TAXATION 1

A. Meaning, Nature, Basis, Characteristics and Purposes of Taxation

Define Taxation.
TAXATION it is an inherent power by which the sovereign through its law-making body, raises
income to defray the necessary expenses of the government, by apportioning the cost among
those who, in some measure are privileged to enjoy its benefits and therefore, must bear its
burdens. (51 Am. Jur. 34)
The power of taxation is the power to impose burdens on subjects and objects within its
jurisdiction.
1. Meaning of Tax, Taxation
CIR v. Algue (158 SCRA 9)
FACTS: Philippine Sugar Estate Development Corporation (PSEDC) appointed Algue, Inc. as its
agent, authorizing it to sell its land, factories, and oil manufacturing process. Philippine Sugar
was later on sold by Vegetable Oil Investment Corporation and Algue received a commission
of P125,000, and it was from this commission that it paid Guevarra, et. al, organizers of
VOICP, P75,000 in promotional fees. In 1965, Algue received assessment from CIR in the
amount of P83,000 as delinquency income tax for years 1958-59. Algue protested but the
Motion for Reconsideration was not acted upon by the BIR.
ISSUE: WON the assessment of 83,000 was reasonable.
HELD: Taxes are the lifeblood of the government and should be collected without necessary
hindrance. Taxes are what we pay for a civilized society. Without taxes, the government
would be paralyzed for lack of the motive power to activate and operate it. Hence, despite
the natural reluctance to surrender part of ones hard earned income to the taxing
authorities, every person who is able to must contribute his share in the running of the
government. The government, for its part, is expected to respond in the form of tangible
and intangible benefits intended to improve the lives of the people and enhance their moral
and material values. This symbiotic relationship is the rationale of taxation and should
dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of
power.
However, collection must be made in accordance with the law, as any arbitrariness will
negate the very reason for government itself. The tax collector can still be stopped in his
tracks if the taxpayer can demonstrate that the law has not been observed. The claimed
deduction as to compensation for personal services (promotional fees) had been legitimately
paid by Algue. It has further proved that the promotional fees paid was reasonable and
necessary in light of the efforts exerted by Algue in including investors (VOICP) to involve
themselves in an experimental enterprise or a business requiring millions of pesos.

What is the nature of the Power to Tax?

The nature of the power to tax is two-fold.
a) Inherent in the state
b) Exclusively legislative in character
Why is the power of taxation considered inherent in nature?
It is inherent in character because its exercise is guaranteed by the mere existence of the state.
It could be exercised even in the absence of a constitutional grant. The power to tax proceeds
upon the theory that the existence of a government is a necessity and this power is an essential
and inherent attribute of sovereignty, belonging as a matter of right to every independent state
or government.
No sovereign state can continue to exist 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,
hence, the emergence of the power to tax.
Basis: The Life-blood Doctrine (CIR vs. Algue)
Without taxes, the government would be paralyzed for lack of motive power to activate and
operate it. Hence, despite the natural reluctance to surrender part of ones earned income to
the taxing authorities, every person who is able must contribute his share in the running of the
government.
May a legislative body enact laws to raise revenues in the absence of constitutional
provisions granting said body the power of tax? Explain.
Yes. It must be noted that the Constitutional provision relating to the power of taxation do not
operate as grants of the power of taxation to the government, but instead merely constitute a
limitation upon a power which would otherwise be practically without limit.
Why is the power of taxation legislative in nature?
It is legislative in nature since it involves promulgation of laws. It is the Legislature which
determines the coverage, object, nature, extent and situs of the tax to be imposed.
May the power of taxation be delegated?
The general rule is no, it cannot be delegated since it is essentially a legislative function. This is
based upon the principle that taxes are a grant of the people who are taxed, and the grant
must be made by the immediate representatives of the people. And where the people have laid
the power, there it must be exercised.

a. Taxation as an inherent power of the State

ABAKADA GURO PARTYLIST vs. ERMITA
FACTS: R.A. 9337 (The Value Added Tax Reform Act) provides that, the President, upon the
recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate
of value-added tax to twelve percent (12%) after any of the following conditions have been
satisfied. (i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of
the previous year exceeds two and four-fifth percent (2 4/5%) or (ii) national government
deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1
%).
ISSUE: WON there was an invalid delegation of legislative power.
HELD: No. There is no undue delegation of legislative power but only of the discretion as to
the execution of the law. This is constitutionally permissible.
Congress did not abdicate its functions or unduly delegate its power when it describes what
job must be done, who must do it, and what is the scope of his authority. The Secretary of
Finance, in this case, becomes merely the agent of the legislative department, to determine
and declare the event upon which its expressed will takes place. The President cannot set
aside the findings of the Secretary of Finance, who is not under the conditions acting as her
alter ego or subordinate.
With respect to the Legislature, Section 1 of Article VI of the Constitution provides that the
Legislative power shall be vested in the Congress of the Philippines which shall consist of a
Senate and a House of Representatives. The powers which Congress is prohibited from
delegating are those which are strictly, or inherently and exclusively, legislative. Purely
legislative power, which can never be delegated, has been described as the authority to
make a complete law complete as to the time when it shall take effect and as to whom it
shall be applicable and to determine the expediency of its enactment. Thus, the rule is that
in order that a court may be justified in holding a statute unconstitutional as a delegation
of legislative power, it must appear that the power involved is purely legislative in nature
that is, one appertaining exclusively to the legislative department. It is the nature of the
power, and not the liability of its use or the manner of its exercise, which determines the
validity of its delegation.
Nonetheless, the general rule barring delegation of legislative powers is subject to the
following recognized limitations or exceptions:
(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of
the Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of Article

VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
b. Tax as a general term, as a legal term
COMPANIA GENERAL DE TOBACOS vs. CITY OF MANILA (8 SCRA 367)
FACTS: Compania General de Tabacos de Filipinas (Tabacalera) paid the City of Manila the
fixed license fees prescribed by Ordinance 3358 for the years 1954 to 1957. In 1954, City
Ordinance 3634 and 3816 were passed; where the term general merchandise found
therein included all articles in Sections 123 to 148 of the Tax Code (thus, also liquor under
Sections 133 to 135). The Tabacalera paid its wholesalers and retailers taxes. In 1954, the
City Treasurer addressed a letter to an accounting firm, expressing the view that liquor
dealers paying the annual wholesale and retail fixed tax under Ordinance 3358 are not
subject to the wholesale and retail dealers taxes prescribed by City Ordinances 3634, 3301,
and 3816. The Tabacalera, upon learning of it, stopped including quarterly sworn declaratons
required by the latter ordinances, and in 1957, demanded refunde of the alleged
overpayment. The claim was disallowed.
ISSUE: WON there is a distinction between Ordinance 3358 and Ordinances 3634, 3301 and
3816, to prevent refund to the company
HELD: Yes. The company is not entitled to refund.
Generally, the term tax applies to all kinds of exactions, which become public funds.
Legally, however, a license fee is a legal concept quite distinct from tax: the former is
imposed in the exercise of police power for purposes of regulation, while the latter is
imposed under the taxing power for the purpose of raising revenues. Ordinance 3358
prescribes municipal license fees for the privilege to engage in the business of selling liquor
or alcohol beverages; considering that the sale of intoxicating liquor is (potentially) harmful
to public health and morals, and must be subject to supervision or regulation by the State
and by cities and municipalities authorized to act in the premises. On the other hand,
Ordinances 3634, 3301 and 3816 imposed taxes on the sales of general merchandise,
wholesale or retail, and are revenue measures enacted by the Municipal Board of Manila.
Both a license fee and a tax may be imposed on the same business or occupation, or for
selling the same article, without it being in violation of the rule against double taxation. The
contrary view of the Treasurer in its letter is of no consequence as the government is not
bound by the errors or mistakes committed by its officers, especially on matters of law.

What is the distinction between a license fee and tax?

Source / Basis
Purpose
Object / Subject
Amount
Effect of non-payment
Time of payment

TAX

TAX
Power of Taxation
To raise revenue
Imposed
of
persons,
property,
rights
or
transaction
Generally unlimited

LICENSE FEE
Police Power
For regulation and control
Imposed on the exercise of a
right or privilege

Limited to the necessary

expenses of regulation and
control
Does not make business Makes the business illegal
illegal
After the start of business
Before the commencement
of the business

c. Tax vs License and Regulatory Fee

LICENSE FEE

OSMENA vs ORBOS

FACTS: Under PD 1956, the Oil Price Stabilization Fund (OPSF) was created as a special fund
for reimbursing oil companies for cost increases in crude oil and imported petroleum
products resulting from exchange rate adjustments and from increase in world market prices
of crude oil. Through EO 137, the OPSF was reclassified into a trust liability account in 1985. It
authorized the investment of the fund in government securities, with earnings therefrom
accruing to the fund. Petitioner Osmena avers that the creation of the trust fund is
unconstitutional as the monies collected should be treated as a special fund and not a trust
fund and can be used for the special purpose for which it was created.
ISSUE: WON the funds collected are considered as tax
HELD: No. While the funds collected may be referred to as taxes, they are executed in the
exercise of the police power of the State. The OPSF is a special fund and is plain from the
special treatment given by EO 137. It is segregated from the general trust fund.
Purpose
Subject

PAL vs EDU
FACTS: The Philippine Airlines (PAL) is engaged in the air transportation business under a
legislative franchise, Act 4271, wherein it is exempt from the payment of taxes. On the
strength of an opinion of the Secretary of Justice (Opinion 307 of 1956), PAL was determined
to have not been paying motor vehicle registration fees since 1956. The Land Transportation
Commissioner required all tax-exempt entities, including PAL, to pay motor vehicle
registration fees. PAL protested.

ISSUE: WON registration fees as to motor vehicles are taxes to which PAL is exempt
HELD: Yes. Taxes are for revenue, whereas fees are exactions for purposes of regulation and
inspection, and are for that reason limited in amount to what is necessary to cover the cost
of the services rendered in that connection. It is the object of the charge, and not the name,
that determines whether a charge is a tax or a fee. The money collected under the Motor
Vehicle Law is not intended for the expenditures of the Motor Vehicle Office but accrues to
the funds for the construction and maintenance of public roads, streets and bridges. As the
fees are not collected for regulatory purposes as an incident to the enforcement of
regulations governing the operation of motor vehicles on public highways, but to provide
revenue with which the Government is to construct and maintain public highways for
everyones use, they are veritable taxes, not merely fees. PAL is, thus, exempt from paying
such fees, except for the period between 27 June 1968 to 9 April 1979, where its tax
exemption in the franchise was repealed.
Purpose

PROGRESSIVE DEVELOPMENT vs QC
FACTS: The City Council of Quezon City adopted Ordinance 7997 (1969) where privately
owned and operated public markets to pay 10% of the gross receipts from stall rentals to the
City, as supervision fee. Such ordinance was amended by Ordinance 9236 (1972), which
imposed a 5% tax on gross receipts on rentals or lease of space in privately-owned public
markets in Quezon City. Progressive Development Corporation, owner and operator of
Farmers Market and Shopping Center, filed a petition for prohibition against the city on the
ground that the supervision fee or license tax imposed is in reality a tax on income the city
cannot impose.
ISSUE: WON the supervision fee / license tax is an income tax
HELD: No. The 5% tax imposed in Ordinance 9236 does not constitute a tax on income, nor a
city income tax (distinguished from the national income tax by the Tax Code) within the
meaning of Section 2 (g) of the Local Autonomy Act, but rather a license tax or fee for the
regulation of business in which the company is engaged. To be considered a license fee, the
imposition must relate to an occupation or activity that so engages the public interest in
health, morals, safety and development as to require regulations for the protection and
promotion of such public interest; the imposition must also bear a reasonable relation to the
probable expenses of the regulation, taking into account not only the costs of direct
regulation but also its incidental consequences as well. The gross receipts from stall rentals
have been used only as a basis for computing the fees or taxes due to the city to cover the
latters administrative expenses. The use of the gross amount of stall rentals, as basis for the
determination of the collectible amount of license tax, does not by itself convert or render
the license tax into a prohibited city tax on income. For ordinarily, the higher the amount of
stall rentals, the higher the aggregate volume of foodstuffs and related items sold in the
privately owned market; and the higher the volume of goods sold in such market, the greater

extent and frequency of inspection and supervision that may be reasonably required in the
interest of the buying public.
Purpose

TOLENTINO vs SECRETARY OF FINANCE (1995)

FACTS: There are various suits challenging the constitutionality of RA 7716 (EVAT Law) on
various grounds. The value-added tax (VAT) is levied on the sale, barter or exchange of goods
and properties as well as on the sale or exchange of services. It is equivalent to 10% of the
gross selling price or gross value in money of goods or properties sold, bartered or exchanged
or of the gross receipts from the sale or exchange of services. RA 7716 seeks to widen the tax
base of the existing VAT system and enhance its administration by amending the National
Internal
Revenue
Code.
Among the petitioners was the Philippine Press Institute,
which claims that RA 7716 violates their press freedom and religious liberty, having removed
them from the exemption to pay VAT. It is contended by the PPI that by removing the
exemption of the press from the VAT while maintaining those granted to others, the law
discriminates against the press. At any rate, it is averred, "even non-discriminatory taxation
of constitutionally guaranteed freedom is unconstitutional." PPI argued that the VAT is in the
nature of a license tax.
ISSUE: WON the purpose of the VAT is the same as that of a license tax
HELD: A license tax, which, unlike an ordinary tax, is mainly for regulation. Its imposition on
the press is unconstitutional because it lays a prior restraint on the exercise of its right.
Hence, although its application to others, such those selling goods, is valid, its application to
the press or to religious groups, such as the Jehovahs Witnesses, in connection with the
latters sale of religious books and pamphlets, is unconstitutional. As the U.S. Supreme Court
put it, it is one thing to impose a tax on income or property of a preacher. It is quite
another thing to exact a tax on him for delivering a sermon.
The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a
privilege, much less a constitutional right. It is imposed on the sale, barter, lease or
exchange of goods or properties or the sale or exchange of services and the lease of
properties purely for revenue purposes. To subject the press to its payment is not to
burden the exercise of its right any more than to make the press pay income tax or subject
it to general regulation is not to violate its freedom under the Constitution.
Purpose

d. Tax vs Special Assessment

Distinguish tax from Special Assessment.

Scope

TAX
Regular exaction

SPECIAL ASSESSMENT
Exceptional as to time and
locality

Purpose
Object / Subject
Nature

Person Liable
Source / Basis

For the support of the

government
Imposed on persons, property
rights or transactions
An enforced proportional
contribution from persons
and property for public
purposes

Contribution to the cost of

public improvement
Levied only on land

An enforced proportional
contribution from owners of
lands especially those who
are peculiarly benefited by
public improvements
Personal liability of the tax Not a personal liability of
payer
the person assessed
Power of Taxation
Police Power

Section 240, RA 7160

Section 240. Special Levy by Local Government Units. - A province, city or municipality may
impose a special levy on the lands comprised within its territorial jurisdiction specially
benefited by public works projects or improvements funded by the local government unit
concerned: Provided, however, That the special levy shall not exceed sixty percent (60%) of
the actual cost of such projects and improvements, including the costs of acquiring land and
such other real property in connection therewith: Provided, further, That the special levy shall
not apply to lands exempt from basic real property tax and the remainder of the land
portions of which have been donated to the local government unit concerned for the
construction of such projects or improvements.
REPUBLIC vs BACOLOD-MURCIA MILLING CO.
FACTS: RA 632 created the Philippine Sugar Institute, a semi-public corporation. In 1951, the Institute
acquired the Insular Sugar Refinery for P3.07 million payable in installments from the proceeds of the
sugar tax to be collected under RA 632. The operation of the refinery for 1954 to 1957 was disastrous
as the Institute suffered tremendous losses. Contending that the purchase of the refinery with money
from the Institutes fund was not authorized under RA 632, and that the continued operation of the
refinery is inimical to their interest, Bacolod-Murcia Milling Co., Ma-ao Sugar Central, Talisay-Silay
Milling Co. and the Central Azucarera del Danao refused to continue with their contribution to said
fund. The trial court found them liable under RA 632.
ISSUE: WON the taxpayers may refuse to pay the special assessment, allegedly distinct from an
ordinary tax which no one can refuse to pay

HELD: No. The nature of a special assessment similar to the case has been discussed and
explained in Lutz vs. Araneta. The special assessment or levy for the Philippine Sugar Institute
(Philsugin) Fund is not so much an exercise of the power of taxation, nor the imposition of a
special assessment, but the exercise of police power for the general welfare of the entire

country. It is, therefore, an exercise of a sovereign power which no private citizen may
lawfully resist. Section 2a of the Charter authorizing Philsugin to conduct research work for
the sugar industry in all its phases, either agricultural or industrial, for the purpose of
introducing into the sugar industry such practices or processes that will reduce the cost of
production and achieve greater efficiency in the industry, justifies the acquisition of the
refinery in question. The financial loss resulting from the operation thereof is no means an
index that the industry did not profit therefrom, as other gains of a different nature (such as
experience) may have been realized.
e. Tax vs Toll
Section 153-155, RA 7160
Section 153. Service Fees and Charges. - Local government units may impose and collect such
reasonable fees and charges for services rendered.
Section 154. Public Utility Charges. - Local government units may fix the rates for the
operation of public utilities owned, operated and maintained by them within their
jurisdiction.
Section 155. Toll Fees or Charges. - The sanggunian concerned may prescribe the terms and
conditions and fix the rates for the imposition of toll fees or charges for the use of any public
road, pier, or wharf, waterway, bridge, ferry or telecommunication system funded and
constructed by the local government unit concerned: Provided, That no such toll fees or
charges shall be collected from officers and enlisted men of the Armed Forces of the
Philippines and members of the Philippine National Police on mission, post office personnel
delivering mail, physically-handicapped, and disabled citizens who are sixty-five (65) years or
older.
When public safety and welfare so requires, the sanggunian concerned may discontinue the
collection of the tolls, and thereafter the said facility shall be free and open for public use.
Distinguish Tax from Toll.
Definition

Purpose
Authority
Amount

TAX
An enforced proportional
contribution from persons
and property for public
purposes
For the support of the
government
May be imposed by the State
only
Generally amount is unlimited

TOLL
A consideration paid for the
use of a road, bridge or the
like, of a public nature.
For the use of anothers
property
May be imposed by private
individuals or entities
Amount is limited to the

cost and maintenance of

public improvement
Source / Basis

Demand of sovereignty

Demand of proprietorship

f. Tax vs Penalty
Section 247-281, National Internal Revenue Code
SEC. 247. General Provisions. (a) The additions to the tax or deficiency tax prescribed in this Chapter shall apply to all taxes,
fees and charges imposed in this Code.
The Amount so added to the tax shall be collected at the same time, in the same manner and
as part of the tax.
(b) If the withholding agent is the Government or any of its agencies, political subdivisions or
instrumentalities, or a government-owned or controlled corporation, the employee thereof
responsible for the withholding and remittance of the tax shall be personally liable for the
additions to the tax prescribed herein.
(c) the term "person", as used in this Chapter, includes an officer or employee of a
corporation who as such officer, employee or member is under a duty to perform the act in
respect of which the violation occurs.
SEC. 248. Civil Penalties. - (A) There shall be imposed, in addition to the tax required to be
paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following
cases: (1) Failure to file any return and pay the tax due thereon as required under the
provisions of this Code or rules and regulations on the date prescribed; or (2) Unless
otherwise authorized by the Commissioner, filing a return with an internal revenue officer
other than those with whom the return is required to be filed; or (3) Failure to pay the
deficiency tax within the time prescribed for its payment in the notice of assessment; or (4)
Failure to pay the full or part of the amount of tax shown on any return required to be filed
under the provisions of this Code or rules and regulations, or the full amount of tax due for
which no return is required to be filed, on or before the date prescribed for its payment.
(B) In case of willful neglect to file the return within the period prescribed by this Code or by
rules and regulations, or in case a false or fraudulent return is willfully made, the penalty to
be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case, any
payment has been made on the basis of such return before the discovery of the falsity or
fraud: Provided, That a substantial underdeclaration of taxable sales, receipts or income, or a
substantial overstatement of deductions, as determined by the Commissioner pursuant to
the rules and regulations to be promulgated by the Secretary of Finance, shall constitute

prima facie evidence of a false or fraudulent return: Provided, further, That failure to report
sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per
return, and a claim of deductions in an amount exceeding (30%) of actual deductions, shall
render the taxpayer liable for substantial underdeclaration of sales, receipts or income or for
overstatement of deductions, as mentioned herein.

Definition

Purpose
Authority

TAX
An enforced proportional
contribution from persons
and property for public
purposes
To raise revenue

PENALTY
Sanction imposed as a
punishment for a violation
of the law or acts deemed
injurious; violation of tax
laws may give rise to
imposition of penalty
To regulate conduct

Maybe imposed by the State Maybe imposed by private

only
entities

g. Tax vs Tariff and Customs Duties

Distinction of tax and Customs Duties
Coverage

TAX
More comprehensive
customs duty

Object

Persons, property, etc.

Goods
exported

To raise revenue

Both revenue-raising and

for regulatory purposes

Purpose

TARIFF & CUSTOMS DUTIES

than Only a kind of tax therefore
limited coverage
imported

or

GARCIA vs EXECUTIVE SECRETARY

FACTS: On 27 November 1990, Pres. Corazon Aquino issued EO No. 438 which imposed an
additional duty of 5% ad valorem to imported goods brought in the Philippines. It was
imposed across the board on all imported articles, including crude oil and other oil products
imported into the Philippines. On January 3, 1991, it was again increased to 9% ad valorem by
virtue of Executive Order No. 443.
On 24 July 1991, the Department of Finance requested the Tariff Commission to initiate the
process required by the Tariff and Customs Code for the imposition of a specific levy on crude

oil and other petroleum products, as mandated by Section 104 of the Tariff and Customs
Code. Following such request, the Tariff Commission conducted a public hearing as required
by Se. 404 of the aforesaid code. On August 15, 1991, again the President issued Executive
Order No. 475 was issued by reducing the rate of additional duty on all imported articles
from 9% to 5% ad valorem, except for crude oil and other oil products which continued to be
subject to the additional duty of 9% ad valorem. On August 16, 1991, upon completion of the
public hearings conducted by the Tariff Commissions, it submitted a report to the President.
Acting on such report, the President issued Executive Order No. 478 which levied a special
duty of P0.95 per liter or P151.05 per barrel of imported crude oil and P1.00 per liter of
imported oil products. This special duty was in addition to the 9% ad valorem duties. Because
of these foregoing circumstances, Congressman Garcia alleged the illegality and
unconstitutionality of Executive Order Nos. 475 and 478. He contended that it runs counter
the provision of Sec. 24, Art. VI of the Constitution. He averred that since the Constitution
vests the authority to enact revenue bills in Congress, the President may not assume such
power by issuing executive orders which are in the nature of revenue-generating measures.
He even argued that Executive Orders No. 475 and 478 contravene Section 401of the Tariff
and Customs Code, which Section authorizes the President, according to petitioner, to
increase, reduce or remove tariff duties or to impose additional duties only when necessary
to protect local industries or products but not for the purpose of raising additional revenue
for the government. Hence, this petition.
ISSUE: WON the President is vested with delegated taxing power thus, authorized her to
issue executive orders imposing tariff rates.
HELD: Yes. Section 28(2) of Article VI of the Constitution provides as follows:
(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.
There is thus explicit constitutional permission to Congress to authorize the President
"subject to such limitations and restrictions as Congress may impose" to fix "within specific
limits" "tariff rates and other duties or imposts." The relevant congressional statute is the
Tariff and Customs Code of the Philippines, and Sections 104 and 401, the pertinent
provisions thereof.
Section 401 however pertains to Flexible Clause which holds that the President has the
power to adjust tariff rates for purposes of protecting our local industries. Therefore,
Executive Order Nos. 475 and 478 are valid and constitutional by virtue of the delegated
taxing power granted to President Corazon Aquino.
Customs duties which are assessed at the prescribed tariff rates are very much like taxes
which are frequently imposed for both revenue-raising and for regulatory

purposes. Customs duties is the name given to taxes on the importation and exportation of
commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a
foreign country.
h. Obligation to pay Tax vs Obligation to pay Debt
Basis
Assignability
Mode of Payment
Set-off
Effect of Non-payment
Interest
Prescription

TAX
Obligation created by law

DEBT
Obligation
based
on
contract, express or implied
Not assignable
Assignable
Payable in money or in kind
Payable in kind or in money
Not subject to set-off
Subject to set-off
May result to
No imprisonment (except
imprisonment
when debt arises from
crime)
Bears
interest
only
if Interest depends upon the
delinquent
written stipulation of the
parties
Governed by the special Governed by the ordinary
prescriptive periods provided periods of prescription
for in the NIRC

Why cant taxes be subject to compensation or set-off?

The general rule is no set-off is admissible against the demands for taxes levied for general or
local governmental purposes. Taxes are not in the nature of contracts between the parties but
grow out of duty to, and are positive acts of the government to the making and enforcing of
which, the personal consent of the individual taxpayer is not required.
Taxes, generally cannot be the subject of compensation or set-off because of the lifeblood
theory, taxes are not a contractual obligation as there is absence of the consent of the
taxpayer. Taxpayer and government are not mutual creditors and debtors of each other.
Where both of the claims of the government and the taxpayer against each other have already
become due, demandable, and fully liquidated, compensation takes place by operation of law
and both obligations are extinguished to their concurrent amounts. In the case of the
taxpayers claim against the government, the government must have appropriated the amount
thereto.
EXCEPTIONS TO THE GENERAL RULE THAT TAXES CANNOT BE THE SUBJECT OF COMPENSATION
1) Where both of the claims of the government and the taxpayer become due,
demandable and fully liquidated

2) local government taxes

3) overpayment of taxes (tax credit / excess)
ARTICLE 1279, 1290: NEW CIVIL CODE
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
Art. 1290. When all the requisites mentioned in Article 1279 are present, compensation takes
effect by operation of law, and extinguishes both debts to the concurrent amount, even
though the creditors and debtors are not aware of the compensation.
REPUBLIC vs MAMBULAO LUMBER
FACTS: Mambulao Lumber Company paid the Government a total of P9,127.50 as
reforestation charges. Having found liable for an aggregate amount of P4,802.37 for forest
charges, it contended that since the Republic (Government) has not made use of the
reforestation charges for reforesting the denuded area of the land covered by the companys
license, the Republic should refund said amount or, if it cannot be refunded, at least the
company should be compensated with what it owed the Republic for reforestation charges.
ISSUE: WON taxes may be subject of set-off or compensation
HELD: No. Internal revenue taxes, such as forest charges, cannot be the subject of set-off or
compensation. A claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off under the statutes of setoff, which are construed uniformly, in the light
of public policy, to exclude the remedy in an action or any indebtedness of the State or
municipality to one who is liable to the State or municipality for taxes. Neither are they
subject of recoupment since they do not arise out of the contract or transaction sued on.
Taxes are not in the nature of contracts between the parties 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 individual taxpayers is not required.
PHILEX MINING vs CIR

FACTS: BIR sent a letter to Philex in 1992 asking it to settle tax liabilities for the 2nd, 3rd, and
4th quarters of 1991 and 1st and 2nd quarters of 1992 totaling to P13M. Philex protested the
demand for payment of tax liabilities stating that it has a pending VAT input credit / refund
for taxes paid for 1989 to 1991 amounting to P119M plus interest, which should be applied
against its tax liabilities.
ISSUE: WON tax liabilities can be offset against pending VAT refund
HELD: No. 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. A distinguishing
feature of a tax is that it is compulsory rather than a matter of bargain. Hence, a tax does not
depend upon the consent of the taxpayer. If any taxpayer can defer the payment of taxes by
raising the defense that it still has a pending claim for refund or credit, this would adversely
affect the government revenue system.
CALTEX vs COA
FACTS: In 1989, COA sent a letter to Caltex, directing it to remit its collection to the Oil Price
Stabilization Fund (OPSF), excluding that unremitted for 1986 and 188 of the additional tax
on petroleum products authorized under Section 8 of PD 1956; and that pending such
remittance, all its claims for reimbursement from the OPSF shall be held in abeyance. Caltex
requested COA, notwithstanding an early release of its reimbursement certificates from the
OPSF, which COA denied. On 31 May 1989, Caltex submitted a proposal to COA for the
payment and the recovery of claims. COA approved the proposal but prohibited Caltex from
further offsetting remittances and reimbursements for the current and ensuing years. Caltex
moved for reconsideration.
ISSUE: WON the amounts due from Caltex to the OPSF may be offsetted against Caltex
outstanding claims from said funds.
HELD: No. Taxation is no longer envisioned as 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. PD 1956, as amended by EO 137,
explicitly provides that the source of OPSF is taxation. A taxpayer may not offset taxes due
from the claims that he may have against the government. Taxes cannot be the subject of
compensation because the government and taxpayer are not mutually creditors and debtors
of each other and a claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off.
FRANCIA vs IAC

FACTS: Engracio Francia was the registered owner of a house and lot located in Pasay City. A
portion of such property was expropriated by the Republic of the Philippines in 1977. It
appeared that Francia did not pay his real estate taxes from 1963 to 1977. Thus, his property
was sold in a public auction by the City Treasurer of Pasay City.
ISSUE: WON the expropriation payment may compensate for the real estate taxes due.
HELD: No. Taxation is no longer envisioned as 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. PD 1956, as amended by EO
137, explicitly provides that the source of OPSF is taxation. A taxpayer may not offset taxes
due from the claims that he may have against the government. Taxes cannot be the subject
of compensation because the government and taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment
as is allowed to be set-off.
i. Tax vs Government Revenue
Revenue a broad term that includes not only taxes but income from other sources as well
Internal revenue refers to taxes other than duties on imports or exports in the nature of
excise taxes such as taxes on tobacco, liquor, etc.
Definition

TAX
REVENUE
A source of revenue of the Includes not only taxes but
government
other sources as well

2. Essential Characteristics of Tax

What are the essential characteristics of tax?
(1) COMPREHENSIVE - it covers persons, businesses, activities, professions, rights and
privileges.
(2) UNLIMITED - it is so unlimited in force and searching in extent that courts scarcely
venture to declare that it is subject to any restrictions, except those that such rests in
the discretion of the authority which exercises it.
(3) PLENARY - it is complete. Under the NIRC, the BIR may avail of certain remedies to
ensure the collection of taxes.
(4) SUPREME - it is supreme insofar as the selection of the subject of taxation is concerned.
CALTEX vs COA

FACTS: In 1989, COA sent a letter to Caltex, directing it to remit its collection to the Oil Price
Stabilization Fund (OPSF), excluding that unremitted for 1986 and 188 of the additional tax
on petroleum products authorized under Section 8 of PD 1956; and that pending such
remittance, all its claims for reimbursement from the OPSF shall be held in abeyance. Caltex
requested COA, notwithstanding an early release of its reimbursement certificates from the
OPSF, which COA denied. On 31 May 1989, Caltex submitted a proposal to COA for the
payment and the recovery of claims. COA approved the proposal but prohibited Caltex from
further offsetting remittances and reimbursements for the current and ensuing years. Caltex
moved for reconsideration.
ISSUE: WON the amounts due from Caltex to the OPSF may be offsetted against Caltex
outstanding claims from said funds.
HELD: No. Taxation is no longer envisioned as 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. PD 1956, as amended by EO 137,
explicitly provides that the source of OPSF is taxation. A taxpayer may not offset taxes due
from the claims that he may have against the government. Taxes cannot be the subject of
compensation because the government and taxpayer are not mutually creditors and debtors
of each other and a claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off.
3. Theory and Basis of Taxation
What are the theories in taxation?
The theories underlying the power of taxation are the following:
(1) Lifeblood Theory
(2) Benefits-Protection Theory (Doctrine of Symbiotic Relationship)
Lifeblood Theory
Taxes are the lifeblood of the government and their prompt and certain availability is an
imperious need. The underlying basis of taxation which is governmental necessity, for indeed,
without taxation, a government can neither exist nor endure. Taxation is a principal attribute of
sovereignty. The exercise of the taxing power derives its source from the very existence of the
State whose social contract with its citizens obliges it to promote public interest and the public
good.
Taxation is the indispensable and inevitable price for a civilized society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and operate it.

The existence of the government is a necessity. It cannot continue without a means to pay its
expenses and therefore has a right to compel all citizens and property within its power and
contribute.
Benefits-Protection Theory (Doctrine of Symbiotic Relationship)
It involves the power of the State to demand and receive taxes based on the reciprocal duties
of support and protection between the State and its citizen. Every person who is able must
contribute his share in the burden of running the government. The government for its part is
expected to respond in the form of tangible and intangible benefits intended to improve the
lives of the people and enhance their material and moral values.
Special benefits to taxpayers are not required. A person cannot object to or resist the payment
of taxes solely because no personal benefit to him can be pointed out arising from the tax.
It is a legal duty on the part of the citizen to pay taxes to support the Government. On the other
hand, it is a reciprocal duty on the part of the Government to provide protection and benefits.
LORENZO vs POSADAS
FACTS: Thomas Hanley dies, leaving a considerable amount of real and personal properties.
The properties under the will of Thomas were to pass to his nephew Matthew Hanley after
10 years. The CFI of Zamboanga considered it proper for the best interest of the estate to
appoint a trustee for the administration of real properties which were to pass to Matthew 10
years after. Moore is one of the appointed trustees by the court in 1924 but resigned in 1932.
Lorenzo was then appointed in his stead. The CIR assessed against the estate an inheritance
tax with penalties amounting to P2K which Lorenzo paid in protest.
ISSUE: WON the trustee is bound to pay inheritance taxes
HELD: Yes. The obligation to pay rests upon the privileges enjoyed by, or the protection
afforded to a 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 the payment of taxes solely
because no personal benefit to him can be pointed out. While courts will not enlarge, by
construction, the government's power of taxation they also will not place upon tax laws so
loose a construction as to permit evasions on merely fanciful and insubstantial distinctions.
When proper, a tax statute should be construed to avoid the possibilities of tax evasion.
Construed this way, the statute, without resulting in injustice to the taxpayer, becomes fair to
the government.
CIR v. Algue (158 SCRA 9)
FACTS: Philippine Sugar Estate Development Corporation (PSEDC) appointed Algue, Inc. as its
agent, authorizing it to sell its land, factories, and oil manufacturing process. Philippine Sugar

was later on sold by Vegetable Oil Investment Corporation and Algue received a commission
of P125,000, and it was from this commission that it paid Guevarra, et. al, organizers of
VOICP, P75,000 in promotional fees. In 1965, Algue received assessment from CIR in the
amount of P83,000 as delinquency income tax for years 1958-59. Algue protested but the
Motion for Reconsideration was not acted upon by the BIR.
ISSUE: WON the assessment of 83,000 was reasonable.
HELD: Taxes are the lifeblood of the government and should be collected without necessary
hindrance. Taxes are what we pay for a civilized society. Without taxes, the government
would be paralyzed for lack of the motive power to activate and operate it. Hence, despite
the natural reluctance to surrender part of ones hard earned income to the taxing
authorities, every person who is able to must contribute his share in the running of the
government. The government, for its part, is expected to respond in the form of tangible
and intangible benefits intended to improve the lives of the people and enhance their moral
and material values. This symbiotic relationship is the rationale of taxation and should
dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of
power.
However, collection must be made in accordance with the law, as any arbitrariness will
negate the very reason for government itself. The tax collector can still be stopped in his
tracks if the taxpayer can demonstrate that the law has not been observed. The claimed
deduction as to compensation for personal services (promotional fees) had been legitimately
paid by Algue. It has further proved that the promotional fees paid was reasonable and
necessary in light of the efforts exerted by Algue in including investors (VOICP) to involve
themselves in an experimental enterprise or a business requiring millions of pesos.