TAXATION LAW

GENERAL PRINCIPLES
POWER OF TAXATION

TAXATION power by which the sovereign through its law-making body raises revenue to
defray the necessary expenses of the government. It is a way of apportioning the costs of the
government among those who in some measure are privileged to enjoy its benefits and must bear
its burden.

NATURE OF THE TAXING POWER

1. It is an inherent attribute of sovereignty- the power of taxation is inherent in sovereignty as
an incident or attribute thereof, being essential to the existence of every government. It exists
apart from constitutions and without being expressly conferred by the people.

2. It is legislative in character - such power is exclusively vested in the legislature except when
the Constitution provides otherwise. This is based upon the principle that "taxes are a grant of the
people who are taxed, and the grant must be made by the immediate representatives of the
people. And where the people have laid the power, there it must be exercised (Cooley)

The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter
of right to every independent government without being expressly granted by the people. Tax is
an attribute of sovereignty, which emanates from necessity upon which the very existence of the
government is dependent. Without tax money, the government would not be able to undertake
the purposes for which it was organized, thus negating the need for its existence.
Pepsi-Cola Bottling Co. v. Tanauan, Leyte, 69 SCRA 460 (1976);

Q. Discuss briefly the importance of taxation as an attribute of sovereignty.

Ans. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a
matter of right to every independent government without being expressly granted by the people.
Tax is an attribute of sovereignty, which emanates from necessity upon which the very existence
of the government is dependent. Without tax money, the government would not be able to
undertake the purposes for which it was organized, thus negating the need for its existence.
Pepsi-Cola Bottling Co. v. Tanauan, Leyte, 69 SCRA 460 (1976);

SCOPE OF LEGISLATIVE TAXING POWER

1. Person, property, occupation, excises or privileges to be taxed provided they are within the
taxing jurisdiction
2. Amount or rate of tax
3. Purposes for which taxes shall be levied provided they are for public purposes
4. Kind of tax to be collected
5. Apportionment of the tax (whether the tax shall be general or limited to a particular locality or
partly general and partly local)
6. Situs of taxation
7. Method of collection

THE OBJECTS OF TAXATION MAY BE:

(1) Persons, whether natural or juridical;
(2) Property, whether real or personal, tangible or intangible;
(3) Transactions, business, interest, rights or privileges.
 TAXATION POLICE POWER EMINENT DOMAIN

1.Purpose

To raise revenue To promote public purpose To facilitate the States need of

through regulations property for public use

2.Amount of Exaction

No limit Limited to the cost of No exaction; but private

regulation, issuance of the property is taken by the State
license or surveillance for public purpose
3.Benefits Received

No special or direct benefit is No direct benefit is received; a A direct benefit results in the
received by the taxpayer; healthy economic standard of form of just compensation to
merely general benefit of society is attained the property owner
protection
4. Non-impairment of Contracts

Contracts may not be impaired Contracts may be impaired Contract may be impaired

5. Transfer of Property Rights

Taxes paid become part of No transfer but only restraint in Transfer is effected in favor of
public funds its exercise the State

6. Scope

All persons, property and All persons, property, rights Only upon a particular property
exercises and privileges

Along with police power and power of eminent domain of the government, taxation is one of the
three basic and necessary attributes of sovereignty. Thus, the State cannot be deprived of this
most essential power and attribute of sovereignty by vague implications of law. Rather, being
derogatory of sovereignty, the governing principle is that tax exemptions are to be construed in
strictissimijuris against the taxpayer and liberally in favor of the taxing authority; and he who
claims an exemption must be able to justify his claim by the clearest grant of statute.
CompagnieFinanciereSucresEtDenrees vs. Commissioner of Internal Revenue, G.R. No. 133834,
August 28, 2006
BASIC PRINCIPLES OF A SOUND TAX SYSTEM (FAT)
1. Fiscal Adequacy - sources of government revenue must be sufficient to meet government
expenditures and other public needs. Chavez v. Ongpin et. al., 186 SCRA 331
2. Administrative Feasibility - tax laws must be capable of effective and efficient
enforcement.
3. Theoretical Justice - a sound tax system must take into consideration the taxpayers ability
to pay (Ability to pay theory). Our laws mandate that taxes must be reasonable, fair, just and
conscionable. The tax laws can reasonably be enforced neither unduly burdensome upon nor
discouraging to business activity. The Constitution provides that taxation must be uniform and
equitable and the State shall evolve a progressive system of taxation.

BASIS OF TAXATION (Lifeblood Theory)

The power of taxation is essential because the government can neither exist nor endure
without taxation. Taxes are the lifeblood of the government and their prompt and certain
availability is an imperious need. (Bull vs. United States) The collection of taxes must be made
without hindrance if the state is to maintain its orderly existence.

Government projects and infrastructures are made possible through the availability of funds
provided through taxation. The governments ability to serve and protect the people depends
largely upon taxes. Taxes are what we pay for a civilized society. (CIR vs. Algue, 158 SCRA 9)

LIFEBLOOD Theory

The CTA ordered CIR to refund to CEPOC overpayments made by the latter of ad valorem taxes
on cement sold by it. The CIR opposed the ruling, claiming that it had a right to apply the
overpayment to another tax liability of CEPOC-sales tax on a, manufactured product (the
cement). CEPOC opposed the CIR, claiming that the overpayment must be refunded pending the
determination of whether the assessed sales tax was proper. CEPOC claims that the cement
cannot be considered a manufactured product and is instead a mineral product exempt from
sales tax.

ISSUE: Whether the CIR must refund the overpayment of the ad valorem tax.
HELD: No, the CIR has the right to apply the overpayment to CEFCCs sales tax deficiency.

It is well settled that cement is a manufactured product. There was some confusion because in a
previous case, it was said that cement was subject to sales tax prior to the effectivity of RA 1299,
which introduced the definitions of "mineral" and "manufactured." However, the decision cannot
be taken to have meant that cement was no longer a manufactured product because such
determination was not at issue. The assessment of sales tax is enforceable despite its being
contested because of the urgency to collect the taxes as the lifeblood of the government, If the
payment of taxes could be postponed by questioning their validity, the government would be
paralyzed, The Tax Code provides that no court shall have authority to grant an injunction or
restrain the collection of taxes, except when in the opinion of the CTA, the collection by the EIR
or the Bureau of Customs may jeopardize the interest of the Government and/or the taxpayer. In
such a case, the Court, at any stage of the proceeding may suspend the collection and require the
taxpayer to either deposit the amount claimed or to file a surety bond for not more than double
the amount with the Court. The exception does not apply in this case.

To require the CIR to refund the overpayment, which he later would have to collect anyway for
application to the sales tax assessment, is an idle ritual.
Commissioner Internal Revenue vs. Cebu Portland Cement Co. GR
L29059 December 15, 1987

Fundamental Principles of Taxation: Meaning of Taxation

THEORIES ON TAXATION

1. Lifeblood Theory

Revenue laws are not intended to be liberally construed. Considering that taxes are the lifeblood
of the government and in Holmes's memorable metaphor, the price we pay for civilization, tax
laws must be faithfully and strictly implemented.
Commissioner of Internal Revenue vs. Rosemarie Acosta, G.R. No. 154068, August 3, 2007
Antero M. Sison Jr. vs Ruben Ancheta 136 SCRA 654

Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile
the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of
taxation, which is the promotion of the common good, may be achieved.
Commissioner of Internal Revenue, et al. vs. Court of Appeals, et al., G.R. No. 119322, June 4,
1996

NO ESTOPPEL ON GOVERNMENT FOR MISTAKE OF ITS AGENTS The defense of reliance

in good faith on rulings of the Commissioner of Internal Revenue requiring no withholding of the
tax due on reinsurance premiums may free the taxpayer from the payment of surcharges or
penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not
exculpate it from liability to pay such withholding tax. The Government is not estopped from
collecting taxes by the mistakes or errors of its agents.
THE PHILIPPINE GUARANTY CO., INC. vs. COMMISSIONER OF INTERNAL REVENUE and
THE COURT OF TAX APPEALS, ET AL.,
G.R. No. L-22074 September 6, 1965

2. Necessity Theory
Taxes proceed upon the theory that the existence of the government is a necessity; that it cannot
continue without the means to pay its expenses; and that for those means, it has a right to compel
all citizens and property within its limits to contribute. The power to tax is an attribute of
sovereignty emanating from necessity. It is a necessary burden to preserve the State's sovereignty
and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from
invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the
citizenry and those which come within the State's territory, and facilities and protection which a
government is supposed to provide. (Phil. Guaranty Co., Inc. vs.
CIR)

3. Benefits-Protection/Reciprocity Theory
The power of the State to demand and receive taxes is based on the reciprocal duties of support
and protection. The citizen supports the State by paying the portion from his property that is
demanded in order that he may, by means thereof, be secured in the enjoyment of the benefits of
an organized society. This theory spawned the Doctrine of Symbiotic Relationship
Every person who is able must contribute his share in the burden of running the government. The
government for its part is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their material and moral values.
(C I R vs. Algue)

This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion
that it is an arbitrary method of exaction by those in the seat of power (Commissioner of internal
Revenue v. Algue, Inc. et. al. 158 SCRA 8 16-17 (1988).The symbiotic relationship being
established by the following:(a) Taxes are what we paid for a civilized society. Without taxes,
the government would be paralyzed for lack of motive power to activate and operate it. (b)
Despite the natural reluctance to surrender part of one's hard earned income to the taxing
authority, every person who is able must contribute his share in tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material running the
government. (c) The government for its part is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the people and enhance their material and
moral values.

Symbiotic relationship between government and people is the rationale of taxation.

It is said that taxes are what we pay for civilized society. Without taxes, the government would be
paralyzed for the lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard-earned income to taxing authorities, every person who
is able to must contribute his share in the running of the government. The government for its part
is expected to respond in the form of tangible and intangible benefits intended to improve the lives
of the people and enhance their moral and material values. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power. Every person who is able to must contribute his share in
the running of the government. It is said that taxes are what we pay for civilized society. Without
taxes, the government would be paralyzed for lack of the motive power to activate and operate it.
Hence, despite the natural reluctance to surrender part of one's hard-earned income to the taxing
authorities, every person who is able to must contribute his share in the running of the government.
The government for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values. This
symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is
an arbitrary method of exaction by those in the seat of power.
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be achieved.
Commissioner of Internal Revenue vs. Algue, Inc., et al., G.R. No. L-28896, February 17, 1988

Obligation to pay taxes rests upon the necessity of money for the support of the state.
The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded
to, a citizen by the government, but upon the necessity of money for the support of the state. For
this reason, no one is allowed to object to or resist the payment of taxes solely because no
personal benefit to him can be pointed out. While courts will not enlarge, by construction, the
government's power of taxation, they also will not place upon tax laws so loose a construction as
to permit evasions on merely fanciful and insubstantial distinctions. When proper, a tax statute
should be construed to avoid the possibilities of tax evasion. Construed this way, the statute,
without resulting in injustice to the taxpayer, becomes fair to the government.
Pablo Lorenzo vs. Juan Posadas, Jr., G.R. No. 43082, June 18, 1937

Q. How is the lifeblood (necessity) theory of taxation being implemented and protected?
Ans. By the following features of taxation:
(1) Collection of taxes may not be prevented by injunction;
(2) Taxes could not be subject to the rule of compensation or set-off;
(3) A valid tax may result in destruction of the taxpayer's property;
(4) Taxation is an unlimited and plenary power.
(5) It is designed to support the services of government for some of the recognized objects
of the country.
Tio v. Videogram Regulatory Board. et. al. 151 SCRA 213
Commissioner of Internal Revenue v. Algue, Inc. et. al. 158 SCRA 8, 16-17 (1988);
As a general rule, the power to tax is an incident of sovereignty and its in the constituency or
citizens who are to pay it (Mactan Cebu International Airport Authority v. Marcos et .al. 261 SCRA
667 (1996)
The power to tax is unlimited in force and so searching in extent, that courts scarcely venture
to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the
authority which exercises it. It is also unlimited in its range, acknowledging in its very nature no
limits, so that security against the abuse is to be found only in the responsibility of the legislature
which imposes the tax.
4. Jurisdiction over the the subjects and objects ( SITUS)

ASPECTS OF TAXATION _

1. Levy or imposition of the tax (tax legislation) - enactment of tax laws or

statutes, includes the determination of the persons, property or excises to be taxed, the sum or
sums to be raised, the due date thereof and the time and manner of levying and collecting taxes.
Levying or imposition- which is a legislative act; or passing of tax legislation; to levy means "an
imposition or for collection of an assessment, tax, tribute or fine
2. Enforcement or tax administration (tax administration) -collection of taxes already levied and
implemented by law.
Collection Enforcement- which is essentially administrative in nature and includes criminal
prosecution, forfeiture, etc.

TAXES - enforced proportional contributions from the persons and property levied by the law-
making body of the State by virtue of its sovereignty in support of government and for public
needs.

ESSENTIAL CHARACTERISTICS OF A TAX

1. It is an enforced contribution - not dependent on the will of the person taxed, not a contract but
a positive act of the government
2. It is generally payable in money
3. It is proportionate in character taxes must be based on ability to pay in accordance with the
constitutional mandate to Congress to evolve a progressive system of taxation
4. It is levied on persons, on rights and on property
5. It is levied by the state which has jurisdiction over the person or property
6. It is levied by the law making body of the state
7. It is levied for public purpose/s

REQUISITES OFAVALID TAX

1. Should be for a public purpose
2. The rule of taxation shall be uniform
3. That either the person or property taxed should be within the jurisdiction of the taxing authority
4. That the assessment and collection of certain kinds of taxes guarantees against injustice to
individuals, especially by way of notice and opportunity for hearing is provided
5. The tax must not impinge on the inherent and Constitutional limitations on the power of taxation

PURPOSES AND OBJECTIVES OF TAXATION

1. Revenue to raise funds or property to enable the state to promote the general welfare and
protection of its citizens.
2. Non-Revenue
a. Promotion of general welfare .
b. Regulation
c. Reduction of social inequality -possible through progressive system of taxation where the
object is to prevent the undue concentration of wealth in the hands of a few individuals
d. Encourage economic growth by granting incentives or exemptions in order to encourage
investments
e. Protectionism taxes sometimes provide protection to local industries
like protective tariffs and customs duties
First, revenue purpose- To raise revenue for governmental needs in-
(1) Promoting public welfare;
(2) funding various infrastructure projects vital to nation building;
(3) meeting its domestic (i.e., salaries) and international obligations e.g., payment of foreign
loans) and commitments.
Second, regulatory purpose- The state Increases taxes on harmful substance making them
more expensive thus limiting consumption (i.e. tobacco/ liquor taxes).
Third, compensatory purpose- to
(1) Maintain high level of employment;
(2) control inflation;
(3) Social justice through distribution of income using the progressive system of taxation.
Fourth, equitable wealth distribution- reduce excessive inequality of wealth (i.e., reduction of
social inequality); that is, it is a tool to promote more equitable distribution of wealth and social
benefits.

Regulatory taxes are those taxes with twin- purpose of regulating and raising revenues on taxable
matters invoking two inherent powers of the state- power to tax and regulate.
Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of
the government. Taxes may be levied with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry which is affected with public interest as
to be within the police power of the state (Caltex Phil. Inc. v. Commission on Audit, 208 SCRA
726(1992); Osmena v. Orbos, 220 SCRA (1993).
(1) Coconut Levy Funds under Coconut Investment Fund created by Rep. Act No. 6260,
Coconut Consumers Stabilization Fund under PD No. 276; Coconut Industry Development Fund
under PD No. 582 and Coconut Industry Stabilization Fund under PD No. 1841.
(2) Regulation of non-useful occupations.

CLASSIFICATION OF TAXES

1. As to subject matter or object:

a. Personal, poll or capitation - tax of a fixed amount imposed upon persons
residing within a specified territory, whether citizens or not, without regard to their property,
occupation or business in which they may be engaged (ex. Community tax).
b. Property tax imposed on property, whether real or personal, in proportion either to its value
or some other reasonable rule of apportionment (ex. Real estate tax).
c. Excise or Privilege-charge imposed upon the performance of an act, the
enjoyment of a privilege or engaging in an occupation, profession or business (ex. Donors tax).

2. As to who bears the burden:

a. Direct tax which is demanded from the person who also shoulders the
burden of the tax; the taxpayer is directly or primarily liable which he cannot shift to another
(ex. Income tax);
b. indirect tax wherein the incidence or liability for the payment falls on one person but the
burden can be shifted or passed on to another (ex. VAT).

3. As to purpose:
a. General, fiscal or revenue - tax is imposed for the general purposes of the Government, to raise
revenue for governmental needs. (ex.- income Tax)
b. Special or regulatory- tax imposed to achieve some social or economic ends irrespective of
whether revenue is actually raised or not ( customs duties)

4. As to determination of amount:
a. Specific- tax of a fixed amount imposed by head or number or by
standard of weight or measurement, it requires no valuation other than a listing or classification
of the objects to be taxed.
b. Ad Valorem (Value) tax of a fixed portion of the value of the property
with respect to which the tax is assessed; it requires the intervention of assessors or appraisers to
estimate the value of such property before the amount of tax due from each taxpayer can be
determined.

5. As to taxing authority:
a. National levied by the National Government
b. Local levied by the local government

6. As to rate:
a. Progressive or graduated tax the rate of which increases as the tax base or bracket increases.
b. Regressive - tax the rate of which decreases as the tax base increases.
c. Proportional - based on a fixed percentage of the amount of the property, receipts or other
basis to be taxed.

PROSPECTIVITY OF TAX LAWS

APPLICATION OF TAX LAWS

General Rule: Tax laws are prospective in operation.
Exception: While it is not favored, a statute may nevertheless operate retroactively provided it is
expressly declared or is clearly the legislative intent. (Cebu Portland Cement vs. Collector)

KINDS OF PROVISIONS OF TAX LAWS

1. Mandatory - those provisions intended for the security of the citizens or which are designed to
insure equality of taxation or certainly as to the nature and amount of each persons tax.
2. Directory-those provisions designed merely for the information or direction of officers or to
secure methodical and systematic modes of proceedings.

Importance of Distinction
The omission to follow mandatory provisions render invalid the act or proceeding to which it
relates while the omission to follow directory provisions does not involve such consequence.

Doctrine of Imprescriptibility
As a rule, taxes are imprescriptible as they are lifeblood of the government. However, tax
statutes may provide for statute of limitations.
DOUBLE TAXATION
DOUBLE TAXATION - means taxing the same property twice when it should be taxed only
once (CIR vs. Solidbank Corp.)

KINDS OF DOUBLE TAXATION

1. Direct Duplicate Taxation -is obnoxious, double taxation in the objectionable or prohibited
sense. This violates the equal protection clause of the Constitution- hence prohibited.
Elements:
a. The same property or subject matter is taxed twice when it should be taxed only once
b. Both taxes are levied for the same purpose
c. Imposed by the same taxing authority
d. Imposed within the same jurisdiction
e. During the same taxing period
f. Covering the same kind or character of tax.

Villanueva vs City of Iloilo

Uniformity; Double Taxation

The municipal board of Iloilo enacted an ordinance imposing license tax fees on persons
engaged in the business of operating tenement houses. Several owners of tenement houses filed a
complaint to declare the ordinance invalid because only the taxpayers of the City of Iloilo are
singled out to pay taxes on their tenement houses, while citizens of other cities, where their
councils do not enact a similar tax ordinance are permitted to escape such imposition. ISSUE:
Whether the ordinance violates the rule on equality and uniformity
in taxation.
HELD; No. This argument is without merit. The rule on equality and uniformity does not require
that taxes for the same purpose should be imposed in different territorial subdivisions at the
same time. So long as
the burden of the tax falls equally and impartially on all owners or
operators of tenement houses similarly classified or situated, equality and
uniformity of taxation is accomplished. Villanueva vs. City of Iloilo

Local Taxation; Double Taxation

CEPALCO was granted a franchise to operate an electric, light, heat, and
power system in Cagayan de Oro. The franchise imposed a 3% franchise
tax which shall be in lieu of all faxes and assessments of whatever authority upon the privileges,
earnings, income, etc, from which CEPALCO was expressly exempted. Subsequently the Local
Tax Code was promulgated allowing provinces to impose a tax of 1/2 of 1% on businesses
enjoying franchises. Pursuant to this, the Province of Misamis Oriental enacted an ordinance
levying the 1/2 of 1% tax on the gross annual receipts of CEPALCO realized within the province
of Misamis Oriental. CEPALCO refused to pay the additional tax, claiming the exemption
granted to it under its franchise.

ISSUE: Whether CEPALCO is exempt from paying the provincial franchise

tax.

HELD: Yes. The franchise of CEPALCO expressly EXEMPTS it from payment of all taxes of
whatever authority, except the 3% tax on its earning. The franchise granting the exemption is a
special law applicable only to
CEPALCO, while the Local Tax Code is a general tax law. The presumption
is that special statutes are exceptions to the general law because they pertain to a special charter
granted to meet a particular set of conditions and circumstances. The franchise tax imposed
under the local tax ordinance pursuant to the Local Tax Code shall be imposed on businesses
holding a franchise, but not from those whose franchises contain the in lieu of all taxes"
proviso in its charter.
Province of Misamis Oriental vs. Cagayan Electric Power and Light Company
Local Taxation; Double Taxation
The imposition of the 20% FWT and 5% GRT does not constitute double taxation. Double
taxation means taxing for the same tax period the same thing or activity twice, when it should be
taxed but once, for the same purpose and with the same kind of character of tax. This is not the
situation in the case at bar. The GRT is a percentage tax under Title V of the Tax Code ([Section
121], Other Percentage Taxes), while the FWT is an income tax under Title II of the Code (Tax
on Income). The two concepts are different from each other. In Solidbank Corporation, this
Court defined that a percentage tax is a national tax measured by a certain percentage of the
gross selling price or gross value in money of goods sold, bartered or imported; or of the gross
receipts or earnings derived by any person engaged in the sale of services. It is not subject to
withholding. An income tax, on the other hand, is a national tax imposed on the net or the gross
income realized in a taxable year. It is subject to withholding. Thus, there can be no double
taxation here as the Tax Code imposes two different kinds of taxes.
Commissioner of Internal Revenue vs. Citytrust Investment Phils., Inc.,
G.R. Nos. 139786-140857, September 27, 2006

2. Indirect Duplicate Taxation is permissible and it is allowed if the taxes are of different
nature or character imposed by different taxing authorities.

Generally, it extends to all cases in which there is a burden of two or more pecuniary
impositions. The afore-mentioned elements makes the double taxation indirect.

International juridical double taxation"-is the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter and for identical periods
[Commissioner v. S. C. Johnson & Sons Inc. GR No. 127105, June 15, 1999)].

METHODS OF REDUCING THE RIGORS OF DOUBLE TAXATION

1. Tax credits - There is no exact legal definition of tax credits however it can be defined by its
ordinary usage based on existing laws to wit:
a. Tax credit is an alternative remedy to a refund of overpaid taxes which may be applied to offset
tax liabilities.
b. Tax credits shall mean credits against taxes and or duties equal to those actually paid on raw
materials used in manufacturing the export products.
c. A reward or incentive granted to certain taxpayers for satisfying certain requirements prescribed
by an incentive law. (dof.gov.ph)
In Blacks Legal Dictionary, Tax Credit is defined as an amount subtracted from an individuals or
entitys tax liability to arrive at the total tax liability.
Tax Credits are granted in lieu of the inability of the government to give cash refund to its
taxpayers. Tax Credit Certificates are given in lieu of cash which in turn can be used by the holder
thereof to settle his or her obligation with the government. (dof.gov.ph)
Examples:
a. For VAT purposes, the tax on inputs or items that go into the manufacture of finished products
(which are eventually sold) may be credited against or deducted from the output tax or tax on the
finished product.
b. In Income taxation, in the case of resident citizen or domestic corporation whose income from
the Philippine tax on the same income. (Sec.34 [C][4][a] and [b] NIRC)

2. Tax deductions , tax write-off or reduction in the gross amount on which a tax is calculated
Example: Our estate tax law provides for the so-called vanishing deduction". (Sec. 86 [A] [2]
NIRC). This involves property previously taxed upon transfer from a prior decedent, and the
recipient (present decedent), dies within 5 years, who then transfers the same property to another.
Deduction is therefore allowed on the subsequent transfer.
3. Reduction of the Philippine income tax rate
Example: Tax Sparing Rule the dividend earned by a NRFC within the Phil. is reduced by
imposing a lower rate of 15% (in lieu of the 35%). on the condition that the country to which the
NRFC is domiciled shall allow a credit against the tax due from the NRFC, taxes deemed to have
been paid in the Phil. (Sec.28 B 5b) (CIR vs. Procter & Gamble)

4. Tax Exemptions a grant of immunity to particular persons or corporations from the

obligation to pay taxes.
Example: Exempt transfers under estate and donors taxes:
a. If the decedent at the time of his death or the donor-at the time of the donation was a citizen and
resident of a foreign country which at the time of his death or donation did not impose a transfer
tax of any character, in respect of intangible personal property of citizens of the Philippines not
residing in that foreign country, or
b. If the laws of the foreign country of which the decedent or donor was a citizen and resident at
the time of his death or donation allows a similar exemption from transfer or death taxes of every
character or description in respect of intangible personal property owned by citizens of the
Philippines not residing in that foreign country. (Sec 104 NIRC)
5. Tax treaties Agreement between two countries specifying what items of income will be taxed
by the authorities of the country where the income is earned.

When an item of income is taxed in the Philippines and the same income is taxed in
another country, is there a case of double taxation?
Ans. Generally yes, but being indirectly a double taxation imposed by different taxing
authority, it is not prohibited.
However, to avoid the impact of double taxation, some countries have considered it as
allowable deduction as a tax credit.
Commissioner of Internal Revenue vs. British Overseas Airways Corp., et al.,
G.R. Nos. L-65773-74, April 30, 1987
Commissioner of Internal Revenue vs. Air India, et al.,
G.R. No. L-72443, January 29, 1988
Commissioner of Internal Revenue vs. American Airlines, Inc., et al.,
G.R. No. 67938, December 19, 1989

CIR vs. Japan Air Lines, Inc. G.R No. 60714 October 4, 1991
South African Airways vs. CIR CTA 6760 June 09, 2005
National Dev. Co. vs. CIR G.R. No. L-53961 June 30, 1987
CIR vs. S.C. Jonhson and Sons, Inc. 309 SCRA 102

Methods resorted to by a tax treaty in order to eliminate double taxation:

a. The tax treaty sets out the respective rights to tax by the state of source or situs and by the state
of residence with regard to certain classes of income or capital. In some cases, an exclusive right
to tax is conferred in one of the contracting states; however, for other items of income or capital,
given the right to tax although the amount of the tax that may be imposed by the state of source is
limited.

b. The state of source is given a full or limited right to tax together with the state of residence. In
this case the treaty makes it incumbent upon the state of residence to allow relief in order to avoid
double taxation. There are two ways under the 2nd method.

1) The Exemption method- the income or capital which is taxable in the state of source or situs
is exempted in the state of residence, although in some instances it may be taken into account in
determining the rate of tax applicable to the taxpayers remaining income or capital. (This may be
done using the tax deduction method which allows foreign income taxes to be deducted from gross
income, in effect exempting the payment from being further taxed.) The focus here is on the
income or capital itself.
2) The credit method - although the income or capital which is taxed in the state of source is still
taxable in the state of residence. The tax paid in the former is credited against the tax, levied in the
latter. (CIR- v. S.C Johnson and Son) The focus is on the tax.

FORMS OF ESCAPE FROM TAXATION

There are six (6) basic forms of escape from Taxation :

1. SHIFTING -The transfer of the burden of a tax by the original payer or the one on whom the
tax was assessed (impact of taxation/statutory taxpayer) or imposed to another or someone else
(incidence of taxation).
Direct tax cannot be shifted - a tax cannot be shifted when it is purely personal or when it has no
relation to any business dealings of the taxpayer. (Schultz and Harris, American Public Finance)
Impact of Taxation - point on which tax is originally imposed or the one on whom the tax is
formally assessed.
Incidence of Taxation -point on which the tax burden finally rests or settles down.
Illustration: Value added tax. The seller is required by-law to pay tax, but the burden is actually
shifted or passed onto the buyer

Kinds of shifting
a. Forward shifting -when burden of tax is transferred from a factor of production through the
factors of distribution until it finally settles on the ultimate purchaser or consumer
b. Backward shifting? When burden is transferred from consumer through factors of distribution
to the factors of production
c. Onward shifting- when the tax is shifted 2 or more times either forward or backward

2. CAPITALIZATION - The reduction in the price of the taxed object equal to the capitalized
value of future taxes which the purchaser expects to be called upon to pay.

3.TRANSFORMATION - The manufacturer or producer upon whom the tax has been imposed,
fearing the loss of his market if he should add the tax to the price, pays the tax and endeavors to
recoup himself by improving his process of production, thereby turning out his units at a lower
cost.

4. 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.
Tax avoidance is the tax saving device within the means sanctioned by law. This method should
be used by the taxpayer in good faith and at arms length. (CIR vs. Estate of Benigno Toda Jr.)
A taxpayer has legal right to decrease the amount of what would otherwise be his taxes or
altogether avoid them by means which the law permits. (Delpher Trades vs. IAC)
Example: Availing of all deductions allowed by law or refraining from engaging in activities
subject to tax.

5. TAX EVASION - A term that connotes fraud through the use of pretenses and forbidden
devices to lessen or defeat taxes. (Yutivo Sons Hardware vs. CTA)
A scheme used outside of those lawful means and when availed of, it usually subjects the
taxpayer to further additional civil or criminal liabilities. (CIR vs. Estate of Benigno Toda Jr.)

Factors in Tax Evasion

a. The end to be achieved, i.e. payment of less than that known by the taxpayer to be legally due,
or paying no tax when is shown that the tax is due.
b. An accompanying state of mind which is described as being evil, in bad faith, willful, or
deliberate and not coincidental.
c. A course of action which is unlawful.
Evidence to prove tax evasion
a. Failure to declare for taxation purposes true and actual income derived from business for 2
consecutive years (Republic vs. Gonzales, L -17962)
b. Substantial under declaration of income in the tax returns of the taxpayer for 4 consecutive years
coupled with intentional overstatement of deduction (CIR vs. Reyes, 104 PHIL 1061)

TAX TAX EVASION

AVOIDANCE
Validity Legal and not Illegal and subject
subject to criminal to criminal penalty
penalty
Effect Minimization of Almost always
taxes results in absence
of tax payments

TAX AVOIDANCE & TAX EVASION

Tax evasion refers to the willful and deliberate attempt done by a taxpayer to reduce or altogether
eliminate his tax liability by unlawful means or device.

Tax avoidance refers to the action taken by a taxpayer to minimize the payment or altogether
eliminate his tax liability by lawful means.

Tax fraud means actual evil motive or intent to evade taxes which are legally due to the
government or willfully acting contrary to truth within the taxpayers knowledge. Fraud denotes
deceit, deception or trickery. Fraud is a generic term embracing the ways one person can freely
represent a fact to another in order to induce that person to surrender something of value.

Negligence is the omission to do something to which a reasonable man, guided by those

ordinary considerations which ordinarily regulate human affair would do, or the doing of
something which a reasonable and prudent man would not do.

Tax fraud or evasion means the elimination or reduction of one's correct and proper tax by
fraudulent means. The fraud contemplated by law is actual and not constructive. It must be
intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to
induce another to give some legal right.

In the realm of tax law, fraud constitutes deceit, trickery, intention perversion of the truth for
some evil motive or with intent to evade taxes, as the statute puts it. The Tax Code contains
no definition of the term fraud and evasion, although these terms are used in many sections
of the tax law. What constitutes fraud would depend upon the circumstances of each case, a
question of fact which requires nicely balanced judgment. This is quite significant for
procedural purposes, since it has been the established policy not to disturb on appeal the findings
of fact of the Tax Court, unless such factual findings are clearly erroneous or lack substantial
basis in the evidence adduced.

Nature of fraud

Fraud with intent to evade tax involves a state of mind. What constitutes fraud is a question of
fact and the determination of which frequently requires nicely balanced judgment. To be
considered are all the facts and circumstances surrounding the conduct of the taxpayers business
and all facts incident to the preparation of the alleged fraudulent tax return. The conclusion must
be based not on isolated bits of testimony but on the basis of conditions at the time and not in the
light of the conditions many years afterwards.

Factors in Fraud or Evasion

To establish the existence of fraud, all the following elements must be proven by competent
evidence:
1. The end to be achieved.-The objective is to pay an amount of tax that is less than that known
by the taxpayer to be legally due.

One of the factors influencing tax evasion is the benefit of not paying taxes. A key assumption
underlying the study is that taxpayers have a free choice to pay or evade taxes, or at least that all
taxpayers are equally constrained in this decision. In fact, different taxpayers have different
opportunities to evade, and the level of evasion can be much more easily explained by examining
what these opportunities are. Remove the element of free choice and you solve tax evasion.
Clearly, one important determinant of the level of evasion is whether withholding can effectively
be applied in collecting a tax. Even if there is collusion regarding withholding between wage-
earner and employer, some amount of taxes will probably has to be paid. An effective
withholding scheme, however, requires a relatively small number of easily identifiable payers of
the income.

2. The accompanying state of mind.-The state of mind is variously described as being "evil," "in
bad faith," "deliberate and not accident," or "willful". The exact term used is not too important.

3. The overt act done or scheme used by the taxpayer.-The act or scheme must be tinged with
some elements of deceit, misrepresentation, trick, device, concealment or dishonesty.