SAN BEDA TAX REVIEWER 2012

8/11/2019 SAN BEDA TAX REVIEWER 2012

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

SUBJECT COMMITTEE:

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

MEMBERS:Baby Perian Arcega, Ethel Joy Arriola, Adrian Aumentado, Paula Tricia Bagnes , Benedicto Beley, Jingle Chua, Luis VoltaireFormilleza, Aiza Gonzales, Roniel Muoz, Gerwin Panghulan, Maria Katrina Rivera, April Salamatin, Eve Hazel Santos, SalvadorAndrew Tugade, Neo Valerio, and Janice Ivy Valparaiso

General Principles | TAXATION LAW

DEFINITION

TAXATION is the power by which thesovereign, through its law-making body, raisesrevenue to defray the necessary expenses ofthe government. It is merely a way ofapportioning the costs of government amongthose who in some measure are privileged toenjoy its benefits and must bear its burdens(51 Am. Jur. 34)

It being inherent to the State, no constitutionalconferment is necessary for its exercise. TheConstitution merely provides the limitations onhow the same will be exercised (Recalde, A

Treatise on Tax Principles and Remedies, p.1).

Two Concepts of Taxation1. 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 theexistence of State and to enable the Stateto promote the general welfare and

protection of its citizens.

B. Non-Revenue/Sumptuary Purposes (PR 2EP)1. P romotion of General Welfare

taxation may be used as an implementof police power in order to promote thegeneral welfare of the people.

Illustration : In the case of Lutz v. Araneta (G.R. No. L-7859, December22, 1955), the Supreme Court upheldthe validity of the Sugar Adjustment

Act, which imposed a tax on milledsugar since the purpose of the lawwas to strengthen an industry that isso undeniably vital to the economicsugar industry.

2. Regulation - as in case of taxes leviedon excises or privileges like thoseimposed on tobacco and alcoholic

products, or amusement places likenight clubs, cabarets, cockpits, etc.Illustration : In Caltex Philippines v.COA (G.R. No. 92585, May 8, 1992 ) ,it was held that taxes may also beimposed for a regulatory purpose as,for instance, in the rehabilitation andstabilization of threatened industrywhich is affected with public interest,like the oil industry.

3. Reduction of social inequality alsoknown as compensatory purpose. This

is made possible through theprogressive system of taxation in thePhilippines which prevents the undueconcentration of wealth in the hands offew individuals. Progressivity is basedon the principle that those who areable to pay more should shoulder thebigger portion of the tax burden.Illustration: Present rates on income,estate, and gift taxes

4. Encourage economic growth In therealm of tax exemptions and tax

reliefs, the purpose is to grantincentives or exemptions to encourageinvestments and thereby promoteeconomic growth.

5. P rotectionism In case of foreignimportations, protective tariffs andcustoms are imposed for the benefit oflocal 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 tosurrender part of ones earned income tothe taxing authorities, every person who isable must contribute his share in the

POWER OF TAXATION


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San Beda College of Law2012 CENTRALIZED BAR OPERATIONS

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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 thegovernment is a necessity. It cannotcontinue without a means to pay itsexpenses and therefore has a right tocompel all citizens and property within itspower to contribute.

C. Benefits-Protection/Reciprocity Theory (Doctrine of Symbiotic Relationship) -The State demands and receives taxesfrom the subjects of taxation within its

jurisdiction so that it may be enabled tocarry its mandate into effect and performthe functions of Government, and thecitizen pays from his property the portiondemanded in order that he may, by meansthereof, be secured in the enjoyment ofthe benefits of organized society.

This theory spawned the DOCTRINE OFSYMBIOTIC RELATIONSHIP : Taxes arewhat we pay for civilized society. Withouttaxes, the government would be paralyzedfor lack of motive power to activate andoperate it. Hence, despite the naturalreluctance to surrender part of one's hard-earned income to the taxing authorities,every person who is able must contributehis share in the burden of running thegovernment. The government, for its part,is expected to respond in the form oftangible and intangible benefits intendedto improve the lives of the people andenhance their material and moral values.(CIR v. Algue , supra)

Thus, the taxpayer cannot question thevalidity of the tax law on the ground thatpayment of such tax will render himimpoverished, or lessen his financial orsocial standing, because the obligation topay taxes is involuntary and compulsory,in exchange for the protection and benefitshe receives from the government.

Special benefits to taxpayers are notrequired. A person cannot object to orresist the payment of taxes solely becauseno personal benefit to him can be pointedout arising from the tax. (Aban, Law onBasic Taxation in the Philippines, citingLorenzo v. Posadas, etc., 64 Phil. 353)

CHARACTERISTICS OF A SOUND TAXSYSTEM (FAT)1. Fiscal Adequacy sources of

government revenue must be sufficient to

meet government expenditures and otherpublic needs. Neither an excess nor adeficiency of revenue vis--vis the needsof government would be in keeping withthe principle.

2. Administrative Feasibility tax lawsmust be capable of being effectivelyenforced with the least inconvenience tothe taxpayer.

3. Theoretical Justice a sound tax systemmust be based on the taxpayers ability topay (Ability to Pay Theory). Our lawsmandate that taxes must be reasonable,fair, just, and conscionable. TheConstitution provides that taxation must beuniform and equitable and that the Statemust evolve a progressive system oftaxation.

Will a violation of these principlesinvalidate a tax law?

It depends. A tax law will retain its validityeven if it is not in consonance with theprinciples of fiscal adequacy andadministrative feasibility because theConstitution does not expressly require so.These principles are only design to make ourtax system sound. However, if a tax laws runscontrary to the principle of theoretical justice,such violation will render the lawunconstitutional considering that under theConstitution, the rule of taxation should beuniform 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 totax 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 furtherdiscussion of the No InjunctionRule) ;

NATURE OF THE TAXING POWER


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4. Rule: Taxes could not be thesubject of set-off or compensation;(see Domingo v. Garlitos, p. 8 forlone exception)

5. Taxation is an unlimited or plenarypower.

C. Distinction between NationalGovernment and Local GovernmentUnit (LGU)1. National Government - inherent2. Local Government Unit - not

inherent since it is merely an agencyinstituted by the State for thepurpose of carrying out in detail theobjects of the government; can onlyimpose taxes when there is:a. Constitutional Grantb. Legislative Grant

D. Grant of Taxing Power of LGUConstitutional GrantPower is derived from Article X ,Section 5 of the 1987 Constitution,which is self-executing.

The taxing power of the Autonomous Regions is conferredby Congress through law. Art. X No.2, Sec. 20 of the Constitution whichis a non-self-executing provision.Thus the power is granted byCongress because said provisionrequires an enabling law.

II. Legislative in Character A. Basis: Taxes are a grant of the

people who are taxed, and the grantmust be made by the immediaterepresentatives of the people. Andwhere the people have laid the power,there it must remain and beexercised . (1 Cooley Taxation, 3 rd ed., p.43)

B. Scope of Legislative Power1. Determine: (SM PARKS) a. S ubjects of taxation (persons,

property, occupation, excisesor privileges to be taxed,provided they are within thetaxing jurisdiction);

b. Method of collection;c. P urposes for which taxes shall

be levied provided they are forpublic purposes;

d. Apportionment of the tax(whether the tax shall be of

general application or limitedto a particular locality, or partlygeneral and partly local);

e. Amount or Rate of tax;f. Kind of tax to be collected;

andg. S itus of taxation .

2. Grant tax exemption orcondonations; and

3. Specify or provide for theadministrative as well as judicialremedies that either thegovernment or the taxpayers mayavail themselves improperimplementation of the tax measure(Petron v. Pililla , G.R. No. 158881,

April 16, 2008 )

Note: As a general rule, the power to taxis plenary and unlimited in its range,acknowledging in its very nature no limits,so that the principal check against itsabuse is to be found only in theresponsibility of the legislature (whichimposes the tax) to its constituency whoare to pay it. Nevertheless, it iscircumscribed by constitutional limitations.

At the same time, like any other statute,tax legislation carries a presumption ofconstitutionality. (CREBA Inc. v. Romulo,G.R. No. 160756, March 9, 2010)

Is the Power to Tax the Power toDestroy?Two Views:1. U.S. Chief Justice Marshall in

McCulloch v. Maryland (4 Wheat, 3164 L ed. 579, 607) opined that the

power to tax involves the power todestroy. Taxation is a destructivepower which interferes with thepersonal and property rights of thepeople and takes from them a portionof their property for the support of thegovernment.

2. Justice Holmes declared in PanhandleOil Co. v. Mississippi (277 US 218) that the power to tax is not the powerto destroy while this court sits.

Reconci l iat ion of the two v iews:

Marshalls view refers to a valid tax whilethe Holmes view refers to an invalid tax .

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

An illegal tax could be judicially declaredinvalid and should not work to prejudice ataxpayers property.


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in view of the problem of assigning valueto such property;

5. It is P roportionate in character taxesmust be based on ability to pay inaccordance with the constitutionalmandate to Congress to evolve aprogressive system of taxation;

6. It is levied on P ersons, property, andexcise;

7. It is levied for P ublic purpose/s;8. It is paid at regular P eriods or intervals;9. It is P ersonal 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 cannotbe enforced against its stockholders.

Exception: stockholders may be heldliable for the unpaid taxes of adissolved corporation if it appears thatthe corporate assets have passed intotheir hands.

Requisites of a Valid Tax (JAPUL )1. That either the person or property taxed

be within the J urisdiction of the taxingauthority;

2. That the Assessment and collection of

certain kinds of taxes guarantee againstinjustice to individuals, especially byproviding notice and opportunity forhearing;

3. That it should be for a P ublic purpose;4. The rule of taxation shall be Uniform;5. The tax must not impinge on the inherent

and Constitutional Limitations on thepower of taxation

Classification of Taxes

I. As to subject matter A. Personal, poll or capitation tax of

a fixed amount imposed upon personsresiding within a specified territory,whether citizens or not, without regardto their property, occupation orbusiness in which they may beengaged (e.g. Community tax).

B. Property tax imposed on property,whether real or personal, in proportioneither to its value or some otherreasonable rule of apportionment ( e.g.Real property tax).

C. Excise or Privilege charge imposedupon the performance of an act, the

enjoyment of a privilege or engagingin an occupation, profession orbusiness ( e.g. donors tax, estate tax,VAT, income tax ).

II. As to who bears the burden andincidence

A. Direct tax which is exacted fromthe very persons who are primarilyliable to pay them; the taxpayercannot shift the burden of its paymentto another. The liability for thepayment of the tax (incidence), aswell as the impact (or burden) of thetax, falls on the same person ( e.g.income tax, community tax ).

B. Indirect tax wherein the incidenceor liability for the payment falls onone person but the burden can beshifted or passed on to another ( e.g.VAT, percentage tax ).

The Constitution does not prohibit theimposition of indirect taxes like the VAT.The Constitution has been interpreted tomean simply that direct taxes are to bepreferred 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 aviolation of the principle that taxes arepersonal liabilities, the payment of whichcannot be transferred to another person.When the seller passes on the tax to hisbuyer, he is only shifting the tax burden (not the liability to pay it) to the purchaseras part of the costs of the goods sold orservices rendered. (Aban, Law of BasicTaxation in the Philippines, p. 24)

III. As to purpose

A. General, fiscal or revenue taximposed for the general or ordinarypurposes of the Government, to raiserevenue for governmental needs.(e.g. income tax)

B. Special, regulatory or sumptuary tax imposed for a special purpose, toachieve some social or economicends irrespective of whether revenueis actually raised or not. (e.g.countervailing and dumping dutiesunder the TCC)

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


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some standard of weight ormeasurement; it requires novaluation other than a listing orclassification of the objects to betaxed. (e.g. tax on fermented liquors,cigars, distilled spirits)

B. Ad Valorem (Value) tax of a fixedportion of the value of the propertywith respect to which the tax isassessed; it requires the interventionof assessors or appraisers toestimate the value of such propertybefore the amount due from eachtaxpayer 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 thelocal government ( e.g. Real propertytax, occupation tax )

VI. As to rate A. Progressive or graduated the tax

rate increases as the tax base orbracket increases. ( e.g. income taxon individuals, estate tax and donorstax )

B. Regressive the tax rate decreasesas the tax base increases.

C. Proportionate tax rate is based ona fixed percentage of the amount ofthe property, receipts or other basesto be taxed. ( e.g. real property tax,VAT and 3% percentage tax )

Distinctions of Tax from OtherImpositions

I. Tax vs. DebtTaxes Debt

Basis

Based on law Based on contract or judgmentFailure to Pay

Failure to pay tax(other than poll tax)

may result inimprisonment.

No imprisonment fornon-payment of debt

Mode of Payment Generally payable in

moneyPayable in money,

property, or service.

Assignability Not assignable Assignable

Taxes DebtPayment

Not subject tocompensation or set-off (see Domingo v.

Garlitos, p. 8)

May be subject tocompensation or set-

off

Interest

Tax does not drawinterest unless

delinquent

Debt draws interest ifstipulated or delayed

Authority Imposed by public

authorityImposed by private

individualsPrescription

Determined by NIRC Determined by CivilCode

II. Tax vs. Toll

Taxes TollDefinition

Demand of sovereigntyfor the purpose of

raising public revenue

Demand ofownership an amount

charged for the costand maintenance of

property usedPurpose

Taxes are levied forthe support of the

government

Tolls are compensationfor the use of anothers

propertyDetermination of Amount

The amount of tax is

determined by thesovereign

The amount of the tollis determined by the

cost of the property orof the improvement

Who may impose

May only be imposedby the State

Imposed by thegovernment or private

individual.

III. Tax vs. Special Assessment

Taxes SpecialAssessmentsDefinition

Imposed only onpersons, properties,

and excises

Special levy on the

lands comprised withinthe territorial

jurisdiction of aprovince, city, or

municipality speciallybenefited by the public

works projects orimprovements fundedby the LGU concerned

Subject Taxes are levied on

land, persons,property, income,

business, etc.

Levied on land

LiabilityPersonal liability of the


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Taxes SpecialAssessmentstaxpayer Cannot be made a

personal liability of theperson assessed

Basis Based on necessity

and partially onbenefits

Based solely onbenefits

Application

General application Special applicationonly as to a particulartime and place

IV. Tax vs. License fee Tax License Fee

Basis Based on the power of

taxationBased on police power

Purpose Purpose is revenue Purpose is regulation

Limitation on Amount

Amount is unlimited

Amount is limited tothe cost of:

1. Issuance oflicense

2. Inspection andsurveillance

When paid

Normally paid the startof business

Normally paid beforethe commencement of

business

Surrender Taxes, being the

lifeblood of the State,cannot be surrendered

except for lawfulconsideration

License fee may bewith or withoutconsideration

Effect of non-payment Non-payment does not

make the businessillegal but may be

ground for criminalprosecution

Non-payment makesthe business illegal.

If the generating of revenue is the primarypurpose and regulation is merely incidental,the imposition is a tax; but if regulation is theprimary purpose, the fact that incidentalrevenue is also obtained does not make theimposition a tax (Progressive DevelopmentCorp. v. Quezon City, G.R. No. L-36081, April24, 1989).

If the purpose is primarily revenue, or ifrevenue is, at least, one of the real andsubstantial purposes, then the exaction isproperly called a tax (PAL v. Edu, G.R. L-

41383, August 15, 1988).

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

Importance of Distinction of Tax from Fee:1. The government instrumentality that

imposes the exaction may have noauthority to collect the tax but is authorizedto collect the fees.

3. The person, who is required to pay theexaction, may be exempt from tax but notfrom 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 Principlesand Remedies, pp.7-9).

V. Tax vs. PenaltyTax Penalty

Definition

Enforced proportionalcontributions from

persons and property

Sanction imposed as apunishment for

violation of law or actsdeemed injurious;

violation of tax lawsmay give rise to

imposition of penaltyPurpose

Intended to raiserevenue

Designed to regulateconduct

Authority

May be imposed onlyby the government

May be imposed bythe:

1. Government2. Private individuals

or entities

VI. Tax vs. Tariff

Tax Tariff All embracing term toinclude various kinds

of enforcedcontributions upon

persons for theattainment of public

purposes

A kind of tax imposedon articles which aretraded internationally

VII. Tax vs. Compromise Penalty

Tax CompromisePenaltyBasic imposition on

persons, property, andexcises

Collected as acompromise in casesinvolving violations ofthe Tax Code, rules or


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regulations.

VIII. Tax vs. SubsidyTax Subsidy

Levied by the law-making body of the

State for the support ofthe government and for

public needs.

A legislative grant ofmoney in aid of aprivate enterprise

deemed to promotethe public welfare.

IX. Tax vs. RevenueTax Revenue

A source of revenue ofthe government

A broad term thatincludes not only taxesbut income from other

sources as well.

Special Principles in Taxation

I. Doctrine of Equitable Recoupment -Where the refund of a tax illegally orerroneously collected or overpaid by ataxpayer is barred by prescription, a taxpresently being assessed against ataxpayer may be recouped or set-offagainst the tax whose refund is not barredby prescription.This is a case where the taxpayer has aclaim for refund but he was not able to file awritten claim due to lapse of the

prescription period within which to make arefund is allowed. Under this doctrine, thetaxpayer is allowed to credit such refund tohis existing tax liability.

Note: Equitable recoupment is allowedonly in common law countries, not in thePhilippines. This rule is absolute, there isno exception at all.

Rationale: If allowed, both the collectingagency and the taxpayer might be temptedto delay and neglect the pursuit of their

respective claims within the periodprescribed by law

II. Compensation or Set-off Compensationshall take place when two persons, in theirown right, are creditors and debtors of eachother (Article 1278, New Civil Code).

This presupposes mutual obligations between the parties, and that they aremutual 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, isindebted to the said taxpayer.

Rule : No set-off is admissible against thedemands for taxes levied for general orlocal governmental purposes.

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

Exception: Compensation was allowed inone exceptional case where the SupremeCourt held that the doctrine of set-off maybe applied. (Domingo v. Garlitos, G.R. No.L-18849, June 29, 1963),

Reason: Compensation was recognized inthis case because both the claim of theGovernment for inheritance tax and theclaim of the estate for services renderedhave already become overdue anddemandable and fully liquidated. Further,an amount for the claim of the estate hadalready been appropriated by theGovernment by virtue of a law, R.A. 2700(General Appropriations Act of 1960).

There can be legal compensation for taxpurposes as long as all the requisites under

Article 1279 of the Civil Code are present.The claims of the taxpayer and theGovernment in such case must be broughtbefore a court where the aforementionedclaims must be pleaded and proved. If allthe requisites under Article 1279 arepresent, then there is no reason why thecourt cannot declare set-off. (Recalde, ATreatise on Tax Principles and Remedies,

p.32).

III. Taxpayers Suit A taxpayer has the r ight to file an action toquestion the validity, or constitutionality, ofa statute or law.

The right is based on the fact thatexpenditure of public funds by an officer forthe purpose of administering orimplementing an invalid or unconstitutionallaw is a misapplication of such funds.

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


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public funds derived from taxation that thetaxpayers suit may be allowed ( Vitug and

Acosta, Tax Law and Jurisprudence citingPascual 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 orinstrumentality and in doing so, a lawis violated or some irregularity iscommitted; and

2. Petitioner is directly affected by thealleged act (Mamba v. Lara, G.R. No.165109, December 14, 2009).

In Mamba v. Lara , although theconstruction of the town center would beprimarily sourced from the proceeds of thebonds, which respondents insist are nottaxpayer's money, a government supportin the amount of P187 million would still bespent for paying the interest of the bonds.Records also show that the governorrequested the Sanggunian to appropriatean amount of P25 million for the interest ofthe bond. Clearly, the first requisite hasbeen met.

As to the second requisite, the court, inrecent cases, has relaxed the stringent"direct injury test" bearing in mind thatlocus standi is a procedural technicality. Incases where serious legal issues wereraised or where public expenditures ofmillions of pesos were involved, the courtdid not hesitate to give standing totaxpayers . The Court finds no reason todeviate from the jurisprudential trend. Theamount involved in this case is substantial.Under the various agreements ratified bythe Sanggunian , the province would incurcosts totalling P231,908,232.39.

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

Rationale: Upon taxation depends theGovernments ability to serve people forwhose benefit taxes are collected. Tosafeguard such interest, neglect oromission of government officials entrustedwith the collection of taxes should not be

allowed to bring harm or detriment to thepeople. (Recalde, A Treatise on TaxPrinciples and Remedies, p.33).

Exception: In the interest of justice andfair play, as where injustice will result tothe 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 fromadopting a position inconsistent with theone previously taken where injustice wouldresult therefrom or where there has been amisrepresentation 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 thepowers of government. Nevertheless, effectivelimitations thereon may be imposed by thepeople through their constitution. Accordingly,no matter how broad and encompassing thepower of taxation, it is still subject to inherentand constitutional limitations.

I. Inherent Limitations they proceedfrom the very nature of the taxing poweritself. They are otherwise known aselements or characteristics of taxation.(SPINE )

A. Territoriality or S itusB. P ublic PurposeC. International ComityD. N on-delegability of the taxing powerE. E xemption of the Government

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

II. Constitutional Limitations restrictions imposed by the Constitution.

A. General or indirect1. Due process requirement;2. Equality of taxation and

requirement of uniformity andequitability of taxation;

3. Freedom of speech and

expression;4. Freedom of religion;

LIMITATIONS OF TAXATION


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5. No taking of private propertywithout just compensation;

6. Non-impairment of obligations ofcontract;

7. Law-making process;8. Presidential power to grant

reprieves, commutations andpardons, and remit fines andforfeitures 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 andexport quotas, tonnage andwharfage dues;

7. Tax exemption of charitableinstitutions, churches andparsonages or conventsappurtenant thereto, mosques,non-profit cemeteries and alllands, buildings andimprovements actually, directly,and exclusively used for religious,charitable or educationalpurposes;

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 specialassessments;

11. Supreme Courts power to review judgments or orders of lowercourts;

12. Grant of authority to LGUs;13. Tax exemption granted to

nonstock, non-profit educationalinstitutions;

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 rightto impose and collect taxes (CIR v.Marubeni Corp., G.R. No. 137377, Dec.18, 2001).

Rule: A state may not tax property lyingoutside its borders or lay an excise orprivilege tax upon the exercise orenjoyment of a right or privilege derivedfrom the laws of another state and thereinexercised or enjoyed (51 Am. Jur. 87-88).

Rationale:1. Taxation is an act of sovereignty

which could only be exercised within acountrys territorial limits.

2. This is the result of the concept thattaxes are paid for the protection andservices provided by the taxingauthority which could not be providedoutside the territorial boundaries of thetaxing state (Benefits-ProtectionTheory).

Exceptions:1. Where tax laws operate outside

territorial jurisdiction.Example: Taxation of resident citizensand domestic corporations on theirincome from sources without thePhilippines.

2. Where tax laws do not operate withinthe 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

levied2. Situs of the thing or P roperty taxed3. C itizenship of the taxpayer4. R esidence of the taxpayer5. Source of the Income taxed6. Situs of the Excise, privilege, business

or occupation being taxed

Situs of Subjects of Tax1. Persons poll, capitation or community

taxes are based upon the residence of thetaxpayer, regardless of the source ofincome or location of the property of thetaxpayer.

2. Property a. Real property Lex rei sitae or lex

situs (where the property is located).

b. Tangible personal property wherethe property is physically locatedalthough the owner resides in another

jurisdiction (51 Am. Jur. 467).

c. Intangible Personal Property i. General Rule: Mobilia sequuntur

personam (movables follow theperson). The situs is the domicileof the owner.


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ii. Exceptions: When the property has acquireda business situs in another

jurisdiction; or When the law provides for thesitus of the subject of tax (e.g.,see Sec. 104, NIRC)

d. Income Factors that determine thesitus 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 theperformance of an act or theengaging in an occupation) -depends upon the place where the actis performed or occupation is engagedin (not upon the domicile of the personsubject to the excise nor upon thephysical location of the property and inconnection with the act or occupationtaxed) (Allied Thread v. City Mayor ofManila, G.R. No.40296, Nov. 21,1984)

f. Gratuitous Transfer thetransmission of property from a donorto a donee, or from a decedent to hisheirs may be subject to taxation in thestate where the transferor is (was) acitizen or resident, or where theproperty is located in case of a nonresident.

B. Public PurposePublic purpose embraces not merely directpublic benefit advantage but also indirectpublic benefit. (Cruz, Constitutional Law,2002)

The power to determine public purpose isa legislative prerogative.

The proceeds of the tax must be used for:1. The support of the State; or2. Some recognized object of

government or directly to promote thewelfare of the community. (Vitug and

Acosta, Tax Law and Jurisprudence, p.5)

The legislature is without power toappropriate public revenues for

anything but a public purpose.(Sababan, Taxation Law Review, p.5)

It is the essential character of thedirect object of the expenditurewhich must determine its validity.Incidental advantage to the publicor the State, which results fromthe promotion of private interests,does not justify their aid by theuse of public money ( Pascual v.Secretary of Public Works, G.R.No. L-10405, December 29, 1960 )

Tests to Determine Public Purpose1. Duty Test whether the thing to be

furthered by the appropriation of publicrevenue is something which is theduty of the State as a government toprovide.

2. Promotion of General Welfare Test whether the proceeds of the tax willdirectly promote the welfare of thecommunity in equal measure. (Aban,Law of Basic Taxation, pp.53-54)

Cases of Public Purpose1. Public improvement2. Unemployment relief3. Buildings and roads/infrastructure4. Subsidies for local police forces under

R.A. 61425. Industries classified as indispensable

under P.D. 1987 (An Act Creating theVideogram Regulatory Board)

6. Construction of home sites7. Promotion of science and invention8. Upliftment of the underprivileged9. Rehabilitation of the sugar industry10. Pensions to deserving retirees11. Oil industry's protection12. Socialized housing13. Educational subsidy

C. International ComityBasis: Sec. 2, Art. II, 1987 Constitution which provides that the Philippines adoptsthe generally-accepted principle ofinternational law as part of the law of theland.

Comity the respect accorded by nationsto each other because they are sovereignequals.

If a tax law is passed imposing taxes onthe income of foreign ambassadors orimposing real property tax upon foreignembassies, this is not a valid law becausethe imposition is in violation of theuniversal principles of international law.


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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 aforeign government may not be suedwithout its consent. Thus, it would beuseless to impose a tax which couldnot be collected

3. The concept that when a foreignsovereign enters the territorial

jurisdiction of another, it does notsubject itself to the jurisdiction of theother.

D. Non-Delegation of Taxing Power

Rule: Delegata potestas non potestdelegari. (A delegated power cannot befurther delegated.) Since the power oftaxation is a power that is exercised byCongress as delegates of the people, thenas 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 toenter into Executive agreements,and to ratify treaties which maycontain tax exemption provisionssubject to the concurrence by theSenate in the ratification made bythe President;

3. When the delegation relates merely toadministrative implementation thatmay call for some degree ofdiscretionary powers under a set ofsufficient standards expressed by lawor implied from the policy andpurposes of the act.

Limitations of the exceptions1. The delegation shall not contravene

any constitutional provisions or theinherent limitations

2. The delegation is effected either bythe Constitution or by validly enactedlegislative measures or statutes. And

3. The delegated levy power, exceptwhen the delegation is by an expressprovision of the constitution itself,should only be in favor of the locallegislative body of the local ormunicipal government concerned.

Stages/Aspects of a System of Taxation1. Tax legislation (levy) This refers to

the enactment of a law by Congressauthorizing the imposition of tax. a. Determination of the subject of

taxationb. 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 ofcollection)

2. Tax administration This is the actof administration and implementationof the tax law by executive through itsadministrative agencies. a. Assessment;b. Collection;

3. Payment This is the act ofcompliance by the taxpayer, includingsuch options, schemes or remedies asmay be legally available to him.

Rule:a. If what is delegated is tax

legislation, the delegation isinvalid;

b. If what is delegated is taxadministration, the delegation isvalid.

E. Exemption of the GovernmentRule: Properties of the nationalgovernment as well as those of the localgovernment units are NOT subject to tax,otherwise it will result in the absurdsituation of the government taking moneyfrom one pocket and putting it in another(Cooley on Taxation, Sec. 621, 4th ed. ascited in Board of Assessment Appeals ofLaguna v. CTA, G.R. No. L-18125, May31, 1963).

As a matter of PUBLIC POLICY , propertyof the State and of its municipalsubdivisions devoted to government usesand purposes is generally deemed to beexempt from taxation although no express


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

As a rule , agencies performinggovernmental functions are tax exemptunless expressly taxed. On the otherhand, agencies performing proprietaryfunctions are subject to tax unlessexpressly exempted. GOCC performproprietary functions hence are subject totaxation, except :1. GSIS2. SSS3. PHIC4. PCSO

Instrumentality of the NationalGovernment is exempt from real propertytax.

Example: Manila International Airport Authority

(MIAA) Philippine Fisheries Development

Authority (PFDA)

The Supreme Court held in ManilaInternational Airport Authority v. Court of

Appeals (G.R. No. 155650, July 20, 2006)that the real properties of MIAA are ownedby the national government and thusexempt from real estate tax. It consideredMIAA as a government instrumentalityunder Sec. 133(o) of the LGC whichprovides that exercise of the taxingpowersshall not extend to the levy of :taxes, fees or charges of any kind on theNational government, its agencies andinstrumentalities and local governmentunits.

Note: See case of Mactan CebuInternational Authority v. Marcos (G.R. No.120082, September 11, 1996) whereMCIAA was considered as a GOCC andthus not tax exempt.

This has been echoed in the case of Phil.Fisheries Development Authority v. TheMunicipality of Navotas (G.R. No. 150301,October 2, 2007) wherein the SC ruledthat PFDA, being an instrumentality if thenational government, is exempt from realproperty tax. ( Dimaampao, Tax Principlesand Remedies, pp.55-56)

Other reasons for the rule:

1. So that the functions of thegovernment shall not be undulyimpeded (51 Am. Jur. 550-51)

2. To reduce the amount of money thathas to be handled by the governmentin the course of its operations(Maceda v. Macaraig, G.R. No. 88291,June 8, 1993).

HOWEVER, the Constitution is silent onwhether Congress is prohibited fromtaxing the properties of the agencies of thegovernment. Therefore, nothing canprevent Congress from decreeing thateven instrumentalities or agencies of thegovernment performing governmentalfunctions may be subject to tax . (MCIAA v.Marcos, G.R. No. 120082, Sept. 11, 1996)

Pursuant to the provisions of theNIRC, the National Government maylevy income tax upon corporations,agencies and instrumentalities ownedor controlled by the governmentsubject to exceptions as providedtherein ( Sec. 27(C ). However, underSec. 32(B)(7)(b), NIRC , incomederived by the government from anypublic utility and from the exercise ofany essential governmental functionsare exempt from income tax.

UNLESS OTHERWISE PROVIDEDBY LAW, the exemption applies onlyto government entities through whichthe government immediately anddirectly exercises its governmentpowers. (Infantry Post Exchange v.Posadas, G.R. No. 33403, Sept. 4,1930)

CONSTITUTIONAL LIMITATIONS A. General or Indirect Constitutional

Limitations1. Due Process Clause (Sec. 1, Art. III,

1987 Constitution )

Any deprivation is with due processif it is done:a. Under the authority of a law that is

valid or under the Constitutionitself, and that it must bereasonable, fair and just(Substantive Due Process) ; and

b. After compliance with fair andreasonable methods of procedureprescribed by law, with notice orhearing, or at least an opportunityto be heard whenever necessary(Procedural Due Process) .

Must the adverse party always benotified?


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No. As a rule, notice and hearing or theopportunity be heard is necessary onlywhen expressly required by law. Wherethere is no such requirement, notice andthe opportunity to be heard aredispensable.

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 NOTREQUIRE:a. Determination through judicial inquiry

of the property subject to tax or theamount of tax to be imposed;

b. Notice and hearing as of amount ofthe tax or the manner ofapportionment.

Where the due process clause is invoked,considering that it is not a fixed rule butrather a broad standard, there is a needfor proof of such persuasive character.The taxing power has authority to makereasonable classifications for purposes oftaxation. Inequalities resulting from asingling out of one particular class fortaxation or exemption do not infringe anyconstitutional limitation. The real estateindustry is, by itself, a class and can bevalidly treated differently from otherbusiness enterprises. (Chamber of RealEstate and Builders' Associations, Inc. v.The Hon. Executive Secretary AlbertoRomulo, G.R. No. 160756, March 9, 2010)

Illustration of violations of the dueprocess clause:a. If the tax amounts to a confiscation of

propertyb. If the subject of confiscation is outside

the jurisdiction of the taxing authorityc. If the law is imposed for a purpose

other than a public purposed. If the law which is applied retroactively

imposes unjust and oppressive taxese. Where the law is in violation of

inherent limitations

2. Equal Protection Clause (Sec. 1, Art.III, 1987 Constitution)

Equal protection neither requiresequal rates of taxation on differentclasses of property, nor prohibitsunequal taxation so long as theinequality is not based uponarbitrary classification. It merely

requires that all persons (orproperty, of the same class)subjected to such legislation shallbe treated alike, under likecircumstances and conditions,both in the privileges conferredand in the liabilities imposed(Cooley, cited in Sison, Jr. v.

Ancheta, G.R. No. 59431 July 25,1984 ).The equal protection clausemay be VIOLATED IN TWOWAYS :a. When classification is made

where there should be none(i.e. where classification doesnot rest upon substantialdifferences); and

b. When classification is calledfor (i.e., when substantialdistinctions exist but nocorresponding classification ismade on the basis thereof.)(Villegas v. Hiu Chiong TsaiPao Ho, G.R. No. L-29646,November 10, 1978 )

The power to select subjects oftaxation and apportion the publicburden among them includes thepower to make classifications. Forthe classification to be valid, thefollowing REQUISITES mustconcur: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; andd. 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 treatmentbetween those who are financiallywell-off and those who haverelatively less.

Horizontal equity implies thatthose who are similarly situated inlife should be taxed similarly.

3. Freedom of the Press (Sec. 4, Art.III, 1987 Constitution)

There is curtailment of pressfreedom and freedom of thoughtand expression if a tax is levied in


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order to suppress this basic rightand 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 thatthe separate sales tax onnewspapers with circulation ofover 20,000 imposed was adeliberate and calculated device inthe guise of tax to limit thecirculation of information to whichthe public is entitled in virtue of theConstitutional guarantees.

In People v. Korins (385 N.Y.S.2D 474 [1976]), the U.S. SupremeCourt held that to apply anordinance requiring a businesslicense to be obtained before aperson could sell newspapers inthe streets would be to impose aprior restraint on press freedombecause a newspaper is not in thesame category as a pineapple or asoap powder, or a pair of shoeswhose sale may be conditioned onthe possession of a businesslicense.However, if the fee imposed is notfor the exercise of a privilege butonly for the purpose of defrayingpart of the cost of registration, theConstitution is not violated.

In Tolentino E-VAT case, it washeld that the requirement to payP1,000 (now P500) as annualregistration fee on all personssubject to VAT is not imposed forthe exercise of a privilege but onlyfor the purpose of defraying part ofthe cost of registration. It is thus, amere administrative fee, one notimposed on the exercise of aprivilege, much less aconstitutional right.

4. Religious Freedom (Sec. 5, Art. III,1987 Constitution)

This provision contains threeclauses : (1) the non-establishment clause; (2) freedomto choose religion clause and (3)the free exercise clause. The

latter is the basis of taxexemptions granted to religiousinstitutions. The first covers the

prohibition to establish a nationalor official religion since in thatcase, there would be anappropriation from taxes paid bythe people.

A municipal LICENSE TAX on thesale of bibles and religious articlesby a non-stock, non-profitmissionary organization at minimalprofit constitutes curtailment ofreligious freedom and worshipwhich is guaranteed by theConstitution. ( American BibleSociety v. City of Manila, G.R. No.L-9637, April 30, 1957 )Not every imposition of taxconstitutes curtailment of religiousfreedom:

In the Tolentino E-VAT case, theCourt held that: What has beensaid above also disposes of theallegations of the PBS that thepublication or importation of booksand religious articles, as well astheir printing and publication,likewise violates freedom ofthought and conscience. For asthe U.S. Supreme Courtunanimously held in JimmySwaggart Ministries v. Board ofEqualization (493 U.S. 378[1978]), the Free Exercise ofReligion Clause does not prohibitimposing a generally applicablesales and use tax on the sale ofreligious materials by a religiousorganization.

In the case of Tolentino v. Sec. ofFinance , the Supreme Courtdistinguished between a licensetax and a revenue tax . Underthe American Bible Society case,

that was a license tax; the VATunder R.A. 7716 is a revenue tax.

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

Rule: Income Exempt from Taxationif:a. Non-stock corporation;b. Organized and operated

exclusively for religious ,charitable, scientific, athletic orcultural, and social welfare

purposes;


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

Exception: Income of SuchOrganizations Taxable if Realizedfrom:a. Productive use of property, real or

personal (i.e. rents, dividends,interests)

b. Profitable Business Pursuits

Note: Regardless of the dispositionmade of such income.

5. No taking of private propertywithout just compensation (Sec. 9,

Art. III, 1987 Constitution)

6. Non-impairment ClauseTo impair the obligation of a contractis to alter or change the terms or effectof the contract, and thus incontemplation of law, to weaken theposition or rights of one or all of theparties to it.

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

Instance when the non impairmentclause becomes a limitation to thepower to tax?When the taxpayer enters into a agreement with the government. Inthis instance, the obligation to pay thetax is now based on the contractbetween the taxpayer and thegovernment pursuant to theircompromise agreement.

Rationale: When the State grants anexemption on the basis of a contract,consideration is presumed to be paidto the State, and the public issupposed to receive the wholeequivalent therefrom.

The non-impairment clauseapplies to the power of taxationbut not to police power andeminent domain.

Note: It applies only where oneparty is the Government and theother party, a private individual.(Sababan, Taxation Law Reviewer2008 ed., p.13 )Examples:

a. When a tax exemption basedon a contract is revoked by alater taxing statute(Cassanova v. Hord, G.R. No.3473, March 22, 1907 );

b. Application of the non-impairment clause dependson how the exemption wasgranted.

When the exemption is bilaterally agreed upon between thegovernment and the taxpayer itcannot be withdrawn withoutviolating the non-impairmentclause.When it is unilaterally granted bylaw and the same is withdrawn byvirtue of another law noviolation.When the exemption is grantedunder a franchise may berevoked because under theConstitution, a franchise issubject to amendment, alteration,or repeal by Congress when thecommon good so requires . (Sec.11, Art. XII, 1987 Constitution )

7. Law-making ProcessBill should embrace only onesubject expressed in the title

thereof;Three (3) readings on threeseparate days;Printed copies in final formdistributed three days beforepassage.

8. Presidential power to grantreprieves, commutations andpardons and remit fines andforfeitures after conviction by final

judgment.

B. Specific or Direct ConstitutionalLimitation

1. Taxation shall be uniform andequitable (Sec. 28(1), Art. VI 1987Constitution ) a. Uniformity all taxable articles or

properties of the same class shallbe taxed at the same rate. ( City ofBaguio v. De Leon, G.R. No.24756, October 31, 1968 );

Uniformi ty, no t equal i ty

Rationale : the imposition of asingle tax upon all persons,properties or transactions would


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result in inequality. It is manifestlyimpractical.

b. Different articles or other subjectsmay be taxed at different ratesprovided that the rate is uniformon the same class everywhere.(De Villata v. Standley G.R. No.8154 December 20, 1915 );

c. Equitability requires that theapportionment of the tax shouldconsider the taxpayers ability toshoulder the tax burden, usuallymeasured in terms of wealth, and,if warranted, on the basis of thebenefits he receives from thegovernment.

d. Taxation may be uniform butinequitable where the amount isexcessive or unreasonable.

2. Progressive System of Taxation(Sec. 28(1), Art. VI, 1987 Constitution) a. A Progressive System of

Taxation means that as theresources of the taxpayer becomehigher, his tax rate likewiseincreases.

b. It is based on the ability to payand in implementation of thesocial justice principle that themore affluent should contributemore for the communitys benefit,and is best exemplified by theincrease of income tax rate as nettaxable income increases.

c. The Constitution does not reallyprohibit regressive taxes. What itsimply provides is that Congressshall evolve a progressive systemof taxation. This is a meredirective 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 antithesisof progressive taxation. By itsvery nature, it is regressive. Theprinciple of progressive taxationhas no relation with the VATSystem inasmuch as the VAT paidby the consumer or business forevery goods bought or servicesenjoyed is the same regardless ofincome.

3. Non-imprisonment for non-paymentof poll tax (Sec. 20, Art. III, 1987Constitution)

a. Poll Tax tax imposed on a perhead basis. The present poll taxis the community tax.

b. One cannot be imprisoned fornon-payment of poll tax becausepayment thereof is not mandatory.

c. While a person may not beimprisoned for non-payment ofpoll tax, he may be imprisoned fornon-payment of other kinds oftaxes where the law so expresslyso 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 theConstitution to originateexclusively in the House ofRepresentatives. A bill originatingin the House may undergo suchextensive changes in the Senatethat the result may be a rewritingof the whole.

b. The Constitution simply meansthat the initiative for filing the billsmust come from the House, on thetheory that, elected as they arefrom the districts, the members ofthe House can be expected to bemore sensitive to the local needsand 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 whichhe does not object

6. Delegated authority of President toimpose tariff rates, import andexport quotas, tonnage andwharfage dues (Sec. 28 par. 2, Art.VI, 1987 Constitution)

Flexible Tariff ClauseThe Congress may, by law, authorizethe President to fix within specifiedlimits, and subject to such limitationsand restrictions as it may impose, tariffrates, import and export quotas,tonnage and wharfage dues, andother duties or imposts within the

framework of the nationaldevelopment program of the


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

7. Tax exemption of charitableinstitutions, churches andparsonages or conventsappurtenant thereto, mosques, non-profit cemeteries and all lands,buildings and improvementsactually, directly, and exclusivelyused for religious, charitable oreducational purposes; a. Section 28(3), Art. VI, 1987

Constitution, exempts religiousand educational institutions fromreal estate tax .

b. Test of Exemption: It is the use of the property, and notownership.

c. Nature of Use: The propertiesmust be actually, directly andexclusively used for the purposesmentioned.

d. Exclusive is defined aspossessed and enjoyed to theexclusion of others; debarred fromparticipation or enjoyment; andexclusively is defined, in amanner to exclude; as enjoying aprivilege exclusively. If realproperty is used for one or morecommercial purposes, it is notexclusively used for the exemptedpurposes but is subject totaxation. The words dominantuse or principal use cannot besubstituted for the words usedexclusively without doing violenceto the Constitutions and the law.Solely is synonymous withexclusively. ( Lung Center of thePhilippines v. Quezon City, G.R.No. 144104, June 29, 2004 )

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

8. Voting Requirement for TaxExemptiona. Rationale: To prevent

indiscriminate grant of taxexemptions.

b. The phrase a majority of all themembers of the Congress means at least plus 1 of ALLthe members voting separately.

c. In granting tax exemptions, anabsolute majority of the membersof Congress is required, while incases of withdrawal of such taxexemption, a RELATIVEMAJORITY is sufficient.

Rationale: Taxation is the ruleand exemption is the exception.Thus, the law makes it easier, byrequiring a smaller number ofvotes, to withdraw exemptioncompared to its grant.

d. Tax amnesties, condonations andrefunds are in the nature of taxexemptions, such being the case,a law granting them requires thevote of an absolute majority.

e. A constitutional grant of exemptionmay be self executing or mayrequire an act of Congress for itsoperation. Where a Constitutionalprovision granting an exemption isself-executing, the legislature canneither add nor detract from it. Itmay, however, prescribe aprocedure to determine whether aclaimant is entitled to theConstitutional exemption.

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

Except : If a priest is assigned toarmed forces, penal institutions,government orphanages orleprosarium.

10. Prohibition on use of tax levied forspecial purpose or specialassessments (par.3 Sec. 29, Art. VI,1987 Constitution)

Money collected on tax levied forspecial purpose to be used onlyfor such purpose. The balance, if any, shall accrueto the general fund.

11. Supreme Courts power to review judgments or orders of lowercourts (Sec. 5(b), Art. VIII, 1987Constitution)

The Supreme Court can review judgments or orders of lowercourts in all cases involving:

a. The legality of any tax, impost,assessment, or toll;


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b. The legality any penaltyimposed in relation to theabove;

Under the Principle of JudicialNon-Interference , the courtscannot inquire into the wisdom ofa taxing act, UNLESS there is aviolation of constitutionallimitations or restrictions.

12. Grant of Authority to LocalGovernment Units

Each local government unit shallhave the power to create its ownsources of revenues and to levytaxes, fees and charges subject tosuch guidelines and limitations asthe Congress may provide,consistent with the basic policy oflocal autonomy. Such taxes, fees,and charges shall accrueexclusively to the localgovernments. ( Sec. 5, Art. X, 1987Constitution )Local government units shall havea just share, as determined bylaw, in the national taxes whichshall be automatically released tothem. (Sec. 6, ibid.)Local governments shall beentitled to an equitable share in

the proceeds of the utilization anddevelopment of the nationalwealth within their respectiveareas, in the manner provided bylaw, including sharing the samewith the inhabitants by way ofdirect benefits. ( Sec. 7, ibid )

13. Tax exemption granted to non-stock, non-profit educationalinstitutions

Constitutional and statutory

provisionsAll revenues and asse ts of non-stock, non-profit educationalinstitutions used actually, directly,and exclusively for educationalpurposes shall be exempt fromtaxes and duties. ( Sec. 4(3), Art.

XIV, 1987 Constitution )

Notes:a. See Section 30, NIRC last

paragraph. Note that itsprovisions, particularly the phrase

regardless of disposition made ofsuch income is in conflict with

Sec. 4(3), Art. XIV, 1987Constitution.

b. This conflict, however, has alreadybeen settled. Section 1 of DOFOrder No. 149-95 , which amendedDOF Order No. 92-88 and DOFOrder No. 137-87, provides thatthese non-stock, non-profiteducational institutions shall besubject to internal revenue taxeson income from trade, business orother activity the conduct of whichis NOT RELATED to the exerciseor performance by sucheducational institution of itseducational purpose of function. Proprietary educationalinstitutions, including thosecooperatively owned, MAY likewise be entitled to suchexemptions subject to limitation:a. Provided by lawb. Provisions for reinvestments

All grants, endowments,donations, or contributions usedactually, directly, and exclusivelyfor educational purposes shall beexempt from tax. ( Sec. 4(4), ibid. )

Article XIV and Article VI comparedArt. XIV, Sec. 4(3) Art. VI, Sec. 28(3)

Grantee Non-stock, non-profiteducational institution

Religious, educational,charitable

Taxes Covered 1. Income tax2. Custom duties,3. Property tax (DECS

Order No. 137-87)

Property

Summary of Rules on Exemption ofAssets and Revenuesa. Non-stock, Non-Profit Educational

Institution whose income is actually,directly, and exclusively used foreducational purposes

EXEMPT (See Sec. 30(H), NIRC) Rationale: Constitutionalprovision is self-executing.

b. Proprietary Educational InstitutionTAXABLE under Sec 27(B), NIRC

Predominance theory - if thepredominant income (more than50%) comes from school relatedactivities, the 10% tax on taxableincome applies. Conversely, it issubject to 30% tax if its grossincome from unrelated trade,


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business or activity exceeds 50%of its the total gross income.Rationale: Constitutionalprovision used the word MAY ,which gives Congress discretionto grant tax exemption.

c. Grants, Endowments, Donations orContributions used actually, directlyand exclusively for educationalpurposes to: TAXABLE : Proprietary

educational institution EXEMPT : Non-Stock, non-profit

educational institution

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

According to the Supreme Court there is noconstitutional prohibition against doubletaxation in the Philippines ( Villanueva v. City ofIloilo, G.R. No. L-26521, December 28, 1968 ).It is something not favored, but is neverthelesspermissible.

KINDS OF DOUBLE TAXATION A. Direct Duplicate Taxation / Obnoxious

(Strict sense) The objectionable kind ordouble taxation in its prohibited sense.This violates the equal protection clause ofthe Constitution, and is prohibited.

Double taxation means t ax ing the sameproper ty twice when i t sho uld be taxedon ly once ; that is, taxing the same

person twice by the same jurisdiction forthe same thing. It is obnoxious when thetaxpayer is taxed twice, when it should bebut once. Otherwise describe d as directduplicate taxation. (The City of Manila,Liberty M. Toledo In Her Capacity as theTreasurer of Manila v. Coca-Cola Bottlers Philippines, Inc., G.R. No. 181845, August4, 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 samepurpose;

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. Cityof Iloilo, supra )

B. Indirect Duplicate Taxation (Broadsense) The permissible kind of doubletaxation, this arises in the absence of oneor more of the above-mentioned elementsof direct double taxation.

There is no double taxation if the tax islevied by the LGU and another by thenational government. The two (2) aredifferent taxing Authorities. (Pepsi-ColaBottling Co. v. Municipality of Tanauan,Leyte, G.R. L-31156, February 27, 1976

Examples of Indirect DuplicateTaxation:1. A tax upon a corporation for its

property and upon its shareholders fortheir shares.

2. A tax upon the same propertyimposed by two different states.

3. A tax on a mortgage as personalproperty and upon the mortgagedproperty as real estate.

C. International Juridical Double Taxation the imposition of comparable taxes intwo or more states on the same taxpayerin respect of the same subject matter andfor identical periods. (Commissioner v. SCJohnson & Sons, Inc., G.R. No.127105,June 25, 1999) .

This double taxation usually takes placewhen a person is a resident of the firstcontracting State and derives incomefrom, or owns capital in the secondcontracting State and both Statesimpose taxes on such income or capital.In order to eliminate double taxation, atax treaty is entered into by the twocontracting States.International juridical double taxationonly occurs when the State of residenceof the taxpayer imposes tax on theincome of said taxpayer from sourceswithin and without their State. There isno international juridical double taxationif the citizens or nationals are only taxedon their income from sources within.See Section 23, NIRC : Except for

income earned by resident citizens anddomestic corporations, only income from

DOUBLE TAXATION


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Philippine sources is taxable by thegovernment.

D. Local Double Taxation - the imposition oftaxes of similar nature both by the nationalgovernment and the local government unitwhere the object of tax is located (Recalde, A Treatise on Tax Principlesand Remedies, p.79).

The Phil. tax system provides for certainschemes in order to avoid or minimize theharsh or burdensome effects of doubletaxation. The means, however, depend onwhether there is international doubletaxation or local double taxation. (ibid,

p.75).

METHODS OF REDUCING THE RIGORS OFDOUBLE TAXATION (CD RET)1. Tax Credits an amount subtracted from

an individuals or entitys tax liability toarrive at the total tax liability.

2. Tax Deductions tax write-off orreduction in the gross amount on which atax is calculated.(refer to illustration of Tax Credit v.Deduction, last page of this section)

3. Reduction of the Philippine income taxrateExample : Tax Sparing Rule the dividendearned by a non-resident foreigncorporation (NRFC) within the Phil. isreduced by imposing a lower rate of 15%(in lieu of the 30%), on the condition thatthe country to which the NRFC isdomiciled shall allow a credit against thetax due from the NRFC, which taxes aredeemed 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 toparticular persons or corporations from theobligation to pay taxes.

5. Tax Treaties Agreement between twocountries specifying what items of incomewill be taxed by the authorities of thecountry where the income is earned.

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

Second method: The state of source is givena full or limited right to tax together with thestate of residence. In this case, the treatymakes it incumbent upon the state ofresidence to allow relief in order to avoiddouble taxation.

There are 2 ways under the 2nd method :1. The exemption method the income or

capital which is taxable in the state ofsource or situs is exempted in the state ofresidence, although in some instances itmay be taken into account in determiningthe rate of tax applicable to the taxpayersremaining income or capital. (This may bedone using the tax deduction methodwhich allows foreign income taxes to bededucted from gross income, in effectexempting the payment from being furthertaxed.) The focus here is on the income orcapital itself.

2. The credit method although the incomeor capital which is taxed in the state ofsource is still taxable in the state ofresidence, the tax paid in the former iscredited against the tax levied in the latter.(CIR v. S.C Johnson and Son, G.R.No.127105, June 25,1999 ) The focus is onthe tax.

Most Favored Nation Clause in Tax TreatiesThe purpose of the most favored nation clauseis to grant to the contracting party treatmentnot less favorable than that which has been ormay be granted to the MOST FAVOREDamong other countries. The most favorednation clause is intended to establish theprinciple of equality of international treatmentby providing that the citizens or subjects of thecontracting nations may enjoy the privilegesaccorded by either party to those of the mostfavored nation.

6 FORMS OF BASIC ESCAPE FROMTAXATION:

1. Shifting - The transfer of the burden oftax by the original payer or the one onwhom the tax was assessed (impact oftaxation/statutory taxpayer) or imposed to

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another or someone else (incidence oftaxation).

Direct tax cannot be shifted a taxcannot be shifted when it is purelypersonal or when it has no relation toany business dealings of the taxpayer.(Schultz and Harris, American PublicFinance ) Impact of Taxation point on whichtax is originally imposed or the one onwhom the tax is formally assessed. Incidence of Taxation point onwhich the tax burden finally rests orsettles down.

Illustration: Value added tax. Theseller is required by law to pay tax, butthe burden is actually shifted orpassed on to the buyer.

Kinds of shiftinga. Forward shifting when the burden

of tax is transferred from a factor ofproduction through the factors ofdistribution until it finally settles on theultimate purchaser or consumer

b. Backward shifting when theburden is transferred from theconsumer through the factors ofdistribution to the factors of production

c. Onward shifting when the tax isshifted 2 or more times either forwardor backward

2. Capitalization The reduction in theprice of the taxed object equal to thecapitalized value of future taxes which thepurchaser expects to be called upon topay.

3. Transformation The manufactureror producer upon whom the tax has beenimposed, fearing the loss of his market ifhe should add the tax to the price, paysthe tax and endeavors to recoup himselfby improving his process of production,thereby producing his units at a lower cost.

4. Tax Exemption - is the grant ofimmunity to particular persons orcorporations or to persons or corporationsof a particular class from a tax whichpersons or corporations generally withinthe same state or taxing district areobliged to pay. (51 Am. Jur. 503)

Principle of Str ict iss imi Juris Laws granting tax exemption areconstrued in strictissimi juris against thetaxpayer and liberally in favor of the taxingpower. Taxation is the rule and exemptionis the exception. The law does not lookwith favor on tax exemptions and that hewho would seek to be thus privileged must

justify it by words too plain to be mistakenand too categorical to be misinterpreted(SeaLand Service v. CA, G.R. No. 57828June 14, 1993 ).

Rationale for the Application ofStr ic t i ss imi Jur i s1. Lifeblood theory2. To minimize differential treatment and

foster impartiality, fairness andequality of treatment among taxpayers(Maceda v. Macaraig, G.R. No. 88291,June 8, 1993).

3. Taxation is a high prerogative ofsovereignty whose relinquishment isnever presumed ( Luzon Stevedoringv. CA, G.R. No 58897, Dec. 3, 1987 )

Exceptions to the Application ofStr ic t i ss imi Jur i s1. When the statute granting exemption

provides for liberal constructionthereof

2. In case of special taxes relating tospecial cases and affecting onlyspecial classes of persons

3. If exemptions refer to the publicproperty

4. In cases of exemptions granted toreligious, charitable and educationalinstitutions or their property

5. In cases of exemptions in favor of thegovernment, its political subdivisionsor instrumentalities

6. If there is an express mention or if thetaxpayer falls within the purview of theexemption by clear legislative intent.(CIR v. Arnoldus

Carpentry Shop,

Inc., G.R. No. 71122, March 25, 1988)

Kinds of Tax Exemption1. Express expressly granted by

organic or statute law 2. Implied whenever particular

persons, properties or excises aredeemed exempt as they fall outsidethe scope of the taxing provision itself

3. Contractual tax exemption inconsideration of a contractual

agreement with the government.


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Revocation of Tax ExemptionsSince taxation is the rule and exemption isthe exception, the exemption may thus bewithdrawn at the pleasure of the taxingauthority. ( Mactan Cebu Intl Airport

Authority v. Marcos, supra )

Restrictions on Revocation1. Non impairment clause Where the

exemption was granted to privateparties based on materialconsideration of a mutual nature, itthen becomes contractual and iscovered by the non-impairment clauseof the Constitution.

2. Adherence to form If the taxexemption is granted by theConstitution, its revocation may beeffected through constitutionalamendment only.

3. Where the tax exemption grant is inthe form of a special law and not by ageneral law even if the terms of thegeneral act are broad enough toinclude the codes in the general lawunless there is manifest intent torepeal 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 RefundsTax refunds are in the nature of taxexemptions. They are regarded as inderogation of sovereign authority and tobe construed strictissimi juris against theperson or entity claiming the exemption.The burden of proof is upon him whoclaims the exemption in his favor and hemust be able to justify his claim by theclearest grant of organic or statute law(CIR v. Court of Appeals, G.R. No.104151, March 10, 1995 )

Nature of Tax Amnesty1. General or intentional overlooking by

the State of its authority to imposepenalties on persons otherwise guiltyof evasion or violation of a revenue ortax law.

2. Partakes of an absolute forgiveness orwaiver of the government of its right tocollect.

3. To give tax evaders, who wish torelent and are willing to reform achance to do so.

Rules on Tax Amnestya. Tax amnesty

a. Like tax exemption, it is neverfavored nor presumed

b. construed strictly against thetaxpayer (must show completecompliance with the law)

b. The government is not estopped fromquestioning the tax liability even ifamnesty tax payments were alreadyreceived.

Rationale: Erroneous application andenforcement of the law by publicofficers do not block subsequentcorrect application of the statute. Thegovernment is never estopped bymistakes or errors of its agents.

Note: There could be no tax amnestygranted by the President of thePhilippines because the same is in thenature of tax exemption which couldbe granted only by a concurrence ofCongress.

Basis: Lifeblood Theory

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

Rationale: Relates to thecircumstances of a particular accusedand not the character of the actscharged in the information.

5. Tax Avoidance also called taxminimization . The exploitation by thetaxpayer of legally permissible alternativetax rates or methods of assessing taxableproperty or income, in order to avoid orreduce tax liability.

Tax avoidance is the tax saving devicewithin the means sanctioned by law.This method should be used by the

taxpayer in good faith and at armslength. ( CIR v. Estate of Benigno TodaJr.,G.R. No. 30554, Feb.28, 1983 )

A taxpayer has legal right to decreasethe amount of what would otherwisebe his taxes or altogether avoid themby means which the law permits.(Delpher Trades v. IAC, G.R. No.69259, Jan. 26, 1988 )Example : Availing of all deductionsallowed by law or refraining fromengaging in activities subject to tax.

(see p. 26 for illustrative example ofdifference between tax credit andavoidance)


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Exception: While it is not favored, a statutemay nevertheless operate retroactivelyprovided it is expressly declared or is clearlythe 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 reversalof any of the rules and regulationspromulgated (in accordance with thepreceding Sections) or any of the rulings orcirculars promulgated by the CIR shall not begiven retroactive application if the revocation,modification or reversal will be prejudicial tothe taxpayers.

Exceptions to non-retroactive applicationof tax rulings to taxpayers:1. Where the taxpayer deliberately misstates

or omits material facts from his return orany document required of him by the BIR;

2. Where the facts subsequently gathered bythe BIR are materially different from thefacts on which the ruling is based, or

3. Where the taxpayer acted in bad faith

KINDS OF PROVISIONS OF TAX LAWS1. Mandatory those provisions intended for

the security of the citizens or which aredesigned to insure equality of taxation orcertainty as to the nature and amount ofeach persons tax.

2. Directory those provisions designedmerely for the information or direction ofofficers or to secure methodical andsystematic modes of proceedings.

Importance of DistinctionThe omission to follow mandatory provisionsrenders invalid the act or proceeding to whichit relates while the omission to follow directoryprovisions does not involve suchconsequence.

SOURCES OF TAX LAWS1. Constitution2. Legislation or statutes, including

presidential decrees and executive orderson taxation and tax ordinances, taxtreaties and conventions with foreigncountries

3. Contemporaneous Construction byExecutive or Administrative Officers,including Revenue Regulations by theDepartment of Finance and Administrativeissuances by the BIR or the BOC.

4. Administrative rules and regulations,rulings and opinions of tax officials

particularly the CIR, including opinions ofthe Secretary of Justice

5. Judicial Decisions decisions of theSupreme Court applying or interpretingexisting tax laws are binding on allsubordinate courts and have the force andeffect of law. They form part of the legalsystem of the Philippines ( Art. 8, CivilCode ). They constitute evidence of whatthe law means ( People v. Licera, G.R. No.L-39990, July 22, 1975 ).


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