Taxation Law Pre-Bar Notes 2015-A

GENERAL PRINCIPLES OF TAXATION
Taxation is the power by which the sovereign, through its law-making body, raises revenue to
defray the necessary expenses of the government. It is merely a way of apportioning the costs of
government among those who in some measure are privileged to enjoy its benefits and must bear its
burdens.
Taxation is the inherent power of the sovereign, exercised through the legislature, to impose
burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry
out the legitimate objects of government.
It is also defined as the act of levying a tax, i.e. the process or means by which the sovereign,
through its law-making body, raises income to defray the necessary expenses of government. It is a
method of apportioning the cost of government among those who, in some measure, are privileged to
enjoy its benefits and must therefore bear its burdens.
Essential elements of a tax

1. It is an enforced contribution.
2. It is generally payable in money.
3. It is proportionate in character.
4. It is levied on persons, property, or the exercise of a right or privilege.
5. It is levied by the State which has jurisdiction over the subject or object of taxation.
6. It is levied by the law-making body of the State.
7. It is levied for public purpose or purposes.
PURPOSES OF TAXATION:
REVENUE OR FISCAL
The primary purpose of taxation on the part of the government is to provide funds or property with
which to promote the general welfare and the protection of its citizens and to enable it to finance its
multifarious activities.
SUMPTUARY PURPOSE OF TAXATION

More popularly known as the non-revenue or regulatory purpose of taxation. While the primary
purpose of taxation is to raise revenue for the support of the government, taxation is often employed
as a devise for regulation by means of which certain effects or conditions envisioned by the
government may be achieved.
For example, government may provide tax incentives to protect and promote new and pioneer
industries. The imposition of special duties, like dumping duty, marking duty, retaliatory duty, and
countervailing duty, promote the non-revenue or sumptuary purpose of taxation.
Regulation - Taxation has a regulatory purpose as in the case of taxes levied on excises or privileges
like those imposed on tobacco and alcoholic products, or amusement places like night clubs, cabarets,
cockpits, etc.
(Do not reproduce without permission of Atty. Noel Siosan, Jr.)
Promotion of General Welfare - Taxation can be used as an implement of police power in order to
promote the general welfare of the people.
Lutz v. Araneta (98 Phil 148) - The SC upheld the validity of the Sugar Adjustment Act, which
imposed a tax on milled sugar since the purpose of the law was to strengthen an industry that is
undeniably vital to the economy - the sugar industry.
Osmea v. Orbos (G.R. No. 99886, March 31, 1993) - While the funds collected under the
OPSF are referred to as taxes, they are extracted in the exercise of the police power of the
State. From such fund, amounts are drawn to reimburse oil companies when appropriate
situations arise for increases in, as well as under-recovery of, the cost of crude oil importation.
Reduction of Social inequity - This is made possible through the progressive system of taxation
where the objective is to prevent the undue concentration of wealth in the hands of few individuals.
Progressivity is keystoned on the principle that those who are able to pay should shoulder the bigger
portion of the tax burden. Examples - income tax, donor's tax and estate tax.
Encourage Economic Growth - The law, at times, grants incentives or exemptions in order to
encourage investments and thereby promote the country's economic growth.
Protectionism - It protects local industries from foreign competition i.e. protective tariffs and customs
duties.
Southern Cross Cement Corp., v. Secretary of Finance et.al. (G.R. No. 158540,
July 8, 2004)
- The Safeguard Measures Act (SMA [RA No. 8800]) allows the imposition of emergency
measures, including tariffs, to protect domestic industries and producers from increased imports
which inflict or could inflict serious injury on them. The power to impose general safeguard
measure is vested with the DTI Secretary upon compliance with two conditions, viz:
1. there must be a positive final determination by the Tariff Commission that a product
is being imported into the country in increased quantities, as to be substantial cause
of serious injury or threat to the domestic injury, and;
2. the Secretary must establish that the application of such safeguard measures is in
the public interest.
Note: in the case of imported agricultural products, it is the Secretary of Agriculture who may
impose the protective tariff.
PAL v. Edu, 164 SCRA 320

The legislative intent and purpose behind the law requiring owners of vehicles to pay for their
registration is mainly to raise funds for the construction and maintenance of highways and, to a much
lesser degree, pay for the operating expenses of the administering agency. It is possible for an
exaction to be both a tax and a regulation. License fees are charges, looked to as a source of revenue
as well as a means of regulation. The fees may properly be regarded as taxes even though 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.
Tio v. Videogram, 151 SCRA 208

PD 1987 which created the Videogram Regulatory Board also imposed a 30% tax on the gross
receipts payable to the local government. SC upheld the validity of the law ruling that the tax imposed
is not only a regulatory, but also a revenue, measure prompted by the realization that earnings of
videogram establishments of around P600 million annually have not been subjected to tax, thereby
depriving the government of an additional source of revenue. It is a user tax imposed on retailers for
every video they make available for public viewing. The 30% tax also served a regulatory purpose: to
answer the need for regulating the video industry, particularly the rampant film piracy, the flagrant
violation of intellectual property rights, and the proliferation of pornographic video tapes.
Caltex v. Commissioner, 208 SCRA 755

Taxation is no longer a measure merely to raise revenue to support the existence of government.
Taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization
of a threatened industry which is affected with public interest as to be within the police power of the
State. The oil industry is greatly imbued with public interest as it vitally affects the general welfare.
THEORY AND BASIS OF TAXATION:

1. N ecessity theory - the existence of the government is a necessity; that it cannot continue
without the means to pay its expenses; and that for those means it has the right to compel all citizens
and property within its limits to contribute (51 Am. Jur. 42)

Lifeblood or necessity theory

The life blood theory constitutes the theory of taxation, which provides that the existence of
government is a necessity; that government cannot continue without means to pay its expenses; and
that for these means it has a right to compel its citizens and property within its limits to contribute.
In Commissioner v. Algue , the Supreme Court said that taxes are the lifeblood of the government
and should be collected without unnecessary hindrance. They are what we pay for a civilized
society. Without taxes, the government would be paralyzed for lack of motive power to activate and
operate it. 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.
2. B enefits-protection theory - the State demands and receives taxes from the subjects of
taxation within its jurisdiction so that it may be enable to carry its mandate into effect and perform the
functions of government, and the citizens pay from his property the portion demanded in order that he
may, by means thereof, be secured in the enjoyment of the benefits of organized society. (51 Am. Jur.
43)
Benefit-received principle
This principle serves as the basis of taxation and is founded on the reciprocal duties of protection and
support between the State and its inhabitants. Also called symbiotic relation between the State
and its citizens.
In return for his contribution, the taxpayer receives the general advantages and protection which the
government affords the taxpayer and his property. One is compensation or consideration for the
other; protection for support and support for protection. However, it does not mean that only those
who are able to and do pay taxes can enjoy the privileges and protection given to a citizen by the
government.
In fact, from the contribution received, the government renders no special or commensurate benefit to
any particular property or person. The only benefit to which the taxpayer is entitled is that derived
from the enjoyment of the privileges of living in an organized society established and safeguarded by
the devotion of taxes to public purpose. The government promises nothing to the person taxed
beyond what may be anticipated from an administration of the laws for the general good. [ Lorenzo v.
Posadas, G.R. No. L-43082 (64 PHIL 353) June 18, 1937]
Taxes are essential to the existence of the government. The obligation to pay taxes rests not upon the
privileges enjoyed by or the protection afforded to the citizen by the government, but upon the
necessity of money for the support of the State. For this reason, no one is allowed to object to or
resist payment of taxes solely because no personal benefit to him can be pointed out as arising from
the tax. [ Lorenzo v. Posadas, G.R. No. L-43082 (64 PHIL 353) June 18, 1937]
THE POW ER TO TAX INVOLVES THE POW ER TO DESTROY
Chief Justice Marshall declared that the power to tax is also called the power to destroy.
Therefore, it should be exercised with caution to minimize injury to the proprietary rights of the
taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kills the hen that lays
the golden egg. And in order to maintain the general publics trust and confidence in the government,
this power must be used justly and not treacherously. [Chief Justice Marshall in McCulloch v.
Maryland , reiterated in Roxas v. CTA , 23 SCRA 276]
Justice Holmes seemingly contradicted the Marshallian view by declaring in Panhandle Oil
Company v. Mississippi that the power to tax is not the power to destroy while this court sits.
Domondons reconciliation of M arshall and Holmes

The imposition of a valid tax could not be judicially restrained merely because it would prejudice
taxpayers property.
An illegal tax could be judicially declared invalid and should not work to prejudice a taxpayers
property.
Marshalls view refers to a valid tax while Holmes view refers to an invalid tax.
NATURE OF TAXING POWER

Two-fold power. The nature of the states power to tax is two-fold. It is both inherent and legislative
power. It is inherent in nature being an attribute of sovereignty. This is so because without the taxes
the states existence would be affronted. It is legislative in nature because it is subject to
constitutional limitations.
Taxation is an inherent attribute of sovereignty. It is a power that is purely legislative. Essentially, this
means that in the legislature primarily lies the discretion to determine the
nature (kind);
object (purpose);
extent (rate);
coverage (subjects); and
situs (place)
of taxation. It has the authority to prescribe a certain tax at a specific rate for a particular public
purpose on persons or things within its jurisdiction. In other words, the legislature wields the power to
define what tax shall be imposed, why it should be imposed, how much shall be imposed, against
whom (or what) it shall be imposed and where it shall be imposed. (CREBA vs. Executive Secretary
Romulo, GR No. 160756, March 9, 2010)
As a general rule, the power to tax is plenary and unlimited in its rage, acknowledging in its very
nature no limits, so that the principal check against its abuse is to be found only in the responsibility of
the legislature (which imposes the tax) to its constituency who are to pay it. Nevertheless, it is
circumscribed by constitutional limitation. At the same time, like any other statute, tax legislation
carries a presumption of constitutionality. (Ibid.)
TAXATION distinguished from POLICE POWER and EMINENT DOMAIN

TAXATION
POLICE POWER
EMINENT DOMAIN
DEFINITION
Power of the State to

demand enforced
contributions for public
purposes
Power of the State to

enact such laws in
relation to persons and
property as may promote
public health, safety,
morals, and the general
welfare of the public
Power of the State to take

private property for public
use upon paying to the
owner a just compensation
to be ascertained according
to law
Authority
Exercising the
Power
Only the government or

its political subdivisions
Only the government or

its political subdivisions
May be granted to public

service companies of public
utilities
Enforced contribution is
demanded for the support
of the government
Use of property is
regulated for the purpose
of promoting the general
welfare
Property is taken for public

use
Persons
Affected
Operates upon a
community or class of
individuals
Operates upon a
community or class of
individuals (usually)
Operates on an individual
as the owner of a particular
property
EFFECT
Money contributed in the

concept of taxes
becomes part of public
funds
No transfer of title, at
most, there is restraint on
injurious use of the
property
Transfer of the right to

property whether it be
ownership or a lesser right
BENEFITS
RECEIVED
Assumed that the

individual receives the
equivalent of the tax in
the form of protection,
and benefits received
from the government as
such
Person affected receives

no direct and immediate
benefit but only such as
may arise from the
maintenance of a healthy
economic standard of
society
Person affected receives

the market value of the
property taken from him
AMOUNT OF
IMPOSITION
Generally no limit on the

amount of tax that may
be imposed
Amount imposed should

not be more than that
sufficient to cover the
cost of the license and
the necessary expenses
of regulation
No amount imposed but

rather the owner is paid the
market value of the property
taken
Relationship to
the
Constitution
Subject to certain
Constitutional limitations
Relatively free from

and is superior to the
impairment provisions
Subject to certain
(e.g. inferior to impairment
of contracts clause)
PURPOSE
1. Police Power
The main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue
generation. The "lawful subjects" and "lawful means" tests are used to determine the validity of a law
enacted under the police power. The power of taxation, on the other hand, is circumscribed by
inherent and constitutional limitations. (PLANTERS PRODUCTS, INC. v. FERTIPHIL
CORPORATION, G.R. No. 166006, March 14, 2008)
The motivation behind many taxation measures is the implementation of police power goals.
Progressive income taxes alleviate the margin between rich and poor; the so-called "sin taxes" on
alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of these
potentially harmful products. (SOUTHERN CROSS CEMENT CORPORATION v. CEMENT
MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540, August
3, 2005)
Taxation is distinguishable from police power as to the means employed to implement these public
good goals. Those doctrines that are unique to taxation arose from peculiar considerations such as
those especially punitive effects of taxation, and the belief that taxes are the lifeblood of the state yet
at the same time, it has been recognized that taxation may be made the implement of the state's
police
power.
(SOUTHERN
CROSS
CEMENT
CORPORATION
v.
CEMENT
3, 2005)
Unlike ordinary revenue laws, R.A. 6260 and P.D. 276 did not raise money to boost the government's
general funds but to provide means for the rehabilitation and stabilization of a threatened industry, the
coconut industry, which is so affected with public interest as to be within the police power of the State.
The subject laws are akin to the sugar liens imposed by Sec. 7(b) of P.D. 388, and the oil price
stabilization funds under P.D. 1956, as amended by E.O. 137. (PAMBANSANG KOALISYON NG
MGA SAMAHANG MAGSASAKA AT MANGGAGAW A SA NIYUGAN v. EXECUTIVE
SECRETARY G.R. Nos. 147036-37 April 10, 2012)
If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a
tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does not make
the imposition a tax. (GEROCHI v. DEPARTMENT OF ENERGY, 527 SCRA 696 (2007)
While it is true that the power of taxation can be used as an implement of police power, the primary
purpose of the levy is revenue generation. 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. (PLANTERS
PRODUCTS, INC. v. FERTIPHIL CORPORATION, G.R. No. 166006, March 14, 2008)
It has been the settled law that municipal license fees could be classified into those imposed for
regulating occupations or regular enterprises, for the regulation or restriction of non-useful occupations
or enterprises and for revenue purposes only. Licenses for non-useful occupations are also incidental
to the police power and the right to exact a fee may be implied from the power to license and regulate,
but in fixing the amount of the license fees the municipal corporations are allowed a much wider
discretion in this class of cases. (ERMITA-MALATE HOTEL AND MOTEL OPERATORS
ASSOCIATION, INC., HOTEL DEL MAR INC. and GO CHIU v. THE HONORABLE CITY
MAYOR OF MANILA, G.R. No. L-24693, July 31, 1967)
2. Power of Eminent Domain

Be it stressed that the privilege enjoyed by senior citizens does not come directly from the State, but
rather from the private establishments concerned. Accordingly, the tax credit benefit granted to these
establishments can be deemed as their just compensation for private property taken by the State for
public use. (COMMISSIONER OF INTERNAL REVENUE v. CENTRAL LUZON DRUG
CORPORATION G.R. No. 159647 April 15, 2005)
Besides, the taxation power can also be used as an implement for the exercise of the power of
eminent domain. Tax measures are but "enforced contributions exacted on pain of penal sanctions"
and "clearly imposed for a public purpose." In recent years, the power to tax has indeed become a
most effective tool to realize social justice, public welfare, and the equitable distribution of wealth.
(COMMISSIONER
OF
INTERNAL
REVENUE
v.
CENTRAL
LUZON
DRUG
CORPORATION G.R. No. 159647 April 15, 2005)
TAXATION AS AN IMPLEMENT OF POLICE POWER

In Walter Lutz vs. J. Antonio Araneta, 98 Phil. 148 , the SC upheld the validity of the tax law
increasing the existing tax on the manufacture of sugar. The protection and promotion of the sugar
industry is a matter of public concern; the legislature may determine within reasonable bounds what is
necessary for its protection and expedient for tis promotion. If objective and methods alike are
constitutionally valid, there is no reason why the state may not levy taxes to raise funds for their
prosecution and attainment. Taxation may be made the implement of the States police power.
In Tio vs. Videogram Regulatory Board, 151 SCRA 208 , the levy of a 30% tax under PD
1987, was imposed primarily for answering the need for regulating the video industry, particularly
because of the rampant film piracy, the flagrant violation of intellectual property rights, and the
proliferation of pornographic videotapes, and therefore VALID. While the direct beneficiaries of the
said decree is the movie industry, the citizens are held to be its indirect beneficiaries.
Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the
government; taxes may be levied with a regulatory purpose to provide means for the rehabilitation and
stabilization of a threatened industry which is affected with public interest s to be within the police
power of the state. ( CALTEX PHILIPPINES, INC. v. COMMISSION ON AUDIT G.R. NO.
92585, MAY 8, 1992)
TAXATION AS AN IMPLEMENT OF EMINENT DOMAIN

In CIR vs. Central Luzon Drug Corp. (GR No. 159647, April 15, 2005), the SC held that as
a result of the 20% discount imposed by RA 7432, respondent becomes entitled to a just
compensation. The taxation power can also be used as an implement for the exercise of the power of
eminent domain. Tax measures are but enforced contributions exacted on pain of penal
sanctions and clearly imposed for a public purpose. In recent years, the power to tax has
indeed become a most effective tool to realize social justice, public welfare, and the equitable
distribution of wealth.
While it is a declared commitment under Section 1 of RA 7432, social justice cannot be invoked to
trample on the rights of property owners who under our Constitution and laws are also entitled to
protection. The social justice consecrated in our constitution is not intended to take away rights from a
person and give them to another who is not entitle thereto. For this reason, a just compensation for
income that is taken away from respondent becomes necessary. It is in tax credit that our legislators
find support to realize social justice, and no administrative body can alter that fact.
It is noteworthy, however, that RA 9257 specifically provides that the senior citizens
discount should now be treated as a deductible expense. In other words, if previously
( CIR vs. Central Luzon Drug Corp. case ) the treatment is a tax deduction by way of
tax credit, with the advent of RA 9257, the said discount is now considered an allowed
deduction, that is, to be deducted from gross income.
CONSTITUTIONAL PROVISIONS ON TAXATION

The following are provisions of the 1987 Constitution concerning taxation:
Article VI
Section 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall originate exclusively in the House of Representatives,
but the Senate may propose or concur with amendments.
Section 28. (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve
a progressive system of taxation.
(2) The Congress may, by law, authorize the President to fix within specified limits, and
subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts within the framework of the national
development program of the Government.
(3) Charitable institutions, churches and parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes shall be exempt from taxation.
(4) No law granting any tax exemption shall be passed without the concurrence of a majority
of all the Members of the Congress.
Section 29. (3) All money collected on any tax levied for a special purpose shall be treated as
a special fund and paid out for such purpose only. If the purpose for which a special fund was created
has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the
Government.
Article X
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 governments.
ASPECTS OF TAXATION
1. Levy the power of taxation is vested on and exercised by the legislative department. The
determination of what should be taxed, when, how, or where lies in the legislative department.
The power to tax is primarily vested in the Congress; however, it may exercised by local legislative
bodies pursuant to direct authority conferred by Sec. 5, Art. X of the Constitution. Under the said
provision, the exercise of the power may be subject to such guidelines and limitations as the Congress
may provide which, however, must be consistent with the basic policy of local autonomy. (MACTAN
CEBU INTERNATIONAL AIRPORT AUTHORITY VS. MARCOS, 261 SCRA 667)
2. Assessment and Collection exercised by the Executive Department. The agency in charge
of the collection of internal revenue taxes is the BIR. For the most part of the lifeblood of the nations,
the duty to collect rests with the BIR.
Taxes may be classified into two as to the manner of collection:

A. Internal revenue taxes imposed under the NIRC
1. Income tax
2. Transfer taxes
a. Estate Tax
b. Donors Tax
3. Percentage taxes
a. Value Added Tax
b. Other Percentage Taxes
4. Excise taxes
10
5. Documentary stamp tax

B. Local/Municipal Taxes
C. Tariff and Customs Duties
D. Taxes/Tax incentives under special laws
3. Payment and/or Exercise of Remedies compliance and/or resistance by the taxpayer. The
exercise of remedy is initially either through the Executive or Legislative Department and ultimately
through the Judiciary.
THREE BASIC PRINCIPLES OF A SOUND TAX SYSTEM

1. Fiscal Adequacy sources of revenue must be adequate to meet expenditures. Violation of this
principle will make the law unsound but still valid and not unconstitutional.
2. Theoretical Justice Taxes must be based on the taxpayers ability to pay and proportional to the
relative value of the property. Violation of this principle will make the law unsound,
invalid and unconstitutional.
3. Administrative Feasibility The taxes should be capable of being effectively enforced. Violation of
this principle will make the law unsound but still valid and not unconstitutional.
TAXES NOT SUBJECT TO COMPENSATION

There is a material and fundamental distinction between a tax and a debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity.
A debt is a sum of money due upon contract, express or implied, or one which is evidenced by
judgment. Taxes are imposts levied by the Government for its support or some special purpose,
which the Government has recognized. However, tax in a broad sense may be a debt, so that interest
on estate and inheritance taxes may be deducted as interest on indebtedness.
General rule: A tax delinquency cannot be extinguished by legal compensation. This is so because
the government and the tax delinquent are not mutually creditors and debtors. Neither is a tax
obligation an ordinary debt. Moreover, the collection of a tax cannot await the results of a lawsuit
against the government. Finally, taxes are not in the nature of contracts but grow out of a duty to, and
are the positive acts of the, government to the making and enforcing of which the personal consent of
the taxpayer is not required. [Francia v. IAC , 162 SCRA 754 and Republic v. Mambulao
Lumber , 4 SCRA 622]
Exception: SC allowed set off in the case of Domingo v. Garlitos [8 SCRA 443] re. claim for
payment of unpaid services of a government employee vis-a-vis the estate taxes due from his estate.
The fact that the court having jurisdiction of the estate had found that the claim of the estate against
the government has been appropriated for the purpose by a corresponding law shows that both the
claim of the government for inheritance taxes and the claim of the intestate for services rendered have
11

already become overdue and demandable as well as fully liquidated. Compensation therefore takes
place by operation of law.
Philex Mining Corporation v. Commissioner, 294 SCRA 687 (1998)

Philex Mining Corporation wants to set off its claims for VAT input credit/refund for the excise taxes
due from it. The Supreme Court disallowed such set off or compensation.
Taxes cannot be subject to compensation for the simple reason that the government and the taxpayer
are not creditors and debtors of each other. There is a material distinction between a tax and a debt.
Debts are due to the government in its corporate capacity, while taxes are due to the government in its
sovereign capacity.
LIMITS OF TAXATION
Inherent limitation
Constitutional limitation
INHERENT LIMITATIONS
1.
2.
3.
4.
5.
6.
Levied for public purpose

Non-delegability of taxing power
Territoriality or situs of taxation
Tax exemption of government entities
Recognition of international comity
Prohibition on double taxation (some authorities do not consider this as inherent limitation)
1. Public Purpose
Tests to determine public purpose, broad interpretation. The proceeds of the tax will directly promote
the welfare of the community in equal measure. Public purpose is now given the broadest
interpretation so as to include even indirect public advantage or benefit. The mere fact that the tax will
be directly enjoyed by a private individual does not make it invalid so long as some link to the public
welfare is established.
Examples of Public Purpose:
1. Tax on sugar for rehabilitation and upliftment of the sugar industry. (Lutz vs. Araneta);
2. Semi-postal stamp on mail matter to raise funds for the eradication of tuberculosis. (Gomez
vs. Palomar);
3. Pensions paid to war veterans because they will encourage emulation of their services by
others assured that their patriotism will be acknowledged and rewarded;
4. Unemployment relief, support for the handicapped and care of the aged;
5. Scholarships for poor but deserving students;
PRESUMPTION OF PUBLIC PURPOSE: Where the purpose of the tax is not specifically stated,
there is a presumption that it is created for a public purpose. (Mendoza Santos & Co. vs. Municipality
of Meycauayan, 94 Phil 1047)
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2. Non-delegability of taxing power

GENERAL RULE
The power of taxation is exclusively legislative. The power of taxation, being purely legislative,
Congress cannot delegate such power. Note, however, that the power of the legislature is itself a
delegated power given by the people.
EXCEPTIONS (Delegable Powers)
(a) Delegation to the President (Tariff Powers)
Congress may authorize the President to fix within the specified limits and subject to such limitations
and restrictions as it may impose:
1. tariff rates;
2. import and export quotas;
3. tonnage and wharfage dues; and
4. other duties or imposts within the framework of the national development program
of the Government.
The reason for this delegation is the necessity, not to say expediency, of giving the chief executive the
authority to act immediately on certain matters affecting the national economy lest delay result in
hardship to the people. It is recognized that the legislative process is much too cumbersome for the
speedy solution of some economic problems, especially those relating to foreign trade.
When Congress tasks the President or his/her alter egos to impose safeguard measures under the
delineated conditions, the President or the alter egos may be properly deemed as agents of Congress
to perform an act that inherently belongs as a matter of right to the legislature. It is basic agency law
that the agent may not act beyond the specifically delegated powers or disregard the restrictions
imposed by the principal. (SOUTHERN CROSS CEMENT CORPORATION v. CEMENT
3, 2005)
Flexible tariff clause

In the interest of national economy, general welfare and/or national security, the President, upon
recommendation of the National Economic and Development Authority, is empowered:
1. To increase, reduce, or remove existing protective rates of import duty, provided that the
increase should not be higher than 100% ad valorem;
2. To establish import quota or to ban imports of any commodity; and
3. To impose additional duty on all imports not exceeding 10% ad valorem.
(b) Delegation to local governments (Local Taxing power)

The theory of non-delegation of legislative power does not apply in matters of local concern. 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.
13
Section 5, Article X of the Constitution does not change the doctrine that municipal corporations do not
possess inherent powers of taxation; what it does is to confer municipal corporations a general power
to levy taxes and otherwise create sources of revenue and they no longer have to wait for a statutory
grant of these powers and the power of the legislative authority relative to the fiscal powers of local
governments has been reduced to the authority to impose limitations on municipal powers. The
important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against
municipal corporations; henceforth, in interpreting statutory provisions on municipal fiscal powers,
doubts will be resolved in favor of municipal corporations. (QUEZON CITY, et al. v. ABS-CBN
BROADCASTING CORPORATION, G.R. No. 162015, March 6, 2006)
(c) Delegation to administrative agencies (Administrative Matters)

Valuation of property pursuant to fixed rules; equalization of assessment by a central body; collection
of taxes.
Clearly, the legislature may delegate to executive officers or bodies the power to determine certain
facts or conditions, or the happening of contingencies, on which the operation of a statute is, by its
terms, made to depend, but the legislature must prescribe sufficient standards, policies or limitations
on their authority. While the power to tax cannot be delegated to executive agencies, details as to the
enforcement and administration of an exercise of such power may be left to them, including the power
to determine the existence of facts on which its operation depends. (ABAKADA GURO PARTY
LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S.
ALBANO v. THE HONORABLE EXECUTIVE SECRETARY G.R. No. 168056 September
1, 2005)
NON-DELEGABLE POW ERS:

1. Selection of property or transaction to be taxed;
2. Determination of purposes;
3. Rate of taxation;
4. Rules of taxation.
3. Territoriality or situs of taxation

The important factor therefore which determines the source of income of personal services is not the
residence of the payor, or the place where the contract for service is entered into, or the place of
payment, but the place where the services were actually rendered. (COMMISSIONER OF
INTERNAL REVENUE v. JULIANE BAIER-NICKEL, G.R. No. 153793, August 29, 2006)
From sources within the Philippines
The "sale of tickets" in the Philippines is the "activity" that produced the income and therefore BOAC
should pay income tax in the Philippines because it undertook an income producing activity in the
country. The tickets exchanged hands here and payments for fares were also made here in Philippine
currency; thus, the situs of the source of payments is the Philippines. (Commissioner of Internal
14
Revenue v. British Overseas Airways Corporation (BOAC) as cited in COMMISSIONER

OF INTERNAL REVENUE v. JULIANE BAIER-NICKEL, G.R. No. 153793, August 29,
2006)
For the source of income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activities within this country regardless of the absence of flight operations
within Philippine territory. Indeed, the sale of tickets is the very lifeblood of the airline business, the
generation of sales being the paramount objective. (COMMISSIONER OF INTERNAL
REVENUE v. JAPAN AIR LINES, INC., G.R. No. 60714, March 6, 1991)
Sale of personal property

It is not the place where the contract was perfected, but the place of delivery which determines the
taxable situs of the property sought to be taxed. In the cases of Soriano y Cia. v. Collector of Internal
Revenue, 51 O.G. 4548; Vegetable Oil Corporation v. Trinidad, 45 Phil. 822; and Earnshaw Docks
and Honolulu Iron Works vs. Collector of Internal Revenue, 54 Phil. 696, it has been ruled that for a sale
to be taxed in the Philippines it must be consummated there; thus indicating that the place of
consummation (associated with the delivery of the things subject matter of the contract) is the
accepted criterion in determining the situs of the contract for purposes of taxation, and not merely the
place of the perfection of the contract. (THE MUNICIPALITY OF JOSE PANGANIBAN, PROVINCE
OF CAMARINES NORTE, ETC. v. THE SHELL COMPANY OF THE PHILIPPINES, LTD., G.R. No.
L-18349, July 30, 1966)
Value-Added Tax (VAT)

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. (PHILIPPINE BRANCH), G.R. No. 152609, June
29, 2005)
Consumption is "the use of a thing in a way that thereby exhausts it," and applied to services, the term
means the performance or "successful completion of a contractual duty, usually resulting in the
performer's release from any past or future liability." The services rendered by respondent are
performed or successfully completed upon its sending to its foreign client the drafts and bills it has
gathered from service establishments here; thus, its services, having been performed in the Philippines,
are also consumed in the Philippines. (COMMISSIONER OF INTERNAL REVENUE v.
AMERICAN EXPRESS INTERNATIONAL, INC. (PHILIPPINE BRANCH), G.R. No.
152609, June 29, 2005)
4. Tax exemption of government entities

The property of the state, its agencies and subdivisions devoted to government uses and purposes is
generally exempt from taxation even in the absence of an express provision of law.
15
The constitution does not contain any provision granting tax exemption to the government. It is a
matter of public policy and no constitutional grant is necessary.
The following Government-owned or controlled Corporations, Agencies, or Instrumentalities are
EXEMPT from payment of income tax:
a. Government Service Insurance System (GSIS);
b. Social Security System (SSS);
c. Philippine Health Insurance Corporation (PhilHealth);
d. Philippine Charity Sweepstakes Office (PCSO); and
e. Local Water Districts (LWD)
Under RA 10026 (March 11, 2011), Local Water Districts were added as government-exempt
corporations. PAGCOR was previously exempt from payment of income tax, but said exemption was
withdrawn by RA 9337 (November 1, 2005).
PAGCOR subject to income tax, exempt from VAT. With the passage of Republic Act No.
(RA) 9337, the Philippine Amusement and Gaming Corporation (PAGCOR) has been excluded from
the list of government-owned and controlled corporations (GOCCs) that are exempt from tax under
Section 27(c) of the Tax Code; PAGCOR is now subject to corporate income tax.
According to the SC, RA 9337 does not contain any provision that subjects PAGCOR to VAT. Instead,
the SC finds support to the VAT exemption of PAGCOR under Section 109(k) of the Tax Code, which
provides that transactions exempt under international agreements to which the Philippines is a
signatory or under special laws [except Presidential Decree No. (PD) 529] are exempt from VAT.
Considering that PAGCORs charter, i.e., PD 1869 which grants PAGCOR exemption from taxes
is a special law, it is exempt from payment of VAT.
5. Recognition of International Comity

International obligations concomitant with our acceptance of the principles of international law as part
of our law demand that certain representatives of foreign states stationed and property of such foreign
states found within our territory be exempted from taxation.
6. Double Taxation
Double taxation simply means taxing the same subject twice for the same taxable year, for the same
tax under the same taxing authority, and within the same taxable territory. It is not a constitutional
limitation, there is no constitutional prohibition against double taxation but is not allowed in this
jurisdiction.
Two types of Double Taxation:
1. Direct (strict sense); and
2. Indirect (broad sense)
In strict sense, double taxation means direct double taxation. This means the same property is
taxed twice when it should be taxed only once and that both taxes are imposed on the same subject
16
matter for the same purpose, by the same taxing authority within the same jurisdiction during the same
taxing period and covering the same kind of tax.
In its broad sense, referred to as indirect double taxation, double taxation is taxation other
than direct duplicate taxation. It extends to all cases in which there is a burden of two or more
impositions.
Constitutionality of double taxation

Unlike the United States Constitution, our Constitution does not prohibit double taxation. However,
while it is not forbidden, it is something not favored. Such taxation should, whenever possible, be
avoided and prevented.
In addition, where there is direct double taxation, there may be a violation of the constitutional
precepts of equal protection and uniformity in taxation.
The argument against double taxation may not be invoked where one tax is imposed by the State and
the other is imposed by the city, it being widely recognized that there is nothing inherently obnoxious in
the requirement that license fees or taxes be exacted with respect to the same occupation, calling, or
activity by both the State and a political subdivision thereof. And where the statute or ordinance in
questions applies equally to all persons, firms and corporations placed in a similar situation, there is no
infringement of the rule on equality. [City of Baguio v. De Leon , 25 SCRA 938]
VILLANUEVA V. CITY OF ILOILO, 265 SCRA 528

An ordinance imposing a municipal tax on tenement houses was challenged because the owners
already pay real estate taxes and also income taxes under the NIRC. The Supreme Court held that
there was no double taxation. The same tax may be imposed by the National Government as well as
the local government. There is nothing inherently obnoxious in the exaction of license fees or taxes
with respect to the same occupation, calling, or activity by both the State and a political subdivision
thereof. Further, a license tax may be levied upon a business or occupation although the land used in
connection therewith is subject to property tax.
International Juridical Double Taxation

It is the imposition of comparable taxes in two or more states on the same taxpayer in respect of the
same subject matter and for identical periods. The apparent rationale for doing away with double
taxation is to encourage the free flow of goods and services and the movement of capital, technology
and persons between countries, conditions deemed vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly predictable and reasonable international investment
climate and the protection against double taxation is crucial in creating such a climate. (CIR VS.
S.C. JOHNSON AND SON, INC., 309 SCRA 87)
REMEDIES AGAINST DOUBLE TAXATION

1. Reciprocity clause e.g. Sec. 104 of the NIRC, on intangibles personal properties of a nonresident alien decedent or donor;
17
2. Tax sparing rule e.g. Sec. 28 (5)(b), intercorporate dividends received by an non-resident
foreign corporation from a domestic corporation;
3. Tax credit method e.g. Sec. 34 (C)(3), credit against taxes paid for taxes of foreign countries
by citizen and domestic corporations; tax credit for estate taxes paid to foreign country by
citizens or resident alien decedent under Sec. 86 (E); tax credits for donors taxes paid by
citizens or resident alien donors to a foreign country under Sec. 101 (C);
4. Exemption method e.g. Sec. 35 (D), personal exemption allowable to non-resident alien
individual;
5. Tax treaties e.g. The RP-US Tax Treaty, RP-Japan Tax Treaty, RP-Netherlands Tax Treaty,
etc.
CONSTITUTIONAL LIMITATIONS
1. Due process clause
2. Equal protection clause
3. Freedom of the speech and of press
4. Religious freedom
5. Non-impairment clause
6. No imprisonment for debt or non-payment of poll tax
7. All appropriations, revenue or tariff bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments
8. The President shall have the veto power to any particular item or items in an appropriation,
revenue or tariff bill, but the veto shall not affect the item or items to which he does not object
9. Taxation shall be uniform, equitable. The Congress shall evolve a progressive system of
taxation
10. Limited power of the congress to delegate taxing power to the President
11. Delegated authority of President to impose tariff rates, import and export quotas, tonnage and
wharfage dues and other duties or imposts within the framework of the national development
program of the Government
12. No tax exemption without concurrence of the majority of all the members of the Congress
13. Subject to exception no public money or property shall be appropriated, applied, paid, or
employed, directly, or indirectly for religious purposes
14. Money collected on tax levied for special purpose to be treated as a special fund and paid for
such purpose only
15. Supreme Courts power to review judgments or orders of lower courts
16. Authority of LGUs to create its own sources of revenues and to levy taxes, fees, and charges
subject to the limitations as the Congress may provide
17. Actually, directly and exclusively clause
PROVISIONS DIRECTLY AFFECTING TAXATION

Prohibition against imprisonment for non -payment of poll tax
Uniformity and equality of taxation
Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class
shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural
18
classifications for purposes of taxation; inequalities which result from a singling out of one particular
class for taxation or exemption infringe no constitutional limitation. (KAPATIRAN NG MGA
NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC. v. HON. BIENVENIDO TAN,
G.R. No. 81311, June 30, 1988)
Grant by Congress of authority to the president to impose tariff rates
It is Congress which authorizes the President to impose tariff rates, import and export quotas, tonnage
and wharfage dues, and other duties or imposts. Thus, the authority cannot come from the Finance
Department, the National Economic Development Authority, or the World Trade Organization, no
matter how insistent or persistent these bodies may be. (SOUTHERN CROSS CEMENT
CORPORATION
v.
CEMENT
MANUFACTURERS
ASSOCIATION
OF
THE
PHILIPPINES, G.R. No. 158540, August 3, 2005)
The authorization granted to the President must be embodied in a law. Hence, the justification cannot
be supplied simply by inherent executive powers. (SOUTHERN CROSS CEMENT
CORPORATION
v.
CEMENT
MANUFACTURERS
ASSOCIATION
OF
THE
PHILIPPINES, G.R. No. 158540, August 3, 2005)
The authorization to the President can be exercised only within the specified limits set in the law and is
further subject to limitations and restrictions which Congress may impose. Consequently, if Congress
specifies that the tariff rates should not exceed a given amount, the President cannot impose a tariff
rate that exceeds such amount. (SOUTHERN CROSS CEMENT CORPORATION v.
CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, G.R. No. 158540,
August 3, 2005)
Assuming there is a conflict between the specific limitation in Section 28 (2), Article VI of the
Constitution and the general executive power of control and supervision, the former prevails in the
specific instance of safeguard measures such as tariffs and imposts, and would thus serve to qualify
the general grant to the President of the power to exercise control and supervision over his/her
subalterns.
(SOUTHERN
CROSS
CEMENT
CORPORATION
v.
CEMENT
3, 2005)
Prohibition against taxation of religious, charitable entities, and educational

entities
The test of exemption is the use of the property. Actual use is necessary, use takes precedence
over ownership. If the property owned by religious, charitable or educational institutions is actually
used for a non-exempt purpose, the exemption is withdrawn. Thus, the lease of a portion of school to
a commercial establishment is subject to tax. (ABRA VALLEY COLLEGE, INC. v. AQUINO, L39086, June 15, 1988). Conversely, a property owned by a criminal but actually used
by religious, charitable or educational institutions is exempt from tax.
Incidental use is also covered by the exemption. Examples: a vegetable garden of a parish priest
adjacent to a convent and lodging place for religious functions are exempted; training school for
nurses, facilities for interns, doctors and staff of a hospital are exempt from taxes; canteen and
19
drugstore in a charitable hospital; and income of charitable hospital from admission of pay patients if
the income is dedicated to charitable purposes.
The word "charitable" is not restricted to relief of the poor or sick. The test whether an enterprise is
charitable or not is whether it exists to carry out a purpose recognized in law as charitable or whether it
is maintained for gain, profit, or private advantage. (LUNG CENTER OF THE PHILIPPINES v.
QUEZON CITY, G.R. No. 144104, June 29, 2004)
Even as we find that the petitioner is a charitable institution, we hold that those portions of its real
property that are leased to private entities are not exempt from real property taxes as these are not
actually, directly and exclusively used for charitable purposes. On the other hand, the portions of the
land occupied by the hospital and portions of the hospital used for its patients, whether paying or nonpaying, are exempt from real property taxes. (LUNG CENTER OF THE PHILIPPINES v.
QUEZON CITY, G.R. No. 144104, June 29, 2004)
To be a charitable institution, however, an organization must meet the substantive test of charity in
Lung Center. Charity is essentially a gift to an indefinite number of persons which lessens the burden
of government. In other words, charitable institutions provide for free goods and services to the public
which would otherwise fall on the shoulders of government. (COMMISSIONER OF INTERNAL
REVENUE v. ST. LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26,
2012)
In Lung Center, this Court declared: "exclusive" is defined as possessed and enjoyed to the exclusion
of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to
exclude; as enjoying a privilege exclusively." The words "dominant use" or "principal use" cannot be
substituted for the words "used exclusively" without doing violence to the Constitution and the law.
Solely is synonymous with exclusively. (COMMISSIONER OF INTERNAL REVENUE v. ST.
LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)
Services to paying patients are activities conducted for profit. There is a "purpose to make profit over
and above the cost" of services. (COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S
MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)
Section 30(E) and (G) of the NIRC requires that an institution be "operated exclusively" for charitable
or social welfare purposes to be completely exempt from income tax. An institution under Section
30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income
from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax,
previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section
27(B). (COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S MEDICAL CENTER,
INC. G.R. No. 195909 September 26, 2012)
A gift tax is not a property tax, but an excise tax imposed on the transfer of property by way of gift inter
vivos, the imposition of which on property used exclusively for religious purposes, does not constitute
an impairment of the Constitution. The phrase "exempt from taxation," as employed in the Constitution
should not be interpreted to mean exemption from all kinds of taxes. (REV. FR. CASIMIRO
LLADOC v. COMMISSIONER OF INTERNAL REVENUE, G.R. No. L-19201, June 16,
1965)
20
Prohibition against taxation of non -stock, non-profit institutions
An organization may be considered as non-profit if it does not distribute any part of its income to
stockholders or members. However, despite its being a tax exempt institution, any income such
institution earns from activities conducted for profit is taxable, as expressly provided in the last
paragraph of Section 30. (COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE'S
MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)
Majority vote of Congress for grant of tax exemption
The incentives under R.A. No. 7227 are exclusive only to the Subic SEZ, hence, the extension of the
same to the John Hay SEZ finds no support therein. The challenged grant of tax exemption would
circumvent the Constitution's imposition that a law granting any tax exemption must have the
concurrence of a majority of all the members of Congress. (JOHN HAY PEOPLES
ALTERNATIVE COALITION, et al. v. VICTOR LIM, et al., G. R. No. 119775, October
24, 2003)
Prohibition on use of tax levied for special purpose
The coco-levy funds, on the other hand, belong to the government and are subject to its administration
and disposition. Thus, these funds, including its incomes, interests, proceeds, or profits, as well as all
its assets, properties, and shares of stocks procured with such funds must be treated, used,
administered, and managed as public funds; the coco-levy funds are evidently special funds.
(PAMBANSANG KOALISYON NG MGA SAMAHANG MAGSASAKA AT MANGGAGAWA
SA NIYUGAN v. EXECUTIVE SECRETARY G.R. Nos. 147036-37 April 10, 2012)
President's veto power on appropriation, revenue, tariff bills
An "item" in a revenue bill does not refer to an entire section imposing a particular kind of tax, but
rather to the subject of the tax and the tax rate; thus, in the portion of a revenue bill which actually
imposes a tax, a section identifies the tax and enumerates the persons liable therefor with the
corresponding tax rate. To construe the word "item" as referring to the whole section would tie the
President's hand in choosing either to approve the whole section at the expense of also approving a
provision therein which he deems unacceptable or veto the entire section at the expense of foregoing
the collection of the kind of tax altogether. (COMMISSIONER OF INTERNAL REVENUE v.
HON. COURT OF TAX APPEALS, G.R. No. L-47421, May 14, 1990)
Non-impairment of jurisdiction of the Supreme Court

Grant of power to the local government units to create its own sources of
revenue
For a long time, the country's highly centralized government structure has bred a culture of
dependence among local government leaders upon the national leadership. The only way to shatter
this culture of dependence is to give the LGUs a wider role in the delivery of basic services, and confer
them sufficient powers to generate their own sources for the purpose. (NATIONAL POWER
CORPORATION v. CITY OF CABANATUAN G.R. No. 149110 April 9, 2003)
21
Republic Act No. 7716, otherwise known as the "Expanded VAT Law," did not remove or abolish the
payment of local franchise tax; it merely replaced the national franchise tax that was previously paid by
telecommunications franchise holders and in its stead VAT. The imposition of local franchise tax is not
inconsistent with the advent of the VAT, which renders functus officio the franchise tax paid to the
national government for VAT inures to the benefit of the national government, while a local franchise
tax is a revenue of the local government unit. (SMART COMMUNICATIONS, INC. v. THE CITY
OF DAVAO, G.R. No. 155491, July 21, 2009)
Flexible tariff clause

Exemption from real property taxes
For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property and this test requires that the institution use the property in a
certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung Center of the Philippines
did not lose its charitable character when it used a portion of its lot for commercial purposes since the
effect of failing to meet the use requirement is simply to remove from the tax exemption that portion of
the property not devoted to charity. (COMMISSIONER OF INTERNAL REVENUE v. ST.
LUKE'S MEDICAL CENTER, INC. G.R. No. 195909 September 26, 2012)
The Constitution exempts charitable institutions only from real property taxes while the NIRC extends
the exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is
materially different from Section 28(3), Article VI of the Constitution: Section 30(E) of the NIRC defines
the corporation or association that is exempt from income tax while Section 28(3), Article VI of the
Constitution does not define a charitable institution, but requires that the institution "actually, directly
and exclusively" use the property for a charitable purpose. (COMMISSIONER OF INTERNAL
2012)
To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a
charitable institution use the property "actually, directly and exclusively" for charitable purposes. To be
exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be
"organized and operated exclusively" for charitable purposes. (COMMISSIONER OF INTERNAL
2012)
No appropriation or use of public m oney for religious purposes
PROVISIONS INDIRECTLY AFFECTING TAXATION

Due process
In Sison, Jr. v. Ancheta, et al., we held that the due process clause may properly be invoked to
invalidate, in appropriate cases, a revenue measure when it amounts to a confiscation of property. But
in the same case, we also explained that we will not strike down a revenue measure as
unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness
22
by the taxpayer. (CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATION, INC. V.

ROMULO, 614 SCRA 605 (2010))
The support for the poor is generally recognized as a public duty and has long been an accepted
exercise of police power in the promotion of the common good but, in the instant case, the
declarations do not distinguish between wealthy coconut farmers and the impoverished ones.
Consequently, such declarations are void since they appropriate public funds for private purpose and,
therefore, violate the citizens' right to substantive due process. (PAMBANSANG KOALISYON NG
MGA SAMAHANG MAGSASAKA AT MANGGAGAWA SA NIYUGAN v. EXECUTIVE
SECRETARY G.R. Nos. 147036-37 April 10, 2012)
Equal protection
The real estate industry is, by itself, a class and can be validly treated differently from other business
enterprises. What distinguishes the real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production processes but the prices of their goods
sold and the number of transactions involved. (CHAMBER OF REAL ESTATE AND
BUILDERS' ASSOCIATION, INC. V. ROMULO, 614 SCRA 605 (2010))
PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative
records of the Bicameral Conference Meeting dated October 27, 1997, of the Committee on Ways and
Means, show that PAGCOR's exemption from payment of corporate income tax, as provided in
Section 27 (c) of R.A. No. 8424, or the National Internal Revenue Code of 1997, was not made
pursuant to a valid classification based on substantial distinctions. The legislative records show that
the basis of the grant of exemption to PAGCOR from corporate income tax was PAGCOR's own
request to be exempted. (PHILIPPINE AMUSEMENT AND GAMING CORPORATION
(PAGCOR) v. THE BUREAU OF INTERNAL REVENUE G.R. No. 172087 March 15,
2011)
Religious freedom
The constitutional guaranty of the free exercise and enjoyment of religious profession and worship
carries with it the right to disseminate religious information. Any restraints 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. (AMERICAN BIBLE
SOCIETY v. CITY OF MANILA, G.R. No. L-9637, April 30, 1957)
It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was
in some instances a little bit higher than the actual cost of the same but this cannot mean that
appellant was engaged in the business or occupation of selling said "merchandise" for profit. For this
reason We believe that the City of Manila Ordinance No. 2529 requiring the payment of license fee
cannot be applied to appellant, 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)
23
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. (ARTURO M. TOLENTINO v. THE SECRETARY OF
FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455,
October 30, 1995)
On the other hand the registration fee of P1,000.00 imposed by Sec. 107 of the NIRC, as amended by
Sec. 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 Sec. 108 of the NIRC. That the
PBS distributes free bibles and therefore is not liable to pay the VAT does not excuse it from the
payment of this fee because it also sells some copies. (ARTURO M. TOLENTINO v. THE
SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R.
No. 115455, October 30, 1995)
The withdrawal of the exemption did not also violate freedom of religion as regards the activities of
PBS on religious articles, as the Free Exercise of Religious clause does not prohibit imposing a
generally applicable sale and use tax on the sale of religious materials by a religious organization as
held by the US Supreme Court in Jimmy Swaggart Ministries v. Board of Equalization (1990). The VAT
registration fee does not constitute censorship of such freedom as held in the American Bible Society
case. The fee is a mere administrative fee and not imposed on the exercise of a privilege, much less a
constitutional right. But for the purpose of defraying cost of registration which is a requirement and a
central feature in the VAT system so as to provide record of tax credits of the taxpayer. (ARTURO
M. TOLENTINO v. THE SECRETARY OF FINANCE and THE COMMISSIONER OF
INTERNAL REVENUE, G.R. No. 115455, October 30, 1995)
Non-impairment of obligations of contracts
The Supreme Court (SC) held that the omission of PAGCOR from the list of tax-exempt GOCCs by
RA 9337 does not violate the right to equal protection of the laws under Section 1, Article III of the
Constitution, because PAGCORs exemption from payment of corporate income tax was not based on
classification showing substantial distinctions; rather, it was granted upon the corporations own
request to be exempted from corporate income tax. Legislative records likewise reveal that the
legislative intention is to require PAGCOR to pay corporate income tax.
With regard to the issue that the removal of PAGCOR from the exempted list violates the nonimpairment clause contained in Section 10, Article III of the Constitution which provides that no law
impairing the obligation of contracts shall be passed. Franchises such as that granted to PAGCOR
partake of the nature of a grant, and is thus beyond the purview of the non-impairment clause of the
Constitution. (PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR) v.
THE BUREAU OF INTERNAL REVENUE G.R. No. 172087 March 15, 2011)
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
24
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." 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." (ARTURO M. TOLENTINO v. THE SECRETARY OF FINANCE
and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, October 30,
1995)
ESCAPE FROM TAXATION

1. Shifting
2. Capitalization
3. Transformation
4. Evasion
5. Avoidance or Tax Planning.
6. Exemption
SHIFTING the transfer of the burden of a tax by the original payer or the one whom the tax was
assessed or imposed to another or someone else.
It should be borne in mind that what is transferred is not the payment of the tax but the burden of the
tax.
Taxes that can be shifted

Only indirect taxes may be shifted; direct taxes cannot be shifted.
Ways of shifting the tax burden
1. Forward shifting
When the burden of the tax is transferred from a factor of production through factors
of distribution until it finally settles on the ultimate purchaser or consumer.
Example: Manufacturer or producer may shift tax assessed to wholesaler, who in
turn shifts it to the retailer, who also shifts it to the final purchaser or consumer.
2. Backward shifting
When the burden of the tax is transferred from the consumer or purchaser through the
factors of distribution to the factor of production.
Example: Consumer or purchaser may shift tax imposed on him to retailer by
purchasing only after the price is reduced, and from the latter to the wholesaler, and finally to
the manufacturer or producer.
25
3. Onward shifting
When the tax is shifted two or more times either forward or backward.
Thus, a transfer from the seller to the purchaser involves one shift; from the producer to the
wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to the purchaser by
the retailer, we have three shifts in all.
Impact and incidence of taxation

Impact of taxation is the point on which a tax is originally imposed. In so far as the law is
concerned, the taxpayer is the person who must pay the tax to the government. He is also
termed as the statutory taxpayer the one on whom the tax is formally assessed. He is the
subject of the tax.
Incidence of taxation is that point on which the tax burden finally rests or settle down. It
takes place when shifting has been effected from the statutory taxpayer to another.
Statutory taxpayer
The statutory taxpayer is the person required by law to pay the tax or the one on whom the
tax is formally assessed. In short, he or she is the subject of the tax.
In direct taxes, the statutory taxpayer is the one who shoulders the burden of the tax while in
indirect taxes, the statutory taxpayer is the one who pay the tax to the government but the
burden can be passed to another person or entity.
Relationship between impact, shifting, and incidence of a tax

The impact is the initial phenomenon, the shifting is the intermediate process, and the incidence
is the result. Thus, the impact in a sales tax (i.e. VAT) is on the seller (manufacturer) who
shifts the burden to the customer who finally bears the incidence of the tax.
Impact is the imposition of the tax; shifting is the transfer of the tax; while incidence is the
setting or coming to rest of the tax.
CAPITALIZATION reduction in the price of the taxed object equal to the capitalized value of future
taxes which the purchaser expects to be called upon to pay.
TRANSFORMATION the manufacturer or producer upon whom the tax has been imposed, fearing
the loss of his market if he should add the tax to the price, pays the tax and endeavors to recoup
himself by improving his process of production thereby turning out his units of products at a lower cost.
26
EVASION use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a
tax. It is also known as TAX DODGING. It is punishable by law.
Tax evasion is a term that connotes fraud through the use of pretenses or forbidden devices to
lessen or defeat taxes. [Yutivo v. Court of Tax Appeals , 1 SCRA 160]
Example: Deliberate failure to report a taxable income or property; deliberate reduction of
income that has been received.
Evidence to prove evasion

Since fraud is a state of mind, it need not be proved by direct evidence but may be proved from
the circumstances of the case.
In Republic v. Gonzales [13 SCRA 633], the Supreme Court affirmed the assessment of a
deficiency tax against Gonzales, a private concessionaire engaged in the manufacturer of furniture
inside the Clark Air Base, for underdeclaration of his income. SC held that the failure of the taxpayer to
declare for taxation purposes his true and actual income derived from his business for two (2)
consecutive years is an indication of his fraudulent intent to cheat the government if its due taxes.
AVOIDANCE OR TAX PLANNING . It is the use by the taxpayer of legally permissible

alternative tax rates or methods to avoid or reduce tax liability. The taxpayer uses tax saving device or
means sanctioned or allowed by law. Politely called TAX MINIMIZATION
In DELPHERS TRADERS CORP. V. INTERMEDIATE APPELLATE COURT [157
SCRA 349], the Supreme Court upheld the estate planning scheme resorted to by the Pacheco
family in converting their property to shares of stock in a corporation which they themselves owned
and controlled. By virtue of the deed of exchange, the Pacheco co-owners saved on inheritance taxes.
The Supreme Court said the records do not point to anything wrong and objectionable about this
estate planning scheme resorted to. The legal right of the taxpayer to decrease the amount of what
otherwise could be his taxes or altogether avoid them by means which the law permits cannot be
doubted.
EXEMPTION grant of immunity from tax. Taxation is the rule and exemption is the
exception, and therefore, he who claims exemption must be able to justify his claim or right thereto,
by a grant expressed in terms too plain to be mistaken and too categorical to be
misinterpreted.
Exemption from taxation
Taxation is the rule and exemption is the exception. (FELS ENERGY, INC. v. PROVINCE OF
BATANGAS, 516 SCRA 186 (2007))
Since the power to tax includes the power to exempt thereof which is essentially a legislative
prerogative, it follows that a municipal mayor who is an executive officer may not unilaterally withdraw
27
such an expression of a policy thru the enactment of a tax. (PHILIPPINE PETROLEUM

CORPORATION v. MUNICIPALITY OF PILILLA, G.R. No. 90776, June 3, 1991)
A tax exemption being enjoyed by the buyer cannot be the basis of a claim for tax exemption by the
manufacturer or seller of the goods for any tax due to it as the manufacturer or seller. The excise tax
imposed on petroleum products under Section 148 is the direct liability of the manufacturer who
cannot thus invoke the excise tax exemption granted to its buyers who are international carriers;
nevertheless, the manufacturer, as the statutory taxpayer who is directly liable to pay the excise tax on
its petroleum products, is entitled to a refund or credit of the excise taxes it paid for petroleum products
sold to international carriers (COMMISSIONER OF INTERNAL REVENUE v. PILIPINAS
SHELL PETROLEUM CORPORATION, G.R. No. 188497, February 19, 2014)
In Philippine Long Distance Telephone Company (PLDT) v. Province of Laguna, the issue that the
Court had to resolve was whether PLDT was liable to pay franchise tax to the Province of Laguna in
view of the "in lieu of all taxes" clause in its franchise and Section 23 of RA 7925. Applying the rule of
strict construction of laws granting tax exemptions and the rule that doubts are resolved in favor of
municipal corporations in interpreting statutory provisions on municipal taxing powers, the Court held
that Section 23 of RA 7925 could not be considered as having amended petitioner's franchise so as to
entitle it to exemption from the imposition of local franchise taxes. (SMART COMMUNICATIONS,
INC. v. THE CITY OF DAVAO, G.R. No. 155491, July 21, 2009)
The "in lieu of all taxes" clause in a legislative franchise should categorically state that the exemption
applies to both local and national taxes; otherwise, the exemption claimed should be strictly construed
against the taxpayer and liberally in favor of the taxing authority. (SMART COMMUNICATIONS,
INC. v. THE CITY OF DAVAO, G.R. No. 155491, July 21, 2009)
PLDT's contention that the "in-lieu-of-all-taxes" clause does not refer to "tax exemption" but to "tax
exclusion" and hence, the strictissimi juris rule does not apply. The Supreme Court explains that these
two terms actually mean the same thing, such that the rule that tax exemption should be applied in
strictissimi juris against the taxpayer and liberally in favor of the government applies equally to tax
exclusions (PHILIPPINE LONG DISTANCE TELEPHONE COMPANY vs PROVINCE OF
LAGUNA G.R. No. 151899, August 16, 2005)
Tax remission or tax condonation

The word remit means to desist or refrain from exacting, inflicting or enforcing something as well as
to restore what has already been taken. The remission of taxes due and payable to the exclusion of
taxes already collected does not constitute unfair discrimination. Such a set of taxes is a class by itself
and the law would be open to attack as class legislation only if all taxpayers belonging to one class
were not treated alike. [Juan Luna Subd. V. Sarmiento , 91 Phil 370]
The condonation of a tax liability is equivalent to and is in the nature of a tax exemption. Thus, it
should be sustained only when expressly provided in the law. [Surigao Consolidated Mining v.
Commissioner of Internal Revenue , 9 SCRA 728]
28
Tax amnesty
Tax amnesty, being 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, partakes of an
absolute forgiveness or waiver by the government of its right to collect what otherwise would be due it
and, in this sense, prejudicial thereto. It is granted particularly to tax evaders who wish to relent and
are willing to reform, thus giving them a chance to do so and thereby become a part of the new society
with a clean slate. [Republic v. Intermediate Appellate Court , 196 SCRA 335]
Like tax exemption, tax amnesty is never favored nor presumed in law. It is granted by statute. The
terms of the amnesty must also be construed against the taxpayer and liberally in favor of the
government.
Tax amnesty v. Tax condonation v. Tax exemption

A tax amnesty, being 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, partakes of an
absolute forgiveness or waiver by the Government of its right to collect what otherwise would be due it
and, in this sense, prejudicial thereto, particularly to tax evaders who wish to relent and are willing to
reform are given a chance to do so and therefore become a part of the society with a clean slate.
Like a tax exemption, a tax amnesty is never favored nor presumed in law, and is granted by
statute. The terms of the amnesty must be strictly construed against the taxpayer and liberally in favor
of the government. Unlike a tax exemption, however, a tax amnesty has limited applicability as to
cover a particular taxing period or transaction only.
There is tax condonation or remission when the State desists or refrains from exacting, inflicting or
enforcing something as well as to restore what has already been taken. The condonation of a tax
liability is equivalent to and is in the nature of a tax exemption. Thus, it should be sustained only when
expressed in the law.
Tax exemption, on the other hand, is the grant of immunity to particular persons or corporations or to
person or corporations of a particular class from a tax which persons and corporations generally within
the same state or taxing district are obliged to pay. Tax exemption are not favored and are
construed strictissimi juris against the taxpayer.
DOCTRINE OF EQUITABLE RECOUPMENT

This doctrine basically refers to a taxpayer who has a claim for refund against the government, but
was not able to file his written claim for tax refund because the reglementary period within which to file
his valid claim for tax refund has already prescribed. As such, despite the lapse of the period, this
doctrine allows that the tax that should have been refunded be credited instead to his
existing or other tax liability. This doctrine of equitable recoupment is not allowed in
this jurisdiction. It is highly disfavored.
29
INCOME TAXATION
A. Income taxation
Income tax systems
a) Global tax system
Global treatment is a system where the tax treatment views indifferently the tax base
and generally treats in common all categories of taxable income of the taxpayer. (TAN v. DEL
ROSARIO, JR. 237 SCRA 324)
b) Schedular tax system
Schedular approach is a system employed where the income tax treatment varies and
made to depend on the kind or category of taxable income of the taxpayer. (TAN v. DEL
ROSARIO, JR. 237 SCRA 324)
c) Semi-schedular or semi-global tax system
What is Income?
Income refers to an amount of money coming to a person within a specified time, whether as payment
for services, interest or profit from investment. I means cash or its equivalent. It is gain derived and
severed from capital, from labor or from both combined.
Stock dividends issued by the corporation are considered unrealized gains, and cannot be subjected
to income tax until those gains have been realized. Before the realization, stock dividends are nothing
but a representation of an interest in the corporate properties. As capital, it is not yet subject to
income tax. Capital is wealth or fund; whereas income is profit or gain or the flow of wealth. The
determining factor for the imposition of income tax is whether any gain or profit was derived from a
transaction (CIR v. CA, 301 SCRA 152)
SOURCES OF REVENUE (Sec. 21, NIRC)
1. Income tax;
2. Estate and donors taxes;
3. Value-added taxes;
4. Other percentage taxes;
5. Excise taxes;
6. Documentary stamp taxes; and
7. Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal
Revenue.
Persons Subject to Income Tax
1. Individual
2. Corporation
3. Estates and Trusts
4. Other entities including partnership
30
1. Individuals
a. Resident citizen
b. Non-resident citizen
c. Overseas Contract Worker
d. Resident Alien
e. Non-resident alien engaged in trade or business
f. Non-resident alien not engaged in trade or business
2. Corporatons
a. Domestic corporation
b. Resident foreign corporation
c. Non-resident foreign corporation
3. Estates and Trusts
a. Income accumulated in trust for the benefit of unborn or unascertained person or persons
with contingent interests, and income accumulated or held for future distribution under the terms of the
will or trust;
b. Income which is to be distributed currently by the fiduciary to the beneficiaries, and income
collected by a guardian of an infant which is to be held or distributed as the court may direct;
c. Income received by estates of deceased persons during the period of administration or
settlement of the estate; and
d. Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.
4. Other Entities including Partnerships
In Sec 22 (B), the term CORPORATION shall include:
a. Partnerships, no matter how created or organized, but does not include:
i. General Professional Partnerships
ii. Joint venture or consortium formed for the purpose of undertaking
construction projects; and
iii. Joint venture or consortium formed for the purpose of engaging in petroleum,
coal, geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the Government.
b.
c.
d.
e.
Kinds
1.
2.
3.
4.
5.
6.
Joint-stock companies;
Joint accounts (cuentas en participacion);
Association; and
Insurance companies.
of Income Tax
Net income tax
Final income tax
Gross income tax
Minimum corporate income tax (MCIT)
Improperly accumulated income tax (IAET)
Optional gross income tax (OGIT)
31
CLASSIFICATION OF TAXPAYER
1. Classification of taxpayer and taxable sources of income.
Taxpayer
Taxable Sources
a. Resident citizen
All sources
b. Nonresident citizen
Within
c. Overseas contract worker/Seaman
Within
d. Resident alien
Within
e. Nonresident Alien
Within
f. Domestic corporation
All sources
g. Foreign corporation
within
According to the NIRC, a NONRESIDENT CITIZEN may be any of the following:
1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of
his physical presence abroad with a definite intention to reside therein.
2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis.
3. A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time during the
taxable year.
4. A citizen who has been previously considered as nonresident citizen and who arrives in the
Philippines any time during the taxable year to reside permanently in the Philippines shall
likewise be treated as a nonresident citizen for the taxable year in which he arrives in the
Philippines with respect to his income derived from sources abroad until the date of his arrival
in the Philippines.
5. The taxpayer shall submit proof to the Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to return to and reside in the Philippines as the
case may be.
Per Revenue Regulation, a citizen of the Philippines who shall have stayed outside the
Philippines for 183 days or more by the end of the year is a nonresident citizen for that
year.
According to BIR Ruling, in order that income derived by overseas contract workers abroad be
exempt from income tax, the time spent abroad is not material. All that is required is for the
employment contract to pass through and registered with the Philippine Overseas
Employment Administration (POEA).
A nonresident alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than 180 days during any calendar year shall be deemed a
nonresident alien doing business in the Philippines.
32
TAX ON INDIVIDUALS
1. Income subject to tax and type of tax
a. Taxable income
b. Passive income
c. Capital gain
-Normal tax
-Final tax
-Capital gains tax
2. Only passive income derived within the Philippines shall be subject to final tax.
Capital Gain
a. Capital gain from Sale of Shares of Stock not Traded in the Stock Exchange
Not over P100,000
On any amount in excess of P100,000
5%
10%
3. The capital gain tax on sale of share of stock shall be imposed upon the net capital gains
realized during the taxable year from the sale, barter, exchange or other disposition of share
of stock in a domestic corporation, except shares sold, or disposed of through the stock
exchange.
4. The capital gain tax on sale of real property shall be imposed upon capital gains presumed to
have been realized from the sale, exchange, or other disposition of Real property, classified
as capital assets, including pacto de retro sales and other forms of conditional sales.
For sale of real property to the government, the gain or the presumed gain shall be subject to
capital gain tax or normal tax under Sec. 24-A, at the option of the taxpayer.
5. Capital gain tax shall be imposed on gain or presumed gain arising from transaction involving
capital assets.
Taxation of Income of Resident Citizens

General Rule: Resident Citizen is taxable on ALL income derived from ALL sources W ITHIN
and W ITHOUT the Philippines subject to the following tax rates:
1. His REGULAR TAXABLE INCOME for each taxable year shall be subject to the schedular
tax rates of 5% to 32% imposed under Section 24 (A)(2) of the NIRC.
2. However, his PASSIVE INCOMES shall be subject to the applicable final withholding taxes
depending on the kind of passive income received by him.
Estates and trusts are taxable in the same manner as a resident citizen.
33
Taxation of Income of Nonresident Citizens
OCW or OFWs are also considered as nonresident citizens for income tax purposes.
Rule: The income of a nonresident citizen derived from ALL sources WITHIN the Philippines
for each taxable year shall be subject to the following tax rates:
Taxation of Income of Resident Aliens
An alien actually present in the Philippines who is not a mere transient or sojourner is a
resident of the Philippines for purposes of income tax. Whether he is a transient or not is
determined by his intentions with regard to the length and nature of his stay.
Rule: The income of a resident alien individual derived during the taxable year from ALL
sources W ITHIN the Philippines shall be subject to the following tax rates:
Taxation of Income of Married Individuals
Married individuals are required by law to file a consolidated income tax return, but they shall
compute separately their individual income tax on their income from employment based on
their respective total taxable income.
If the spouses are only physically separated and there is no legal separation, they are still
required by law to file consolidated or joint returns for which they are considered as jointly and
severally liable to the tax.
Separate computation of tax liabilities of husband and wife - designed to avoid the "marriage
penalty tax."
34
Taxation of Income of Minimum Wage Earners (MWEs)
Compensation income of MWEs being paid the Statutory Minimum Wage (SMW) shall be
exempt from income tax.
A senior citizen whose salary is equivalent to the SMW shall also be considered as MWE
entitled to exemption from income tax.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be exempted from income tax. However, an employee
who receives/earns additional compensation such as commissions, honoraria, fringe benefits,
benefits in excess of the allowable statutory amount of P82,000 (starting January 1,
2015), taxable allowances and other taxable income other than the SMW, his/her entire
earnings are not exempt from income tax and, consequently, from withholding tax.
Taxation of Passive Income of Citizens and Resident Aliens
Income subject to the final tax refers to an income which tax due is fully collected through the
withholding tax system in the form of final withholding tax. The recipient is NO longer
required to include the item of income subject to final tax as part of his gross
income in his income tax returns.
Under the new income tax form, however, individuals are required to report their passive
income in the ITR which had been subjected to the final withholding tax.
Capital Gains from Sale of Shares of Stock
Net capital gains from the sale, barter, exchange or other disposition of shares of stock of a
domestic corporation NOT LISTED AND NOT TRADED IN THE LOCAL STOCK
EXCHANGE held as capital asset shall be subject to the CAPITAL GAINS TAX of 5% on the
net capital gains not over P100,000 plus 10% on any amount in excess of P100,000.
In case, however, of sale, barter, exchange or other disposition of shares of stock of a

domestic corporation which are TRADED AND LISTED IN THE LOCAL STOCK
EXCHANGE also held as capital asset, the same shall be subject to the 1/2 of 1% STOCK
TRANSACTION TAX based on the gross selling price or gross value in money of shares of
stock sold or transferred.
On the other hand, if the sale is made by a dealer in securities, the resulting gain is
considered as ordinary income subject to the scheduler rates of 5%-32% in the case of
individual and the normal corporate tax rate of 30% in the case of corporations.
Gains from shares of stock in a foreign corporation are not subject to capital gains tax but to
the scheduler rates of 5% to 32% in the case of individual seller and the normal corporate
income tax rate of 30% in the case of corporate-seller.
35
Capital Gains from Sale of Real Property
The sale of real property by an individual will be subject to the capital gains tax if the said
property is considered as his capital asset which is located in the Philippines, including pacto
de retro sales and other forms of conditional sales. The said sale shall be subject to the
capital gains tax of 6% based on the presumed gain which is the higher value between the
current fair market value (i.e., zonal value) or the gross selling price. Actual gain is not
required for the imposition of the tax but it is the presumed gain by the fiction of law which is
taxable.
In case the disposition of real property classified as capital asset by individuals to the
government, the tax to be imposed shall be determined either the capital gains shall be added
to the gross income subject to the scheduler rates OR subject to final tax on the presumed
capital gains form sale of real property of 6%, at the option of the individual taxpayer-seller.
Sale of Principal Residence
If the purpose for the sale of principal residence is not to buy a new principal residence, the
sale, barter, exchange of the said principal residence shall be subject to the capital gains tax
based on the presumed gain on the sale.
What is the nature of personal exemptions?

Personal exemptions are the theoretical personal, living and family expenses of an individual taxpayer.
These are arbitrary amounts which have been calculated by our lawmakers to be roughly equivalent to
the minimum of subsistence, taking into account the personal status and additional qualified
dependents of the taxpayer. (Pansacola v. CIR, G.R. No. 159991, November 16, 2006).
Taxation of Members of a General Professional Partnership (GPP)
A GPP is a partnership formed by persons for the sole purpose of exercising their common profession,
no part of the income of which is derived from engaging in any trade or business.
The net income (distributable net income) of the GPP is computed in the same manner as a
corporation, i.e. Gross income less deductions.
TAX ON CORPORATIONS
1. Classification of corporate taxpayers
a. Domestic corporation
b. Resident foreign corporation
c. Nonresident foreign corporation
2. Income tax subject to tax and type of tax
a. Taxable income -
Normal tax (NT) 30%

36
b. Passive income c. Capital gain

-
- Gross income tax (GIT) 15%

- Minimum corporate income tax (MCIT) 2%
Final tax(FT)
Capital gain tax (CGT)
Passive income shall include income derived from sources within the Philippines.
Income derived by a depository bank under the expanded foreign currency deposit system from
foreign currency transactions with local commercial banks and interest income from foreign currency
loans granted by such depository banks under said expanded foreign currency deposit system to
residents are subject to final income tax at the rate of 10%
Any income of nonresidents, whether individuals or corporations, from transactions with depository
banks under the expanded system is exempt from income tax.
For Capital gain

a. Capital gain from Sale of Shares of stock not Traded in the Stock Exchange
Not over P100,000
On any amount in excess of P100,000
5%
10%
b. Capital gain from sale of real property

6% of gross selling price or the fair market value, whichever is higher
Special Rules for special corporations

TAXPAYER
TAX BASE
RATE
a. Proprietary educational institution
taxable income
10%
b. Hospitals which are nonprofit
taxable income
10%
c. Government owned or controlled
Corporations
1. If the gross income from unrelated trade, business or other activity of a proprietary educational
institution or nonprofit hospital exceeds 50% of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed on ordinary
corporations shall be imposed on the entire taxable income.
The term unrelated trade, business or other activity means any trade, business or other
activity, the conduct of which is not substantially related to the exercise or performance by
such educational institution or hospital of its primary purpose or function.
2. Government owned or controlled corporations are subject to the same tax imposed on
ordinary corporation engaged in similar business or industry.
37
The following government owned or controlled corporations are exempt from income tax:
a) Government service insurance system (GSIS)
b) Social security system (SSS)
c) Philippine health insurance corporation (PHIC)
d) Philippine charity sweepstakes office (PCSO)
e) Local Water District (LWD)
3. Resident foreign corporation and applicable income taxes
TYPE OF TAX
a) Normal tax
b) Gross income tax
c) Minimum corporate income tax
TAX BASE
taxable income
gross income
gross income
TAX RATE
30%
15%
2%
Taxable income shall include income derived from sources within

Rules on GIT applicable to domestic corporations are also applicable to resident foreign corporations.
Rules on MCIT applicable to domestic corporations are also applicable to resident foreign
corporations.
Branch profit remittance tax any profit remitted by a branch to its head office shall be subject to a tax
of 15% which shall be based on the total profits applied or earmarked for remittance without any
deduction for the tax component thereof.
Interest, dividends, rents, royalties, including remuneration for technical services, salaries, wages
premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains,
profits. Income and capital gains received by a foreign corporation during each taxable year from all
sources within the Philippines shall not be treated as branch profits unless the same are effectively
connected with the conduct of its trade or business in the Philippines.
Special rules for special corporations

TAXPAYER
a) International carrier doing
Business in the Philippines
b) Regional or area headquarters of
Multinational companies
c) Regional operating headquarters
Of multinational companies
TAX BASE
Gross Philippine
Billings
exempt
taxable income
RATE
2%
exempt
10%
1. Improperly accumulated earnings tax shall be imposed on every corporation formed or availed
for the purpose of avoiding the income tax with respect to its shareholders or the shareholders
38
of any other corporation, by permitting earnings and profits to accumulate instead of being
divided or distributed.
2. The fact that the earnings or profits of a corporation are permitted to accumulate beyond the
reasonable needs of the business shall be determinative of the purpose to avoid the tax upon
its shareholders or members unless the corporation proves to the contrary
3. The term reasonable needs of the business means reasonably anticipated needs of the
business.
4. The fact that any corporation is a mere holding company or investment company shall be
prima facie evidence of a purpose to avoid the tax upon its shareholders or members.
5. The rationale is that if the earnings and profits were distributed, the shareholders would then
be liable to income tax thereon, whereas if the distribution were not made to them, they would
incur not tax in respect to the undistributed earnings and profits of the corporation. Thus a tax
is being imposed in the nature of a penalty to the corporation.
6. The improperly accumulated earnings tax does not apply to the following corporations:
a) banks and other non-bank financial intermediaries;
b) insurance companies;
c) publicly-held corporations;
d) taxable partnership
e) general professional partnership
f) non-taxable joint ventures;
g) enterprises duly registered with the Philippine economic zone authority (PEZA) under
R.A 7916, and enterprises registered pursuant to the bases conversion and
development act of 1992 under R.A. 7227
MINIMUM CORPORATE INCOME TAX (MCIT)

2% of the gross income as of the end of the taxable year is hereby imposed upon any domestic
corporation beginning on the 4th taxable year immediately following the year in which such corporation
commenced its business operations. The MCIT shall be imposed whenever such corporation has zero
or negative taxable income or whenever the amount of MCIT is greater than the normal income tax
computed due from such corporation.
Any excess of the MCIT over the normal income tax as computed shall be carried forward on an
annual basis and credited against the normal income tax for the three (3) immediately succeeding
taxable years.
39
Normal Income Tax (30%)

MCIT (2% of Gross Income)
Amount of tax payable
Excess of MCIT over Normal Income Tax
1998
P 50,000
75,000
1999
P 60,000
100,000
2000
P100,000
60,000
P 75,000
P100,000
25,000
40,000
P100,000
1998 (25,000)
1999 (40,000)
P35,000
Domestic corporations which are not subject to MCIT:

a. Proprietary educational institutions subject to tax at 10%
b. Non-profit hospitals subject to tax at 10%
c. Depositary banks under expanded foreign currency deposit system subject to tax at 10%
TAXABLE INCOME refers to the gross income subject to tax, less deductions, whether itemized
or optional standard deductions, and/or personal and additional exemptions, if any, authorized for
such type of income. In short, this term refers to the tax base.
GROSS INCOME all income from whatever source derived, including, but not limited to the
following items:
a. Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items
b. Gross income derived from the conduct of trade or business or the exercise of a
profession
c. Gains derived from dealings in property
d. Interest
e. Rents
f. Royalties
g. Dividends
h. Annuities
i. Prizes and winnings
j. Pensions
k. Partners distributive share from the net income of the general professional
partnership.
Exclusions from gross income

The following items shall not be included in gross income and shall be exempt from income
tax:
40
a. Life insurance the proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured, whether in a single sum or otherwise, but
if such amounts are held by the insurer under an agreement to pay interest thereon,
the interest payments shall be included in gross income.
b. Amount received by insured as return of premium the amount received by the
insured, as a return of premiums paid by him under life insurance, endowment, or
annuity contracts, either during the term or at the maturity of the term mentioned in the
contract or upon surrender of the contract.
c.
Gifts, bequests, and devises the value of property acquired by gift, bequest, devise
or descent, income from such property, as well as gifts, bequest, devise or descent of
income from any property, in case of transfer of divided interest, shall be included in
gross income.
d. Compensation for injuries or sickness amounts received, through accident or health

insurance, as compensation for personal injuries or sickness, plus the amounts of any
damages received on account of such injuries or sickness
e. Income exempt under treaty
f.
Retirement benefits, pensions, gratuities
Conditions:
1. The retiring official or employee has been in the service of the same employer for
at least ten 10 years;
2. Is not less than fifty (50) years of age at the time of his retirement;
3. In accordance with a reasonable private benefit plan maintained by the employer;
4. The benefits granted may be availed of by an official or employee only once.
Any amount received by an official or employee or by his heirs from the employer as a
consequence of separation of such official or employee from the service of the
employer because of death sickness or other physical disability or for any cause
beyond the control of the said official or employee.
g. Income derived by a foreign government
h. Income derived by the government or its political subdivisions. income derived from
any public utility or from the exercise of any essential government function accruing to
the government of the Philippines or to any political subdivisions thereof.
i.
Prizes and awards

Conditions:
1. In recognition of religious, charitable, scientific, educational, artistic, literary, or
civic achievement;
41
2. The recipient was selected without any action on his part to enter the contest
or proceeding;
3. The recipient is not required to render substantial future services as a
condition to receiving the prizes or ward.
j.
Prizes and awards in sports competition all prizes and awards granted to athletes in
local and international sports competitions and tournaments whether held in the
Philippines or abroad and sanctioned by their national sports associations.
k.
Thirteen month pay and other benefits these benefits shall not exceed P82,000
l.
GSIS, SSS, medicare and Pag-ibig contributions, and union dues of individuals
m. Gains realized from the sale or exchange or retirement of bonds, debentures or other
certificate of indebtedness with a maturity of more than five (5) years
NOTES IN ALLOWABLE DEDUCTIONS

AND ITEMS NOT DEDUCTIBLE
ALLOWABLE DEDUCTIONS
1.ordinary and necessary expenses
Only expenses which are directly attributable to, the development, management,
operation and/or conduct of the trade, business or exercise of a profession are
allowed as deductions.
A reasonable allowance for salaries, wages, and other forms of compensation for
personal services actually rendered, including the grossed-up monetary value of
fringe benefit furnished or granted by the employer to the employee.
1. Substantiation requirements- no deduction from gross income shall be allowed unless the
taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate
records.
2. Bribes, kickbacks and other similar payments are not allowed as deductions from gross
income.
3. Special expenses allowable to private educational institutions private educational institutions
may at their option elect either:
a. To deduct expenditures, considered as capital outlays of depreciable assets incurred
during the taxable year for the expansion of school facilities; or
b. To deduct allowance for depreciation
42
2. interest expense
1. interest expense must be connected with trade or business of the taxpayer in order to be
allowed as deduction from gross income.
If the amount borrowed is momentarily deposited with the bank and earns interest income
subject to final tax, the interest expense deductible from gross income shall be reduced by
33% of the interest income.
2. optional treatment of interest expense at the option of the taxpayer, interest incurred to
acquire property used in trade business or exercise of a profession may be allowed as a
deduction (outright) or treated as a capital expenditure (depreciation).
3. taxes
Taxes must be connected with the trade or business of the taxpayer in order to be deductible
from gross income.
The following are non-deductible taxes:
a. Income tax
b. Income tax paid to a foreign country claimed as tax credit
c. Estate and donors taxes
d. Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed (special assessment)
4. losses
losses actually sustained during the taxable year and not compensated for by insurance or
other forms of indemnity shall be allowed as deductions:
a. If incurred in trade. Profession or business
b. Of property connected with the trade, business or profession, if the loss arises from
fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement
c. No loss shall be allowed as a deduction if at the time of the filling of the tax purposes
in the state tax return
2. net operating loss carry-over the net operating loss of the business or enterprise for any
taxable year immediately preceding the current taxable year, which had not been previously
offset as deduction from gross income shall be carried over as a deduction from gross income
for the next 3 consecutive taxable years immediately following the year such loss.
43
Any net loss incurred in a taxable year during which the taxpayer was exempt from income
tax shall not be allowed as deduction
Net operating loss carry-over shall be allowed only if there has been no substantial change in
the ownership of the business or enterprise.
Net operating loss carry-over means excess of allowable deduction over gross income of the
business in a taxable year. (gross income less allowable deduction)
3. capital losses loss from sales or exchanges of capital asset shall be allowed only to the
extent of the gains from such sales and exchanges.
Securities becoming worthless. if securities become worthless during the taxable year and
are capital asset, the loss resulting therefrom be considered as a loss from the sale or exchange, on
the last day of such taxable year. Of capital assets.
4. losses from wash sales of stock or securities.
In the case of any loss claimed to have been sustained from any sale or other disposition of
shares of stock or securities where it appears that within a period beginning 30 days before the date of
such sale or disposition and ending 30 days after such date, the taxpayer has acquired or has entered
into a contact or option to acquire, substantially identical stock or securities, no deduction for the loss
shall be allowed unless the claim is made by a dealer in stock or securities and with respect to
transaction made in the ordinary course of the business of such dealer.
5. wagering losses losses from wagering transactions shall be allowed only to the extent of
the gains from such transactions.
5. bad debts expense
Debts due to the taxpayer actually ascertained to be worthless and charged off within the
taxable year except:
(1) those not connected with profession, trade or business
(2) those sustained in a transaction entered into between related parties.
Related parties mean:
a. Between members of a family. Family of an individual shall include only his brothers and
sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants;
b. Except in case of distributions in liquidation. Between an individual and corporation more than
50% in value of the outstanding stock of which is owned, directly or indirectly, by or for such
individual;
c.
Except in the case of distributions in liquidation, between two coporations more than 50% IN
value of the outstanding stock of which is owned, directly or indirectly, by or for the same
individual;
44
d. Between the grantor and a fiduciary of any trust;

e. Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the
same person is a grantor with respect to each trust;
f.
Between a fiduciary of a trust and beneficiary of such trust.
6. depreciation expense
1. Depreciation expense must be connected with trade or business of the taxpayer. It
includes amortization of intangible assets with definite life
.
2. Methods of computing reasonable allowance
a. Straight-line method
b. Declining-balance method
c. Sum-of-the-years-digit method
d. Any other method which may be prescribed by the secretary of finance upon
recommendation of the commissioner
7. charitable and other contributions
1. Subject to limitation
Contributions to the following institutions or entities are subject to limitation.
(1) government of the Philippines or any of its agencies or any political subdivision
thereof exclusively for public purposes,
(2) to accredited domestic corporation or associations organized and operated
exclusively for religious, charitable, scientific, youth and sports development, cultural
or educational purposes or for the rehabilitation of veterans
(3) to social welfare institutions
(4) to non-government organizations,
Limitation: not in excess of 10% in the case of an individual. And 5% in the case of a
corporation, of the taxpayers taxable income derived from trade, business or
profession as computed without the benefit of this deduction.
2.deductible in full.
Donations to the following institutions or entities shall be deductible in full:
a. Donations to the government of the Philippines or to any of its agencies or political
subdivisions, including fully-owned government corporations, exclusively to finance, to
provide for, or to be used in undertaking priority activities in education. Health. Youth
and sports development, human settlements, science and culture, and in economic
development
45
b. Donations to certain foreign institutions or international organizations

c.
Donations to accredited non-government organizations- organized and operated

exclusively for scientific, research, educational, character-building and youth and
sports development, health, social welfare, cultural or charitable purposes, or a
combination thereof, no part of the net income of which inures to the benefit of any
private individual
3.valuation the amount of any charitable contribution of property other than money shall be
Based on the acquisition cost of said property.
8. Research and development expense

1. Research and development expense incurred or paid by the taxpayer in connection
with trade or business are allowed as deductions from gross income.
2. Capitalized research and development expenditures
Requisites:
a. Paid or incurred by the taxpayer in connection with his trade, business or
profession
b. Not treated as expense under paragraph 1
c. Chargeable to capital account but not chargeable to property of a character
which is subject to depreciation or depletion
In computing taxable income. Such deferred expenses shall be allowed as

deduction ratably distributed over a period of not less than 60 months as me be
elected by the taxpayer (beginning with the month in which the taxpayer first
realizes benefits from such expenditures)
9. Pension trusts
For current services
The contributions of employer to pension trust for the benefit of employees for current services are
deductible from gross income.
For past services
The lump contributions of employer to pension trust for the benefit of employees for past services are
deductible from gross income but are to be distributed over a period of 10 consecutive years.
10.Additional requirements for deductibility of certain payments
46
Any amount paid or payable which otherwise deductible from. Or taken into account in computing
gross income or for which depreciation or amortization, shall be allowed as deduction only if it is
shown that the tax required to be deducted and withheld therefrom has been paid to the bureau of
internal revenue.
11. Optional standard deduction
Optional standard deduction (OSD) may be availed of by individual (self-employed) and corporate
taxpayers in lieu of the itemized deductions.
For individual (self-employed) taxpayer. The OSD is 40% of gross sales or receipts
For corporations, the OSD is 40% of gross income
12. Premium payments on health and/or hospitalization insurance
1. Conditions:
a. The amount of premiums not to exceed P2,400 per family or P200 a month paid
during the taxable year for health and/or hospitalization insurance taken by the
taxpayer for himself, including his family
b. Family has a gross income of not more than P250,000 for the taxable year
c.
In case of married taxpayer. Only the spouse claiming the additional exemption for
dependents shall be entitled to this deduction
2. Taxpayer earnings compensation income arising from personal services rendered under an
employer-employee relationship are not allowed any deduction except premium payments on
health and/or hospitalization insurance.
ITEMS NOT DEDUCTIBLE

1. Personal, living or family expenses
2. Any amount paid out for new buildings or for permanent improvement, or betterments
made to increase the value of any property or estate;
3. Any amount expended in restoring property or in making good the exhaustion thereof
for which an allowance is has been made
4. Premiums paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business carried on
by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a
beneficiary under such policy.
47
5. Losses from sales or exchange of property in computing net income, no deductions

shall in any case be allowed in respect of losses from sales or exchanges of property
directly or indirectlya. Between members of a family, family of an individual shall include only his
brothers and sisters (whether by the whole or half-blood), spouse, ancestors,
and lineal descendants;
b. except in case of distributions in liquidation between an individual and
corporation more than 50% in value of the outstanding stock of which is
owned directly or indirectly, by or for such individual.
c.
Except in the case of distribution in liquidation , between two corporations

more than 50% in value of the outstanding stock of which is owned directly or
indirectly, by or for the same individual;
d. Between the grantor and a fiduciary of any trust;

e. Between the fiduciary of end the fiduciary of a trust and the fiduciary of
another trust if the same person is a grantor with respect to each trust;
f.
Between a fiduciary of a trust and beneficiary of such trust.
NOTES IN THE ORGANIZATION AND FUNCTIONS OF THE

BUREAU OF INTERNAL REVENUE
1. Power and duties of the Bureau of Internal Revenue
The bureau of the Internal Revenue is under the control and supervision of the Department of
Finance and its powers and duties include the assessment and collection of all national
internal revenue taxes, fees and charges; the enforcement of all forfeitures, penalties, and
fines; and the execution of judgments in all cases decided in its favor by the court of tax
appeals and the ordinary courts.
2. Chief officials of the bureau of internal revenue
The bureau of internal revenue is headed by chief known as the commissioner, with 4
assistants known as deputy commissioners.
3. Powers of the commissioner

a. Power of the commissioner to interpret tax laws and to decide tax cases
48
b. Power of the commissioner to obtain information; and to summon and to take

testimony of persons (authority to administer oath)
c. Power of the commissioner to make assessments and prescribed additional
requirements for tax administration to and enforcement
4. Power of the commissioner to make assessments and prescribe additional requirements for
tax administration to and enforcement, includes:
a. Authority to examine returns and determine tax due
b. Authority to conduct inventory-taking, surveillance and to prescribe presumptive gross
sales and receipts
c. Authority to terminate taxable period
d. Authority to prescribe real property values
e. Authority to inquire into bank deposit accounts
Authority to terminate taxable period
When it comes to the knowledge of the commissioner that a taxpayer is retiring from business
subject to tax; is intending to leave the Philippines; intending to remove his property from the
Philippine; or intending to hide or conceal his property; or his performing any act tending to
obstruct the proceedings for the collection of the tax, the commissioner may declare the tax
period of such taxpayer terminated at any time and shall send the taxpayer a notice of such
decision, together with request for the immediate payment of the tax for the period so declared
terminated and the tax for the preceding year or quarter, and shall be subject to all the
penalties, unless paid within the time fixed in the demand made by the commissioner.
Authority to prescribe real property values
The commissioner is authorized to divide the Philippine into different zones or areas and shall
determine the fair market value of real properties located in each zone or area
For purposes of computing any internal revenue tax, the value of the property is whichever is
the higher of:
1. The fair market value as determined by the commissioner or
2. The fair market value as shown in the schedule of values of the provincial and city assessors.
Authority to inquire into bank deposit accounts

Notwithstanding any contrary provision of republic act no. 1405 (bank secrecy law) and other
general or special laws, the commissioner is authorized to inquire into bank deposits of:
1. A decedent to determine his gross estate; and
2. Any taxpayer who has filed an application for compromise of his tax liability by reasons of
financial incapacity to pay his tax liability.
49
In case a taxpayer files an application to compromise the payment of his tax liabilities on his
claim that his financial position demonstrates a clear inability to pay the tax assessed, his
application shall not be considered unless he waives in writing his privileges under republic act
no. 1405 or under other general or special laws and such waiver shall constitute the authority
of the commissioner to inquire into the bank deposits of the taxpayer.
Issuance and rulings of the bureau of internal revenue
Revenue regulations (RRs) (RMOs) are issuance that provide directives or instructions;
prescribe guidelines; and outline processes, operations, activities, workflows, methods and
procedures necessary in the implementation of stated policies, goals, objectives, plans and
programs of the bureau in all areas of operations, except auditing.
Revenue memorandum rulings (RMRs) are rulings, opinions and interpretations of the
commissioner of internal revenue with respect to the provisions of the tax code and other tax
laws, as applied to a specific set of facts, with or without established precedents, and which
the commissioner may issue from time to time for the purpose of providing taxpayers guidance
on the tax consequence in specific situations. BIR rulings, therefore, cannot contravene duly
issued RMRs; otherwise, the rulings are null and void ab initio.
Revenue memorandum circular (RMCs) are issuance that publish pertinent and applicable
issued by the BIR and other agencies/offices.
Revenue Bulletins (RB) refer to periodic issuances, notice and official announcements of t6he
Commissioner of Internal Revenue that consolidate the Bureau of Internal Revenues position
on certain specific issues of law or administration in relation to the provisions of the Tax Code,
relevant tax laws and other issuances for the guidance of the public.
BIR Rulings are official position of the bureau to requires raised by taxpayers and other
stakeholders relative to clarification and interpretation of tax laws
5. Delegations of power
The commissioner may delegate the powers vested in him under the tax code to any
or such subordinate officials with the rank equivalent to a division chief or higher. The
following powers of the commissioner may not be delegated:
a. The power to recommend the promulgation of rules and regulations by the secretary
of finance;
b. The power to issue rulings of first impression or to reverse, revoke or modify any
existing ruling of the bureau;
c. The power to compromise or abate any tax liability: provided, however, that
assessment issued by the regional offices involving basic deficiency taxes of
P500,000 or less, and minor criminal violations, discovered by regional and district
officials, may be compromised by a regional evaluation board which shall be
50
composed of the regional director as chairman, the assistant regional director, the
heads of the legal, assessment and collection divisions and the revenue district officer
having jurisdiction over the taxpayer, as members;
d. The power to assign or reassign internal revenue officers to establishments where
articles subject to excise tax are produced or kept.
6. Authority of internal revenue officers to make arrest and seizures

The commissioner, the deputy commissioners, the revenue regional directors, the revenue
district and other internal revenue officers have the authority to make arrests and seizures for the
violation of any penal law, rule or regulation administered by the bureau revenue.
7. Collection agents (internal revenue taxes)
a. The commissioner of customs and his subordinates with respect to the collection of national
internal revenue taxes on imported goods;
b. The head of the appropriate government office and his subordinates with respect to the
collection of energy tax:
c. Banks duly accredited by the commissioner with respect to receipt of payments of internal
revenue taxes.
51

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GENERAL PRINCIPLES OF TAXATION

Essential elements of a tax

SUMPTUARY PURPOSE OF TAXATION

(Do not reproduce without permission of Atty. Noel Siosan, Jr.)

PAL v. Edu, 164 SCRA 320

(Do not reproduce without permission of Atty. Noel Siosan, Jr.)

Tio v. Videogram, 151 SCRA 208

Caltex v. Commissioner, 208 SCRA 755

THEORY AND BASIS OF TAXATION:

Lifeblood or necessity theory

(Do not reproduce without permission of Atty. Noel Siosan, Jr.)

(Do not reproduce without permission of Atty. Noel Siosan, Jr.)

Domondons reconciliation of M arshall and Holmes

NATURE OF TAXING POWER

(Do not reproduce without permission of Atty. Noel Siosan, Jr.)

TAXATION distinguished from POLICE POWER and EMINENT DOMAIN

Power of the State to

Power of the State to

Power of the State to take

Only the government or

Only the government or

May be granted to public

Property is taken for public

Money contributed in the

Transfer of the right to

Assumed that the

Person affected receives

Person affected receives

Generally no limit on the

Amount imposed should

No amount imposed but

Relatively free from

(Do not reproduce without permission of Atty. Noel Siosan, Jr.)

(Do not reproduce without permission of Atty. Noel Siosan, Jr.)

2. Power of Eminent Domain

TAXATION AS AN IMPLEMENT OF POLICE POWER

(Do not reproduce without permission of Atty. Noel Siosan, Jr.)

TAXATION AS AN IMPLEMENT OF EMINENT DOMAIN

CONSTITUTIONAL PROVISIONS ON TAXATION

(Do not reproduce without permission of Atty. Noel Siosan, Jr.)

Taxes may be classified into two as to the manner of collection:

(Do not reproduce without permission of Atty. Noel Siosan, Jr.)

5. Documentary stamp tax

THREE BASIC PRINCIPLES OF A SOUND TAX SYSTEM

TAXES NOT SUBJECT TO COMPENSATION

(Do not reproduce without permission of Atty. Noel Siosan, Jr.)

Philex Mining Corporation v. Commissioner, 294 SCRA 687 (1998)

Levied for public purpose

(Do not reproduce without permission of Atty. Noel Siosan, Jr.)

2. Non-delegability of taxing power

Flexible tariff clause

(b) Delegation to local governments (Local Taxing power)

(Do not reproduce without permission of Atty. Noel Siosan, Jr.)

(c) Delegation to administrative agencies (Administrative Matters)

NON-DELEGABLE POW ERS:

3. Territoriality or situs of taxation

(Do not reproduce without permission of Atty. Noel Siosan, Jr.)

Revenue v. British Overseas Airways Corporation (BOAC) as cited in COMMISSIONER

Sale of personal property

Value-Added Tax (VAT)

4. Tax exemption of government entities

(Do not reproduce without permission of Atty. Noel Siosan, Jr.)

5. Recognition of International Comity