Taxation started in the times of Pharaohs

Their scribes imposed tax on the use of cooking oil and collect funds
by auditing each household and determine that they are using the
oil they purchase and not a byproduct of any other source other
than the ones they buy from the market (no reusing of oil)

Earliest recorded taxation was done in China

They imposed taxes on whatever goods produced by the people

Greeks imposed tax

Whenever there was war, the government imposed tax which is

used to finance the war
But some of the funds that remain at the end of the war, they were
refunded to the people
Greeks also imposed taxes on foreigners (those whose father or
mother are not greeks)

Roman Empire

Caesar Augustus imposed inheritance tax to get reitrment funds for

soldiers
This tax was a great idea since it encouraged men to become
soldiers for the roman army

British

First imposed income tax, imposed tax on the wealthy

The british brought this practice to their colonies hence it went to
the US

Philippines

Never had taxes until the Spaniards came to our lands

Prior to that never had taxes
Spaniards imposed taxes but never got funds therefore the Spanish
empire usually subsidized the Colony
Taxes imposed in the form of maize (corn or currency?)
Imposed taxes on jewelry and trinkets
The practice has always been to impose tax on the rich than the
poor

American Period

Tax measure was first imposed

Embodied in the phil bill of 1902
It was then codified in 1935
Another tax code was enacted in 1977
1987, another tax code
Then finally 1997 the NIRC was enacted

Summary

Governments have always imposed taxes to fund its operations

It is inherent in any government since government can never exist
without any funds and it is what is needed for a civilized society
What is Taxation?

Power by which the sovereign raises revenue to defray necessary

expenses of the government
It is a way of apportioning the cost of government among those who
in some measure are privileged to enjoy its benefits and must bear
its burden
Taxation is a destructive power which interferes with the personal
and property rights of the people and takes from them a portion of
their property for the support of the government. (Paseo Realty
Case)
It is not necessary for the power of taxation to be embodied in the
constitution because it is inherent in the sovereign

What encompasses the sovereign? Pelizloy case

The power to tax is an attribute of sovereignty and the sovereign

refers to the national government
The power to tax is not inherent in other political subdivisions
(cities, provinces, etc) but they can tax as long as their charter or
there is a statute plainly showing an intent to confer the power to
tax upon it and this is done pursuant to a constitutional mandated
(Fiscal Autonomy)
but that constitutional mandate is subject to the limitations of
Congress as specifically provided in the Constitution (this is done
through the Local Government Code)
The power to tax of local government is subject to inherent,
constitutional, and statutory limitations
On the other hand, the power to tax of the national government is
governed by no one but there are still inherent and constitutional
limitations in the power to tax

Nature of the power of taxation

Two-fold: It is an attribute of sovereignty and legislative in character

Although power to tax is unlimited, it is subject to inherent and
constitutional limitations

Attribute of Sovereignty

It is an attribute of sovereignty which means no law or

constitutional mandate is necessary for the national government to
practice it
Constitutional provisions on taxation are not grants but actually
limitations on the power to tax which would otherwise be unlimited
As an incident of sovereignty, the power to tax has been described
as unlimited in its range, acknowledging in its very nature no limits,
so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the
constituency who are to pay for it
But then again the case of paseo realty states that it is a necessity
for one to have a civilized society and therefore:
o Tax exemptions must be construed strictly against the tax
payer and liberally for the state
 o But taxation laws itself must be construed strictly against
the state and in favor of the taxpayer

Due to this, taxation is described to be unlimited in its range

Congress wields the power to limit the power of taxation.
Although taxation is unlimited, it is under the control of
Congress. There is accountability on the part of our
representatives.
Basis: The inherent power of the State is anchored on its social
contract with its citizens which obliges it to promote public
interest and common good (Concurring and Dissenting Opinion
of Justice Leonen in Manila Memorial v. DSWD and DOF)
Paseo case: Taxation is a destructive power. It affects property
rights because people have to give out of their properties. Thats
why we have Congress as wielder of the control of this power.
Based on the special contract, it the obligation of Congress to
enact laws which are reasonable and within the limits described
by most as reasonable.
Manifestations:
a. One of the manifestation of the power of taxation as
inherent is the fact that it is unlimited and it can only be
limited by the representatives of the people
b. Another manifestation of it being inherent is the mere fact
that the government needs taxes for its lifeblood. And
because it is necessary, the consequence is that the
collection of taxes cannot be hindered.
c. Another manifestation is that it cannot be compensated or
set off. However, there is exception: When the tax payable
to the government and the governments obligation to the
taxpayer are already due and demandable and are duly
liquidated.
o GR: Taxes cannot be set off. Otherwise, the government will
be left with no money and would run counter to the
lifeblood doctrine. We follow the doctrine of equitable
recoupment where any illegally or erroneously collected
taxes or those which the taxpayer overpaid and the same
has already prescribed supposedly can be set off with taxes
to be paid to the government. This is not applicable in the
Philippines. Although one case allowed setting off but this
was already abandoned.

Power to tax cannot be subject to injunction. Whenever there is tax

to be paid, taxpayer cannot go to court to order the government to
stop collecting the tax. This would run counter to lifeblood doctrine

Legislative in character

It has to be Congress who exercises the power to tax through a

legislative act (sanggu in the political subdivisions)
Scope of power to tax or extent
o To Determine
Purpose
in relation to making a tax, the primary
purpose is for public purpose. This is to be
 determined by Congress. It is presumed that
the tax is for public purpose once enacted
by Congress. However, this can still be
questioned.
Concept of public purpose has been elastic.
(Planters Product v. Fertiphil) P10 per sack
of fertilizer is taken from the revenues of
sellers of fertilizers in favor of FPI which is a
private entity. However, FPI is owned by a
foundation which is intended for the benefit
of farmers. In this case, there is a private
entity being supported by the revenues of
private individuals. The justification of the
government in imposing it is that it will help
rebuild or strengthen the fertilizer industry.
SC said that clearly, it was not intended for
the benefit of fertilizer industry because of
the several circumstances surrounding FPI.
There has been record that FPI is having
difficulty in paying its debts. Why will public
be made to pay the debt of a public
corporation. SC though recognizes that the
concept of public purpose is no longer
limited to what it was traditionally
contemplated to be as involving
government services. It has become an
elastic concept intended to promote social
justice.
Subjects and objects of taxation within its
jurisdiction
Persons, property, and exercise of privilege
Amount and rate of tax
No specific as to amount but it must be
uniform, equitable and reasonable; one
which would not go against the deprivation
of property without due process of law.
What could be considered reasonable is a
determination by Congress
Kind of tax to be collected
It can be based on income, customs, tariff,
import and export, sales, privilege
This is part of the scope of the legislative
power
Apportionment of the tax
Who gets to be benefited by the tax
To which portion of the Philippine society
gets to make use of the tax
There are taxes intended for specific
industry
Manner and mode of enforcement and collection
Details of collecting taxes is with the
administrative agencies but the manner and
 mode are still to be provided for by
Congress
Ex. NIRC provides how taxes are to be
collected, either through withholding,
creditable, or final
Congress still has to provide sufficient
standards on how taxes should be collected.
Situs of taxation
Place of taxation
Ones connection with a particular place
makes up the situs
Philippines follow a multi-situs taxation; it
can be based on residence, citizenship,
where a particular income is earned
Grant tax exemption or condonation
To be determined by Congress
However, there are instances where
Congress delegates the prerogative to
determine whether it would fall under the
exemption
Tax exemption must be construed strictly
against the taxpayer and liberally in favor of
the government
Provision of administrative and judicial remedies
that may be availed by the taxpayers and
government
Provisions under National Internal Revenue Code
which provides remedies for the government on
how theyre supposed to collect taxes and remedies
for taxpayers in case they want to question the
assessment given to them
Executive branch enforces the tax laws enacted by
Congress. Whenever there are disputes as to how
the laws be interpreted, there is the judiciary. This is
actually an interplay of the three branches of
government.
o To be specific, it is the lower house which raises the bill up
to the upper house and they decide on it in plenary
o Being legislative in character, the GR is that it is only
Congress which can exercise such power. Exception
Congress may delegate these as long as the delegation is proper by
providing sufficient standards
o Basis: Legislative character of power to tax is based on the
principle that taxes are the grant of the people who are
taxed. The grant is made by the immediate representatives
of the people. Power to tax exist because the sovereign
exists which is composed of the people. So, the power to tax
is a grant of the people by choosing the representatives who
can sit in the legislature and decide on the appropriate tax
to levy on the people in exchange of general welfare and
protection
 o Read Creva v. Romulo this case is about the
constitutionality of minimum corporate income tax

Generally not delegated to executive or judicial department except for

certain cases

The power to tax delegated to the executive or judicial department

is not necessarily an exception since Congress can still set the
standards on how the other branches of government can exercise
the power to tax
Example
o LGU can exercise power to tax through the LGC because the
constitution provides that LGUs must have fiscal autonomy
o President have the power to fix within specified rates
wharfage etc. and this is embodied in the TCC and the
Constitution
o In relation to the administrative aspect of taxation, the
administrative power of taxation is delegated to the
administrative agencies

Subject to constitutional and inherent limitations

The power to tax may be unlimited, plenary, comprehensive and

supreme
Other the constitutional and inherent limitations, the only thing
stopping Congress from abusing their power to tax is their
responsibility to their constituents

Theory and Basis of Taxation

Theory of Taxation (Lifeblood theory or the Necessity Theory (IMPORTANT)

The governments existence is a necessity and it cannot continue

without the means to pay its expenses and that is why taxes need to
be imposed to sustain the government, taxes become the lifeblood
of the government to sustain it
And for this reason the government has the right to compel all
citizens and property within its limits to contribute in the form of
taxes
Answer of last resort

Basis of Taxation (Benefits received Theory or the Symbiotic relationship

Theory)

Taxes are what we pay for is for the civilized society

Without taxes, the government would be paralyzed for lack of the
motive power to activate and operate it
Everyone has to give up part of their property and in turn the
government 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 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
If you want to get the benefits of the government, pay taxes
Taxes for support, support for taxes

Clarification:

Theory of taxation is the lifeblood theory

Basis of taxation is the benefits received theory
\Necessity theory is known as the lifeblood theory, governmental
necessity theory
Benefits theory is also known as the symbiotic relationship theory,
reciprocity theory, compensation theory
Theres a thin line of difference between necessity theory and
lifeblood theory. Necessity theory looks at the existence of the
government as necessary while lifeblood doctrine refers to the taxes
as being necessary for the government to exist. But theyre actually
the same.

Objectives of Taxation

Revenue Raising

To raise revenue to promote the general welfare and protection of

its citizens
Circumscribed by inherent and constitutional limitations
collected to support the government operations because of the
lifeblood doctrine; the government needs this for the state to exist

Redistribution

When taxes are imposed, the higher your ability to pay, the higher
the taxes you pay
By imposing higher taxes, the people who have less in life get to share
in the abundance of other individuals
o The wealth you have will be distributed
Income tax is the best example for this
This is also the justification of estate tax. When you receive an
inheritance, it is just a windfall or waterfall profit because it just falls
on your hand due to certain luck. So, the inheritance is subject to tax
in order for some people who did not have the same luck that you
have to benefit from it because we want to redistribute wealth

Repricing

higher taxes are imposed on luxury products and on those which are
against the government objective in terms of health, especially on
alcoholic drinks and beverage.
o If we impose higher taxes on these products, the prices will
also be altered
o The entities or people selling this have to change the price in
order to pay the higher taxes.
o By doing so, you get to change the behavior of the citizens.
o This helps the government in promoting its objective.
 Taxes can be used to reprice a product to promote a government
objective.
o It is the intention of the government to make these things
more expensive to discourage people from patronizing it
Purpose is to change the behavior of the people or promote a
certain policy that you want. If you want a healthy community, you
impose higher taxes on unhealthy items
In order to prevent these habits from continuing, government can
make use of power to tax to curtail such habits

Representation

Refers to a historical concept in the US that there can be no taxation

without representation.
Because we lodged the power to tax with our legislature, we expect
something in return.
Taxes being imposed is because of our representatives in
government
This is the form of consent to the taxes imposed upon us
We vote people who will represent us in Congress who will impose
taxes on us
The people we put in office serves as our reps in imposing taxes on
us
It is a matter of accountability because of the power and authority
given to them.
Our representatives are the ones imposing the tax and since were
the ones who put them in their position, we can demand something
from them through efficient and effective government service. The
representation referred is representatives of political community
which has accountability to the people who elected them. There is no
taxation without representation.

Purpose of Taxation

Main Purpose: Revenue raising

To raise revenue to promote the general welfare and protection of its

citizens
The power of taxation is circumscribed by inherent and constitutional
limitations

Sumptuary Purposes: Non-revenue raising

Regulation

Created by legislature to levy a tax on an industry to promote the

industry or to curtail problems in the industry.
o Repricing is a form of regulation.
o When you impose high taxes on liquors, the cost of buying is
higher so you are regulating.
o You can also rehabilitate a particular industry.
If you want to protect local industry, you impose high taxes on foreign
corporations in order to prevent unfair competition because foreign
corps tend to have higher funding
 It can be used to provide means for rehabilitation or stabilization of a
threatened industry
Tio v. Video Regulatory Board
o In the case of Tio vs Video Regulatory Board, the government
levied tax on the videogram industry and the petitioner
assailed the constitutionality of PD 1987 creating the
videogram regulatory board and that section 10 of such law
imposes a tax of 30% on the gross recepits payable to the
local government which was harsh, confiscatory, oppressive
and unlawful restraint of trade
SC said that contrary to what the petitioner alleges,
such law was not confiscatory in nature because it
was actually enacted to regulate the industry and
used as an additional source of revenue
The tax here was used to strengthen the videogram
industry to regulate the video industry and the
levying of 30% of gross receipts payable to the local
government was intended to curtail the evils in the
industry.
Prior to such regulation, anyone can just
produce videos and sell it to the public, even
including pornographic materials.
o The petitioners who were producers are questioning why
they are asked to pay for the expenses of the videogram
regulatory board because the tax collected is for the benefit
of the latter.
SC said that the tax may be used to regulate an
industry for public purpose even if the motive of
congress is to favor a particular industry and it
doesnt take away its public purpose.
It is inherent in the power to tax that a state be free
to select the subjects of taxation, and it has been
repeatedly held that inequities which result from a
singling out of one particular class for taxation or
exemption infringe no constitutional limitation
o There are other taxes to strengthen a particular industry like
that of the sugar industry which is commonly referred to but
which are very old cases already.
o Congress passed an act creating a videogram regulatory
board and one of the provisions imposes 10% tax on the
local gross receipts. Group of producers assailed the validity
of the law saying that videogram regulatory board is actually
unconstitutional because it was intended to restrict their
industry. SC said that public purpose could favor one
industry over another. It is still considered for public
purpose even if Congress thinks that the motive which
impelled them to impose the tax is to favor one industry
over another. It is inherent power of the state. Inequities
which results to singling out of one particular class for
taxation or exemption infringe no constitutional limitation
because taxation has been made the implement of states
police power.
Promotion of General Welfare and Implementation of Police Power

This is the same with regulation.

Police power may be exercised for the purpose of requiring licenses
for which license fees may have to be paid
o For useful occupations
The amount should only be sufficient to pay for the
cost of the licence and the necessary expense of
police surveillance and regulation
o For non-useful occupations
License fee may be sufficiently high to discourage the
particular activity sough to be regulated
Police power may not be exercised by itself alone for raising taxes
o BUT it may be exercised jointly with the power ot taxation for
the purpose of raising revenue
Whatever revenue generated is used to fund a government activity
intended to promote general welfare.
However, in its exercise, this may be used to destroy
Reconcile the Marshall and Holmes dictum
o The power to tax involves the power to destroy but not while
the court sits.
o The SC remains there to check and make sure that there is
still due process.
o The power to tax can destroy only if it is used as an
implement of police power.
o In other instances, the court will be there to check.
o Those who are selling alcoholic drinks who cannot shoulder
the cost of tax might as well close their business.
o That is how powerful tax is but there are still constitutional
and inherent limitations which can be used to question a tax
law.

Eliminate social inequalities

There is progressive system in taxation prevents the undue

concentration of wealth in the hands of a few individuals; the more
you earn the higher taxes you pay.
Progressivity is keystoned on the principle that those who are able to
pay shoulder the bigger portion of the tax burden
Those who are earning less get to share in the services, in effect
whatever one earns is for the benefit of all.

Encourage economic growth

The power to condone taxes does not exist, except in the

condonation of taxes granted only for certain justifiable reasons
expressly stated in the law
There can be incentives and exemptions granted to foreign investors
to encourage them to invest and pour their capital in the Philippines.
This is done to encourage higher reserves of foreign currency so that
the peso in relation to foreign exchange will be higher and will
stabilize.
By doing so, we improve the economy of our country.
 Scope of taxation

It can tax anything; there is no limitation as to the amount that it may

tax.
o It is comprehensive, unlimited, supreme and plenary.
The SC said that plenary nature of taxation is delegated to the local
government.
o This implies that the legislative body has the discretion to
delegate the power of taxation to the local governments.
o The fact of delegation will not make the law invalid or
unconstitutional.
It went on to say that when it is plenary, the legislative body can
determine what tax it can impose as they may deem expedient.
They may determine the subjects and objects of taxation. It can be at
the whim and expedience of the legislature and anyone can be
affected. The power is very broad.

Aspects of taxation

Levy or imposition

Essentially legislative in character and done by the legislature;

refers to power of congress to enact laws and the determination of
the subjects and objects of tax which involves tax policy

Administration (Assessment and Collection)

executive branch will enforce tax laws enacted which Includes

assessment and collection of taxes.
o Assessment is the determination of the amount of tax due.
In our country, we follow self-assessment.
If you are not honest, BIR will have an involuntary
assessment against you.
o Collection is the process of satisfying the tax obligation as
when the government actually takes the money from the
taxpayer.

Payment

There can also be payment when you look at it in relation to the

taxpayers, when the latter complies with the tax law.
This is the act of compliance by the taxpayer, including such options,
schemes, or remedies as may be legally available to him

Refund

also another aspect and is done when there is erroneous payment of

tax.
In most cases, authors say that there are only two aspects of taxation
if you look at it as an inherent power of the government to levy or
administer taxes.
 Basic principles of a sound tax system

Fiscal adequacy

Your tax laws must be sufficient to address contingencies.

o If you have one tax to cover the expenses on personnel, you
should have a tax system that allows you to cover a new tax
other than those covered by appropriations.
capable of expanding and/or contracting for the purpose of paying
for government activities.
While we said that there should be no excess, it doesnt mean that
the government cannot impose additional taxes in case of
contingencies.
o They can implement tax laws which are in excess, provided
that it doesnt amount to unreasonable confiscation of
personal, or that which violates theoretical justice as to the
case where more than 50% of the total taxes collected is
used to cover contingencies.
o There is no hard and fast rule as to what is considered
unreasonable.
It is determined by the circumstances involved.
The sources (proceeds) of tax revenue should coincide with and
approximate the needs of government expenditures
o Neither an excess nor a deficiency of revenue vis a vis the
needs of government would be in keeping the principle
it must be enough to defray the expenses of the government; it must
be sufficient.
Illustration:
o If you have 100 million expenses and you collect 200M, is
there fiscal adequacy? Does this violate the principle of
theoretical justice by collecting more than what you spend?
According to sir, there is no fiscal adequacy and theoretical
justice here.
o You are collecting more taxes when in fact the government
only spends less.
o But, you can always argue that there are certain funds
allocated for contingencies.
o What is important is that it cannot be more or it cannot be
less.
o You look at the value as to how unreasonable it has become.

Theoretical justice or equity

the tax system should be fair to the average taxpayer and based upon
his ability to pay
o tax must be uniform, equitable and progressive; tax varies
according to the ability of the taxpayer.
o Progressive system is to be implemented.
By this system, we mean that the increase in income corresponds to
an increase in tax rate.
o The higher the income, the higher the tax rate.
 Another indication of a progressive system is more direct taxes
compared to indirect taxes.
o As discussed in one case (sir forgot the citation), that case
which questions constitutionality of RA9337 (VAT)
o SC discussed what the concept of progressive system.
o While you have a value-added tax which is an indirect tax, it
doesnt make the system regressive for as long as there are
more direct taxes compared to indirect taxes. (Abakada case)

Administrative feasibility

refers to capacity of government to collect tax; one which can be

easily implemented to assure that there is smooth flow of funds to
the treasury in such a way that it can be enforced uniformly,
convenient as to time and manner and not unduly burden the people
to encourage business activities.

Economic Efficiency

the tax collected should be greater than the amount used in

collecting. It should be cost efficient.
You will have a system of collecting taxes efficient enough to collect
taxes covered in your tax law but it should be one where the cost of
implementing the same is less than the benefits gathered.
o So lets assume 100 million, and the tax can be collected is
only 1 million, then dont make the country spend more
money than what it can actually collect.
Most authors only recognize three basic principles of sound tax
system. But some authors add economic efficiency which is related to
administrative feasibility

Non-observance of the three principles

It will not render the tax impositions by the taxing authority invalid,
except when there is a specific constitutional or statutory limitation
but only to that extent

How would you distinguish taxation from other inherent powers of the
state?

Taxation Police Power

Effect Form part of government funds Used to promote injury
Purpose Revenue raising and regulation Regulation
Amount No limit Amount doesnt exceed the cost of regulation
Compensation Enjoyment of government services Altruistic feeling of contributing to society
Property taken Generally money Any type of property

Non-impairment Taxation can impair validity of contracts, It is superior than the non-impairment clause
clause generally, unless there is valid and
valuable consideration

Scope (out of life, Property Property and liberty

liberty, property)
 Being subjected to It can be bargained through tax As a rule, it cannot be bargained
bargain/what can amnesties (privilege which forgives
be surrendered imposition of any penalty including civil,
criminal and admin liability; in fact, the
national internal revenue code
specifically provides that taxation can be
compromised and can be subject of
abatement

Taxation Eminent Domain

(inherent power whereby the state takes
property in exchange for just compensation)
As to who can Only the government May be exercised by public utility companies
exercise and the government

Purpose Generally for revenue raising For public convenience

Impairment of Cannot impair contracts It can impair. If the property is sold to

contracts someone else, it can impair and the priority
would be the government

Persons Persons of the same qualifications, having Owner of public property

affected same taxes imposed upon them

Tax

It is an enforced proportional contribution, generally payable in

money, levied in persons properties or the exercise of right or
privilege by the state which has the jurisdiction over the subject or
object of taxation through the legislative body of the state for a
public purpose at regular periods or interval.

Revenue

On the other hand, revenue pertains to sources of income or funds

derived by the government to fund, including taxes and subsidies.
Tax is a form of revenue for the government.

Essential characteristics of taxes

Enforced contribution

it is not voluntary, those who are subjects of taxation are bound and
compelled to pay even if they are not benefitted.
Whether you like it or not, you have to pay (not upon your will to
pay tax)
it is based on a legal obligation and is mandatory
it operates ad invitum or it is in no way dependent upon the will or
contractual assent, express or implied, of the person taxed
Generally payable in money

Taxpayer is not allowed to settle his tax liability by conveying

property
EXCEPTION: backpay certificate, tax credit certification
o backpay certificate is the same as a tax credit certificate
you get them after you paid taxes in excess of your
liability and the government doesnt dispense cash;
most likely it will use the cash that it has collected
o house and lot may be forfeited by the government, freezed
bank accounts
taxes may be satisfied by using the governments
tax lien on your property or the claim of the
government over your property
these are not really exceptions because the
government still has to sell them to appropriate
them for your tax liability
but some authors of books classify it as an exception

Proportionate in character

based on ability to pay as per the constitutional mandate for

Congress to evolve a progressive tax system

Levied over persons, properties, or exercise of rights or privilege and levied

by the state which has jurisdiction over the subject matter

it has to be the state because it only those objects in its jurisdiction

can be subject of its control, you cannot enforce your power on
other states.
However it can be imposed on citizens even if they are not within
Philippine territory

Levied by the legislative body

A tax creates a civil liability on the part of the delinquent taxpayer,

although the non-payment thereof creates a criminal liability which
could be the subject of criminal prosecution under existing laws
It is ones civil liability to pay national internal revenue taxes that
gives rise to criminal liability, not the other way around
Criminal cases cannot operate to discharge anyone from the duty of
paying the taxes which the law requires to be paid, since the duty is
imposed by statute prior to and independently of any attempts by
the taxpayer to evade payment

For public purpose

it is an elastic concept which extends not only for public use but also
for public welfare, public benefit, and public interest. It is used to
promote social justice.

Personal to the Taxpayer

Requisites of a valid tax

1. For public purpose

2. Rule of taxation must be uniform
3. Either person or property taxed must be within the jurisdiction of
the taxing authority
4. Assessment and collection must not violate due process clause
5. Tax must not infringe the inherent and constitutional limitations of
the power of taxation

Difference between essential characteristics and requisites of a valid tax

There must be due process in imposing a tax for it valid.

It also has to be limited by its constitutional and inherent limitations

Classifications of taxes

As to object:

Personal /capitation/poll
o community tax (imposed on your being a person)
Property
o real property taxes
Excise/privilege
o ie. income tax, exercised on your right to earn an income.
This is different from the excise tax mentioned in
the tax code which talks about taxes levied on a
certain production.

As to burden/incidence

Direct
o on persons primarily burdened: those who are statutorily
mentioned are the one paying the tax. The impact and
incidence of tax is lodged in one and the same person.
Indirect
o passed to consumers: You get to transfer the incidence of
taxation to someone else as in the case of VAT where the
sellers are considered as statutory taxpayers but it is the
buyers who get to pay the taxes

As to tax rates

Specific
o imposed by number, weight, or volume; it requires
statistics, you have to measure using any measuring
instrument as in the case of proof for alcoholic drinks and
weights for customs duties. They are taxes imposed based
on a unit of measurement
Ad valorem
o based on the value of the subjects of tax, best example
would be income tax (based on value of income)
Mixed
 o applicable to customs duties (based on the value and the
weight)

As to purpose

General
o for the government, taxes used for whatever purpose
Special/ regulatory/ sumptuary
o for particular legitimate purpose ; may only be used for the
specific purpose mentioned in the law making it as in the
case of Sugar Act for the rehabilitation of the sugar industry;
it cannot be used for whatever purpose

As to scope or authority which imposes it

National
o imposed by the national government; national internal
revenue taxes (those found in the national internal revenue
code) are national taxes
Local/municipal
o imposed by the local government units

As to graduation

Progressive

as tax base increases, the tax rate also increases, ie income taxes

Regressive

when tax rate decreases, the tax base also decreases ie value added
tax according to the Supreme Court; though we can look at it as it is
and say that it is proportionate because the tax rate doesnt
increase along with the increase in income, its effect is considered
regressive.
At the end of the transaction, it is the consumer which doesnt have
any value added to their purchases which gets to bear the burden. If
you accumulate all taxes from the players in the market
(manufacturer to wholesaler to retailer to consumer), the consumer
gets to shoulder the entire tax that is value added by these players
in the market.
As to its effect, VAT is considered a regressive tax, so read the case,
the citation of which was forgotten by sir.

Proportionate

illustrated by corporate taxes

corporate income tax is fixed at 30% regardless of how much
income the corporation earns

Mixed

most books do not have a mixed system according to sir

Take note: this is not classification as to tax system. This is different from the
regressive and progressive system of taxation. Do not confuse these
classifications.

Taxes distinguished from other impositions

Taxes License fees

Purpose Revenue Regulatory

Basis power of taxation based on police power

Amount Unlimited limited

Time of After the transaction, you Before the

Payment cannot determine the commencement of
amount of tax unless the taxation
transaction has already
occurred

Effect of non- Non-payment of taxes is Renders transaction

Payment illegal illegal

Compensation You get government service None, it is the altruistic

feeling
Exemption There can be exemptions none

Taxes Toll fee

(collected as
reimbursement for the cost
incurred in construction
and maintenance of an
infrastructure, whether
public or private)

Purpose Revenue Reimbursement of cost

Basis Power of taxation Proprietorship; exercise of

ownership of the property

Subject/object Everyone and anyone Only those who are actual

users
Amount Unlimited Based on cost, if LGU
imposes this it is limited to
60% of the cost

Authority to Government Government and private

impose entities

Time of Imposed after Imposed before and after

payment transaction

Effect of non- Business will be closed You cannot use the toll
payment for non-payment
 As to what can You cannot waive taxes You can waive if you do not
be surrendered without consideration want to be reimbursed
with the cost incurred

INHERENT LIMITATIONS

PENIT:

Public purpose,
Exemption of government agencies from taxes
non-delegation of the power to tax
international comity
territorial jurisdiction

Public Purpose

The power to tax is for raising revenues and for general welfare.
Fertiphil case tells us that public purpose has become an elastic
concept which is not only limited to government services but it is also
for the promotion of general welfare and social justice.
best test for public purpose:
o proceeds of the tax are used for the support of the
government
o proceeds of the tax are for any of the recognized objects of
the government
o promote general welfare of the community
These must be present into the law which taxes a particular individual
object, person, property or exercise of a right.
o If it is not mentioned, it is deemed to be for public purpose.
It is important that it is determined to be for public purpose upon the
time the law is enacted and not at the time of implementation.
o At the time it is created it must have a public purpose
character, otherwise it is considered unconstitutional, or at
least it violates the inherent limitation on the power to tax.

International Comity

It means equality among states.

The property of other states cannot be taxed by other states.
Nations are sovereign equals and we ought to give respect to other
states because we do not have jurisdiction over them.
If a head of state comes into the country, can he be taxed?
o if his activity is related to a state activity, he cannot be taxed.
o After all, when states come into the jurisdiction of the
Philippines, it does not divest itself of its identity as a state.
o His visit does not make the country accountable, or at most it
doesnt give us the right to exercise jurisdiction over him,
being the representative of their state.
In effect, it tells us that there is sovereign equality among states, that
there is no intention of degrading the state when it comes into the
country, and a state may not be sued without its consent.
We cannot enforce our tax on them because we cannot exercise our
jurisdiction over them. Because we are equal, we cannot enforce our
 right over them, more so in courts because states may not be sued
without its consent.

Non-delegation

It is exercised by the legislative but there are exceptions:

o Delegation to the local governments
allowed because it is granted by the congress (LGU
Code) based on what the constitution provides (Fiscal
Autonomy), subject to limitations set by congress.
As we learned in the case of Pelizloy, this is already a
practice long before the LGU Code was enacted
o Delegation to the president
flexible tariff clause (found in the Tariff and Customs
Code), there is also a constitutional provision (Sec
28(2) Article VI of the Constitution) which grants the
president the power to determine quotas, wharfage
dues, etc.
The reason for this is expediency and practicality
because we want to protect our country in terms of
goods coming in and out of the country.
We have said that certain control tariffs must be set
in order for us to protect ourselves from the
discrimination from subsidies by other countries.
There is also what we call a countervailing duty which
is a duty imposable by the president.
There is also dumping duties which protect us from
being the dumping ground of goods not sold by
countries in their own country; marking duties which
protect us from products improperly marked.
This is intended to protect the country and we do not
have so much time to lose just so that these will be
implemented.
If we follow congress and they took too long, then we
may end up not protecting our country.
o Delegation to administrative agencies
for assessment and collection; for administrative
purposes. Test for a valid delegation: completeness
and sufficient standard test. Completeness test
provides that the law must be complete and that all
that is left is to implement the law. Sufficient
standard test provides that the laws limits are
determinate and determinable so that the delegate
must conform for its performance and functions to
these standards; the standards are already state. You
may read Abakada Guro vs Ermita.

Territorial Jursdiction

The state can tax objects within its territory because tax laws do not
operate beyond the countries territorial jurisdiction.
It is in relation to international comity.
You are only supreme with regards to those in your territory.
 Those outside your territory receive no protection for which the
country is supposed to give compensation for.
Even if you tax territories outside your country, you cannot justify this
because you cannot give the benefit that is due them because they
are under the jurisdiction of another state.

Exemption from Tax of Government Entities

General rule: there is tax exemption if it is performing a

governmental function
EXCEPTION: if it is performing proprietary functions, it is subject to
tax.
Reason for Exemption
o It is for these entities to perform the functions expediently,
so that there will be no delay in performing government
activities.
o Otherwise, they will spend their time finding for sources of
profit so that they can pay taxes.
o Secondly, this will promote a series of taxation because if
one agency is subject to tax, in order for it to earn profit, it
might as well impose another tax so that it can recover tax
previously imposed.
o It will promote another third tax so that it can pay the second
tax.
o It will promote a culture of taxing because it will impose taxes
so it can pay taxes previously imposed.
o You can not only base the exemption on the provision of
NIRC, you can also refer to the provision in the charter of the
government agency concerned.
o In the case of Pagcor,
it questioned the exemption of Pagcor because it was
subjected to a 5% franchise tax as well as a corporate
tax.
BIR issued a memorandum circular stating that it is
no longer that it is exempt from the gambling and
licensing operations as well as income from other
operations.
o In a previous Pagcor case decided last Sept 13, 2013,
the Supreme Court mentions that Pagcor is not
exempted from taxes without any delineation as to
its operation.
In this case, it delineated the exemption or non-
exemption.
There was a law, RA 9337, which amended the
provisions of the NIRC, one of those pertained to the
exemption of government entities.
Prior to that law, Pagcor was exempted but RA 9337
excluded Pagcor and this is really what the congress
intends.
However, SC failed to consider, under the previous
decision, the fact that Pagcor was already exempted
by the provision of its own charter. It doesnt require
another law for it to be exempted.
 o According to Atty Amago, this is a franchise and it is subject
to revocation by congress.
If a new law was passed by congress after such a
charter by not including those entities as not part of
the exempted entities then it must have revoked the
exemption granted under the franchise.
The SC did not follow this.
According to SC, the attachment attached to the
income of gaming corporations existed even before
the enactment of the tax code.
There is no conflict between the PD and the RA 9337.
When can a GOCC be taxed?
o Entities which are really exempted clearly provide in their
charter that they exempted from both national and local
taxes.
o Because of the blanket withdrawal of the Local Government
code of the exemption of GOCCs from tax, absent provisions
in the charter, these may still be subject to local taxes.
o After the issuance of the LGC, the SC categorically mentioned
that for GOCCs to be exempted, the charter must mention
that it is exempt from both local and national taxes or that it
is subject to a preferential tax rate in lieu of the national and
local tax.
o You will see that the City of Davao subjected GSIS to tax and
SC said that such was valid.
After such decision, congress enacted a law
exempting GSIS from both local and national taxes.
SSS is also exempted from both taxes.
o The exemption also extends to their functions.
Generally, if they are doing a proprietary function,
which is what most GOCCs do, they are subject to tax,
unless their charter provides otherwise.
o A clarification on the MCIAA and MIAA ruling:
If it is doing government functions = non-taxable,
proprietary = may be taxed, but you still have to look
into the franchise (if exempted for local and national
taxes).
That is how you have to reconcile it.
There was an issue in the MIAA case about whether
it is an instrumentality, but we will go to that
technicality later in the future.

CONSTITUTIONAL LIMITATIONS: DIRECT

Revenue bills must originate in the house but the senate may propose
amendments

Sec 24, Art VI of the Constitution provides that all appropriations,

revenue and tariff bills, bills authorizing increase of public debt and
bills of local application must originate from the Congress but the
senate may make their own amendments.
o However, they may make their own version.
 The case of Tolentino vs Secretary of Finance which talks about the
value added tax provided that even if the law came from the senate,
it was still valid.
o Senate already had its own version even before the House of
Reps passed their bill.
o There is no problem, according to SC, because Senate never
submitted them until they had gotten the bill from the HR.
o SC said that it originated from the House, it is just that the
senate did not adopt the version of the House, for which they
are not prohibited from doing.
o They may make amendments.
o It may happen that they have different versions and there will
be a bicameral committee which reviews the versions.
o The bicameral committee may even create its own version of
the law.

Concurrence of a majority of ALL the member of congress for the passage of

a law granting tax exemption

Sec 28(4) Article 6 of the constitution provides that no law granting

any tax exemption shall be passed without the concurrence of the
majority of all the members of the congress. By majority, we mean
half plus one of all members of congress, voting separately.

Rule on uniformity and equity

All rules must be uniform and equitable. Uniformity: All taxable

articles or properties of the same class shall be taxed at the same rate.
Equity is effected through the apportionment of the tax burden
among taxpayers which under the constitution must be equitable and
based on the taxpayers ability to pay.
You look at the taxpayer, it he is taxed the same way with all the
member of the class where he belongs. People in the same class may
be subject to different tax rates because they may be earning more.
Compensation income earners are part of one class; you must be
taxed the same way. However, you may have different tax rates
because some may be earning more than others (based on capacity
to pay). True, they are taxed for their income earners so that is
uniformity but at a different rate and that is equity.
Uniformity is horizontal equality, equity is vertical equality.

Progressive system of taxation

Sec 28(1) Art 6 of the constitution which provides that congress

should evolve a progressive system of taxation. It is in relation to the
taxpayers ability to pay. It also means that there are more direct
taxes imposed compared to indirect taxes. The progressive system is
merely directory (an encouragement) and not mandatory.
VAT is constitutional because while it is an indirect tax, we continue
to have more direct taxes. Besides, what the constitution provides is
for congress to evolve a progressive system. This is not mandatory; it
is only an encouragement.
Exemption of religious, charitable, and educational entities, non-profit
cemeteries, and churches from property taxation

Sec 28(3) Art 6 of the constitution provides that charitable

institutions, churches, personages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and
improvements actually, directly and exclusively used for religious,
charitable, or educational purposed shall be exempt from taxation.
They are exempted from real property tax. We know this because it
talks about churches, personages, convents, and then there is land,
buildings, and improvements. Under jusdem generis, we know that
this is what is meant.

Land owned by INC:

INC (Iglesia) Jollibee

Idle
INC parking lot UC

Exemption from real property taxes: INC (this is where the church is built), INC
parking lot (incidental to religious purpose), UC (used for educational
purpose)

Not exempted: Jollibee (commercial), Idle (not actually, directly and used
exclusively used)

Land owned by Jollibee:

Same answer because it is the use and not the ownership that is relevant in
determining the exemption from real property taxes. The constitution is
clear. Look at how the property is used and ownership is irrelevant.

Legal basis for saying that parking lot is exempt: Abra Valley Case

The president of the school lived in the second floor of one of the school
buildings. Educational institutions are exempted from property taxes for land
those used actually, directly and exclusively used for educational purposes.
The SC said that such use by the president is incidental to the operations of
the school and its educational purpose. Exemption is applied not only to
indispensable properties but also to those which are necessary and incidental
to its purpose.

The parking lot is intended for the use of INC members when they hear
masses; the use is incidental to religious purpose so it should be exempted.
As rule in Abra Valley case, commercial establishments are not incidental to
the purpose because they are basically for profit; it is not for religious,
charitable or educational purpose.

If the idle land is set-aside for the building of an INC church, would it be
exempted? NO. It must be actually, directly, and exclusively USED. It doesnt
matter if I am setting it aside. But if you are already building the church (even
if w aka nagsimba), it is already exempted.

Question: The ruling of abra regarding incidental purpose has been

abandoned by the ruling in Lung center. According to sir, look at the word
solely in relation to the area. So solely in relation to INC. this is further
clarified in the case of St Lukes which said that Only income not related to the
charitable purpose of the hospital which is subject to the 10% income tax, you
can still delineate. Thats for the income tax? No, its still the same according
to sir.

In this case, it talks about charitable institutions, it is not (delineated?) even if

it is engaged in some other activities. Relate solely to the property alone. That
has always been the position of taxation.

Exclusive means solely. Dapat tanan is subject to tax but the lung center case
is not clear. It talks about subject to real property tax. But the understanding
has always been and this is what I have been taught and what I have been
teaching.

If the parking lot is shared by INC and Jollibee, will it be exempted? No,
because it is not solely and exclusively used.

What is idle lot is used by INC is used by rituals, can it be exempted? Yes,
because it is ADE used for religious purpose. No building is necessary.

What if parking lot is used for InC people but there are tickets for recoupment
of expenses? The answer is the Chong Hua case. While the CHHMAC is being
rented out, it is intended for the maintenance of the building. SC said that it
is intended for hospital use and not for profit. It is subject to preferential rate
but not exempt from income tax. If we talk about real property tax, it is still
exempted however it is different when we talk about income tax.

According to Sir, because it is used for maintenance it is not subject to tax.

However, Henares view is that since you collected something, you should be
taxed. For condominium units, collection of maintenance fees was exempted
from tax. However, Henares issued a revenue regulation saying that it is
subject to income and value added tax because it is intended for profit but
naa pa sa CA ang case. But sirs position is that it is exempt.

However, if tickets are used to earn profit, then taxable na (it is a different
thing). Under the tax code, it is subject to income tax because it is an income
from the property but for real property tax, it is exempted because it is used
by members and it is exclusively for public purpose.

What if Abra claims that it is leased for commercial purposes but the purpose
is educational (like for the support of the school). According to sir, there are
guidelines when certain commercial establishments in schools are exempted.
For example, the canteen is not taxable because it is incidental to education.
Asa pakan.on ang students? It is for the safety of the students man. But the
concessionaire should be run by the school.

It is not on the entity. It is the use, not on the ownership.

If you are the lessee, how would you apply for exemption? It depends if it is
already declared to the municipality or city or province. If you are in cebu and
you are in argao, you will be taxed by the province of cebu. Anyway, if you are
the lessor and you want to be exempted, you have to declare it. You have to
go to the assessors office. (way apil sa coverage. Pang tax 2 ni xa)

Exemption of non-stock, non-profit educational institution from taxes

Article XIV, Section 4(3) All revenues and assets of non-stock, non-
profit educational institutions used actually, directly, and exclusively
for educational purposes shall be exempt from taxes and duties.
Upon the dissolution or cessation of the corporate existence of such
 institutions, their assets shall be disposed of in the manner provided
by law.

Proprietary educational institutions, including those cooperatively

owned, may likewise be entitled to such exemptions, subject to the
limitations provided by law, including restrictions on dividends and
provisions for reinvestment.
(4) Subject to conditions prescribed by law, all grants, endowments,
donations, or contributions used actually, directly, and exclusively for
educational purposes shall be exempt from tax.
What type of taxes are these non-stock, non-profit educational
institution exempted from? Income, real property, donors tax and
customs duties.
If USC imports computer, it is exempted from customs duties as
provided by law.
Non-stock non-profit educational institution is different because it
says ALL revenues. It means that it is not limited to the property but
extends to money generated by that property. It is exempted from
income and real property tax and customs duties because consti
provides and duties.
Reason for the exemption: Education is supposed to be a public
service. Here comes an educational institution which doesnt earn
profit for the perpetuation of its educational institution. Government
wants to give them an incentive for helping the government. Without
the exemption, these educ institutions will be increasing their fees to
the detriment of the students. This is very ideal back then when
education was regulated. Now it is already deregulated so mao nang
dako na kayo mog tuition fee.
When they registered with SEC and declare yourself to be non-stock,
non-profit, that is already enough. Is there a standard for saying that
you are non-stock, non-profit? If you put that it is your purpose, then
that will be your purpose na. But if you do activities outside your
purpose, then they will be invalidated for being ultra vires.

Non-imprisonment for non-payment of poll tax

Art III, Sec 20: No person shall be imprisoned for debt or non-payment
of poll tax.
If you want to get a CTC (community tax certificate) and you say that
your income is 1M but in truth it is 10M, this act amounts to
falsification of public documents but you will not be imprisoned for
non-imprisonment.

Non-impairment of the jurisdiction of the SC in tax cases

Art VIII, Sec 5 (2)(b): The supreme court shall have the following
powers: review, revise, reverse, modify or affirm on appeal or
certiorari, s the law or the rules of court may provide, final
judgements and orders of lower courts in:
All cases involving the legality of any tax, impost, assessment, or toll,
or ay penalty imposed in relation thereto.
If a law is created and it provides that decisions of the Court of Tax
Appeals are final and executory, would that be valid? No, it would the
 derogate the jurisdiction of the SC. You cannot make any court as the
final arbiter of any tax case, other than the SC.

CONSTITUTIONAL LIMITATIONS: INDIRECT

Due process of law

Art III, Sec 1: No person shall be deprived of life, liberty, or property

without due process of law.
For as long as there is due process, it is valid depravation.

Due process

there is substantive and procedural due process.

Substantive due process

requires that that there must be a law compliant with the

constitution, you have valid authority.
The law must provide that it is for public purpose.
It must comply with all the inherent and constitutional limitations.
In the case of Fertiphil, there was no valid due process because it was
not done for public purpose.
If the City of Cebu imposes taxes outside its jurisdiction, it violates
tax inherent limitation.

Procedural due process

is compliance with the measures provided in the law. If you did not
comply with that, you did not comply.
The opportunity to be heard need not be complied as long as the law
is fair and reasonable.
For example, if you are supposed to give a preliminary assessment
notice (pan) before giving the final assessment notice (fan), but you
failed to give pan, then it is violation of the procedural due process.
Such procedure has been provided for by law and it must be complied
with.

CREBA vs Romulo

You have a group of real estate brokers questioning validity of

minimum corporate income tax (MCIT).
They are supposed to be taxed
o kanang sa last na unta na 30% pero nay rule na I subject na
sila sa MCIT, meaning di na ma consider ila expenses.

Sales
Sales -Cost of Sales
-Cost of Sales Gross Income (multiply by 2% for
Gross Income MCIT)

-Expenses -Expenses
Net Income (multiply by 30%) Net Income
Corporate Tax

CREBA says that it is a violation of the due process of law.

 The SC said that there is no violation of due process because there is
a legitimate governmental purpose.
This was enacted to minimize tax evasion, avoidance and for
administrative purpose.
You cant say that it is unconstitutional.
There must be factual and legal basis to declare it unconsti.
The petitioners failed to present fraud.
They failed to present financial reports showing losses because of this
law.

Prior to this law, corporations will mark-up their products so high and then
bloat their expenses even if they did not incur it resulting to a loss.

Yet, even if they are said to incur losses, they still continue to do
business.
It is a clear manifestation that they are manipulating their reports.
MCIT is done to ensure that corporations are contributing taxes.
This is a corrective measure.

Also, there is a corrective nature in MCIT as it is imposed on the fifth year of

operation.

Done on the fifth year because it is provided for in the law: impose on
the fourth year following the period of first year of operations
because you are still undergoing the birth pangs of doing a business.
There is also a carrying-forward of MCIT.
Third, one of the corrective nature is that if you experience losses due
to legitimate business reverses, force majeure, or labor disputes, you
may ask for relief from MCIT.

the contention of the petitioner is that pegging the MCIT at the corporations
gross income is tantamount to confiscation of capital because gross income,
unlike net income is not a realized gain.

They are saying that it is a tax on capital.

But how can this be merely a capital when you are putting a markup
already on your gross sales.
This is a tax on income, not on capital.
Deduction in expenses is a privilege given by congress.
They may opt not to give it, but they are giving it though.
You cannot demand if from them.
If they decide to impose taxes on gross income, it is not for you to
question.
This is legislative prerogative because the power to tax is plenary.
American courts have emphasized that congress has the power to
limit or deny deductions from gross income in order to arrive at the
net that it chooses to tax.
Deductions are a matter of legislative grace. (based on the case of
Okin, cited in Creba)

Also, petitioner has not cited any actual, specific and concrete negative
experiences of its members nor does it present empirical data to show that
the implementation of the MCIT resulted in the confiscation of their property.
 SC said that, petitioner failed to support, by any factual or legal basis,
its allegation that the MCIT is arbitrary and confiscatory.
The Court cannot strike down a law as unconstitutional simply
because of its yokes.
Taxation is necessarily burdensome because, by its nature, it
adversely affects property rights.
The party alleging the laws unconstitutionality has the burden to
demonstrate the supposed violations in understandable terms.

In sum, there is legitimate governmental end, MCIT is not a tax on capital but
a tax on income, tax deductions are legislative grace and then petitioners
failed to present proof that that there was confiscation of property.

Equal protection of laws

No definition but it is said that the law treats all persons alike under
same circumstances and conditions both in the privileges conferred
and liabilities imposed.
This is in consonance with the uniformity clause of taxation.
Jurisprudence tells us that there is equal protection if you can justify
it using valid classification.

Substantial Distinction that makes a real difference

Jurisprudence provides for compelling interest test: focuses on

presence of compelling rather than substantial governmental
interest. In the absence of less restrictive means for achieving that
interest, there must be a compelling interest.
In Creba, the compelling interest is to minimize tax evasion.
o If it made a distinction between real estate business and
manufacturing industry, there is a reason for that.
o Real estate business have significantly less business
transactions in a year compared to the manufacturing
industry and there is a big disparity.
o Government wants to impose tax conveniently like in the
case of withholding taxes so instead of going back and forth
per month, you withhold taxes and then compute them after
a year and deduct what was previously paid.
o This is not a different income tax, the difference is in the
matter of collection.
o Just as in Creba, there is no additional tax collected.
o What was imposed was the manner of collection because of
compelling interest to collect taxes.
o There is a substantial difference for real estate and
manufacturing business.
Other forms of compelling interest: Tiu vs CA (Subic economic zone
case where those who are adjactent to the area are not exempt but
those in the area are exempt) provides that the compelling interest is
 the generation of income and employment and rehabilitate the Subic
area.
o It is to make use of property for investment purposes by
attracting foreign investors.
o Establishments along the fence are not exempted but this
was justified because of the compelling interest of the state.
(discrimination daw ni kay ang mga ginagmay di ka
generate ug millions. Haha. Bati daw pagka storya sa
SC)

Distinction is Germane to the Purpose of Law

Germane to the purpose of the law: for incentives to investors and

the government doesnt stop the people from investing into the area

Distinction is Applied not only to the present but also to the future

Must apply not only to present but also to future.

In the case of Ormoc sugar company the ordinance provides that only
ormoc sugar is subjected to tax.
Even there is a company similarly doing business with Ormoc in the
future, this company will not be subject to tax because the law
provides that only ormoc sugar company is subject to tax.

Distinction must apply to person belonging to the same class

Another test: rational basis test:

The classification is valid if it is rationally related to constitutionally

permissible state interest.
The interest must be that which is related to industry favored by the
constitution.
Like the senior citizens law, there is a constitutional provision which
says that we ought to promote family.
If you make a distinction, it must be based on consti provision and it
must comply with the rational basis test.
VAWC is valid because consti provides that women and children
should be protected.

Non-impairment of the obligations of contracts

Art III, Sec 10: No law impairing the obligations of contracts shall be passed.

The terms and conditions have been changed without consent on

your part.
You are put in a disadvantageous position because of change in your
contract.
o This will not apply if there is valuable consideration in your
contract.
If PEZA companies invested in so much and in the middle of the
operations, the govt takes away the govt incentives, the govt has put
them in a disadvantageous position.
o If you are operating under PAGCOR-registered business and
then the govt subjects pagcor to tax for non-gaming services,
 can you say there is violation n of non-impairment of
contract?
NO, you were exempted because of the
consideration you gave, but because the law
provides an exemption to pagcor as an entity.
Franchise is not covered by non-impairment clause.
o Under Art 12, Sec 11 of the consti, franchises may be
unilaterally revoked, modified or amended by the
government without the consent of the franchisee.
o No impairment if taken by the govt because consti allows it.
o If there is a tax exemption premised on a valuable
consideration and then if taken away by the government, it is
considered an impairment of the obligations of contracts.

Non-infringement of religious freedom

Art III, Sec 5: No law shall be made respecting an establishment of religion, or

prohibiting the free exercise thereof. The free exercise and enjoyment of
religious profession and worship, without discrimination or preference, shall
forever be allowed. No religious test shall be required for the exercise of civil
or political rights.

When the govt spent so much on the visit of the pope, it was not a
violation because he was a head of state and at the same time
because it was for tourism purposes.
o The benefit to the catholic church is merely incidental which
doesnt make it unconstitutional.
But if he was not a head of state, would it be unconstitutional?
o Yes. According to sir, he is not a head of state and what
tourism will you promote?
American Bible Society vs City of Manila: they were imposed mayors
permit and license fee.
o Imposition of mayors permit is consti, premised on the
power of the state to impose tax.
o The ordinance is intended for the general public, not
pinpointing any religion.
o It is not unconstitutional to impose the mayors permit but
because it is not subject to tax as an entity, you cannot
enforce this on them.
o Imposition of license fee is unconsti because power to tax is
power to control, you are sort of controlling religious
freedom, the government sort of controls you by enforcing
tax.

No appropriation for religious purposes

Similar to pope visit, but the government may pay priest when:

Art VI, Sec 3: No public money or property shall be appropriated,

applied, paid, or employed, directly or indirectly, for the use, benefit,
or support of any sect, church, denomination, sectarian institution, or
system of religion, or of any priest, preacher, minister, other religious
teacher, or dignitary as such, except when such priest, preacher,
minister, or dignitary is assigned to the armed forces, or to any penal
institution, or government orphanage or leprosarium.
Non-infringement of the freedom of the press

Art III, Sec 4: No law shall be passed abridging the freedom of speech, of
expression, or of the press, or the right of the people peaceably to assemble
and petition the government for redress of grievances.

You cannot hide under non-infringement if you are earning income

by expressing.
Otherwise, newspapers or other media entities may claim that they
are not subject to tax because they are engaged in disseminating
news despite the advertisements they get.

Power of the president to veto any particular item/s in a revenue/tariff bill

Art VI, Sec 27(b) The President shall have the power to veto any particular
item or items in an appropriation, revenue, or tariff bill, but the veto shall not
affect the item or items to which he does not object.

Veto may be made on an item basis, it need not be the entire law.
This item, for tax purposes, refers to the subject of the tax and the tax
rate: you may read the case of CIR vs Manila Golf and Country Club,
GR No 47421.

SITUS OF TAXATION

Situs

place or authority with the right to impose or collect taxes; situs

generally means place but it need not be limited to a place.
We impose taxes on our residents and also non-residents for as long
as they are citizens of our country. We impose taxes on income
earned in the Philippines.
Situs is necessarily in the state which exercises dominion over the
subject being levied. Even if the individual or entity is citizen of other
country, we can still impose tax because we exercise jurisdiction over
them. We may not protect them as a citizen but we protect the
individual who engage businesses or deals with them. It is the activity
that the Philippine government has interest over.
Foreign corporations, resident aliens and non-resident aliens are
subject to tax here in the Philippines but only in relation to income
earned here.

Factors to consider in relation to situs

Based on nature

Income tax imposed on resident citizen, non-resident citizen, non-

resident alien engaged in trade or business, or non-resident alien not
engaged in trade or business
Estate tax imposed for RC, NRC, Resident alien whether engaged in
business or not
Situs of tax varies along with the type of tax

Income tax individuals are taxable for income earned within and
without the Philippines (for resident citizens)
Estate within and without (resident citizen)
Non-resident citizen are subject to income tax only in the Philippines.
o If you are an OFW, you are not taxed on income earned in
Hongkong.
o But if you rented out properties in the Philippines, you are
taxable for rent income here.
You are subject to estate tax for properties in and
outside the Philippines.
It is different from income tax.
Citizenship, residence and type of the tax have to be separately
considered in the determination of your situs because they matter.
o There are several factors: nature of the tax, subject of the tax,
possible protection that may accrue both to the government
and the taxpayer, residence and citizenship of the taxpayer.

Shares of domestic corporation

if MRSG (Metro Retail Store Group Inc, newly listed company of the
gaisanos) stocks are sold in Singapore, for income earned out of share
of stocks, it is subject to Philippine tax.
It is a domestic corporation and therefore can derive benefit and
protection from the government.

Shares of foreign corporation

if they sell shares of company in US but they are only doing business
here; it is only as a branch, not a corporation.
o It is a different type of registration.
We do not get to protect them in relation to that company as a whole.
o They are not registered under the Philippine law.
o We do not get to tax the shares sold outside the country even
if they are doing business here.
It matters on the benefits or protection given by the government.
o They are not subject to capital gains tax but they may be
subject to income tax (as when they sell their products here).
IF you deposit a foreign currency in a foreign bank doing business in
the Philippines, will you be subject to tax?
o According to sir, the rule is that the government will find a
way to tax you if you are doing business here in the
Philippines and if the government can find means to collect
tax.
We follow domiciliary theory
o based on residence of taxpayer i.e. domestic corp, resident
foreign corp, or non-resident foreign corp
We also follow nationality theory
o citizen or not, or if your are an alien or a foreign corporation
We are also basing our situs on source of income/estate/donation
etc;
o whether the activity which produced the income took place
in the Philippines.
 Landmark case: CIR vs Bayer Nickel case (GR 153793, Aug 29, 2006)
o German individual who earned commission from all sales in
Europe but she conducted the activity in Philippines.
o She asked for a refund but the activities which generated the
sale were from the Philippines,
SC said that it is subject to tax in the Philippines.
(read this daw ana sir. Hehe)

Income tax

SOURCES within and without the Philippines

Interest

situs is based on residence of debtor, considered income in

Philippines

Dividends

foreign depends if 50% of income of such corporation is derived

from Philippines within the three year period (more discussion on
income tax proper)
Domestic - if within Philippines

Services

depends on where it is generated; there is a specific NIRC provision

Rentals and royalties

depends on property rented.

If real property like a building = within Philippines,
if located in US outside na.

Royalties

based on where it is used; usually generated by use of intellectual

property.
If you are a franchisee of McDo, with intent to use franchise in
Philippines, and you pay royalty to McDo US, it is subject to tax here.
Royalty income depends on where it is used.
If Jollibee, a Philippine corporation, has franchises in the US, the US
company pays Jollibee Phils, will it be subject to tax?
Yes, because it is a domestic corporation, because it can be taxed
within and without.
o (dont try to absorb everything kay this is just an overview
daw. Hehe)

Real property

lex rei sitae, depends on location of property

Personal property

depends on location

Intangible
 income follows the income earner/owner/domicile of owner, mobilia
sequitur personam
Copyright if you are an author here in Philippines and you sell books
in London, with copyright here, will income given by UK publishing
company to you considered income here? General rule is that it
follows domicile, unless it has gained situs somewhere else according
to law.
Our law provides that if it is an intangible property, it is where the
property is being used (outside the Philippines). But because you are
a Filipino, you are still subject to tax earned from the copyright, its
just that it is considered as income earned outside the Philippines.

Sales of domestic shares

if San Miguel shares are sold in Hongkong, situs of income is within

Philippines because income follows the income earner; wherever is
the domicile of the company (nga pilipinas).

Situs of Excise taxed

basis is placed of production, or where it is mined or extracted.

If imported article place of release or customs house, if franchise, it
is where privilege is exercised.

Estate

nationality, residence, location of property left by decedent (the dead

person)

Donors

nationality, residence of donor, location of property donated, where

donation takes place

Business

real property location; personal place of purchase or sale

VAT

service or activity is being rendered

Basis for Income tax

domicile, nationality and source

US Citizen of Phils Resident Citizen

Compensation income i-Check i-Check
$100,000 (source) Taxable here (within
and without)

If income is generated in the US and you earn $100,000 in a year, you are a
citizen and a resident of the Philippines. You are a resident citizen earning
income outside the country. You are taxable in and out of the country. Even
if the situs of tax is in the US because it is earned there, still you are taxable
here because you are a resident citizen. That is situs. Daghan ang I consider
because of multiplicity of situs in the Philippines. That is why there should be
a measure for double taxation as in the abovementioned case. She may be
subject to both US and Philippine taxes. Is this unconstitutional? No. what is
prohibited is double taxation in its strict sense.

DOUBLE TAXATION

Direct Double Taxation

Direct double taxation is prohibited, or double taxation in its strict

sense.
Taxed twice, by the same taxing authority, for the same purpose,
same taxing period, within the same jurisdiction or taxing district,
same property.
o Requisites of Direct Double Taxation
o Same object
o Same taxing authority
o Same jurisdiction
o Same purpose
o Same period
If A corporation earns P100,000, the rate would be 30%, tax payable
is P30,000. What if the government imposes a profit tax of 10%, so
that the same 100,000 is subject to an additional 10% tax. Is there
double taxation? Yes, if it satisfies the definition; same taxing
authority by the national government, within same jurisdiction, same
taxing purpose, same purpose privilege to earn profit, same object
same 100,000. So chaka na. This is double taxation in the strict
sense. There should be two instances of taxation when there ought
to be one in a direct double taxation. The intention was to add 10%
to the existing 30%.

Indirect Double Taxation

If one or more element is not present, then strict sense becomes

broad sense.
If a new law is passed and it is found to be a direct double taxation,
the later law is struck down.
What if the P70,000 (100k less 30% tax) is subjected to the 10%? It is
still the same subject matter; it is the income that you are taxing. It
doesnt matter if it is the same value for as long as the amount is
carved out of the same 100k (same subject matter and income ra).
If the corporation is taxed at 30% and then you the net profit after tax
is distributed to you as a shareholder. You will be taxed with a final
tax (passive income tax equivalent to 10%) as a shareholder. There is
an indirect double taxation here. One is for individuals, the other is
for corporations.
This makes sense because if I am an individual doing business alone,
I will be subjected to all taxes. If you are in a corporation, they can
hide in the corporation so that they may be subject to one tax alone.
So in order to make the field fair, they are subjected to a dividend tax.

Instances of double taxation in the broad sense:

Tax upon corporation for its capital stock as a whole and on

shareholders for their share
Tax upon depositors in the bank for their deposits and tax upon bank
for the property in which such deposits are invested in
 Tax upon same property imposed by two different states
Tax upon corporation subject to local business taxes and national tax
(NIRC)
Each of these activities is subject to tax.

Constitutionality of double taxation

not unconstitutional if it is in its broad sense; you do not cite double

taxation as basis for unconstitutionality of law.
Rather, you have to look at other constitutional prohibitions.
The exception is double taxation in the strict sense because it violates
the uniformity rule or equal protection guarantee.
Philippines wants to minimize the effects of double taxation, most
especially international double taxation as in the case of Manny
Pacquiao who is taxed for his winnings here and abroad.
The country may enter into treaties to grant them reliefs under the
principle of reciprocity. This is applicable to dividend income from a
non-resident foreign corporation. If A Corporation in the Philippines
is a stockholder of B Corporation located in US, A can earn dividends
and they will be subject to tax. But, under the rule of reciprocity, the
dividends may not be subject to 30% but only 15%, provided that the
reverse is true and that the benefit is applicable to the Philippine
company. This is the tax sparing rule. There must be a treaty
otherwise, dili ka ka-avail ani. Haha. Storya tag treaty. Huhu
Another example of reciprocity: personal exemption on individuals is
the P50,000 basic personal exemption. If domicile country of non-
resident alien engaged in trade and business (NRA ETB) allows BPE of
P50,000 for Filipinos, the NRA ETB is also given exemption, equal to
the exemption granted by them, but maximum of P50,000.
If Swiss government allows Filipinos 50,000 tax exemption, then we
also grant Swiss citizens in the Philippines in 50k. If they grant 100k to
Filipinos, we only grant 50k kay maximum man. If they grant 10k, we
grant 10k. If they dont grant, we do not also grant. Bow!

Tax credits

Foreign taxes are allowed as deductions for local taxes due to be paid
(Manila Memorial, Carlos Superdrug case)
The Philippines can grant foreign tax credit or foreign tax deduction
as forms of relief to minimize double taxation.

How is tax credit illustrated?

If you earn 100k in the Philippines and you earn 100k in the US, you
are subject to Philippine tax of 30%. Lets assume you are taxed 40%
in US. If it is tax credit, you can deduct the 40k tax in the US. For
further illustration, 100k plus 100k equals 200k. This 200k is subject
to 30%, so you are supposed to pay 60K. but if there is a tax credit
scheme allowed in the Philippines for foreign tax payments then the
40k you pay is deducted from 60k, leaving you of a balance of only
20k to be paid.
If it is tax deduction, you will still have a total of 200k, you first deduct
40k, so you get 160k and this will be the basis for the 30%, so you will
 be paying 48k tax. Better jud ang credit kay gamay nalang ka
bayranan. =)
The Philippines follows tax credits. PEZA companies have a
preferential tax rate of 5% based on gross income in lieu of other
taxes.

I want you to understand the concept of most favored nation clause in

relation to double taxation. This is intended to establish the principle of
equality of international treaties by providing that citizens of the contracting
nation may enjoy privileges of the rate of most favored nation.

If Philippines grants royalty tax of 10% to US and then 5% to German,

Germany is the most favored nation. (mas gamay ra ang gisingil sa
Germany. Hehe) Even if you are availing of the benefits under US, but
under the provision of the treaty of the most favored nation clause,
you get to apply 5%.
But there has to be a provision that there is a most favored nation
clause. This is illustrated in the case of CIR vs SC Johnson (GR 127105
June 25,1999 (read)). What you should look at is the type of
transaction and the rate, not the currency, and you always base it on
Philippine peso kay these royalties were earned in the Philippines.
Enforcement of tax treaties are international obligations and they
cannot be derogated by mere regulations of the government. This is
subject of a Deutsch? bank case. BIR claimed that the bank cannot ask
for refund because of failure to apply for tax treaty relief. Take note
that tax treaty relief application is applied 30 days counted from the
time you begin your operations and lodged at international tax div of
BIR
According to SC, tax treaties should be upheld in good faith, we
should follow pacta sunt servanda; the bank should be given
regardless of the application for tax relief because the agreement has
been signed. But you should still apply for the tax treaty relief but this
should not be the end and all. The application will serve as record for
your application. More discussions about these soon.

FORMS OF ESCAPE

Shifting

o transfer of the burden from on taxpayer to the other. Tax

impact refers to the levying of taxes on the taxpayers himself.
If the law provides that it is the seller who should be subject
to tax, the impact is on the seller and he is called the statutory
taxpayer.
o If law grants for them to shift the burden to someone else, as
to consumers, it means that the incidence of taxation may be
transferred to someone.
o Incidence is on the one who will pay the tax and bear the
burden.
o It is applied in VAT.
o Seller is statutory taxpayer and impact is on him but the buyer
has the incidence.
o It is the buyer who has the incidence because seller shifts the
burden.
 o Incidence is different from impact. Shifting happens only
when there is exchange of commodities. There has to be
other parties.

Forms of shifting:
o Forward shift manufacturer down to consumer

Manufacturer Wholesaler Retailer Buyer (tax

inclusive)
Selling 100 112 120
price 100 112
- Cost of 12% 12 x 12% 134.4 x 156.8
Sales Tax 12%
Net 12.0 14.4 Tax: Tax paid:
income Input tax 16.8 16.8
Tax rate 12.0 Tax
Tax payable 14.4
2.4 Tax
payable
2.4

If manufacturer sells his products at 100, he is subject to

12% VAT. If he transfers the burdens of 12 to wholesaler,
then the latter will have a cost of 112. If wholesaler shifts,
then the retailer will base it at 112. You will not look at
the 12 as a tax, but rather as a cost. So you will be selling
it at 120, so what is 12% of 120? Answer kay 14.4. So this
14.4 will likewise be added to the retailer with a total of
134.4.
If the seller sells it, the cost is 134.4, so he will now sell it
at 140. In addition to that, it is subject to 12% VAT, which
is 16.8. So the total cost that you have is 156.8. Imagine
the costs. So adto kas manufacturer palit. Haha. So buyer
ends up absorbing and paying for everything, from
manufacturer to retailer.
When w sold it at 120, it was based on 112. The
wholesaler is subject to 14.4 but it gets to pay 12 to
manufacturer. So he absorbs only 2.4 supposedly. mao
rana tax na iyang bayran sa BIR. Kung buot hunahunaon,
when he had a markup, 120 it was based on 112. Ni
forego xa ug gamay na profit. Kay pwede man na iyang
122.4 aron entire 20 kay iyaha. If retailer ka, pila man?
Pabayron kag 16.8 pero you shifted that to the buyer.
Pero gipabayad kag 14.4 sa wholesaler so 2.4 ra imong
gibayran jud. If buyer ka, pila man imong bayran? The
entire 16.8. Di na nimo ma pasa.
This shows that tax is regressive from wholesaler to
retailer. Sila pay ni markup, sila pay gamay ug tax pero
ikaw ang ni pay ug entire 16.8. This is forward shift, from
one creating down to one consuming.
Backward shift
o Instead of allowing the shift of the whole 16.8, you may want
to haggle with your retailer and claim for a discount for the
 taxes you want to pay. Instead of buying 10, you buy 12.
Sometimes, part of the taxes shifted is foregone to the
retailer. The buyer passes it back to retailer. Profit is foregone
by the seller.
o There has to be forward shift first before there is a backward
shift.
Onward shift
o more than one shift onward forward ug onward backward
shift

Capitalization

reduction in the price of the tax object equal to the capitalized value
of future taxes which the purchaser expects to be called upon to pay.
It depends on the future taxes that you will pay.
This is ordinarily applied to leases and rents. If a contract says that
you will pay real property tax for the next five years, you may want to
haggle for the amount of rent that you will pay with the lessor.
Instead of you paying for the entire amount, you shift it back to the
lessor. Capitalization is a special form of a backward shift but it is an
active form. You will be required to pay something but you are
already letting the lessor absorb the burden in a scheming way.
(haha)
Part of the future taxes is used to reduce the price of the goods. We
also illustrate this in the form of properties which are subject to
depreciation like car, building, etc. If I will buy a car, I can be able to
reduce my tax out of the car that I bought. Why? The value of the car
gets to be depreciated and the amount of depreciation is deducted
from the amount of car in your books. I am paying now for my tax but
it will reduce my future taxes. Buying depreciable goods is a form of
capitalization, an escape.
If I buy a car worth 1M, I use if for 5 years, I will have 200k per year
reduction as depreciation expense, or sometimes less because of the
residual value. This is one way of reducing taxes because depreciation
is an allowable deduction.
If I have 1M income, I get a 200k deduction from depreciation, and
then I have saved on taxes. It usually falls on income-producing
property on properties you lease out. Lessee shifts it to you in the
form of reduced rent income.

TRANSFORMATION
method of escape in taxation whereby the manufacturer or
producer upon whom the tax has been imposed 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. The
taxpayer escapes by a transformation of the tax into a gain through
the medium of production.
One need to be efficient so that if you lower cost, therell be no
increase in price if ever there are tax increases
 Example: for the past year - selling price = 100
Cost = 1M
Production = 100k units
Rate of tax = 10%
Cost/unit = P10 (assuming tax is
included in this cost)
Profit = 80

Current year = to retain the selling price

so as not to lose current market
VAT = increased to 12% (2% increase in
VAT)
Options so that therell be No increase
in the unit price
lower cost of production, or
increase production --> employ
more efficient people or invest in
machine which will increase twice
the production
Machine = addt'l cost = 200K (total cost
1.2M)
Production = 200K unit
Total cost = 1.2M/200K = P6 cost/unit +
P12 vat
Profit = 100-12-6 = 82

TAX AVOIDANCE
The exploitation by the taxpayer of legally permissible alternative tax
rates or methods of assessing taxable property or income in order to
avoid or reduce tax liability.
It is politely called tax minimization and is not punishable by law.
Example: A person refrains from engaging in some activity
or enjoying some privilege in order to avoid the incidental
taxation or to lower his tax bracket for a taxable year. -
NOT doing anything
Tax planning - ex. Transfer properties to corps, earn shares
out of the value of the property
Value of prop = 1M, tax = 60K (6%) as capital gains
tax
Transfer to a corp - add to paid in capital, share at a
premium
P1/share = 1M share to corp = should be 1M
To save taxes, transfer 1M to corp. but do not
recognize the 1M shares, but only refer them as
additional paid in capital = 100K is declared as
shares, 900K for paid in capital
Once you sell ownership, sell at P100K --> zero gain.
No taxes
Capital gains tax
Life insurance proceeds - tax free under NIRC --> proceeds
used to pay up estate taxes
Estate planning scheme
TAX EVASION
TAX EVASION - is the 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.
 Example: Deliberate failure to report a taxable income or
property; deliberate reduction of income that has been
received.
CASE: BIR vs Estate, GR 147188

Elements of Tax Evasion

(1) The end to be achieved.
Example: the payment of less than that known by the taxpayer to be
legally due, or in paying no tax when such is due.
(2) An accompanying state of mind described as being evil, in bad faith,
willful or deliberate and not accidental.
- difficult to prove because it is a state of mind
(3) A course of action (or failure of action) which is unlawful.
- based on overt act; can be proven

Since fraud is a state of mind, it need not be proved by direct evidence but
may be inferred from the circumstances (circumstantial evidence) of the
case. Thus:
(1) The failure of the taxpayer to declare for taxation purposes his true and
actual income derived from his business for two consecutive years has been
held as an indication of his fraudulent intent to cheat the government of its
due taxes.
(2) The substantial under declaration of income in the income tax returns of
the taxpayer for four (4) consecutive years coupled with his intentional
overstatement of deductions justifies the finding of fraud.

Presumption of fraud arises under the tax code when:

1. Under declare sales, debits, by more than 30%
2. Over declaration expenses or deduction by more than 30% -
automatic presumption - but rebuttable

ALL compensation earners are subject to tax

But minimum wage earners are not.

EXEMPTION FROM TAXATION

Meaning of exemption from taxation
Broad Sense:

Narrow Sense:
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.
It is an immunity or privilege
it is freedom from a financial charge or burden to which others are
subjected.
Strictly construed against the taxpayer

Nature of tax exemption

1. Mere personal privilege- cannot be assigned or transferred without
the consent of the Legislature. The legislative consent to the transfer
may be given either in the original act granting the exemption or in a
subsequent law
2. General rule: revocable by the government.
 a. Exception: if founded on a contract which is protected from
impairment. But the contract must contain the essential
elements of other contracts. An exemption provided for in a
franchise, however, may be repealed or amended pursuant
to the Constitution (see Sec. 11, Art. XII). A legislative
franchise is in the nature of a contract. - impaired when
founded on valuable consideration

Inherent power to exempt is out of inherent power to tax

from the national gov't - not from the LGU, but have the power to
grant exemption now because of constitutional mandate of local fiscal
autonomy

Rationale: - sanctuary purposes. Public interest will be subserved by the

exemption. Cost is outweighed by the benefits from it.

Rationale of Tax Exemption

Such exemption will benefit the body of the people and not particular
individuals or private interest and that the public benefit is sufficient to
offset the monetary loss entailed in the grant of the exemption.

EX: Senior citizen discount - public interest subserved

GROUNDS FOR EXEMPTION

1. Based on contract
The charter on a particular corporation. Ex: GSIS, provides
exemption in its charter

2. Based on some ground of public policy

The Constitution already provides for it.
Example:
real property tax exemption on educational institutions;
privileges granted to proprietary educational institution
and to non-stock, non-profit hospitals

3. Based on reciprocity
It may be created in a treaty on grounds of reciprocity or to lessen
the rigors of international or multiple taxation.
Applied to prevent international double taxation
Ex. Personal exemptions

KINDS OF TAX EXEMPTION

As to Manner of relation
1. Express or Affirmative the law itself provides for exemption
Either entirely or in part, may be made by provisions
of the Constitution, statutes, treaties, ordinances,
franchises, or contracts.

2. Implied or by Omission when the law does not provide for it.
Ex: PAGCOR current law did not include it
anymore in the enumeration. By implication, it is
now subject to tax. If it is exemption, it would be
treated the same way. Example, the documentary
 stamp tax chapter of the NIRC does not provide
for taxes, sales on personal property

levied on certain classes without mentioning the

other classes. Every tax statute, in a very real
sense, makes exemptions since all those not
mentioned are deemed exempted. The omission
may be either accidental or intentional.
Exemptions are not presumed, but when public
property is involved, exemption is the rule

As to scope or extent
Based on the number of persons Or based on the amount itself
1. Total from all taxes; Everyone is exempted
2. Partial part of the tax; not everyone is exempted

As to object
1. Personal relates to the person
a. Exemption on minimum wage earners exercise of a
persons privilege
2. Impersonal relates to the property
a. Exemption on properties used for religious, charitable
institutions exemption on the land

CONSTRUCTION AND INTERPRETATION OF:

Tax exemption
Tax exemptions must be shown to exist clearly and categorically, and
supported by clear legal provisions.
General Rule: In the construction of tax statutes, exemptions are not
favored and are construed strictly against the taxpayer, liberally in favor of
the government
EXCEPTION:
When the law itself expressly provides that it should be construed
liberally in favor of the taxpayer
When the exemption is in favor of the government itself or its
agencies
When granted In favor of religious, charitable, educational institution -
granted by the constitution itself

Taxation is the rule and exemption the exception, and therefore, he who
claims exemption must be able to justify his claim or right thereto, by a
grant too plain to be mistaken and too categorical to be misinterpreted.
or if the taxpayer falls within the purview of the exemption by clear
legislative intent

Tax Amnesty
Not the same as tax exemption
o In tax exemption, you are never taxed. But in tax
amnesty, youre taxed first, but you are being
pardoned from paying taxes
General pardon granted to taxpayers or an intentional overlooking
by the state of his authority to impose penalties on persons
otherwise guilty of evasion or violation of a revenue or tax law
 Only Congress can grant tax amnesties. There must be a law for such
grant

Construed strictly against the taxpayer

TAX AMNESTY vs Tax Exemption

Amnesty Exemption
Immunity all criminal, civil and Civil liability only
administrative liabilities
- Arising from
non-payment
of taxes
Application Only to past tax periods Could be Past, present,
future - whenever the law
provides
Always retroactive application Generally, prospective
application
Construction Strictly against taxpayer Strictly against taxpayer
No tax amnesty for succeeding periods
o If pardoned from whatever tax in the next few years - the
government will end up not earning revenue at all

Tax exemption is an immunity from all civil liability only. It is an

immunity or privilege, a freedom from a charge or burden of which
others are subjected.

Tax Laws
construed strictly against the government and liberally in favor of
the taxpayer

Tax Refund
also construed strictly against taxpayer, in favor of government
based on exemptions

Tax rules and regulations

1. Tax Ruling issued in favor of the taxpayer
o Before 2010 sale of vehicular assets as used in business is
not subject to VAT, because it is not considered sale in
the ordinary course of doing your business
o New regulation issued sale of vehicular assets are
considered subject to VAT because it is considered
incidental still to the business of the taxpayer
Ruling is now reversed how construed? Can it
be construed that govt is already estopped in
taxing you because of the previous favorable
ruling?
NO. Government cannot be
estopped by the mistake of its
agent

2. Penal provisions of a tax law

In criminal cases, STATUTE of LIMITATIONS are acts of
grace, a surrendering the sovereign of its right to
 prosecute. They receive a strict construction in favor of
the Government and limitations in such cases will not be
presumed in the absence of clear legislation
Statute of Limitations - STRICTLY against
taxpayer only to statute of limitations in
relation to criminal cases

LAW on PRESCRIPTION being a remedial measure (not

relating to criminal cases; ex: failure of government to
collect taxes, failure to make an assessment which
prescribes in 3 yrs)
LIBERALLY construed in order to
afford protection of the taxpayer from
any unreasonable examination,
investigation or assessment

NON-RETROACTIVITY OF RULINGS (SEC. 246)

General rule: Prospective.
o Any revocation, modification or reversal of rules and
regulations promulgated in accordance with Sections 244
and 245 of the Tax Code and rulings or circulars
promulgated by the CIR, that is prejudicial to the taxpayer,
as a general rule, shall NOT be given retroactive effect.
Exceptions:
1. When the law expressly provides for the retroactive application
2. When it relates to tax rulings or regulations - where the
taxpayer deliberately misstates or omits material facts from his
return or any document required of him by BIR;
0. Where the facts subsequently gathered by the BIR are materially
different from the facts on which the ruling is based; OR
1. Where the taxpayer acted in bad faith. (Sec. 246, NIRC)

NATURE OF INTERNAL REVENUE LAWS

1. Not political in nature
Implication: Laws cannot be abrogated whenever our country is
being occupied by another
a. Japanese occupation tax laws remain as it is
b. Tax laws during the Spanish period: tax laws are still
applicable unless otherwise superseded by a law
imposed by the American regime

2. Civil and not penal in nature.

Not penal - while there are penal provisions, the intention is not
really to imprison erring taxpayers. It is still to collect taxes but to
raise revenues. However, if failed to pay taxes, it may be a ground
of tax evasion.
*Not a lot are incarcerated. Reason why there is
compromise penalty to forestall any criminal prosecution
MANDATORY and DIRECTORY PROVISIONs of TAX LAWS
1. Mandatory
o When it is intended for the security of the citizens
If said notice must be given, then it should
be given, otherwise it violates the tax
laws (violates the due process of law.)

o Designed to insure equality of taxation, or certainty as to

the nature and amount of each person's tax.
Cannot grant a different tax rate for some
taxpayers, and impose what the law
really provides for others (violates equal
protection clause)
Impose tax rate which promotes equality to
other tax payers.

2. Directory - designed merely for the information or direction of

officers or to secure methodical and systematic modes of
proceedings
Ex. Memorandum circulars of the BIR

It is a general rule that those provisions of a statute relating to the

assessment of taxes, which are intended for the security of the citizen, or to
insure the equality of taxation, or certainty as to the nature and amount of
each person's tax, are mandatory; but those designed merely for the
information or direction of officers or to secure methodical and systematic
modes of proceedings are merely directory

The Secretary of Finance, upon recommendation of the CIR, shall

promulgate all needful rules and regulations for the effective enforcement
of the provisions of the NIRC. (Sec. 244)

Revenue Regulations vs Revenue Rulings

Revenue Regulations
Who issues Secretary of Finance
More formal pronouncements which
prescribe or define rules and regulations
for the effective enforcement of the
provisions of the tax code and related
statutes
Revenue Rulings
Commissioner of the Bureau of Internal Revenue
or his representative
Official positions of the BIR to taxpayers certain
specific issues of laws or administration in
relation to the provisions of the tax code, relevant
laws and issuances of the BIR clarifying or
interpreting them

General in application Only applies to the taxpayer questioning

Unless proven that one have the same
facts/circumstance as that of the other who
questioned it the first time

Power to make regulations is not the power to legislate. True, the BIR has
quasi-legislative functions in relation to assessment, protests in relation to
rulings which it makes. Limited to what the law provides.

BIR issued revenue regulation implementing the Senior citizen defines tax
credit as synonymous to tax deduction considered unconstitutional for
being violative of the constitution. Beyond its power to make laws. Because
it is delegated power, limited only to what the law provides
Why are delegations necessary? Because it will promote proper
enforcement. Set as a guideline on the part of the taxpayers and of the
administrative agencies. After all, its function is to clarify and explain the
law, its provisions by providing the details of administration and procedure

Requisites for validity and effectivity of regulations (note: does not apply
to revenue rulings)
Revenue Regulations:
1. Not contrary to law and the Constitution (Art. 7, Civil Code)
2. Published under the Official gazette (under the civil code)

Force and effect: Once established and found to be in consonance

with the general purposes and objects of the law, then it could be
considered as valid interpretation of the law. Otherwise, null and
void. As if part of the law.

Administrative interpretations are not binding upon courts

Should be regarded with respect. These entities are the one
enforcing it, so they may have technical knowledge about the
matter.
o At best it is only persuasive. Not conclusive on the part of
the courtmost especially if it is erroneous.

Decisions of the Supreme Court

Form part of the legal system of the Phils

Decisions of MTC to CTA

Only persuasive.
May be respected but not binding to SC

SOURCES of TAX LAWS:

According to the order of hierarchy:
a. Constitution primary source of tax law
b. National law (NIRC)
c. Bilateral tax treaties
d. Judicial decisions of SC
e. Revenue Regulations of the Sec of Finance
f. Tax ruling of the BIR