Tax (done)

General Principles
I. GENERAL PRINCIPLES

CONCEPT AND PURPOSE OF TAXATION

1. Definition
1. Elements of Taxation
1. Enforced proportional contribution from persons and properties
2. Imposed by the State by virtue of its sovereignty; and
3. It is levied for the support of government [Republic v. COCOFED,
G.R. Nos. 147062-64 (2001)]
2. Purpose
1. Revenue raising
2. Non-revenue/Sumptuary (police power)
1. General Welfare
2. Regulation
3. Reduction of social inequality
4. Encourage economic growth
5. Protectionism
3. Concept
1. Comprehensive
2. Unlimited
3. Plenary
4. Supreme
4. Distinguish: tax and other forms of exactions
1. Taxes versus Toll fees
1. In sum, fees paid by the public to tollway operators for use of the
tollways, are not taxes in any sense.
2. A tax is imposed under the taxing power of the government principally
for the purpose of raising revenues to fund public expenditures.
3. Toll fees, on the other hand, are collected by private tollway operators
as reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well as to
assure them a reasonable margin of income.
4. Although toll fees are charged for the use of public facilities,
therefore, they are not government exactions that can be properly
treated as a tax. Taxes may be imposed only by the government under
its sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute of
ownership. (Diaz v. Secretary of Finance, 2011)
 5. Hence, VAT on tollway operations cannot be deemed as tax on tax.
2. Taxes versus License fees; Primary Purpose Test
1. If the generating of revenue is the primary purpose and regulation is
merely incidental, the imposition is a tax;
2. But if regulation of activity imbued with public interest is the primary
purpose, the fact that incidentally revenue is also obtained does not
make the imposition a tax.
1. To be considered a license fee, the imposition questioned must
relate to an occupation or activity that so engages the public
interest in health, morals, safety and development as to
require regulation for the protection and promotion of such
public interest; the imposition must also bear a reasonable
relation to the probable expenses or cost of regulation, taking
into account not only the costs of direct regulation but also its
incidental consequences as well.
1. The "Farmers Market & Shopping Center" was built by a
resolution by respondents’ Sanggunian, authorizing petitioner
to establish and operate a market with a permit to sell fresh
meat, fish, poultry and other foodstuffs. The resolution
imposed upon petitioner, as a condition for continuous
operation, the obligation to "abide by and comply with the
ordinances, rules and regulations prescribed for the
establishment, operation and maintenance of markets in
Quezon City."
2. The "Farmers' Market and Shopping Center" being a public
market in the sense of a market open to and inviting the
patronage of the general public, even though privately owned,
petitioner's operation thereof required a license issued by the
respondent City, the issuance of which, applying the
standards set forth above, was done principally in the exercise
of the respondent's police power. The operation of a privately
owned market is, as correctly noted by the Solicitor General,
equivalent to or quite the same as the operation of a
government-owned market; both are established for the
rendition of service to the general public, which warrants
close supervision and control by the respondent City, for the
protection of the health of the public by insuring, e.g., the
maintenance of sanitary and hygienic conditions in the
market, compliance of all food stuffs sold therein with
applicable food and drug and related standards, for the
prevention of fraud and imposition upon the buying public,
and so forth.
3. We believe and so hold that the five percent (5%) tax imposed
 3.
in Ordinance No. 9236 constitutes, not a tax on income, not a
city income tax, but rather a license tax or fee for the
regulation of the business in which the petitioner is engaged.
(Progressive Development Corp. v. Quezon City, 1989)
3. Importance of distinction
1. It is necessary to determine whether a particular imposition is a tax or
a license fee because some limitations apply only to one and not to
the other, and for the reason that exemption from taxes may not
include exemption from license fee.
2. The power to regulate as an exercise of police power does not include
the power to impose fees for revenue purposes. [Progressive
Development Corp. v. Quezon City, G.R. No. L-36081 (1989)]
3. An exaction, however, may be considered both a tax and a license fee.
This is true in the case of car registration fees which may be regarded
as taxes even as they also serve as an instrument of regulation. If the
purpose is primarily revenue, or if revenue is, at least, one of the
real and substantial purposes, then the exaction is properly called
a tax. [Phil. Airlines, Inc. v. Edu, G.R. No. L- 41383 (1988)]
4. But it is possible that a tax may only have a regulatory purpose. The
general rule, however, is that the imposition is a tax if its primary
purpose is to generate revenue, and regulation is merely incidental;
but if regulation is the primary purpose, the fact that incidentally
revenue is also obtained does not make the imposition a tax.
[Progressive Development Corp. v. Quezon City, supra]
5. ALSO, IT IS IMPORTANT TO DISTINGUISH TO DETERMINE THE
EXISTENCE OF DOUBLE TAXATION IN ITS PROHIBITED SENSE.
Taxes Tariff
All embracing term to include various A kind of tax imposed on articles which
kinds of enforced contributions upon are traded internationally
persons for the attainment of public
purposes
Taxes Special Assessment
Levied not only on land Levied on land
Imposed regardless of public Imposed because of increase in value
improvements of land benefited by public
improvement
Contribution of a taxpayer for the Contribution of a person for the
support of the government construction of a public improvement
It has general application both as to Exceptional both as to time and locality
time and place
It is a personal liability of the person It is not a personal liability of the
taxed. person assessed, i.e., his liability is
limited only to the land involved.
support of the government construction of a public improvement
It has general application both as to Exceptional both as to time and locality
time and place
It is a personal liability of the person It is not a personal liability of the
taxed. person assessed, i.e., his liability is
limited only to the land involved.
Taxes Toll
Define Enforced proportional A consideration which is
contribution from paid for the use of the
persons or property to property
support the government
Nature of power/ Sovereignty Proprietorship
authority
Purpose Taxes are levied for the Toll fees are
support and revenue compensation for the
raising of the cost and maintenance
government of the property used
Limitation Generally, no limit on Amount paid depends
the amount collected as upon the cost of
long as it is not construction or
excessive, maintenance of the
unreasonable, or public improvement
confiscatory used.
Who can impose Only the State can State or private entities
impose this can impose this
Nature of obligation Imposed by law Contractual in nature
Taxes License and Regulatory
Fee
Nature of power Power of taxation Police Power, i.e., public
interest in health, morals,
safety, and development
Purpose Revenue raising Regulation
Limitation No limitation Limited/Related to the
cost of 1) issuance of
license and 2)
inspection and
surveillance, except for
non-useful occupation
When is it imposed Imposed after the start Imposed before the start
of the business of the business
Can it be surrendered It cannot be surrendered It can be surrendered by
because of the lifeblood the State
doctrine
Does nonpayment make Nonpayment of taxes It makes the business
the business illegal does not make the illegal
business illegal, but it
makes the taxpayer a
Can it be surrendered It cannot be surrendered It can be surrendered by
because of the lifeblood the State
doctrine
Does nonpayment make Nonpayment of taxes It makes the business
the business illegal does not make the illegal
business illegal, but it
makes the taxpayer a
criminal

Taxes Debt
Nature of obligation Imposed by law Contractual in nature
Assignability Generally cannot be Assignable
assigned
Paid in what kind Generally paid in money May be paid in kind
Set off or compensation Cannot be the subject Can be the subject of set
of set off or off or compensation
compensation
Is nonpayment criminal Imprisonment is a A person cannot be
sanction for non- imprisoned for non-
payment of tax, except payment of debt
poll tax
Taxes Penalty
Violation of tax laws may give rise to Any sanction imposed as a punishment
imposition of penalty for violation of law or acts deemed
injurious
Primarily intended to raise revenue Designed to regulate conduct
May be imposed only by the May be imposed by the government or
government private individuals or entities
Cannot be a subject of set off or Can be the subject of set off or
compensation compensation

DISTINGUISH: POWER OF TAXATION, POLICE POWER, AND EMINENT DOMAIN

Taxation Police Power Eminent Domain
Purpose Raising revenue Promote public Facilitate the
welfare through taking of private
regulations property for public
use
Effect The money There is restraint There is transfer
exacted from the on the injurious of property to the
taxpayer becomes use of property State.
part of the public
funds
Non-impairment Contracts may not Contracts may be Contracts may be
of contracts be impaired by impaired impaired
taxation
Delegability the Generally, the Can be expressly Can be expressly
power power to make tax delegated to the delegated to the
 exacted from the on the injurious of property to the
taxpayer becomes use of property State.
part of the public
funds
Non-impairment Contracts may not Contracts may be Contracts may be
of contracts be impaired by impaired impaired
taxation
Delegability the Generally, the Can be expressly Can be expressly
power power to make tax delegated to the delegated to the
laws cannot be local government local government
delegated unit by the unit by the
legislature legislature
Persons affected It affects the It affects the It affects only the
community or community or class individual who
class of of individuals owns the
individuals particular
property
Limit of Amount No limit Limited to the cost Just
of regulation compensation is
determined by the
court
Benefit No direct benefit No direct benefit A direct benefit is
is received by the is received received when the
taxpayer just compensation
is paid
Taking There is taking. There may be There is taking.
The property taking of noxious The property
taken is and harmful taken is
wholesome properties, i.e., wholesome.
nuisance per se.
Compensation The tax exacted Altruistic feeling The just
of helping the compensation
State

THEORY AND BASIS OF TAXATION (NLB)

1. Necessity theory
1. The power of taxation proceeds upon the theory that the existence of
government is a NECESSITY, and it cannot continue without means to
pay its expenses. Hence, it has a right to compel all its citizens and
property within its limits to contribute.
2. Lifeblood theory
1. It is said that taxes are what we pay for civilized society. Without taxes,
the government would be paralyzed for lack of the motive power to
operate it.
2. Hence, despite the natural reluctance to surrender part of one's hard-
earned income to the taxing authorities, every person who is able to
 2.

must contribute his share in the running of the government.

3. Benefits-received theory; Benefits Received; Reciprocity; Doctrine of
Symbiotic Relationship
1. Hence, despite the natural reluctance to surrender part of one's hard-
earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government. The government
for its part, is expected to respond in the form of tangible and intangible
benefits intended to improve the lives of the people and enhance their
moral and material values. This symbiotic relationship is the rationale of
taxation and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power. (CIR v Algue, 1988)
2. For this reason:
1. Injunction generally does not lie against the collection of taxes
2. Taxes are generally not subject to set-off or compensation
3. The State is not estopped from collecting taxes by the mistakes or
errors of agents
4. Tax exemptions are never presumed and are strictly construed against
the taxpayer
5. Taxation is plenary and unlimited in range.

PRINCIPLES OF A SOUND TAX SYSTEM (JFA)

1. Theoretical justice; Ability-to-Pay theory
1. A sound tax system must be just, so it must be based on the taxpayers’
ability to pay. The Constitution dictates that taxes must be uniform and
equitable. (Art. VI, Sec. 28(1), Constitution)
2. Fiscal adequacy
1. The sources of government revenue must be “adequate” to meet
government expenditures and other public needs.
3. Administrative feasibility
1. Tax laws must be capable of being “efficiently” enforced or administered
with the least convenience to the taxpayer.
2. A tax law will retain its validity even if it is not in consonance with the
principles of fiscal adequacy and administrative feasibility because the
Constitution does not expressly require so. These principles are only
designed to make our tax system sound. However, if a tax law runs
contrary to the principle of theoretical justice, such violation will
render the law unconstitutional considering that under the Constitution,
the rule of taxation should be uniform and equitable. [Dimaampao, Tax
Principles and Remedies (2015)]

JURISDICTION OVER SUBJECT AND OBJECTS

1. The limited powers of sovereignty are confined to objects within the
respective spheres of governmental control. These objects are the proper
 1.

subjects or objects of taxation and none else.

1. Tax laws cannot operate beyond a State’s territorial limits
2. The gov’t cannot tax a particular object of taxation which is not within its
territorial jurisdiction
3. Property outside the State’s jurisdiction does not receive any
protection of the State
4. If a law is passed by Congress, it must see to it that the object or subject
of taxation is within the territorial jurisdiction of the taxing authority

STAGES OR ASPECTS OF TAXATION

1. Levy - the act of the legislature in choosing the persons, properties, rights or
privileges to be subjected to taxation.
2. Assessment and Collection - the acts of executing the law through the
administrative agencies of government.
3. Payment - the act of the taxpayer in settling his tax obligations
4. Refund - the act of the taxpayer in claiming refund for taxes paid.

REQUISITES OF A VALID TAX (PUTDL)

1. The tax must be for a Public purpose;
2. The rule of taxation should be Uniform;
3. The person or property taxed is within the Territorial jurisdiction of the taxing
authority;
4. The assessment and collection should be in harmony with the Due process
clause; and
5. The tax must not infringe on the inherent and constitutional Limitations of the
power of taxation.

KINDS OF TAXES
1. Subject matter
1. Personal
2. Property
3. Excise
2. Burden
1. Direct - taxes wherein both the impact (liability) and the incidence
(burden) of taxation falls on the same person
2. Indirect - taxes wherein the impact(liability) of taxation falls on one
person, and the incidence(burden) of taxation falls to another, because
the former shifted it to the latter. It will be shifted not as a tax but as part
of the purchase price.
3. Purpose
1. Revenue
2. Regulatory
4. How amount is determined
 1. Specific - tax of a fixed amount imposed by the head or number or piece
or by some standard of weight or measurement. The value of the article
taxed is not important. Examples are: 1) a tax of P6 per liter of sweetened
beverage/per pack of cigarette; 2) a tax of P1.75 on each kilogram of
tobacco. Both of these are excise taxes.
2. Ad valorem (Value) - tax based upon the value of the articles taxed. It
sometimes requires the intervention of assessors to estimate the value of
the property. Examples are Income tax, VAT, RPT, and even some excise
taxes. In Section 149, automobiles are subject to an “ad valorem tax”
based on the manufacturer’s selling price.” Another example is Section
145, which provides that cigars are subject to an “ad valorem tax” of 20%
of the net retail price per cigar.
3. Mixed - tax having both specific and ad valorem tax. An example is
Section 142 which states that “there shall be collected an excise tax, per
liter of volume capacity, on sparkling wines/champagnes if the net retail
price per bottle is P500 or less, the tax is P250.” The specific tax feature
here is the net retail price, which is the value of the sparkling wine taxed,
while the ad valorem tax feature here is the per liter of volume capacity.
5. Taxing authority
1. National
2. Local
6. Rate
1. Progressive - the rate of tax increases as the amount of income increases.
An example is the tax bracket of tax on individuals
2. Regressive - the rate decreases as the amount of income increases. There
is no such tax in the Philippines. However, in Tolentino v Sec. of Finance, it
categorized VAT as regressive tax, even though the rate is fixed.
3. Proportionate - the rate is a flat tax base. Examples are percentage tax
and real property tax.

GENERAL CONCEPTS IN TAXATION

1. Prospectivity of tax laws
1. General Rule:
1. Tax laws are prospective in application.
2. Exception:
1. When the language of the statute clearly demands or expresses that it
shall have retroactivity effect.
3. Non-Retroactivity of Rulings (Sec 246, NIRC)
1. Any revocation/modification/reversal of any of the rules and
regulations OR rulings or circulars promulgated by the Commissioner,
shall NOT be given retroactive application, if the revocation/
modification/reversal is PREJUDICIAL to the taxpayers.
2. Exception: (Misstates facts return; Different facts gather; Bad
 2.
faith; Beneficial)
1. Where the taxpayer deliberately Misstates or omits material facts
from his return or any document required of him by the Bureau of
Internal Revenue;
2. Where the facts subsequently gathered by the Bureau of Internal
Revenue are materially Different from the facts on which the ruling
is based; or
3. Where the taxpayer acted in Bad faith. (Sec. 246, NIRC)
1. In short, BAD FAITH
1. Deliberate misstatement/omission of material facts in the
return
2. The facts gathered by BIR are different from the facts on
which the ruling is based (the facts from the ruling being
given by the taxpayer)
4. Where the rules and regulations/rulings/circulars are Beneficial to
the taxpayer. (Implied)
3. Illustration:
1. There was a BIR Ruling on January 10, 2011, stating that a class of
corporations is exempt from tax. Hence, the taxpayer did not pay
such taxes for 2012. Later, on June 5, 2013, there was another BIR
Ruling stating that the same is taxable already. On February 1,
2014, the BIR assessed the taxpayer for unpaid taxes. Is the
assessment valid? No. Under Sec. 246, the reversal of the ruling
of the Commissioner shall NOT apply retroactively to the taxpayer,
because it is prejudicial to him.
2. Imprescriptibility
1. General Rule:
1. The right to assess and to collect are imprescriptible.
2. Exception:
1. When the law provides for statute of limitations.
3. Illustrations:
1. For NIRC, assessment of internal revenue taxes within 3 years after
the last day prescribed by law for filing of the return; in cases of fraud,
at any time within 10 years after the discovery of the same. (Sec. 222,
NIRC); and
2. For LGT and RPT, five (5) year prescriptive period for assessment/
collection. (Sections 194 and 270, LGC)
3. Situs of taxation
1. This means place of taxation
2. The state where the subject to be taxed has a situs may rightfully levy and
collect the tax;
4. Double taxation
1. Strict sense; Direct double taxation
1. Requisites: (SPAJ-PK)
1. Same property or Subject matter is taxed twice
2. For the same Purpose
3. By the same taxing Authority
4. Within the same taxing Jurisdiction
5. During the same taxing Period
6. Both covering the same Kind or character of tax. (Villanueva v City
of Ilo-Ilo, 1968)
2. This kind of double taxation is prohibited by law.
3. Illustrations:
1. Using the aforementioned test, the Court finds that there is
indeed double taxation if respondent is subjected to the taxes
under both Sections 14 and 21 of Tax Ordinance No. 7794, since
these are being imposed:
1. (1) on the same subject matter – the privilege of doing
business in the City of Manila;
2. (2) for the same purpose – to make persons conducting
business within the City of Manila contribute to city
revenues;
3. (3) by the same taxing authority – petitioner City of Manila;
4. (4) within the same taxing jurisdiction – within the territorial
jurisdiction of the City of Manila;
5. (5) for the same taxing periods – per calendar year; and
6. (6) of the same kind or character – a local business tax
imposed on gross sales or receipts of the business.
1. The distinction petitioners attempt to make between the
taxes under Sections 14 and 21 of Tax Ordinance No.
7794 is specious. The Court revisits Section 143 of the
LGC, the very source of the power of municipalities and
cities to impose a local business tax, and to which any
local business tax imposed by petitioner City of Manila
must conform. It is apparent from a perusal thereof that
when a municipality or city has already imposed a
business tax on manufacturers, etc. of liquors, distilled
spirits, wines, and any other article of commerce,
pursuant to Section 143(a) of the LGC, said municipality
or city may no longer subject the same manufacturers,
etc. to a business tax under Section 143(h) of the same
Code. Section 143(h) may be imposed only on businesses
that are subject to excise tax, VAT, or percentage tax
under the NIRC, and that are "not otherwise specified in
preceding paragraphs." In the same way, businesses such
as respondent’s, already subject to a local business tax
 under Section 14 of Tax Ordinance No. 7794 [which is
based on Section 143(a) of the LGC], can no longer be
made liable for local business tax under Section 21 of the
same Tax Ordinance [which is based on Section 143(h) of
the LGC]. (City of Manila v Coca-Cola Bottlers, 2009)
2. On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc.
and Swedish Match Philippines, Inc., the Court now holds that all
the elements of double taxation concurred upon the City of
Manila’s assessment on and collection from the petitioners of
taxes for the first quarter of 1999 pursuant to Section 21 of the
Revenue Code of Manila. Firstly, because Section 21 of the
Revenue Code of Manila imposed the tax on a person who sold
goods and services in the course of trade or business based on a
certain percentage of his gross sales or receipts in the preceding
calendar year, while Section 15 and Section 17 likewise imposed
the tax on a person who sold goods and services in the course of
trade or business but only identified such person with
particularity, namely, the wholesaler, distributor or dealer (Section
15), and the retailer (Section 17), all the taxes – being imposed on
the privilege of doing business in the City of Manila in order to
make the taxpayers contributeto the city’s revenues – were
imposed on the same subject matter and for the same purpose.
Secondly, the taxes were imposed by the same taxing authority
(the City of Manila) and within the same jurisdiction in the same
taxing period (i.e., per calendar year). Thirdly, the taxes were all in
the nature of local business taxes. We note that although Coca-
Cola Bottlers Philippines, Inc. and Swedish Match Philippines, Inc.
involved Section 21 vis-à-vis Section 14 (Tax on Manufacturers,
Assemblers and Other Processors) of the Revenue Code of
Manila, the legal principles enunciated therein should similarly
apply because Section 15 (Tax on Wholesalers, Distributors, or
Dealers)and Section 17 (Tax on Retailers) of the Revenue Code of
Manila imposed the same nature of tax as that imposed under
Section 14, i.e., local business tax, albeit on a different subject
matter or group of taxpayers. In fine, the imposition of the tax
under Section 21 of the Revenue Code of Manila constituted
double taxation, and the taxes collected pursuant thereto must be
refunded. (Nursery Care Corp. v Acevedo and City of Manila,
2014)
2. Broad sense; Indirect double taxation
1. It is a kind of double taxation that does not have one or more of the
requisites of double taxation in the strict sense.
2. This is allowed by law.
 3. “International Juridical Double taxation” is the imposition of
comparable taxes in two or more States on the same taxpayer in
respect to the same subject matter and period. (CIR v S.C. Johnson &
Son, 1999)
1. It is covered by double taxation in broad sense, so it is allowed by
law. However, it is avoided by the Government to encourage the
free flow of goods and services between countries. (CIR v S.C.
Johnson & Son, 1999)
4. “Local Double taxation” happens when an LGU imposes a tax which is
already imposed by the National Government or another LGU that has
territorial jurisdiction over such LGU, i.e. province and city.
1. Again, this is double taxation in broad sense, so it is allowed by
law. However, it is avoided by the Government. Hence, we have
the so-called “pre-emption rule.” Such rule refers to an instance
where the national government elects to tax a particular area,
impliedly withholding from the local government the delegated
power to tax the same field. This doctrine primarily rests upon the
intention of Congress. (Victorias Milling v Municipality of Victorias,
1968)
3. Tax treaties as relief from double taxation
1. Reliefs from double taxation (CREDIT)
1. Tax Credits
2. Reduction of Philippine Income tax rates
3. Tax Exemptions
4. Tax Deductions
5. Tax Treaties
2. Tax credit v Tax deduction
1. A tax credit differs from a tax deduction.
2. On the one hand, a tax credit reduces the tax due/LIABILITY,
including -- whenever applicable -- the income tax that is
determined after applying the corresponding tax rates to taxable
income.
3. A tax deduction, on the other, reduces the taxable INCOME.
4. A tax credit is used only AFTER the tax has been computed; a tax
deduction, BEFORE. (CIR v Central Luzon Drug Corporation,
2005)
3. Tax treaties
1. An agreement between two states specifying what items of
income will be taxed by the authorities of the country where the
income is earned. (Air Canada v CIR, 2016, Leonen)
4. Methods resorted to by a tax treaty to eliminate double taxation
1. Exclusive right to tax is conferred in one of the contracting states;
or
 2. The state of source is given the right to tax together with the state
of residence. In this case, the treaty will make it the duty of the
state of residence to give relief in favor of the taxpayer in order to
avoid double taxation.
5. Two ways under the second method
1. Exemption Method - In the exemption method, the income or
capital which is taxable in the state of source or situs is exempted
in the state of residence, although in some instances it may be
taken into account in determining the rate of tax applicable to the
taxpayer's remaining income or capital. (CIR v S.C. Johnson &
Son, 1999)
2. Credit Method - On the other hand, in the credit method,
although the income or capital which is taxed in the state of
source is still taxable in the state of residence, the tax paid in the
former is credited against the tax levied in the latter. The basic
difference between the two methods is that in the exemption
method, the focus is on the income or capital itself, whereas the
credit method focuses upon the tax. (CIR v S.C. Johnson & Son,
1999)
6. BIR cannot impose additional requisites to avail of tax treaties
1. In Deutsche Bank, the Court categorically held that the BIR should
not impose additional requirements that would negate the
availment of the reliefs provided for under international
agreements, especially since said tax treaties do not provide for
any prerequisite at all for the availment of the benefits under said
agreements.
1. It bears reiterating that the application for a tax treaty relief
from the BIR should merely operate to confirm the
entitlement of the taxpayer to the relief. Since CBK Power had
requested for confirmation from the ITAD on June 8, 2001 and
October 28, 2002 before it filed on April 14, 2003 its
administrative claim for refund of its excess final withholding
taxes, the same should be deemed substantial compliance
with RMO No. 1-2000, as in Deutsche Bank.. (CBK Power
Company v CIR, 2015) In the case, the BIR withheld, as final
withholding taxes, 15-20% of the interest payments by CBK
Power Company to foreign banks. However, the relevant tax
treaties between the Philippines and the foreign countries
only subject such payments to 10% tax rate. Despite these
treaties, the BIR still denied the tax refund filed by CBK Power
because the latter did not submit a prior application for an
ITAD ruling, as required in a published revenue memorandum
circular.
 7. Most favored nation clause
1. The purpose of a most favored nation clause is to grant to the
contracting party treatment not less favorable than that which
has been or may be granted to the "most favored" party among
other countries. The most favored nation clause is intended to
establish the principle of equality of international treatment. (CIR v
S.C. Johnson & Son, 1999) The essence of the principle is to allow
the taxpayer in one state to avail of more liberal provisions
granted in another tax treaty to which the country of residence of
such taxpayer is also a party. However, this is provided that the
subject matter of taxation, in this case royalty income, is the
same as that in the tax treaty under which the taxpayer is liable.
(CIR v S.C. Johnson & Son, 1999)
1. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b)
of the RP-West Germany Tax Treaty, above-quoted, speaks of
tax on royalties for the use of trademark, patent, and
technology. The entitlement of the 10% rate by U.S. firms
despite the absence of a matching credit (20% for royalties)
would derogate from the design behind the most grant
equality of international treatment since the tax burden laid
upon the income of the investor is not the same in the two
countries. The similarity in the circumstances of payment
of taxes is a condition for the enjoyment of most favored
nation treatment precisely to underscore the need for
equality of treatment. We accordingly agree with petitioner
that since the RP-US Tax Treaty does not give a matching tax
credit of 20 percent for the taxes paid to the Philippines on
royalties as allowed under the RP-West Germany Tax Treaty,
private respondent cannot be deemed entitled to the 10
percent rate granted under the latter treaty for the reason that
there is no payment of taxes on royalties under similar
circumstances. (CIR v S.C. Johnson & Son, 1999) In short,
SC Johnson, a US company, is not entitled to the most
favored nation clause, because the circumstances of the tax
relief in RP-West Germany is not the same as in the RP-US.
5. Escape from taxation
1. Means of escaping taxation:
1. Capitalization
1. Capitalization is made when the price of a property is lowered to
accommodate the exclusion of the tax which is expected to be
paid by the seller-taxpayer as a result of sale transaction.
2. As example, the original price of a book is P1000. The seller-
taxpayer lowered it to P700. As a result, the tax expense of the
 2.

seller-taxpayer will also be lowered.

2. Exemption
1. Exemption will be discussed below, along with tax amnesty. The
latter is not an escape, but more of forgiveness.
3. Shifting
1. The liability(impact) for the payment of tax will be imposed on the
taxpayer, but the burden(incidence) thereof is shifted or passed
on to the purchaser, not as tax but as part of purchase price.
1. The liability or impact of taxation cannot be shifted. The tax
laws expressly provide who is the statutory taxpayer.
However, the incidence or burden of taxation can be shifted.
Hence, what the purchaser will transfer, when he re-sells the
product, is the ultimate burden of the tax.
2. It is forward shifting when the burden is transferred from
production to distribution to ultimate consumer.
3. It is backward shifting when the burden is transferred from the
ultimate consumer to distribution to production.
4. It is onward shifting if the burden is shifted two or more times.
4. Transformation
1. The manufacturer or producer, who is also the taxpayer, fearing
the loss of customer if he should add the tax to the price, pays the
tax and aims to recoup himself by improving his process of
production, thereby producing the units at a lower cost.
2. As example, the excise tax of manufactured automobiles
increased. XYZ Motors feared that its customers will not buy its
cars, if it will add the increased excise tax to the selling price.
Hence, it did not increase the price. Instead, it paid the increase in
excise taxes, and it aimed to recoup the added expenses by
improving the process of making cars. That way, the cost of
manufacturing will be lowered, and the expenses of XYZ Motors
will be the same as before the excise tax was increased.
5. Avoidance
1. This is also called as tax minimization. It is reducing or tally
escaping payment of taxes through lawful means.
2. Example are 1) selling shares of stock through the stock exchange
instead of outside of the same; 2) availing of all deductions
allowed by law; or 3) availing of all the exclusions provided by law.
6. Evasion
1. Elements of tax evasion: (EMA - end; state of mind; action)
1. End to be achieved - the payment of less than that known by
the taxpayer to be legally due, or the non-payment of tax
when it is shown that a tax is due;
2. State of mind - described as being "evil," in "bad faith,"
 2.
"willfull," or "deliberate and not accidental"
3. Act - A course of action or failure of action which is unlawful.
(CIR v. Estate of Toda, Jr., September 14, 2004)
2. This is the unlawful means of escaping taxation. It connotes fraud.
3. As example, 1) misstating the gross selling price of a real property
sold to reduce capital gains tax, or 2) failure to issue a receipt for
a consummated sale to reduce VAT and income tax liability.
4. Assessment not necessary before filing a criminal charge
1. Section 222 of the NIRC states “In the case of a false or
fraudulent return with intent to evade tax or of failure to file a
return, the tax may be assessed, or a proceeding in court for
the collection of such tax may be filed without
assessment, at any time within ten (10) years after the
discovery of the falsity, fraud or omission.”
2. Furthermore, Section 205 of the same Code states “Either of
these remedies or both simultaneously may be pursued in
the discretion of the authorities charged with the collection of
such taxes.”
1. Also, a criminal complaint is instituted not to demand
payment, but to penalize the taxpayer for a violation of
the Tax Code. Hence, an assessment is not necessary
before a criminal charge can be filed. The criminal
charge need to only be supported by a prima facie
showing of a willful attempt to evade taxes, such as
failure to file a required tax return. This fact can be proven
without a prior assessment. (CIR v. Pascor, G.R. No.
128315 (1999))
2. A crime is complete when the violator has knowingly and
willfully filed a fraudulent return, with intent to evade and
defeat the tax. The perpetration of the crime is grounded
upon knowledge of the taxpayer that he has made an
inaccurate return, and the government’s failure to
promptly assess him has no connection with the
commission of the crime. (Ungab v Cusi, 1980)
3. However, we must take note that for criminal prosecution
to proceed without assessment, there must be a prima
facie showing of willful attempt to evade taxes. If there
was no prima facie showing, then a prior assessment of
taxes is necessary. (CIR v CA, Fortune Tobacco, and Lucio
Tan, 1996) In this case, there was no prima facie showing
because there was a real issue on what amount of taxes
were meant to be paid. Hence, the case was dismissed for
lack of prior assessment.
 3. NOTE: If the Bar question is silent, stick to the general rule,
i.e., assessment is not necessary to file a criminal case for tax
evasion . However, if the Bar question clearly states that there
is lack of prima facie showing of willful attempt to evade
taxes, apply the exception, i.e., prior assessment is necessary.
2. Distinguish: tax avoidance and tax evasion
Avoidance Evasion
Legality Legal and not subject to Illegal and subject to
criminal liability criminal or civil liability
Manner of Commission Accomplished by legal Accomplished by illegal
procedures or means procedures or means or
by breaking the letter of
the law
Effects Minimization of taxes Almost always the
absence of tax payments
(CIR v Toda Jr., 2004)
6. Exemption from taxation
1. It is the grant of immunity to particular persons from a tax which persons
in general are obliged to pay.
2. The power to grant tax exemptions are necessarily included in the inherent
power of the State to impose taxes.
3. Tax exemptions are never presumed, and if granted, they are strictly
construed against the taxpayer.
4. Kinds of tax exemptions:
1. Express - when the law expressly grants the exemption
2. Implied - when particular persons, properties, or excises are deemed
exempt because they fall outside of the scope of the provision of the
tax law.
3. Contractual - tax exemption in consideration of a contractual
agreement with the government.
5. Revocation of tax exemptions
1. Since taxation is the rule and exemption is the exception, the
exemption may thus be withdrawn AT THE PLEASURE of the taxing
authority. (MCIAA v Marcos, 1996)
6. Limitations on Revocation of tax exemptions
1. Non-impairment clause - if the tax exemption arises from a
contractual agreement for a valuable consideration, the government
cannot unilaterally revoke the tax exemption. (Dimaampao)
1. However, police power prevails over non-impairment clause.
(Oposa v Factoran, 1993)
2. Constitution (form) - if the tax exemption is granted by the
Constitution, it can revoked by Constitutional amendment ONLY
2.

(adherence to form)
3. Special laws are not repealed by general laws - RA Nos. 3247, 3570
and 6020 are special laws applicable only to CEPALCO, while P.D. No.
231 is a general tax law. The presumption is that the special statutes
are exceptions to the general law (P.D. No. 231) because they pertain
to a special charter granted to meet a particular set of conditions and
circumstances. Hence, a tax exemption granted in a special law is not
repealed by a general law that is later enacted, even if the terms of
the general law are broad enough to include the cases in the special
law, UNLESS there is manifest intent by Congress to repeal or alter the
special law. (Province of Misamis Oriental v Cagayan Electric Power,
1990)
1. Another example of special law, granting a tax exemption, is
not repealed by a later general law - Firstly, a basic rule in
statutory construction is that a special law cannot be repealed or
modified by a subsequently enacted general law in the absence of
any express provision in the latter law to that effect. A special law
must be interpreted to constitute an exception to the general law
in the absence of special circumstances warranting a contrary
conclusion. R.A. No. 7716, a general law, did not provide for the
express repeal of PAGCOR's Charter, which is a special law;
hence, the general repealing clause under Section 20 of R.A. No.
7716 must pertain only to franchises of electric, gas, and water
utilities, while the term other franchises in Section 102 of the NIRC
should refer only to transport, communications and utilities,
exclusive of PAGCOR's casino operations. (CIR v Secretary of
Justice and PAGCOR, 2016) Section 13 of PD 1869 (PAGCOR’s
Charter) states that payment of the 5% franchise tax by PAGCOR
and its contractees and licensees exempts the from payment of
any other taxes, including corporate income tax. (Bloomberry
Resorts and Hotels v BIR, 2016)
2. “Unless there is manifest intent to repeal or alter the special
law” - It is next contended that, in any event, a special law
prevails over a general law and that the franchise of petitioner
giving it tax exemption, being a special law, should prevail over the
LGC, giving local governments taxing power, as the latter is a
general law. Petitioner further argues that as between two laws on
the same subject matter which are irreconcilably inconsistent,
that which is passed later prevails as it is the latest expression of
legislative will. This proposition flies in the face of settled
jurisprudence. In City Government of San Pablo, Laguna v. Reyes,
this Court held that the phrase "in lieu of all taxes" found in
special franchises should give way to the peremptory language of
 § 193 of the LGC specifically providing for the withdrawal of such
exemption privileges. Thus, the rule that a special law must prevail
over the provisions of a later general law does not apply as the
legislative purpose to withdraw tax privileges enjoyed under
existing laws or charters is apparent from the express
provisions of §§ 137 and 193 of the LGC. (PLDT v City of Davao
and Barcelona)
7. Tax amnesty (Clean Slate Theory)
1. A tax amnesty operates as 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 tax law.
2. It is an absolute forgiveness or 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.
3. A tax amnesty, much like a tax exemption, is never favored nor presumed
in law.
4. The grant of a tax amnesty is akin to a tax exemption; thus, it must be
construed strictly against the taxpayer and liberally in favor of the taxing
authority. (CIR v Transfield Philippines, 2019)
8. Prohibition on compensation and set-off
1. General Rule:
1. There can be no off-setting of taxes against the claims that the
taxpayer may have against the Government.
2. This is because taxes are not in the nature of contract. Instead, it
grows out of duty to the Government and are the positive acts of the
government.
3. Also, the lifeblood doctrine would be violated.
4. Further, a person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of the
lawsuit. (Francia v IAC, 1988)
2. Exception: “Intertwined”
1. In numerous cases, the Court allowed offsetting of taxes only because
the determination of the taxpayer's liability is intertwined with the
resolution of the claim for tax refund of erroneously or illegally
collected taxes under Section 229 of the NIRC(CIR v Toledo Power,
2015)
2. COMMENT: In other words, the taxpayer was claiming that it is
entitled to tax credits. On the other hand, the CIR was claiming that
the taxpayer has outstanding tax liabilities. That is the only scenario
where the Court granted compensation.
3. Question:
1. CIR made an assessment, stating that A owes P1M in taxes. A
 1.
presented a contract to the CIR, showing that the LGU did not pay him
of his services of P1M. Is this allowed? No, it is not allowed because
there can be no off-setting of taxes against the claims of the taxpayer
against the Government. Taxes grow out of a duty to and are the
positive acts of the government, whereas the services rendered by A
are in the nature of contracts.
9. Equitable recoupment
1. This doctrine states that a tax credit/refund, which has PRESCRIBED,
may be allowed to be used as PAYMENT of outstanding tax liability, if
both taxes arise from the same transaction in which overpayment is made
and underpayment is due.
2. This doctrine is not applicable in our jurisdiction because both the
collecting agency and the taxpayer might be tempted to delay and neglect
the pursuit of their respective claims within the period prescribed by law.
3. Illustration: XYZ Corporation paid its output VAT for the first quarter of
2019 on April 2019. Later, he also paid its output VAT for the fourth
quarter of 2019 on January 2020. On May 2020, the CIR made an
assessment that he underpaid his output VAT for the year 2019. As
contention, XYZ Corporation alleged that it had creditable input VAT for
the year 2019. Hence, it is seeking a set-off of its creditable input VAT and
the underpayment in output VAT. This illustrates the doctrine of equitable
recoupment because the underpayment (output VAT) is due and
demandable while the overpayment (creditable input VAT) has prescribed.
The TRAIN Law states that the taxpayer only has 90 days from the date of
submission of the official receipts or invoices and other documents to
refund creditable input VAT. At the time XYZ Corporation brought up its
claim, it has already prescribed.
4. NOTE: If you see set-off/compensation in the facts, the topic is NOT
NIRC, but GENERAL PRINCIPLES of taxation.
10. Compromise
1. It is a contract whereby the parties, by making “reciprocal concessions,”
avoid litigation or put an end one already commenced. (Art. 2028, NCC)
2. Authority of the Commissioner to Compromise, Abate and Refund or
Credit Taxes. (Sec. 204, NIRC)
1. The Commissioner may:
1. Compromise the payment of any internal revenue tax when:
(doubt; inability)
1. A reasonable doubt as to the validity of the claim against the
taxpayer exists; or
2. The financial position of the taxpayer demonstrates a clear
inability to pay the assessed tax.
2. Abate or cancel a tax liability when: (excessively; collection
cost)
 1. The tax or any portion thereof appears to be unjustly or
excessively assessed; or
2. The administration and collection costs involved do not justify
the collection of the amount due.
3. All criminal violations may be compromised except: (already
filed; fraud)
1. those already filed in court, or
2. those involving fraud.
2. Can the Commissioner delegate the power to compromise?
1. Yes.
2. The National Evaluation Board (NEB), when:
1. the basic tax exceeds P1,000,000, or
2. the settlement offered is less than the prescribed minimum
rates [Sec. 204(A), NIRC]
3. The Regional Evaluation Board (REB), in case of:
1. assessments issued by regional offices involving basic taxes
of P500,000 or less; and
2. minor criminal violations discovered by regional and district
officials [Sec. 7(C), NIRC]

INHERENT AND CONSTITUTIONAL LIMITATIONS ON TAXATION

1. Inherent Limitations of Taxation: (PENIS)
1. Public Purpose
1. Tests to determine public purpose:
1. Duty Test - whether the object to be furthered by the
appropriation of public revenue is something which is the duty of
the State to provide
2. Promotion of General Welfare Test - whether the proceeds of
the tax will directly promote the welfare of the community in equal
measure.
2. Exemption of the Government
1. This covers: a) Government entities, b) Government agencies, and c)
Government instrumentalities.
2. GOCCs are subject to taxation.
3. Pertinent provisions under the LGC are:
1. SEC. 133. Common Limitations on the Taxing Powers of Local
Government Units. - Unless otherwise provided herein, the
exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following: (o)
Taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, and local
government units.
2. SEC. 234. Exemptions from Real Property Tax. - The following are
 2.
exempted from payment of the real property tax: (a) Real
property owned by the Republic of the Philippines or any of its
political subdivisions, except when the beneficial use thereof
has been granted, for consideration or otherwise, to a taxable
person.
3. These does not include GOCCs.
4. Pertinent provisions under the NIRC are:
1. Exclusions from Gross Income
1. Income Derived by the Government or its Political
Subdivisions. - Income derived from any public utility or from
the exercise of any essential governmental function
accruing to the Government of the Philippines or to any
political subdivision thereof. (Sec. 32(B), 7(b))
2. This does not include GOCCs.
2. GOCCs are generally subject to income tax, except that the
following are not subject to income tax:
1. GSIS
2. SSS
3. Philippine Health Insurance Corporation (PhilHealth)
4. Local Water Districts (LWDs)
5. Illustration:
1. MIAA is not a government-owned or controlled corporation but a
government instrumentality which is exempt from any kind of
tax from the local governments.
2. LGT - Indeed, the exercise of the taxing power of local
government units is subject to the limitations enumerated in
Section 133 of the Local Government Code. Under Section 133(o)
of the Local Government Code, local government units have no
power to tax instrumentalities of the national government like the
MIAA. Hence, MIAA is not liable to pay real property tax for the
NAIA Pasay properties.
3. RPT - Furthermore, the airport lands and buildings of MIAA are
properties of public dominion intended for public use, and as
such are exempt from real property tax under Section 234 (a) of
the Local Government Code. However, under the same provision,
if MIAA leases its real property to a taxable person, the specific
property leased becomes subject to real property tax. In this case,
only those portions of the NAIA Pasay properties which are leased
to taxable persons like private parties are subject to real property
tax by the City of Pasay.(Mactan-Cebu International Airport
Authority (MCIAA) v. City of Lapu-Lapu and Pacaldo, G.R. No.
181756, [June 15, 2015], 759 PHIL 296-352)
3. Non-delegability of taxing power
 1. General Rule: Since the power to tax has been delegated to the
Congress by the people, the Congress cannot re-delegate the same to
other bodies. Hence, the selection of objects to tax, the purpose of
the tax, and the rate of tax are not delegable.
2. Exceptions: (PAL)
1. Delegation to the President of tariff powers under the flexible
tariff clause, and emergency powers.
2. Delegation to Administrative agencies to create subordinate
legislations like IRRs (BIR)
3. Delegation to Local Government, as the Constitution grants LGUs
the power to create its own sources of revenue and levy taxes,
fees, and charges which will accrue exclusively to the LGU. (Art.
X, Sec. 5, Constitution)
4. International Comity
1. The Philippines recognizes the generally accepted principle of
International law, specifically those that limit the authority of the
government to impose tax on sovereign states and instrumentalities.
2. Hence, the income of foreign ambassadors and the real property of
foreign embassies cannot be subjected to tax. Further, the TRAIN law
provides that income derived from investments by foreign
governments are exempt income tax. Lastly, diplomatic and consular
representatives are exempt from community tax. These exemptions
are based on the doctrine of sovereign equality, and doctrine of
sovereign immunity.
5. Situs or territoriality
1. General Rule: The State may not tax a thing that is outside the
territorial jurisdiction of the Philippines.
1. Classic example is VAT - destination principle
2. Exceptions:
1. Where the tax law operates outside the territorial jurisdiction, e.g.
Resident citizens are taxed on income derived from sources within
and without the Philippines; Estate of deceased citizens are taxed
on properties located within and without the Philippines
2. Where the tax law does not operate inside the territorial
jurisdiction, e.g. No real property tax on foreign embassies.
3. Situs of Subjects of Tax:
1. Persons - Poll or community tax are based on the residence of
the taxpayer
2. Tangible Property - For real property and tangible personal
property, it is where the property is located.
3. Intangible Property - For intangible personal property, it is the
domicile of the owner.
1. Exceptions to intangible personal property: Here, the situs is
 1.
the Philippines, even if the domicile of the owner is abroad.
1. Franchise exercised in the Philippines
2. Shares of stock, bonds, and obligations issued by
domestic corporations
3. Shares of stock, bonds, and obligations issued by a
foreign corporation where 85% of its business is located
in the Philippines
4. Shares of stock, bonds, and obligations issued by foreign
corporation, which has acquired business situs in the
Philippines, when such have been used in the furtherance
of the business of the foreign corporation
5. Share/s rights in a partnership business or industry
established in the Philippines.
4. Income - To determine the situs, the following factors must be
taken into account: a) Nationality of the taxpayer, b) Residence of
the taxpayer, and c) Source of the income
5. Excise tax upon the performance of an act or engaging in an
occupation - The power to levy an excise upon the performance
of an act or the engaging in an occupation does not depend upon
the domicile of the person subject to the excise, nor upon the
physical location of the property and in connection with the act or
occupation taxed, but depends upon the place in which the act is
performed or occupation engaged in. Thus, the gauge for
taxability under the said Ordinance No. 7516 as amended does not
depend on the location of the office, but attaches upon the place
where the respective sale transaction(s) is perfected and
consummated. (Allied Thread Co., Inc. v. City Mayor of Manila,
G.R. No. L-40296, [November 21, 1984], 218 PHIL 308-314)
6. VAT - it is taxed in the place where the goods or services will be
consumed (DESTINATION PRINCIPLE). (CIR v American Express,
2005)
1. Destination Principle
1. As a general rule, the VAT system uses the destination
principle as a basis for the jurisdictional reach of the tax.
Goods and services are taxed only in the country where
they are consumed. Thus, exports are zero-rated, while
imports are taxed. (Commissioner of Internal Revenue v.
American Express International, Inc., G.R. No. 152609,
[June 29, 2005], 500 PHIL 586-618)
7. Gratuitous transfer - For estate tax, the property of the
decedent RC, NRC, or RA are included in the gross estate whether
located within or without the Philippines. For NRA, only those
located within the Philippines. The same rule applies for donor’s
 7.

tax.
2. Constitutional Limitation of Taxation
1. Indirect or General (DENRS - PPJ)
1. Due process
2. Equal protection
1. Homeless Poor and Homeless Less Poor are different classes
1. Moreover, there is a difference between the "homeless poor"
and the "homeless less poor" in the example given by
petitioner, because the second group or middle class can
afford to rent houses in the meantime that they cannot yet
buy their own homes. The two social classes are thus
differently situated in life. "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 for taxation, or exemption
infringe no constitutional limitation.'" (Lutz v. Araneta, 98 Phil.
148, 153 (1955). Accord, City of Baguio v. De Leon, 134 Phil.
912 (1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984);
Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas,
Inc. v. Tan, 163 SCRA 371 [1988]).||| (Tolentino v. Secretary of
Finance, G.R. Nos. 115455, 115525, 115543, 115544, 115754,
115781, 115852, 115873 & 115931 (Resolution), [October 30,
1995], 319 PHIL 755-803)
3. Non-impairment of contracts
1. Increase of tax expenses in particular contracts; Not
impairment of contracts
1. The short answer to this is the one given by this Court in an
early case: "Authorities from numerous sources are cited by
the plaintiffs, but none of them show that a lawful tax on a
new subject, or an increased tax on an old one, interferes with
a contract or impairs its obligation, within the meaning of the
Constitution. Even though such taxation may affect particular
contracts, as it may increase the debt of one person and
lessen the security of another, or may impose additional
burdens upon one class and release the burdens of another,
still the tax must be paid unless prohibited by the
Constitution, nor can it be said that it impairs the obligation of
any existing contract in its true legal sense." (La Insular v.
Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574
[1919]) Indeed not only existing laws but also "the
reservation of the essential attributes of sovereignty,
is . . . read into contracts as a postulate of the legal
order." (Philippine-American Life Ins. Co. v. Auditor General,
 22 SCRA 135, 147 [1968]) Contracts must be understood as
having been made in reference to the possible exercise of
the rightful authority of the government and no obligation of
contract can extend to the defeat of that authority. (Norman
v. Baltimore and Ohio R.R., 79 L. Ed. 885 [1935]) cd|||
(Tolentino v. Secretary of Finance, G.R. Nos. 115455, 115525,
115543, 115544, 115754, 115781, 115852, 115873 & 115931
(Resolution), [October 30, 1995], 319 PHIL 755-803)
1. Even in the field of taxation, authorities are numerous to
the effect that a lawful tax on a new subject, or an
increased tax on an old one, interferes not with a contract
or impairs its obligation within the meaning of the
Constitution, even though such taxation may affect
particular contracts so as to increase the debt of one
party or lessen the security of another, or impose
additional burdens upon one class and release the
burdens of the other class (La Insular v. Machuca Go-
Tauco, 39 Phil. 567, and authorities cited therein). Thus,
the imposition of a tax under a statute passed after a
contract has been entered into was held not an
impairment of the obligation of contract even if the
immediate consequence of the tax is to make the contract
less profitable to one of the parties (Kehrer v. Stewart,
197 U.S. 60, 49 L. ed. 663; Tanner v. Little, 240 U.S. 369,
60 L. ed. 691; La Insular v. Machuca Go-Tauco, supra), the
reason being that all contracts are made subject to the
taxing powers of the government (Clement National Bank
v. State of Vermont, 231 U.S. 120, 58 L. ed. 148)."
1. The inherent powers of the State are read into
every contracts.
2. The fundamental powers prevail over obligations
and contracts
4. Religious freedom
1. License Fees; License tax; Not allowed if it impairs religious
freedom
1. The constitutional guaranty of the free exercise and
enjoyment of religious profession and worship carries with it
the right to disseminate religious information. Any restraint of
such right can only be justified like other restraints of freedom
of expression on the grounds that there is a clear and present
danger of any substantive evil which the State has the right to
prevent." (Tañada and Fernando on the Constitution of the
Philippines, Vol. I, 4th ed., p. 297). In the case at bar, plaintiff
 is engaged in the distribution and sales of bibles and religious
articles. The City Treasurer of Manila informed the plaintiff
that it was conducting the business of general merchandise
without providing itself with the necessary Mayor's permit and
municipal license, in violation of Ordinance No. 3000, as
amended, and Ordinance No. 2529, as amended, and required
plaintiff to secure the corresponding permit and license.
Plaintiff protested against this requirement and claimed that it
never made any profit from the sale of its bibles. Held: It is
true the price asked for the religious articles was in some
instances a little bit higher than the actual cost of the same,
but this cannot mean that plaintiff was engaged in the
business or occupation of selling said "merchandise" for
profit. For this reasons, the provisions of City Ordinance No.
2529, as amended, which requires the payment of license fee
for conducting the business of general merchandise, cannot
be applied to plaintiff society, for in doing so, it would impair
its free exercise and enjoyment of its religious profession
and worship, as well as its rights of dissemination of religious
beliefs.||| (American Bible Society v. City of Manila, G.R. No.
L-9637, [April 30, 1957], 101 PHIL 386-402) The Court was
speaking in American Bible Society case of a license tax,
which, unlike an ordinary tax, is mainly for regulation. Its
imposition on the press is unconstitutional because it lays a
prior restraint on the exercise of its right. Hence, although
its application to others, such those selling goods, is valid, its
application to the press or to religious groups, such as the
Jehovah's Witnesses, in connection with the latter's sale of
religious books and pamphlets, is unconstitutional. As the U.S.
Supreme Court put it, "it is one thing to impose a tax on
income or property of a preacher. It is quite another thing to
exact a tax on him for delivering a sermon."||| (Tolentino v.
Secretary of Finance, G.R. Nos. 115455, 115525, 115543,
115544, 115754, 115781, 115852, 115873 & 115931
(Resolution), [October 30, 1995], 319 PHIL 755-803)
2. VAT; Freedom of Religion is not violated
1. The VAT is, however, different. It is not a license tax. It is not
a tax on the exercise of a privilege, much less a
constitutional right. It is imposed on the sale, barter, lease
or exchange of goods or properties or the sale or exchange
of services and the lease of properties purely for revenue
purposes. To subject the press to its payment is not to
burden the exercise of its right any more than to make the
 press pay income tax or subject it to general regulation is not
to violate its freedom under the Constitution.||| (Tolentino v.
Secretary of Finance, G.R. Nos. 115455, 115525, 115543,
115544, 115754, 115781, 115852, 115873 & 115931
(Resolution), [October 30, 1995], 319 PHIL 755-803)
Additionally, the Philippine Bible Society, Inc. claims that
although it sells bibles, the proceeds derived from the sales
are used to subsidize the cost of printing copies which are
given free to those who cannot afford to pay so that to tax the
sales would be to increase the price, while reducing the
volume of sale. Granting that to be the case, the resulting
burden on the exercise of religious freedom is so incidental
as to make it difficult to differentiate it from any other
economic imposition that might make the right to disseminate
religious doctrines costly. Otherwise, to follow the petitioner's
argument, to increase the tax on the sale of vestments would
be to lay an impermissible burden on the right of the preacher
to make a sermon. On the other hand the registration fee of
P1,000.00 imposed by § 107 of the NIRC, as amended by § 7
of R.A. No. 7716, although fixed in amount, is really just to pay
for the expenses of registration and enforcement of
provisions such as those relating to accounting in § 108 of
the NIRC. (Tolentino v. Secretary of Finance, G.R. Nos.
115455, 115525, 115543, 115544, 115754, 115781, 115852,
115873 & 115931 (Resolution), [October 30, 1995], 319 PHIL
755-803)
5. Freedom of Speech or expression or the press
1. VAT; Freedom of the Press is not violated
1. As a general proposition, the press is not exempt from the
taxing power of the State and that what the constitutional
guarantee of free press prohibits are laws which single out
the press or target a group belonging to the press for special
treatment or which in any way discriminate against the press
on the basis of the content of the publication, and R.A. No.
7716 is none of these. Since the law granted the press a
privilege, the law could take back the privilege anytime
without offense to the Constitution. The reason is simple:
by granting exemptions, the State does not forever waive the
exercise of its sovereign prerogative. Indeed, in withdrawing
the exemption, the law merely subjects the press to the same
tax burden to which other businesses have long ago been
subject. And VAT is not a license tax. It is not a tax on the
exercise of a privilege, much less a constitutional right. It
 is imposed on the sale, barter, lease or exchange of goods
or properties or the sale or exchange of services and the
lease of properties purely for revenue purposes. To subject
the press to its payment is not to burden the exercise of its
right any more than to make the press pay income tax or
subject it to general regulation is not to violate its freedom
under the Constitution.||| (Tolentino v. Secretary of Finance,
G.R. Nos. 115455, 115525, 115543, 115544, 115754, 115781,
115852, 115873 & 115931 (Resolution), [October 30, 1995],
319 PHIL 755-803)
2. COMMENT: 3 reasons: 1) it does not single out the press. It
merely subjects the press to the same tax burden as other
businesses, 2) since the tax exemption in favor of the press
was a mere privilege, the State could take back the privilege
anytime without violating the Constitution, and 3) VAT is not a
license tax. It does not tax the exercise of a right or privilege.
It merely taxes the sale or exchange of goods or services.
6. Presidential power to grant reprieves, commutations, and Pardons,
and remit fins and forfeiture after conviction by final judgment
7. Law-making Process; and
8. No taking of private property without Just compensation
3. Direct or Specific (PPUTO-SERV-JAIL)
1. Prohibition against imprisonment for non-payment of Poll tax
2. Progressive system of taxation
1. Regressive taxes are not prohibited by the Constitution
1. The Constitution does not really prohibit the imposition of indirect
taxes which, like the VAT, are regressive. What it simply provides
is that Congress shall "evolve a progressive system of taxation."
The constitutional provision has been interpreted to mean simply
that "direct taxes are . . . to be preferred [and] as much as
possible, indirect taxes should be minimized." (E. FERNANDO, THE
CONSTITUTION OF THE PHILIPPINES 221 Second ed. [1977])
Indeed, the mandate to Congress is not to prescribe, but to
evolve, a progressive tax system. Otherwise, sales taxes, which
perhaps are the oldest form of indirect taxes, would have been
prohibited with the proclamation of Art. VIII, § 17 (1) of the 1973
Constitution from which the present Art. VI, § 28 (1) was taken.
Sales taxes are also regressive. Resort to indirect taxes
should be minimized but not avoided entirely because it is
difficult, if not impossible, to avoid them by imposing such taxes
according to the taxpayers' ability to pay. In the case of the VAT,
the law minimizes the regressive effects of this imposition by
providing for zero rating of certain transactions (R.A. No. 7716, §
 3, amending § 102 (b) of the NIRC), while granting exemptions to
other transactions. (R.A. No. 7716, § 4, amending § 103 of the
NIRC)||| (Tolentino v. Secretary of Finance, G.R. Nos. 115455,
115525, 115543, 115544, 115754, 115781, 115852, 115873 &
115931 (Resolution), [October 30, 1995], 319 PHIL 755-803)
3. Uniformity and equitability of taxation
1. Meaning of Uniformity and Equitability
1. Uniformity/Equality - Equality and uniformity of taxation means
that all taxable articles of the same class be taxed at the same
rate. (Tolentino v. Secretary of Finance)
2. Equitability - It means taxes must be proportionate to one’s
ability to pay.
1. A tax may be uniform but still inequitable.
2. As example, all persons below P250,000 annual income have
an income tax rate of 50%. The provision is uniform because
all persons below P250,000 annual income are taxed at the
same rate. However, it is inequitable because the tax rate is
not proportionate to their ability to pay.
2. VAT is uniform and equitable
1. It is uniform. The sales tax adopted is applied similarly on all
goods and services sold to the public, which are not exempt, at
the constant rate of 0% or 10%.
2. It is also equitable. It is imposed only on sales of goods or
services by persons engaged in business with an aggregate
gross annual sales exceeding P200,000.00. Small corner sari-
sari stores are consequently exempt from its application.
Likewise exempt from the tax are sales of farm and marine
products, so that the costs of basic food and other necessities,
spared as they are from the incidence of the VAT, are expected to
be relatively lower and within the reach of the general public.
(Tolentino v. Secretary of Finance)
4. Delegated authority of the President to impose Tariff rates, import, and
export quotas, tonnage and wharfage dues (Flexible Tariff Clause)
5. Origin of revenue and tariff bills and appropriations
6. Votes required to grant tax Exemptions
1. (4) No law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress. (Art. VI,
Section 28(4), Constitution)
7. Tax exemptions to Religious, charitable, and educational entities (CCP-
CMC); (ADE-Used-RCE)
1. (3) Charitable institutions, Churches and parsonages or Convents
appurtenant thereto, mosques, non-profit Cemeteries, and
2. All lands, buildings, and improvements, Actually, Directly, and
2.
Exclusively used for Religious, Charitable, or Educational purposes
shall be exempt from taxation. (Art. VI, Section 28(3), Constitution)
1. Test of Exemption: it is the USE of the property, and not the
ownership of the same. (Abra Valley College v Aquino, 1988) Not
who owns, not who uses. It is the USE ITSELF.
2. NOTE: The income of the real property is not important. The
owner of the real property is not important. The user is not
important. What is only important is how it is used.
3. If real property is also used for one or more commercial purposes,
it is not “exclusively” used for the exempted purposes under the
Constitution. (Lung Center v Quezon City, 2000)
1. DIMAAMPAO: The rule enunciated in Herrera v Quezon City,
1961, that the exemption extends to facilities which are
incidental to and reasonably necessary to accomplish the
RCE purposes is ABANDONED.
2. DLSU v CIR, 2016: Those facilities incidental to and
reasonably necessary to accomplish the RCE purposes are
still EXEMPT from real property tax.
4. As illustrations:
1. XYZ Corporation leased its building to the INC Church. The
latter used it for their weekly religious worship. The Local
Government, however, assessed XYZ Corporation for RPT. Is
the property exempt from RPT? Yes, because the property is
ADE used for religious purposes.
2. The INC Church leased its vacant building to XYZ Mining Co.
The latter used the same as office of its employees. The Local
Government assessed the INC Church for RPT. Is the property
exempt from RPT? No, because the property is NOT ADE used
for religious purposes. It was used for commercial purposes.
3. The INC Church leased its vacant building to AAA University, a
nonstock nonprofit institution. The latter used the same as
classrooms for its K-12 Program. The Local Government
assessed the INC Church for RPT. Further, the BIR assessed
the INC Church for lease income. Lastly, the BIR assessed
AAA University for its income from the K-12 Program. The
income from the k-12 program was used to invest in treasury
bonds.
1. Is the INC Church exempt from RPT? Yes, because the
property is ADE used for educational purposes.
2. Is the INC Church exempt from income tax? No. Under
Section 30, nonstock nonprofit corporations organized
exclusively for religious purposes, where no part of its
income inure to its members, shall not be taxed for
 2.

income received as such nonstock nonprofit corporation.

However, under the last paragraph of Section 30, income
derived by it from activity conducted for profit is taxable
regardless of the disposition of the same. Here, the INC
Church conducted an activity for profit, which is the
leasing of its property to AAA University. Hence, it shall be
subject to income tax.
3. Is the AAA University liable for RPT? No, because RPT is
paid by the owner, and not the lessee of the real property.
4. Is the AAA University exempt from income tax? Yes,
because Article XIV provides that all revenues and assets
of nonstock nonprofit educational institutions ADE used
for educational purposes are exempt from income tax.
4. FEU campus.
1. Is the campus subject to RPT? No. Art. VI
2. Subject to income tax? Yes, because not included in Art.
XIV
3. Is the machine subject to RPT? Yes, because not covered
by Art. VI because improvements do not include
machinery. Further, the assests under Art. XIV must be
owned by non-stock non-profit educational institutional.
5. WHEN ANSWERING QUESTIONS ABOUT EDUCATIONAL
INSTITUTION
1. First check if the school is stock profit or nonstock non
profit
2. If nonstock profit, limit yourself to Art. XIV
3. if stock profit, limit yourself to Art. VI
1. This means nonstock profit may be exempt from taxes
on revenues and assets
2. While stock profit may only be exempt for RPT on
land, building, improvement. it does not include
machinery.
1. This is the only time when you must check if ADE
used.
6. WHEN ANSWERING QUESTIONS ABOUT CHARITABLE/
RELIGIOUS INSTITUTION
1. limit yourself to Art. VI
8. President’s Veto power
9. Non-impairment of the SC’s jurisdiction
10. Non-Appropriation or use of public money for religious purposes;
11. Non-taxability of non-stock, non-profit Educational institutions (All-RA-
NNE-ADE-Used-E)
1. (3) All revenues and assets of Non-stock, Non-profit Educational
1.
institutions Used Actually, Directly, and Exclusively for Educational
purposes shall be exempt from taxes and duties. Upon the dissolution
or cessation of the corporate existence of such institutions, their
assets shall be disposed of in the manner provided by law. (Art. XIV,
Section 4(3), Constitution)
1. Here, for “revenues,” we do not care about how the revenue was
derived. It can even be derived from business such as retailing of
school supplies. As long as the income/revenue of the nonstock,
nonprofit educational institution was ADE used for
EDUCATIONAL purposes, it is exempt from tax.
2. Further, for “assets,” this covers ALL kinds of properties. As long
as it is ADE used by the nonstock nonprofit educational
institution for EDUCATIONAL purposes, it is exempt from real
property tax.
1. “Revenues” - this covers income tax, output VAT, percentage
tax, excise tax, and local government tax
2. “Assets” - this covers excise tax, and real property tax.
3. What should be applied between Art. XIV and Art. VI?
1. If the taxpayer is non-stock non-profit educational institution,
apply Art. XIV, because it is more powerful. For other
institutions, apply Art. VI.
4. What properties are covered in Art. XIV and Art. VI?
1. The provision in Article XIV states “assets.” Hence, this covers
all kinds of properties.
2. In Article VI, it only covers “lands, buildings, and
improvements.”
1. As example, “improvements” do not cover machines, but
“assets” cover machines.
2. Hence, a non-stock non-profit educational institution is
exempt from real property tax because the exemption
under Article XIV Sec. 4(3) applies. On the other hand, a
machine ADE used for religious purposes is not exempt
from real property tax because it is not an “improvement."
5. Last paragraph of Section 30 of NIRC is ineffective as to non-
stock non-profit educational institutions
1. The Court then significantly laid down the requisites for
availing the tax exemption under Article XIV, Section 4 (3),
namely: (1) the taxpayer falls under the classification non-
stock, non-profit educational institution; and (2) the
income it seeks to be exempted from taxation is used
actually, directly and exclusively for educational
purposes. (CIR v DLSU, 2016) The tax-exemption
constitutionally-granted to non-stock, non-profit educational
 institutions, is not subject to limitations imposed by law.
Hence, the last paragraph of Section 30 of NIRC is ineffective
against non-stock, non-profit educational institutions. (CIR v
DLSU, 2016)
1. Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character of
the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such
income shall be subject to tax imposed under this Code.
(Section 30, NIRC)
6. Taxability of DONOR in donation to Non-stock Non-profit
educational institutions
1. The donors of a non-stock non-profit educational institutions
are exempt from donor’s tax, PROVIDED that not more than
30% of the same shall be used for ADMINISTRATIVE
PURPOSES. (Section 101(A)(2), of NIRC)
2. NOTE: The Constitution is irrelevant in this case. The
Constitution provides an exemption in favor of the educational
institution itself. In the NIRC, the donor of the educational
institution is given the exemption.
7. Proprietary (Stock) Non-Profit Educational Institutions (and
Propriety Non-Profit Hospitals); Preferential Income Tax rate;
Predominance Rule
1. Proprietary educational institutions and hospitals which are
nonprofit shall pay a tax of ten percent (10%) on their taxable
income except those covered by Subsection (D) hereof:
Provided, That if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the
total gross income derived by such educational institutions or
hospitals from all sources, the tax prescribed in Subsection
(A) hereof shall be imposed on the entire taxable income.
(Sec. 27(B), NIRC)
2. NOTE: As a rule, they are ONLY subject to 10% income tax on
their income. The exceptions are: 1) Section 27(D) on final
withholding taxes on certain incomes, and 2) Section 27(A) if
the gross income on unrelated trade exceeds 50% of the total
gross income.
8. Proprietary Profit Educational Institutions
1. They are taxed like any other taxable corporations.
9. Taxability of DONOR in donations to Proprietary Educational
Institutions
1. Donations by donors to “Proprietary” educational institutions
 1.
are subject to donor’s tax because Section 101 of the NIRC
does not include in them in the exemption.
10. Government Educational Institutions (GOCCs)
1. They are exempt from:
1. Income tax (Section 30(i))
2. Real property tax (Art. VI, Section 28(3))
3. Donor’s tax (Section 101(A)(2)) - same treatment as non-
stock non-profit educational institutions.
1. NOTE: For them, the last paragraph of Section 30 is
applicable. Hence, income from activities conducted
for profit, regardless of the disposition of the same,
are subject to income tax.
2. NOTE: The inherent limitations of taxation do not
apply to government educational institutions because
they are not government instrumentalities. They are
GOCCs. Hence, the exemptions of these institutions
must be expressly stated in the Constitution and/or
the law.
12. LGU’s power to create its own sources of revenue
1. SECTION 5. Each local government unit shall have the power to create
its own sources of revenues and to levy taxes, fees, and charges
subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to the local
government. (Article X, Section 5, Constitution)
1. The LGUs are expressly empowered by the Constitution to impose
taxes. However, the Congress can limit such power.

CONSTRUCTION AND INTERPRETATION OF TAX LAWS, RULES AND REGUL A

TIONS
1. Tax laws are prospective in operation, unless the language of the statue
clearly provides otherwise
2. When there is doubt, taxes, being burdensome, must not be imposed. It
cannot also extend beyond what the tax statute clearly expresses or declares.
In other words, a statue will not be construed as imposing a tax unless it does
so CLEARLY, EXPRESSLY, and UNAMBIGUOUSLY.
3. Further, taxes cannot be imposed by implication.
4. In short, tax laws shall be construed in favor of the taxpayer, and against the
State.
5. However, construction of statute by predecessors are not binding on the
successors. Hence, the Secretary of Finance has authority to revoke the
previous rulings of his predecessor in office. (Hilado v CIR, 1956)
1. NOTE: take note that such revocation will not have retroactive effect if it
 1.
will be prejudicial against taxpayers. (Sec. 246, NIRC) It will only have
prospective application.
6. NOTE: TRAIN Law took effect on January 1, 2018.