Head Office of Ensite, Ltd.. and are
not reflected as assets of the Philippine branch. In 2009, Philippine Stamping
Plant, Inc.. declared dividends to its stockholders. Before remitting the dividends
to Ensite Ltd.,., Philippine Stamping Plant, Inc. Co. seeks your advice as to whether
it will subject the remittance to withholding tax. There is no need to discuss WT
rates, if applicable. Focus your discussion on what is the
issue. SUGGESTED
ANSWER: Philippine Stamping Plant, Inc.. should subject the remittance to withholding
tax.. Since Philippine Stamping Plant. is a Philippine corporation, its shares of stock have
obtained a business situs in the Philippines, hence the dividends are considered as
income from within. Ensite. Ltd., being a foreign corporation, should be subject to tax on
its income from within.
17. Philippine Stamping Plant, Inc., a Philippine corporation, has an
executive Larry who is a Filipino citizen. Philippine Stamping Plant, Inc,. has a
subsidiary in Malaysia (Kuala Lumpur Manufacturing, Inc.) and will assign Larry for
an indefinite period to work full time for Kuala Lumpur Manufacturing, Inc.. Larry
will bring his family to reside in Malaysia and will lease out his residence in the
Philippines. The salary of Larry will be shouldered 50% by Philippine Stamping
Plant, Inc.. while the other 50% plus housing, cost of living and educational
allowances of Larrys dependents will be shouldered by Kuala Lumpur
Manufacturing, Inc.. Philippine Stamping Plant, Inc.. will credit the 50% of Larrys
salary to his Philippine bank account. Larry will sign the contract of employment
in the Philippines. He will also be receiving rental income for the lease of his
Philippine
residence. Ar
e these salaries, allowances and rentals subject to Philippine income tax? Explain
briefly. SUGGESTED ANSWER: The salaries and
allowances of Larry, being derived from labor or personal services rendered outside of
the Philippines is considered as income from without. Since Larry is an OCW, then he is
to be taxed only on his income derived from within the Philippines such as the rentals on
his Philippine residence, and not on his income from without.
18. Obama Airlines, Inc., a foreign airline company which does not
maintain any flight to and from the Philippines sold air tickets in the Philippines,
through a general sales agent, relating to the carriage of passengers and cargo
between two points, both outside the Philippines.
a. Is Obama, Inc., subject to income taxes on the sale of the tickets ?
 SUGGESTED ANSWER: Yes. The source of income which is taxable is that
activity which produced the income. The sale of tickets in the Philippines is the activity
that determines whether such income is taxable in the Philippines.
The tickets exchanged hands here and payments for fares were also made here in
Philippine currency. The situs of the source of payments is the Philippines. the flow of
wealth proceeded from and occurred, within the Philippine territory, enjoying the protection
accorded by the Philippine Government. In consideration of such protection, the flow of
wealth should share the burden of supporting the government. [Commissioner of Internal
Revenue v. British Overseas Airways Corporation (BOAC), 149 SCRA 395]
Off-line air carriers having general sales agents in the Philippines are engaged in
or doing business in the Philippines and their income from sales of passage documents
here is income from within the Philippines. Thus, the off-line air carrier liable for the 32%
(now 30%) tax on its taxable income. [South African Airways v. Commissioner of Internal
Revenue, G.R. No. 180356, February 16, 2010 citingCommissioner of Internal Revenue
v. British Overseas Airways Corporation (British Overseas Airways), No. L-65773-74,
April 30, 1987, 149 SCRA 395]
b. Supposing that Obama, Inc., sells tickets outside of the Philippines
for passengers it carry from Gold City, South Africa to the Philippines but returns to
South Africa without any cargo or passengers. Would it then be subject to any
Philippine tax on such sales ?
SUGGESTED ANSWER: It would not be subject to any tax. It is not subject to any
income tax because the activity which generated the income (the sale of the tickets) was
performed outside of the Philippines.
It is not subject to the carriers tax based on gross Philippine billings because there
were no lifts that originated from the Philippines. Gross Philippine Billings refers to the
amount of gross revenue derived from carriage of persons, excess baggage, cargo and
mail originating from the Philippines in a continuous and uninterrupted flight, irrespective
of the place of sale or issue and the place of payment of the ticket or passage
document. [NIRC of 1997, Sec. 28(A)(3)(a)]
c. Would your answer be the same if Obama, Inc. sold tickets outside of
the Philippines for travelers who are going to picked up by Obama, Inc., planes from
the Diosdado Macapagal Intl. Airport at Clark, Angeles, Pampanga, bound for
Nairobi, Kenya ? Reason out your answer.
SUGGESTED ANSWER: No more. This time Obama, Inc., would be subject to the
carriers tax based on Gross Philippine Billings. (GPB).
Gross Philippine Billings refers to the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and mail originating from the Philippines in
a continuous and uninterrupted flight, irrespective of the place of sale or issue and the
place of payment of the ticket or passage document. [NIRC of 1997, Sec. 28(A)(3)(a)]
The place of sale is irrelevant; as long as the uplifts of passengers and cargo
occur from the Philippines, income is included in GPB. (South African Airways v.
Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010)

19. No improper delegation of legislative authority to tax. The power to

tax is inherent in the State, such power being inherently legislative, based on the principle
that 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. (Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008)

CONSTITUTIONAL LIMITATIONS

1. Constitutional limitations on the power of taxation . The general or

indirect constitutional limitations as well as the specific or direct constitutional limitations.

2. The general or indirect constitutional limitations on the power of taxation

are:
a. Due process clause;
b. Equal protection clause;
c. Freedom of the press;
d. Religious freedom;
e. No taking of private property without just compensation;
 f. Non-impairment clause;
g. Law-making process:
1) Bill should embrace only one subject expressed in the title thereof;
2) Three (3) readings on three separate days;
3) Printed copies in final form distributed three (3) days before passage.
h. Presidential power to grant reprieves, commutations and pardons and
remittal of fines and forfeiture after conviction by final judgment.

3. The specific or direct constitutional limitation.

a. No imprisonment for non-payment of a poll tax;
b. Taxation shall be uniform and equitable;
c. Congress shall evolve a progressive system of taxation;
d. All appropriation, revenue or tariff bills shall originate exclusively in the
House of Representatives, but the Senate may propose and concur with amendments;
e. The President shall have the power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which
he does not object;
f. Delegated power of the President to impose tariff rates, import and export
quotas, tonnage and wharfage dues:
1) Delegation by Congress
2) through a law
3) subject to Congressional limits and restrictions
4) within the framework of national development program.
g. Tax exemption of charitable institutions, churches, parsonages and
convents appurtenant thereto, mosques, and all lands, buildings and improvements of all
kinds actually, directly and exclusively used for religious, charitable or educational
purposes;
h. No tax exemption without the concurrence of majority vote of all members
of Congress;
i. No use of public money or property for religious purposes except if priest is
assigned to the armed forces, penal institutions, government orphanage or leprosarium;
 j. Money collected on tax levied for a special purpose to be used only for such
purpose, balance if any, to general funds;
k. The Supreme Court's power to review judgments or orders of lower courts
in all cases involving the legality of any tax, impose, assessment or toll or the legality of any
penalty imposed in relation to the above;
l. Authority of local government units to create their own sources of revenue,
to levy taxes, fees and other charges subject to guidelines and limitations imposed by
Congress consistent with the basic policy of local autonomy;
m. Automatic release of local government's just share in national taxes;
n. Tax exemption of all revenues and assets of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational purposes;
o. Tax exemption of all revenues and assets of proprietary or cooperative
educational institutions subject to limitations provided by law including restrictions on
dividends and provisions for reinvestment of profits;
p. Tax exemption of grants, endowments, donations or contributions used
actually, directly and exclusively for educational purposes subject to conditions prescribed
by law.

5. Equal protection of the law clause is subject to reasonable

classification. If the groupings are characterized by substantial distinctions that make
real differences, one class may be treated and regulated differently from another. The
classification must also be germane to the purpose of the law and must apply to all those
belonging to the same class. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410,
January 20, 1999)

6. Requisites for valid classification. All that is required of a valid

classification is that it be reasonable, which means that a. the classification
should be based on substantial distinctions which make for real differences,
b. that it must be germane to the purpose of the law;
c. that it must not be limited to existing conditions only; and
d. that it must apply equally to each member of the class.
 The standard is satisfied if the classification or distinction is based on a reasonable
foundation or rational basis and is not palpably arbitrary. [ABAKADA Guro Party List,
etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008]

7. Equal protection does not demand absolute equality. It merely

requires that all persons shall be treated alike, under like circumstances and conditions,
both as to the privileges conferred and liabilities enforced. (Santos v. People, et al, G. R.
No. 173176, August 26, 2008)
It is imperative to duly establish that the one invoking equal protection and the
person to which she is being compared were indeed similarly situated, i.e., that they
committed identical acts for which they were charged with the violation of the same
provisions of the NIRC; and that they presented similar arguments and evidence in their
defense - yet, they were treated differently. (Santos, supra)

8. Tests to determine validity of classification. The United States

Supreme Court has established different tests to determine the validity of a classification
and compliance with the equal protection clause. The recognized tests are:
a. The traditional (or rational basis) test.
b. The strict scrutiny (or compelling interest) test.
c. The intermediate level of scrutiny (or quasi-suspect class) test.
9. The traditional (or rational basis) test used in order to determine the
validity of classification. The classification is valid if it is rationally related to a
constitutionally permissible state interest.
The complainant must prove that the classification is invidous, wholly arbitrary,
or capricious, otherwise the classification is presumed to be valid. (Lindsley v. Natural
Carboinic Gas Co., 220 U.S. 61; McGowan v. Maryland, 366 U.S. 420; United States
Railroad Retirement Board v. Fritz, 449 U.S. 166)

10. The strict scrutiny (or compelling interest) test used in order to
determine the validity of the classification. Government regulation that intentionally
discriminates against a suspect class such as racial or ethnic minorities, is subject to
strict scrutiny and considered to violate the equal protection clause unless found
necessary to promote a compelling state interest.
A classification is necessary when it is narrowly drawn so that no alternative, less
burdensome means is available to accomplish the state interest.
Thus, it was held that denial of free public education to the children of illegal aliens
imposes an enormous and lasting burden based on a status over which the children have
no control is violative of equal protection because there is no showing that such denial
furthers a substantial state goal. (Plyler v. Doe, 457 U.S. 202)

11. The intermediate level of scrutiny (or quasi-suspect class) test used
in order to determine the validity of he classification. Classification based on gender
or legitimacy are not suspect, but neither are they judged by the traditional or rational
basis test.
Intentional discriminations against members of a quasi-suspect class violate
equal protection unless they are substantially related to important government
objectives. (Craig v. Boren, 429 U.S. 190)
Thus, a state law granting a property tax exemption to widows, but not widowers,
has been held valid for it furthers the state policy of cushioning the financial impact of
spousal loss upon the sex for whom that loss usually imposes a heavier burden. (Kahn
v. Shevin, 416 U.S. 351)

12. Equality and uniformity of taxation may mean the same as equal
protection. In such a case, the terms would mean that all subjects and objects of taxation
which are similarly situated shall be subject to the same burdens and granted the same
privileges without any discrimination whatsoever.
13. It is inherent in the power to tax that the State be free to select the
subjects of taxation, and it has been repeatedly held that, "inequalities which result from
a singling out of one particular class of taxation, or exemption, infringe no constitutional
limitation." (Commissioner of Internal Revenue, et al., v. Santos, et al., 277 SCRA 617)
 9. Benjie is a law-abiding citizen who pays his real estate taxes
promptly. Due to a series of typhoons and adverse economic conditions, an
ordinance is passed by Soliman City granting a 50% discount for payment of
unpaid real estate taxes for the preceding year and the condonation of all penalties
on fines resulting from the late payment.
Arguing that the ordinance rewards delinquent tax payers and discriminates
against prompt ones, Benjie demands that he be refunded an amount equivalent to
one-half of the real property taxes he paid. The municipal attorney rendered an
opinion that Benjie cannot be reimbursed because the ordinance did not provide
for such reimbursement. Benjie files suit to declare the ordinance void on the
ground that it is a class legislation. Will his suit prosper ? Explain your answer
briefly.
SUGGESTED ANSWER: No. There is no class legislation because there is no
violation of the equal protection suit. There is a valid classification between those who
already paid their taxes and those who have not. Furthermore, the taxing authority has
the prerogative to select the subjects and objects of taxation, including granting a 50%
discount in the payment of unpaid real estate taxes, and the condonation of all penalties
on fines resulting from late payment.

10. The rewards law to tax collectors does not violate equal
protection. The equal protection clause recognizes a valid classification, that is, a
classification that has a reasonable foundation or rational basis and not arbitrary. With
respect to RA 9335, its expressed public policy is the optimization of the revenue-
generation capability and collection of the BIR and the BOC. Since the subject of the law
is the revenue- generation capability and collection of the BIR and the BOC, the incentives
and/or sanctions provided in the law should logically pertain to the said agencies.
Moreover, the law concerns only the BIR and the BOC because they have the common
distinct primary function of generating revenues for the national government through the
collection of taxes, customs duties, fees and charges.
Indubitably, such substantial distinction is germane and intimately related to the
purpose of the law. Hence, the classification and treatment accorded to the BIR and the
BOC under RA 9335 fully satisfy the demands of equal protection. (ABAKADA Guro
Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008)

11. The prosecution of one guilty person while others equally guilty are
not prosecuted, however, is not, by itself, a denial of the equal protection of the
laws. Where the official action purports to be in conformity to the statutory classification,
an erroneous or mistaken performance of the statutory duty, although a violation of the
statute, is not without more a denial of the equal protection of the laws.
The unlawful administration by officers of a statute fair on its face, resulting in its
unequal application to those who are entitled to be treated alike, is not a denial of equal
protection unless there is shown to be present in it an element of intentional or purposeful
discrimination. This may appear on the face of the action taken with respect to a particular
class or person, or it may only be shown by extrinsic evidence showing a discriminatory
design over another not to be inferred from the action itself.
(Santos v. People, et al, G. R. No. 173176, August 26, 2008)

12. Equal protection should not be used to protect commission of

crime. While all persons accused of crime are to be treated on a basis of equality before
the law, it does not follow that they are to be protected in the commission of crime. It
would be unconscionable, for instance, to excuse a defendant guilty of murder because
others have murdered with impunity.
Likewise, if the failure of prosecutors to enforce the criminal laws as to some
persons should be converted into a defense for others charged with crime, the result
would be that the trial of the district attorney for nonfeasance would become an issue in
the trial of many persons charged with heinous crimes and the enforcement of law would
suffer a complete breakdown. (Santos v. People, et al, G. R. No. 173176, August 26,
2008)

13. Illustration of double taxation in local taxation. there is indeed double

taxation if Coca-Cola is subjected to the taxes under both Sections 14 and 21 of Tax
Ordinance No. 7794, since these are being imposed: (1) on the same subject matter
the privilege of doing business in the City of Manila; (2) for the same purpose to make
persons conducting business within the City of Manila contribute to city revenues; (3) by
the same taxing authority City of Manila; (4) within the same taxing jurisdiction within
the territorial jurisdiction of the City of Manila; (5) for the same taxing periods per
calendar year; and (6) of the same kind or character a local business tax imposed on
gross sales or receipts of the business. (The City of Manila, et al., v. Coca-Cola Bottlers
Philippines, Inc., G. R. No. 181845, August 4, 2009)

14. A lawful tax on a new subject, or an increased tax on an old one, does
not interfere with a contract or impairs its obligation, within the meaning of the
constitution. (Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA
630)

15. The withdrawal of a tax exemption should not be construed as

prohibiting future grants of exemption from all taxes. (Philippine Long Distance
Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001)

16. Tax exemptions in franchises are always subject to withdrawal. A

legislative franchise is granted with the express condition that it is subject to amendment,
alteration, or repeal. (1987 Constitution, Art. XII, Sec. 11)
It is enough to say that the parties to a contract cannot, through the exercise of
prophetic discernment, fetter the exercise of the taxing power of the State. For not only
are existing laws read into contracts in order to fix obligations as between parties, but the
reservation of essential attributes of sovereign power is also read into contracts as a basic
postulate of the legal order. The policy of protecting contracts against impairment
presupposes the maintenance of a government which retains adequate authority to
secure the peace and good order of society. (Smart Communications, Inc. v. The City of
Davao, etc., et al., G. R. No. 155491, September 16, 2008)
NOTES AND COMMENTS: Philippine Long Distance Telephone Company, Inc.,
v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001 made the observation that
since Smarts franchise was granted after the effectivity of the Local Government Code that
its tax exemption privilege was reinstated. However,Smart Communications, Inc. v. The
City of Davao, etc., et al., G. R. No. 155491, September 16, 2008 is explicit in its holding
that Smart is not entitled to a tax exemption.

17. When withdrawal of a tax exemption impairs the obligation of

contracts. The Contract Clause has never been thought as a limitation on the exercise
of the States power of taxation save only where a tax exemption has been granted for a
valid consideration. (Smart Communications, Inc. v. The City of Davao, etc., et al., G. R.
No. 155491, September 16, 2008) citing Tolentino v. Secretary of Finance, G. R. No.
115455, August 25, 1994, 235 SCRA 630, 685) The author opines that since practically
all franchises granted to telecommunications companies are similarly worded that the
above doctrine finds application to the others)

18. The primary reason for the withdrawal of tax exemption privileges granted
to government owned and controlled corporations and all other units of government
was that such privilege resulted to serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises, hence resulting in the need for these entities to
share in the requirements of development, fiscal or otherwise, by paying the taxes and
other charges due them. (Philippine Ports Authority v. City of Iloilo, G. R. No. 109791, July
14, 2003)

19. National Power Corporation (NPC) is of the insistence that it is not

subject to the payment of franchises taxes imposed by the Province of Isabela
because all of its shares are owned by the Republic of the Philippines. It is thus, an
instrumentality of the National Government which is exempt from local taxation. As
such it is not a private corporation engaged in business enjoying franchise
Is such contention meritorious ?
SUGGESTED ANSWER: No. Philippine Long Distance Telephone Company, Inc.,
v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001, upheld the authority of
the City of Davao, a local government unit, to impose and collect a local franchise tax
because the Local Government Code has withdrawn all tax exemptions previously enjoyed
by all persons and authorized local government units to impose a tax on business enjoying
a franchise tax notwithstanding the grant of tax exemption to them.

20. In lieu of all taxes in the franchise of ABS-CBN does not exempt it
from local franchise taxes. It does not expressly provide what kind of taxes ABS-CBN is
exempted from. It is not clear whether the exemption would include both local, whether
municipal, city or provincial, and national tax. Whether the in lieu of all taxes provision
would include exemption from local tax is not unequivocal.
The right to exemption from local franchise tax must be clearly established and
cannot be made out of inference or implications but must be laid beyond reasonable
doubt. Verily, the uncertainty in the in lieu of all taxes provision should be construed
against ABS-CBN. ABS-CBN has the burden to prove that it is in fact covered by the
exemption so claimed but has failed to do so. (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation, G. R. No. 166408, October 6, 2008)
NOTES AND COMMENTS: This is practically the same holding in an earlier
case involving another telecommunications company Smart Communications, Inc. v.
The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008. The author opines
that since practically all franchises granted to telecommunications companies are
similarly worded that the above doctrine finds application to the others.)

21. In lieu of all taxes refers to national internal revenue taxes and not
to local taxes. The in lieu of all taxes clause applies only to national internal revenue
taxes and not to local taxes. As appropriately pointed out in the separate opinion of Justice
Antonio T. Carpio in a similar case involving a demand for exemption from local franchise
taxes:
[T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other
than income tax, imposed under the National Internal Revenue Code. The "in lieu of all
taxes" clause does not apply to local taxes. The proviso in the first paragraph of Section
9 of Smart's franchise states that the grantee shall "continue to be liable for income taxes
payable under Title II of the National Internal Revenue Code." Also, the second paragraph
of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of Internal
Revenue or his duly authorized representative in accordance with the National Internal
Revenue Code." Moreover, the same paragraph declares that the tax returns "shall be
subject to audit by the Bureau of Internal Revenue." Nothing is mentioned in Section 9
about local taxes. The clear intent is for the "in lieu of all taxes" clause to apply only to
taxes under the National Internal Revenue Code and not to local taxes. Even with respect
to national internal revenue taxes, the "in lieu of all taxes" clause does not apply to income
tax.
If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also
apply to local taxes, Congress would have expressly mentioned the exemption from
municipal and provincial taxes. Congress could have used the language in Section 9(b)
of Clavecilla's old franchise, as follows:
x x x in lieu of any and all taxes of any kind, nature or description levied,
established or collected by any authority whatsoever, municipal, provincial or national,
from which the grantee is hereby expressly exempted, x x x. (Emphasis supplied).
However, Congress did not expressly exempt Smart from local taxes. Congress
used the "in lieu of all taxes" clause only in reference to national internal revenue taxes.
The only interpretation, under the rule on strict construction of tax exemptions, is that the
"in lieu of all taxes" clause in Smart's franchise refers only to national and not to local
taxes. [Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,
September 16, 2008 citing Philippine Long Distance Telephone Company, Inc. v. City of
Davao, 447 Phil. 571, 594 (2003)]
NOTES AND COMMENTS: The author opines that the above finds application to
all telecommunications companies.

22. The in lieu of all taxes clause in the franchise of ABS-CBN has
become functus officio with the abolition of the franchise tax on broadcasting
companies with yearly gross receipts exceeding Ten Million Pesos. The clause in
lieu of all taxes does not pertain to VAT or any other tax. It cannot apply when what is
paid is a tax other than a franchise tax. Since the franchise tax on the broadcasting
companies with yearly gross receipts exceeding ten million pesos has been abolished,
the in lieu of all taxes clause has now become functus officio, rendered inoperative.
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October
6, 2008)
NOTES AND COMMENTS: This is practically the same holding in an earlier
case involving another telecommunications company. Smart Communications, Inc. v.
The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008. The author opines
that since practically all franchises granted to telecommunications companies are
similarly worded that the above doctrine finds application to the others.)

23. Double taxation in its generic sense, this means taxing the same
subject or object twice during the same taxable period. In its particular sense, it may
mean direct duplicate taxation, which is prohibited under the constitution because it violates
the concept of equal protection, uniformity and equitableness of taxation. Indirect duplicate
taxation is not anathematized by the above constitutional limitations.

24. Elements of direct duplicate taxation:

a. Same
1) Subject or object is taxed twice
2) by the same taxing authority
3) for the same taxing purpose
4) during the same taxable period
b. Taxing all of the subjects or objects for the first time without taxing all of them
for the second time.
If any of the elements are absent then there is indirect duplicate taxation which is
not prohibited by the constitution.
NOTES AND COMMENTS:
a. Presence of the 2nd element violates the equal protection clause. If
only the 1stelement is present, taxing the same subject or object twice, by the same taxing
authority, etc., there is no violation of the equal protection clause because all subjects and
objects that are similarly situated are subject to the same burdens and granted the same
privileges without any discrimination whatsoever,
 The presence of the 2nd element, taxing all of the subjects and objects for the first
time, without taxing all for the second time, results to discrimination among subjects and
objects that are similarly situated, hence violative of the equal protection clause.
25. Double taxation a valid defense against the legality of a tax measure if the
double taxation is direct duplicate taxation, because it would violate the equal protection
clause of the constitution.

26. When an item of income is taxed in the Philippines and the same
income is taxed in another country, this would be known as international juridical
double taxation which is the imposition of comparable taxes in two or more states on the
same taxpayer in respect of the same subject matter and for identical
grounds. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al.,G.R. No.
127105, June 25, 1999)

27. Methods for avoiding double taxation (indirect duplicate taxation).

a. Tax treaties which exempts foreign nationals from local taxation and local
nationals from foreign taxation under the principle of reciprocity.
b. Tax credits where foreign taxes are allowed as deductions from local taxes
that are due to be paid.
c. Allowing foreign taxes as a deduction from gross income.

28. Tax credit generally refers to an amount that is subtracted directly from
ones total tax liability, an allowance against the tax itself, or a deduction from what is
owned.
A tax credit reduces the tax due, including whenever applicable the income tax
that is determined after applying the corresponding tax rates to taxable
income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No.
159647, April 15, 2005)
 29. A tax deduction is defined as a subtraction fro income for tax purposes, or
an amount that is allowed by law to reduce income prior to the application of the tax rate to
compute the amount of tax which is due.
A tax deduction reduces the income that is subject to tax in order to arrive at taxable
income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No.
159647, April 15, 2005)

30. The petitioners allege that the R-VAT law is constitutional because the
Bicameral Conference Committed has exceeded its authority in including provisions
which were never included in the versions of both the House and Senate such as
inserting the stand-by authority to the President to increase the VAT from 10% to
12%; deleting entirely the no pass-on provisions found in both the House and Senate
Bills; inserting the provision imposing a 70% limit on the amount of input tax to be
credited against the output tax; and including the amendments introduced only by
Senate Bill No. 1950 regarding other kinds of taxes in addition to the value-added
tax. Thus, there was a violation of the constitutional mandate that revenue bills shall
originate exclusively from the House of Representatives.
Are the contentions of such weight as to constitute grave abuse of discretion
which may invalidate the law ? Explain briefly.
SUGGESTED ANSWER: No. There was no grave abuse of discretion because all
the changes and modifications made by the Bicameral Conference Committee were
germane to subjects of the provisions referred to it for reconciliation.
The Bicameral Conference Committee merely exercised the judicially recognized
long-standing legislative practice of giving said conference committee ample latitude for
compromising differences between the Senate and the House. [Abakada Guro Party List
(etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases]

31. The VAT while regressive is NOT violative of the mandate to evolve a
progressive system of taxation. Do you agree ? The mandate to Congress is not to
prescribe but to evolve a progressive system of taxation. Otherwise, sales taxes which
perhaps are the oldest form of indirect taxes, would have been prohibited with the
proclamation of the constitutional provision. Sales taxes are also regressive. . [Abakada
Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and
companion cases citing Tolentino v. Secretary of Finance, et al., G. R. No. 115455, August
25, 1994, 235 SCRA 630]

32. All revenues and assets of non-stock, non-profit educational

institutions that are actually, directly and exclusively used for educational purposes
shall be exempt from taxation.

33. Revenues and assets of proprietary educational institutions,

including those which are cooperatively owned, may be entitled to exemptions
subject to limitations provided by law including restrictions on dividends and
provisions for reinvestments. There is no law at the present which grants exemptions,
other the exemptions granted to cooperatives.

OTHER CONCEPTS

1. Distinguish tax from debt.

TAX DEBT
Basis based on law based on contract
or judgment
Failure to may result in no imprisonment
Pay imprisonment
Mode of generally payable payable in money,
Payment in money property or service
Assignability not assignable assignable
Payment unless it becomes may be a subject
a debt is not
subject to
 compensation or
set-off
Interest does not draw draws interest if
interest unless stipulated or
delinquent delayed
Authority imposed by public can be imposed by
authority private individuals
Prescription Prescriptive debt under the
periods for tax Civil Code
under NIRC

WARNING: Do not use the above arrangement in answering Bar questions.

2. Compensation takes place by operation of law, where the local

government and the taxpayer are in their own right reciprocally debtors and creditors of
each other, and that the debts are both due and demandable, in consequence of Articles
1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8 SCRA 443)

3. May there be compensation or set-off between a national tax and a debt

? Reason out your answer. SUGGESTED ANSWER: As a
general rule, there could be no compensation or set-off between a tax and a debt for the
following
reasons:
a. Lifeblood
theory. b. Taxes are
not contractual obligations but arise out of a duty to, and are the positive acts of
government, to the making and enforcing of which the personal consent of the individual
taxpayer is not required. (Republic v. Mambulao Lumber Co., 4 SCRA
622) c. Taxes cannot be the subject of
compensation because the government and taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off.
Thus, it is correct to say that the offsetting of a taxpayers tax refund with its alleged
tax deficiency is unavailing under Art. 1279 of the Civil Code. (South African Airways v.
Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010
reiterating Caltex Philippines, Inc. v. Commission on Audit, which applied Francia v.
Intermediate Appellate Court)

4. Exceptions: When set-off or compensation allowed for local

taxes. a. Where both
claims already become overdue and demandable as well as fully liquidated.
Compensation takes place by operation of law under Art. 1200 in relation to Arts. 1279
and 1290 all of the Civil Code. (Domingo v. Garlitos, 8 SCRA
443) b. Compensation takes place by operation of
law, where the government and the taxpayer are in their own right reciprocally debtors
and creditors of each other, and that the debts are both due and demandable. This is in
consequence of Article 1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8 SCRA
443) c. ,The Supreme Court upheld
the validity of a set-off between the taxpayer and the government. In both cases, the
claims of the taxpayers therein were certain and liquidated. The claims were certain since
there were no doubts or disputes as to their refundability. In fact, the government
admitted the fact of over-payment. (Commissioner of Internal Revenue v. Esso
Standard Eastern, Inc., 172 SCRA 364) d. In case of a tax
overpayment, the BIRs obligation to refund or off-set arises from the moment the tax was
paid. REASON: Solutio indebeti. (Commissioner of Internal Revenue v. Esso Standard
Eastern, Inc 172 SCRA
364) e.
While judgment should be rendered in favor of Republic for unpaid taxes, judgment
ought at the same time to issue for Sampaguita Pictures commanding payment to the
latter by the Republic of the value of the backpay certificates which the Republic received.
(Republic v. Ericta, 172 SCRA 623)
 5. Gilbert obtained a judgment for a sum of money against the
municipality of Camiling. The judgment has become final although execution has
not issued. Upon receiving an assessment for municipal sales taxes from the
Municipal Treasurer, Gilbert executed a partial assignment of his judgment
sufficient to cover the assessment in favor of the Municipality. May the Municipal
Treasurer validly accept the assignment? Why?
SUGGESTED ANSWER: Yes. The parties in this case are mutually debtors and
creditors of each other, and since both of the claims became overdue, demandable and
fully liquidated, compensation takes place by operation of law. Such was the holding
in Domingo v. Garlitos, 8 SCRA 443, a case decided by the Supreme Court whose factual
antecedents are similar to the
problem.
6. In case of doubt, tax
laws must be construed strictly against the State and liberally in favor of the
taxpayer because taxes, as burdens which must be endured by the taxpayer, should not
be presumed to go beyond what the law expressly and clearly declares. (Lincoln Philippine
Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)
7. Interpretation in the imposition of taxes, is not the similar doctrine as
that applied to tax exemptions. The rule in the interpretation of tax laws is that a statute
will not be construed as imposing a tax unless it does so clearly, expressly, and
unambiguously. A tax cannot be imposed without clear and express words for that
purpose. 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. 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. [Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos.
167274-75, July 21, 2008 citing CIR v. Court of Appeals, 338 Phil. 322, 330-331
(1997)] As burdens, taxes should not be unduly exacted nor assumed beyond the plain
meaning of the tax laws. (Ibid., citing CIR v. Philippine American Accident Insurance
Company, Inc.,G.R. No. 141658, March 18, 2005, 453 SCRA 668)

8. Strict interpretation of tax exemption laws. Taxes are what civilized

people pay for civilized society. They are the lifeblood of the nation. Thus, statutes
granting tax exemptions are construed stricissimi juris against the taxpayer and liberally
in favor of the taxing authority. A claim of tax exemption must be clearly shown and based
on language in law too plain to be mistaken. Otherwise stated, taxation is the rule,
exemption is the exception. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation,
G. R. No. 166408, October 6, 2008 citing Mactan Cebu International Airport Authority v.
Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680) The burden of
proof rests upon the party claiming the exemption to prove that it is in fact covered by the
exemption so claimed. (Quezon City, supra citing Agpalo, R.E., Statutory Construction,
2003 ed., p. 301)

9. Rationale for strict interpretation of tax exemption laws. The basis for
the rule on strict construction to statutory provisions granting tax exemptions or
deductions is to minimize differential treatment and foster impartiality, fairness and
equality of treatment among taxpayers. (Quezon City, et al., v. ABS-CBN Broadcasting
Corporation, G. R. No. 166408, October 6, 2008) He who claims an exemption from his
share of common burden must justify his claim that the legislature intended to exempt
him by unmistakable terms. For exemptions from taxation are not favored in law, nor are
they presumed. They must be expressed in the clearest and most unambiguous language
and not left to mere implications. It has been held that exemptions are never presumed
the burden is on the claimant to establish clearly his right to exemption and cannot be
made out of inference or implications but must be laid beyond reasonable doubt. In other
words, since taxation is the rule and exemption the exception, the intention to make an
exemption ought to be expressed in clear and unambiguous terms. (Quezon City,
supra citing Agpalo, R.E., Statutory Construction, 2003 ed., p. 302)
 10. Why are tax exemptions are strictly construed against the taxpayer
and liberally in favor of the State ?
SUGGESTED ANSWER: Taxes are necessary for the continued existence of the
State.

11. In case of a tax overpayment, where the BIRs obligation to refund or

set-off arises from the moment the tax was paid under the principle of solutio
indebeti. (Commissioner of Internal Revenue v. Esso Standard Eastern, Inc, 172 SRCA
364)

12. But note Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July
6, 2001 which held that in order for the rule on solutio indebeti to apply it is an essential
condition that the petitioner must first show that its payment of the customs duties was in
excess of what was required by the law at the time the subject 16 importations of milk and
milk products were made. Unless shown otherwise, the disputable presumption of
regularity of performance of duty lies in favor of the Collector of Customs.
13. Strict interpretation of a tax refund that partakes of the nature of a
tax does not apply to tax refund based on erroneous payment or where there is no
law that authorizes collection of the tax. There is parity between tax refund and tax
exemption only when the former is based either on a tax exemption statute or a tax refund
statute. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos.
167274-75, July 21, 2008)
Tax refunds (or tax credits), on the other hand, are not founded principally on
legislative grace but on the legal principle which underlies all quasi-contracts abhorring a
persons unjust enrichment at the expense of another. [Commissioner,
supra citing Ramie Textiles, Inc. v. Hon. Mathay, Sr., 178 Phil. 482 (1979); Puyat & Sons
v. City of Manila, et al., 117 Phil. 985 (1963)]
The dynamic of erroneous payment of tax fits to a tee the prototypic quasi-
contract, solutio indebiti,which covers not only mistake in fact but also mistake in law.
(Commissioner, supra citing CIVIL CODE,Arts. 2142, 2154 and 2155)
 The Government is not exempt from the application of solutio indebiti.
(Commissioner, supraciting Commissioner of Internal Revenue v. Firemans Fund
Insurance Co., G.R. No. L-30644, 9 March 1987, 148 SCRA 315, 324-325; Ramie
Textiles, Inc. v. Mathay, supra; Gonzales Puyat & Sons v. City of Manila, supra)
Indeed, the taxpayer expects fair dealing from the Government, and the latter has
the duty to refund without any unreasonable delay what it has erroneously collected.
(Commissioner, supra citingCommissioner of Internal Revenue v. Tokyo Shipping Co.,
supra at 338) If the State expects its taxpayers to observe fairness and honesty in paying
their taxes, it must hold itself against the same standard in refunding excess (or
erroneous) payments of such taxes. It should not unjustly enrich itself at the expense of
taxpayers. [Commissioner, supra citing AB Leasing and Finance Corporation
v. Commissioner of Internal Revenue, 453 Phil. 297 in turn citing BPI-Family Savings
Bank, Inc. v. Court of Appeals, 330 SCRA 507, 510, 518 (2000)] And so, given its
essence, a claim for tax refund necessitates only preponderance of evidence for its
approbation like in any other ordinary civil case. (Commissioner, supra)

14. Tax refunds premised upon a tax exemption strictly construed, Tax
exemption is a result of legislative grace. And he who claims an exemption from the
burden of taxation must justify his claim by showing that the legislature intended to exempt
him by words too plain to be mistaken. [Commissioner of Internal Revenue v. Fortune
Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing Surigao Consolidated
Mining Co. Inc. v. Commissioner of Internal Revenue and Court of Tax Appeals, 119 Phil.
33, 37 (1963)]
The rule is that tax exemptions must be strictly construed such that the exemption
will not be held to be conferred unless the terms under which it is granted clearly and
distinctly show that such was the intention. [Commissioner, supra citing Phil. Acetylene
Co. v. Commission of Internal Revenue, et al., 127 Phil. 461, 472 (1967); Manila Electric
Company v. Vera, G.R. No. L-29987, 22 October 1975, 67 SCRA 351, 357-358; Surigao
Consolidated Mining Co. Inc. v. Commissioner of Internal Revenue, supra]
A claim for tax refund may be based on statutes granting tax exemption or tax
refund. In such case, the rule of strict interpretation against the taxpayer is applicable as
the claim for refund partakes of the nature of an exemption, a legislative grace, which
cannot be allowed unless granted in the most explicit and categorical language. The
taxpayer must show that the legislature intended to exempt him from the tax by words too
plain to be mistaken. [Commissioner, supra with a note to see Surigao Consolidated
Mining Co. Inc. v. CIR, supra at 732-733; Philex Mining Corp. v. Commissioner of
Internal Revenue, 365 Phil. 572, 579 (1999); Davao Gulf Lumber Corp. v. Commissioner
of Internal Revenue, 354 Phil. 891-892 (1998); . Commissioner of Internal Revenue v.
Tokyo Shipping Co., Ltd., 314 Phil. 220, 228 (1995)]

15. Effect of a BIR reversal of a previous ruling interpreting a law as

exempting a taxpayer. A reversal of a BIR ruling favorable to a taxpayer would not
necessarily create a perpetual exemption in his favor, for after all the government is never
estopped from collecting taxes because of mistakes or errors on the part of its
agents. (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et
al., 293 SCRA 92, 99)

16. A tax amnesty is a general pardon or intentional overlooking by the State

of its authority to impose penalties on persons otherwise guilty of evasion or violation of a
revenue or a tax law.
It partakes of an absolute waiver by the government of its right to collect what is
due it and to give tax evaders who wish to relent a chance to start with a clean slate. A
tax amnesty, much like a tax exemption, is never favored nor presumed in law. The grant
of a tax amnesty, similar to a tax exemption, must be construed strictly against the
taxpayer and liberally in favor of the taxing authority. (Philippine Banking Corporation,
etc., v. Commissioner of Internal Revenue, G. R. No. 170574, January 30, 2009)

17. The purpose of tax amnesty is to

a. give tax evaders who wish to relent a chance to start a clean slate, and to
b. give the government a chance to collect uncollected tax from tax
evaders without having to go through the tedious process of a tax case. (Banas, Jr.
v. Court of Appeals, et al.,G.R. No. 102967, February 10, 2000)
 18. Tax amnesty distinguished from tax exemption.
a. Tax amnesty is an immunity from all criminal, civil and administrative
liabilities arising from nonpayment of taxes (People v. Castaneda, G.R. No. L-46881,
September 15, 1988) WHILE a tax exemption is an immunity from civil liability only. It is an
immunity or privilege, a freedom from a charge or burden to which others are
subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365)
b. Tax amnesty applies only to past tax periods, hence of retroactive
application (Castaneda,supra) WHILE tax exemption has prospective application.

19. Tax avoidance is the use of legally permissible means to reduce the tax
while tax evasion is the use of illegal means to escape the payment of taxes.

20. Tax evasion connotes the integration of three factors:

a. 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;
b. an accompanying state of mind which is described as being evil on bad
faith, willful, or deliberate and not accidental; and
c. a course of action or failure of action which is unlawful. (Commissioner of
Internal Revenue v. The Estate of Benigno P. Toda, Jr., , etc., G. R. No. 147188,
September 14, 2004)

21. Tax avoidance distinguished from tax evasion.

a. Tax avoidance is legal while tax evasion is illegal.
b. The objective of tax avoidance in most instances is merely to reduce the
tax that is due while is tax evasion the object is to entirely escape the payment of taxes.
c. Tax evasion warrants the imposition of civil, administrative and criminal
penalties while tax avoidance does not.
 22. Tax sparing is a provision in some tax treaties which provides that the
state of residence allows as credit the amount that would have been paid, as if no
reduction has been made. (Vogel, Klaus on Double Taxation Conventions, Third Edition,
p.1255 cited in Segarra, Venice H, Tax Treaties: Trick or treat ?, Philippine Daily Inquirer,
December 6, 2002, p. C5)
There may be instances where a particular income is exempt from taxation in order
to encourage foreign investments which may lead to economic development. If the tax
credit method is used, there would be no more tax to credit since there is no more tax to
credit as a result of the tax exemption. Consequently, when the tax method credit method
is applied to these items of income, such incentives are siphoned off since, in effect, the
tax benefits are cancelled out. (Ibid.) Thus, the need for the tax sparing provision.