TAX1

GENERAL PRINCIPLES

Every person who is able to pay must

contribute his share in the running of the
government. The Government, for his 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 is an arbitrary method of
exaction by those in the seat of power. (Algue v.
CIR, GR L-28896, 17 February 1988)

PART ONE: BASIC CONCEPTS OF TAXATION

1.

Definition; 5 Elements

Taxation may refer to either the power to tax or the

act or process by which the taxing power is
exercised.
It is the inherent power of the sovereign exercised
through the legislative to impose burdens upon
subjects and objects within its jurisdiction for the
purpose of raising revenues to carry out the
legitimate objects of the government.

Taxes are enforced proportional contributions from

properties and persons levied by the State by virtue
its sovereignty for the support of the government
and for public needs.
Elements of Taxation (S-L-I-P-R)

a.
b.
c.
d.

It is an Inherent power of the State.

It is essentially Legislative in character
It should be for a Public purpose

Either the person or property taxed be

within the jurisdiction of the taxing authority.
(Situs of taxation)

e.

The purpose is to Raise revenues or the

promotion of general welfare, regulation,
reduction of social inequality and to encourage
economic growth. (public purpose)
2.

State Policy on Taxation

a.
RA 8424 (Tax Reform Act of 1997)
Section 2. State Policy. - It is hereby declared the
policy of the State to promote sustainable
economic growth through the rationalization of the
Philippine internal revenue tax system, including tax
administration; to provide, as much as possible, an
equitable relief to a greater number of taxpayers
in order to improve levels of disposable income and
increase economic activity; and to create a robust
environment for business to enable firms to
compete better in the regional as well as the global
market, at the same time that the State ensures that
Government is able to provide for the needs of
those under its jurisdiction and care.

3.

b.

The state policy looks into 3 entities:

1)
The Government
2)
The person or individual
3)
Businesses

taxes
are
important
considerations in entering a business.

Theories and Basis of Taxation

a.
Necessity Theory

Existence of a government is a necessity

and cannot continue without any means to pay
for expenses

For those means, the government has the

right to compel all citizens and property within
its limits to contribute.
Benefits-Protection Theory (Symbiotic)

Reciprocal duties of protection and support

between State and inhabitants. Inhabitants pay
taxes and in return receive benefits and
protection from the State

Sotelo, MS

4.

Nature of the Power of Taxation

Attribute of sovereignty and emanates from
necessity, relinquishment of which is never
presumed
Legislative in character

Scope of Legislative Taxing Power (P-A-P-M-A-S-K)

a. The persons, property and excises to be taxed,
provided it is within its jurisdiction
b. Amount or rate of tax
c.
Purposes for its levy, provided it be for a public
purpose
d. Kind of tax to be collected
e. Apportionment of the tax
f.
Situs of taxation
g. Method of collection
Is the power to tax the power to destroy?

"The power to tax is the power to destroy."

A state cannot have authority under the Constitution
to destroy or tax any agency that has been properly
set up by the government Chief Justice Marshall
(McCulloch v. Maryland 17 US 318)

(The Court), so often has defeated the

attempt to tax in certain ways, can defeat an
attempt to discriminate or otherwise go too far
without wholly abolishing the power to tax. The
power to tax is not the power to destroy while this
Court sits. The power to fix rates is the power to
destroy if unlimited, but this Court while it
endeavors to prevent confiscation does not
prevent the fixing of rates. A tax is not an
unconstitutional regulation in every case where an
absolute prohibition of sales would be one. - Justice
Holmes (Panhandle Oil v. Mississippi 277 US 218)

To say that the power to tax is the power to

destroy is to describe not the purpose for which the
taxing power may be used but the degree of vigor
with which the taxing power may be employed in
order to raise revenue. (1 Cooley 179-181)

The power to tax is an incident of

sovereignty and is 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 it.
Nevertheless, effective limitations thereon may be
imposed by the people through their Constitutions.
Our Constitution provides that the rule of taxation
shall be uniform and equitable and Congress shall
evolve a progressive system of taxation. So potent
indeed is the power that it was once opined that the
power to tax involves the power to destroy. Verily,
taxation is a destructive power which interferes with
the personal and property rights of the people and

NOTES |1

takes from them a portion of their property for the

support of the government. (MCIAA v. Marcos GR
120082, 11 September 1996)
Power of Judicial Review in Taxation
As long as the legislature, in imposing a tax, does
not
violate
applicable
constitutional
limitation
restrictions, the courts have no concern with the wisdom
or policy of the exaction, the political or other collateral
motives behind it, the amount to be raised, or the
persons, property or other privileges to be taxed.
The courts power in taxation is limited only to the
application and interpretation of law.

Manifestations of the Lifeblood Doctrine

a.
Purpose and Objective of Taxation
b.
Revenue
c.
Regulation
d.
Reduction of Social Inequality
e.
Encourage Economic Growth
f.
Protectionism
Taxes are Personal to the Taxpayer

1.

A corporations tax delinquency cannot be

enforced against its stockholder. (Corporate Entity
Doctrine).
EXCEPT:
a.
If it appears that the corporate
assets have passed into their hands; or
b.
When the stockholders have unpaid
subscriptions to the capital of the
corporation.
2.
Estate taxes are obligations that must be
paid by the executor or administrator out of the net
assets and cannot be assessed against the heirs.
EXCEPT:
If prior to the payment of the estate tax
due, the properties of the deceased are
distributed to the heirs, then the latter is
subsidiary liable for the payment of such portion
of the estate tax as his distributive share bears
to the total value of the ent estate.

Judicial Review, Defined

Judicial power includes the duty of the courts of
justice to settle actual controversies involving rights
which are legally demandable and enforceable, and to
determine whether or not there has been a grave abuse
of discretion amounting to lack or excess of jurisdiction
on the part of any branch or instrumentality of the
government.
5. Importance of Taxes
Lifeblood Doctrine

Taxes are the lifeblood of the nation

Without revenue raised from taxation, the

government will not survive, resulting in detriment
to society. Without taxes, the government would be
paralyzed for lack of motive power to activate and
operate it.

Taxes are the lifeblood of the government and there

prompt and certain availability is an imperious need.

Taxes are the lifeblood of the nation through which

the agencies of the government continue to operate
and with which the state effects its functions for the
benefit of its constituents

Taxes are the lifeblood of government, and their

prompt and certain availability an imperious need.
Time out of mind, therefore, the sovereign has
resorted to more drastic means of collection. The
assessment is given the force of a judgment, and if
the amount assessed is not paid when due,
administrative officials may seize the debtor's
property to satisfy the debt.
In recognition of the fact that erroneous
determinations and assessments will inevitably
occur, the statutes, in a spirit of fairness, invariably
afford the taxpayer an opportunity at some stage to
have mistakes rectified (Bull v. US, 295 US 247)

Illustrations of the Lifeblood Theory

Basic is the principle that "taxes are the lifeblood of
the nation." The primary purpose is to generate funds for
the State to finance the needs of the citizenry and to
advance the common weal. Due process of law under the
Constitution does not require judicial proceedings in tax
cases. This must necessarily be so because it is upon
taxation that the government chiefly relies to obtain the
means to carry on its operations and it is of utmost
importance that the modes adopted to enforce the
collection of taxes levied should be summary and
interfered with as little as possible. (PBCom v. CIR GR
112024, 28 January 1999)

Sotelo, MS

TAX1

6.

Purpose and Objective of Taxation

PRIMARY

Revenue the purpose of taxation is to

provide funds or property with which the state
promotes the general welfare and protection of its
citizens

Taxes are for revenue, whereas fees are

exactions for purposes of regulation and inspection,
and are for that reason limited in amount to what is
necessary to cover the cost of the services rendered
in that connection. It is the object of the charge, and
not the name, that determines whether a charge is a
tax or a fee. (PAL v. EDU, GR L-41383, 15 August
1988)
SECONDARY

1)

Regulation - it has a regulatory purpose as in the

case of taxes levied on excises or privileges like
those imposed on tobacco and alcoholic products, or
amusement places, etc.

2)
3)

Promotion of General Welfare

4)

Encourage Economic Growth in the realm of tax

exemptions and tax reliefs, the purpose is to grant
tax incentives or exemptions in order to promote the
countrys economic growth.

5)

Protectionism in some sectors of the economy, as

in the case of foreign importations, taxes sometimes
provide protection to local industries like protective
tariffs and customs duties.

7.

Characteristics or Attributes of Taxes

Reduction of Social Inequality made possible

through the progressive system of taxation where
the objective is to prevent undue concentration of
wealth in the hands of a few individuals.

NOTES |2

TAX1

Taxation and Eminent Domain Subject to

certain constitutional limitations, including the
prohibition against impairment of the obligation of
contracts.
Police Power Relatively free from constitutional
limitations and superior to the non-impairment
provisions thereof.

a.

It is an enforced contribution payment is

mandatory not discretionary.

b.

It is generally payable in money some

exceptions: (1) when law provides that backpay
certificates or government bonds are acceptable
for payment of taxes; (2) when property being
sold at public auction because of delinquent
taxes is declared forfeited and applied to the
payment of the tax.

c.

It is proportionate in character the tax

burden should be allocated on some reasonable
basis of apportionment, primarily on the basis of
ability to pay and secondarily on benefits
received.
d. It is levied on persons, property, or the
exercise of a right or privilege
e. It is levied by the State which has
jurisdiction over the subject or object of taxation
f. It is levied by the law-making body of the
State
g. It is levied for publics purpose or purposes
8.

1)

2)

3)

4)

5)

6)

Distinctions
a.
Taxation From Other Inherent Powers
of the State
TAXATION vs. POLICE POWER vs. EMINENT
DOMAIN
As to purpose:
Taxation for the support of the government
Eminent Domain_- for public use
Police Power to promote general welfare, public
health, public morals, and public safety.
As to compensation:
Taxation Protection and benefits received from the
government.
Eminent Domain just compensation, not to exceed
the market value declared by the owner or
administrator or anyone having legal interest in the
property, or as determined by the assessor,
whichever is lower.
Police Power The maintenance of a healthy
economic standard of society.
As to persons affected:
Taxation and Police Power operate upon a
community or a class of individuals
Eminent Domain operates on the individual
property owner.
As to authority which exercises the power:
Taxation and Police Power Exercised only by the
government or its political subdivisions.
Eminent Domain may be exercised by public
services corporation or public utilities if granted by
law.
As to amount of imposition:
Taxation Generally no limit to the amount of tax
that may be imposed.
Police Power Limited to the cost of regulation
Eminent Domain There is no imposition; rather, it is
the owner of the property taken who is just paid
compensation.
As to the relationship to the Constitution:

Sotelo, MS

b.
Taxation
impositions

From

Other

Monetary

1)

toll amount charged for the cost and maintenance

of property used;

2)

penalty punishment for the commission of a

crime.

3)

compromise penalty amount collected in lieu of

criminal prosecution in cases of tax violations;

4)

special assessment levied only on land based

wholly on the benefit accruing thereon as a result of
improvements of public works undertaken by
government within the vicinity.

5)

license or fee regulatory imposition in the

exercise of the police power of the State;

6)

margin fee exaction designed to stabilize the

currency

7)

custom duties and fees duties charged upon

commodities on their being imported into or
exported from a country;

8)

debt a tax is not a debt but is an obligation

imposed by law.

9)

Subsidy a legislative grant of money in aid of a

private enterprise deemed to promote public
welfare.

10) Revenue

a broad term that includes taxes and

income from other sources as well.

11) Impost

in its general sense, it signifies any tax,

tribute or duty. In its limited sense, it means a duty
on imported goods and merchandise.

License Fee v. Tax

If the purpose is primarily revenue, or if revenue is,
at least, one of the real and substantial purposes, then the
exaction is a tax.
If the purpose is regulatory in nature, it is a license.
Special assessment v. tax
1.

A special assessment tax is an enforced

proportional contribution from owners of lands
especially benefited by public improvements
A special assessment is levied only on land.
A special assessment is not a personal liability of
the person assessed; it is limited to the land.
A special assessment is based wholly on
benefits, not necessity.
A special assessment is exceptional both as to
time and place; a tax has general application.

2.
3.
4.
5.
Tax vs. Toll

1.

Toll is a sum of money for the use of something. It is

the consideration which is paid for the use of a road,
bridge, or the like, of a public nature. Taxes, on the
other hand, are enforced proportional contributions
from persons and property levied by the State by

NOTES |3

virtue of its sovereignty for the support of the

government and all public needs.

2.

Toll is a demand of proprietorship; tax is a demand

of sovereignty.

3.

Toll is paid for the used of anothers property; tax is

paid for the support of government.

4.

The amount paid as toll depends upon the

construction or maintenance of the
improvements used; while there is no limit
amount collected as tax as long as it
excessive, unreasonable, or confiscatory.

5.

Toll may be imposed by the government or by

private individuals or entities; tax may be imposed
only by the government.

TAX1

The amount of the fee or charge is properly

considered in determining whether it is a tax or an
exercise of the police power. The amount may be so
large as to itself show that the purpose was to raise
revenue and not to regulate, but in regard to this
matter there is a marked distinction between license
fees imposed upon useful and beneficial occupations
which the sovereign wishes to regulate but not
restrict, and those which are inimical and dangerous
to public health, morals or safety. In the latter case
the fee may be very large without necessarily being
a tax. (PHYSICAL THERAPY ORGANIZATION v.
MUNICIPAL BOARD, 101 PHIL 114)

The Government and the taxpayer are not mutually

creditors and debtors of each other under Article
1278 of the Civil Code and a claim of taxes is not
such a debt, demand, contract or judgment as is
allowed to be set-off. (FRANCIA VS. INTERMEDIATE
APPELLATE COURT, GR L-67649, 28 June 1988)

Taxes cannot be subject to compensation for the

simple reason that the government and the taxpayer
are not creditors and debtors of each other. There is
a material distinction between a tax and debt. Debts
are due to the Government in its corporate capacity,
while taxes are due to the Government in its
sovereign capacity. (PHILEX MINING v. CIR, GR
125704 August 28 1998)
Claim for payment of unpaid services of a
government employee vis--vis the estate taxes due
from his estate. The fact that the court having
jurisdiction of the estate had found that the claim of
the estate against the government has been
appropriated for the purpose by a corresponding law
shows that both the claim of the government for
inheritance taxes and the claim of the intestate for
services rendered have already become overdue and
demandable
as
well
as
fully
liquidated.
Compensation therefore takes place by operation of
law. (Domingo v. Garlitos 8 SCRA 443)

cost of
public
on the
is not

Tax vs. Penalty

1.

Penalty is any sanction imposed as a

punishment for violation of law or for acts
deemed
injurious;
taxes
are
enforced
proportional contributions from persons and
property levied by the State by virtue of its
sovereignty for the support of the government
and all public needs.

2.

Penalty is designed to regulate conduct; taxes

are generally intended to generate revenue.

3.

Penalty may be imposed by the government or

by private individuals or entities; taxes only by
the government.

Obligation to Pay Debt vs. Obligation to Pay Tax

1.

A debt is generally based on contract, express or

implied, while a tax is based on laws.

2.

A debt is assignable, while a tax cannot generally

be assigned.

3.

A debt may be paid in kind, while a tax is generally

paid in money.

4.

A debt may be the subject of set off or

compensation, a tax cannot.
A person cannot be imprisoned for non-payment of
tax, except poll tax.

5.

6.

A debt is governed by the ordinary periods of

prescription, while a tax is governed by the special
prescriptive periods provided for in the NIRC.

7.

A debt draws interest when it is so stipulated or

where there is default, while a tax does not draw
interest except only when delinquent.

Requisites of compensation
1.
That each one of the obligor be bound principally,
and that he be at the same time a principal creditor
of the other.
2.
That both debts consist in a sum of money, or if the
things due are consumable, they be of the same
kind and also of the same quality if the latter has
been stated.
3.
That the two (2) debts be due.
4.
That they be liquidated and demandable.
5.
That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtors.
ILLUSTRATIONS:

Sotelo, MS

9.

Taxpayers Suit
There have been several cases wherein the Court
recognized the right of a taxpayer to file an action
questioning the validity or constitutionality of a statute
or law, on the theory that the expenditure of public funds
by an officer of the government for the purpose of
administering or implementing an unconstitutional or
invalid law, constitutes a misapplication of such funds.
(GASCON v. ARROYO, GR 125704 August 28 1998)
10. Aspects,
Taxation

A.

Classification

and

Limitations

of

Aspects of Taxation (L-A-P)

a.

Levy (or imposition) of the tax by a

legislative act (passage of tax laws and ordinances)

b.

Assessment and Collection through the

administrative agencies.
Assessment is the fixing the amount of tax
due and demanding payment; not the assessment
which refers to the valuation of real properties to fix
the bases of real property taxes under the RPTC.

c.

Payment compliance by the taxpayers,

including options and remedies available to them.
B. Classification of Taxation

NOTES |4

TAX1

AS TO SUBJECT MATTER OR OBJECT

1.

Personal, poll or capitation tax - Tax of a fixed

amount imposed on persons residing within a specified
territory, whether citizens or not, without regard to their
property or the occupation or business in which they
may be engaged, i.e. community tax.

2.

Property tax - Tax imposed on property, real or

personal, in proportion to its value or in accordance with
some other reasonable method of apportionment.

3.

Excise tax - A charge impose upon the performance

of an act, the enjoyment of privilege, or the engaging in
an occupation.
AS TO PURPOSE
General/fiscal revenue tax is that imposed for the purpose
of raising public funds for the service of the government.
A special or regulatory tax is imposed primarily for the
regulation of useful or non-useful occupation or enterprises
and secondarily only for the purpose of raising public funds.
AS TO WHO BEARS THE BURDEN

1.

Direct tax - A direct tax is demanded from the

person who also shoulders the burden of the tax. It is a
tax which the taxpayer is directly or primarily liable and
which he or she cannot shift to another.

2.

Indirect tax - An indirect tax is demanded from a

person in the expectation and intention that he or she
shall indemnify himself or herself at the expense of
another, falling finally upon the ultimate purchaser or
consumer. A tax which the taxpayer can shift to another.

Transferring some or all of a tax burden of an entity

(such as an employee) to another (such as the
employer). What is shifted is merely the burden of
paying but not the consequences when it is not paid.

AS TO THE SCOPE OF THE TAX

1.
2.

National tax - imposed by the national government.

Local tax - A local tax is imposed by the municipal
corporations or local government units (LGUs).

AS TO THE DETERMINATION OF AMOUNT

1.

Specific tax is a tax of a fixed amount imposed by

the head or number or by some other standard of
weight or measurement. It requires no assessment
other than the listing or classification of the objects to
be taxed.

2.

An ad valorem tax is a fixed proportion 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 due from each taxpayer can be determined.
AS TO GRADUATION OR RATE

1.

Proportional tax - based on a fixed percentage of

the amount of the property receipts or other basis to
be taxed. Example: real estate tax.

2.

Progressive or graduated tax - the rate of which

increases as the tax base or bracket increases.
Digressive tax rate: progressive rate stops at a
certain point. Progression halts at a particular stage.

3.

Regressive tax - the rate of which decreases as the tax

base or bracket increases. There is no such tax in the
Philippines.

Sotelo, MS

C.

Limitations of Taxation

Inherent Limitations

1.

Legislative in Nature; Non-Delegability

of Taxing Power
As a general rule, taxing power may not be delegated. This
is the right to levy taxes (scope of the legislative power)
which includes:
a. Object to be taxed
b. Amount of rate to be taxed
c. Purposes for which the tax is levied provided
that it is for a public purpose
d. Kind of tax to be collected
e. Apportionment of tax
f. Situs of taxation
g. Method of collection.
EXCEPT:

to the PRESIDENT The Congress may, by

law, authorize the President to fix within specified
limits, and subject to such limitations and restrictions
as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties
or imposts within the framework of the national
development program of the Government. (Sec.
28[2], Art. VI, 1987 Constitution)
In the interest of national economy, general welfare
and/or national security, the President upon the
recommendation of the National Economic and
Development Authority is empowered:

1)

To increase, reduce or remove existing

protective rates of import duty, provided that
the increase should not be higher than 100% ad
valorem
2) To establish import quota or to ban imports of
any commodity
To impose additional duty on all imports not
exceeding 10% ad valorem (Flexible Tariff Clause, SEC.
401 Tariff and Customs Code)

to the LGCs Each local government unit

shall have the power to create its own sources of
revenues and to levy taxes, fees and charges subject
to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments. (Sec.5, Art. X,
1987 Constitution.)

to the ADMIN AGENCIES refers merely to

the implementation and execution of the tax law. It
refers to the interpretation or filling up the law. Also, in
contingency or suspending the law when certain
circumstances are present. For the delegation to be
constitutionally valid, the law must be complete in
itself and must set forth sufficient standards.
Certain aspects of the taxing process that are
not really legislative in nature are vested in
administrative agencies. In these cases, there really is
no delegation, to wit:
a. power to value property
b. power to assess and collect taxes
c. power to perform details of computation,
appraisement or adjustments.

NOTES |5

TAX1

2.
Territorial/Situs
The power to tax is limited only to persons, property
or businesses within the jurisdiction or territory of the
taxing power.
EXCEPT:
A) Where the tax laws operate outside territorial
jurisdiction
1) TAXATION of resident citizens on their
incomes derived from abroad
B) Where tax laws do not operate within the
territorial jurisdiction of the State
1) When exempted by treaty obligations
2) When exempted by international comity

d.

Shares, obligations, or bonds issued by any

foreign corporation if such shares, obligations or
bonds have acquired a business situs in the
Philippines; and
Shares or rights in any partnership business or
industry established in the Philippines.

e.

Factors that Determine Situs

a. Kind or classification of the tax being levied
b. Situs of the thing or property taxed
c. Citizenship of the tax payer
d. Residence of the taxpayer
e. Source of the income taxed

f. Situs of the excise, privilege, business or occupation

KIND OF TAX

SITUS

Personal or Community
Tax

Residence or domicile of the

taxpayer

Real Property Tax

Personal Property Tax

Business Tax

It must be imposed for a public purpose.

Duty Test whether the thing to be furthered by the

appropriation of public revenue is something which is
the duty of the State, as a government, to provide.
(Waples v. Marrast, 108 Texas 5)

Promotion of General Welfare Test whether the

proceeds of the tax will directly promote the welfare
of the community in equal measure. The right to tax
depends upon the ultimate use, purpose and object
for which the funds is raised. There is no power to tax
an object which not within the purposes of which the
governments are established.

INTANGIBLE: Subject to Sec 104

of the NIRC * and the principle
of Mobilia Sequuntur Personam
**
Place of Business
Where the act is performed or
where occupation is pursued

Sales Tax

Where the sale is consummated

ILLUSTRATIONS:

Income Tax

Consider: (1) citizenship, (2)

residence, (3) source of income
(Sec 42, 23, NIRC of 1997)

Transfer Tax

Residence or citizenship of the

taxpayer or location of the
property
Location of the property and
the citizenship of the donor
(Sec 98, NIRC 1997)
Location and citizenship of the
decedent.(Sec 85, NIRC)

Donors Tax

Estate Tax

Franchise Tax

state which granted the

franchise

* Mobilia Sequuntur Personam movables

person. According to this maxim, the situs
property is the domicile of the owner. This is
fiction of law intended for convenience and
controlling where justice does not demand it.

follow the
of personal
a merely a
not to be

** the following intangible properties are considered as

properties with a situs in the Philippines:
a. Franchise which must be exercised in the Philippines

c.

3.

Location of the property

TANGIBLE: where it is physically
located or permanently kept
(Lex Rei Sitae)

Excise or Privilege Tax

b.

being taxed.
g. Method of collection.

Shares, obligations or bonds issued by any

corporation or sociedad anonima organized or
constituted in the Philippines in accordance with its
laws.
Shares, obligations or bonds issued by any foreign
corporation 85% of business which is located in the
Philippines

Sotelo, MS

The right of the legislature to appropriate funds is

correlative with its right to tax, under constitutional
provisions against taxation except for public purposes
and prohibiting the collection of a tax for one purpose
and the devotion thereof to another purpose, no
appropriation of state funds can be made for other than
a public purpose.(Pascual v. Sec of Public Works 110 Phil
331)
Taxation is no longer envisioned as a measure merely to
raise revenue to support the existence of government;
taxes may be levied with a regulatory purpose to provide
means for the rehabilitation and stabilization of a
threatened industry which is affected with public interest
as to be within the police power of the state. (Caltex
Philippines v. COA GR 92585, 8 May 1992)
The eradication of a dreaded disease is a public purpose,
but if by public purpose the petitioner means benefit to a
taxpayer as a return for what he pays, then it is sufficient
answer to say that the only benefit to which the taxpayer
is constitutionally entitled is that derived from his
enjoyment of the privileges of living in an organized
society, established and safeguarded by the devotion of
taxes to public purposes.(Gomez v. Palomar, 25 SCRA
827)

4.

Government entities are exempted

As a matter of public policy, property of the state
and of its municipal subdivisions devoted to government
uses and purposes is deemed to be exempt from
taxation although no express provisions in the law are
made therefore.

NOTES |6

1)

Agencies performing governmental functions >>

TAX EXEMPT, unless
when the law expressly
provides for tax.

2)

Agencies performing proprietary functions

>>
TAXABLE, unless exempted by law.
GOCCs >> TAXABLE, at the rate imposed upon
corporations or associations engaged in a similar
business, industry or activity.
EXCEPT: GSIS, SSS, PHIC, PCSO, PAGCOR (Sec 27[C],
NIRC)

3)

REASON FOR THE EXEMPTION:

Taxing
itself
would
require
administration
unnecessarily
increasing
its
expenditures
with
administrative expenses in the collection of payment of
such taxes, without an increase in total revenues.

thereby submit itself to

jurisdiction of the other.

In exempting from taxation "property owned by the

Republic of the Philippines, any province, city,
municipality or municipal district . . .," said section
3(a) of Republic Act No. 470 makes no distinction
between property held in a sovereign, governmental
or political capacity and those possessed in a
private, proprietary or patrimonial character. And
where the law does not distinguish neither may we,
unless there are facts and circumstances clearly
showing that the lawmaker intended the contrary,
but no such facts and circumstances have been
brought to our attention. Indeed, the noun
"property" and the verb "owned" used in said section
3(a) strongly suggest that the object of exemption is
considered more from the view point of dominion,
than from that of domain. Moreover, taxes are
financial burdens imposed for the purpose of raising
revenues with which to defray the cost of the
operation of the Government, and a tax on property
of the Government, whether national or local, would
merely have the effect of taking money from one
pocket to put it in another pocket (Cooley on
Taxation, Sec. 621, 4th Edition.) Hence, it would not
serve, in the final analysis, the main purpose of
taxation. What is more, it would tend to defeat it, on
account of the paper work, time and consequently,
expenses it would entail. (Board of Assessment
Appeals of Laguna v. CTA 8 Phil 227)
MCIAA is a taxable person under its Charter, and
was only exempted from the payment of real
property taxes. The grant of the privilege only in
respect of this tax is conclusive proof of the
legislative intent to make it a taxable person subject
to all taxes, except real property tax. Finally, even if
the petitioner was originally not a taxable person for
purposes of real property tax, it had already
become, even if it be conceded to be an agency or
instrumentality of the Government, a taxable
person for such purpose in view of the withdrawal in
the last paragraph of Section 234 of exemptions
from the payment of real property taxes applies to
the MCIAA. (MCIAA v. Marcos 261 SCRA 667)

International comity
These principles limit the authority of the authority
of the government to effectively impose taxes on a
sovereign state and its instrumentalities, as well as on its
property held and activities undertaken in that capacity.
Even where one enters the territory of another, there is
an implied understanding that the former does not

and

TAX1

1. Due Process of Law

DUE PROCESS CLAUSE (Art III Sec 1, 1987 Constitution)
No person shall be deprived of life, liberty, or
property without due process of law, nor shall any
person be denied the equal protection of the laws.
Two Aspects of Due Process:

a.

Substantive due process requires that laws

in substance and content must be reasonable, fair
and just. It should not be oppressive.
A tax is reasonable when the purpose is public
purpose and the means to achieve such purpose is
reasonable. The means is reasonable when taxes are
assessed on subjects affected by the purpose.

b.

Procedural due process requires that the

manner of enforcing the law is likewise reasonable
fair and just.
This requires notice and opportunity to be
heard before judgment is rendered.
INSTANCES WHEN THE TAX LAW MAYBE DECLARED
AS UNCONSTITUTIONAL
FOR VIOLATING DUE
PROCESS [C-O-N-U]

1)

If it amounts to confiscation of property

without due process

2)

If the subject of taxation is outside of the

jurisdiction of the taxing state

3)

The law maybe declared as unconstitutional

if it is imposed not for a public purpose

4)

If a tax law which is applied retroactively,

imposes unjust and oppressive taxes.
ILLUSTRATION:
Although taxes are the lifeblood of the government
and should be collected without unnecessary hindrance,
such collection should be made in accordance with law
as any arbitrariness will negate the very reason for
government itself. As the Reyeses are burdened by the
Rent Freeze Laws (RA 6359 and PD 20), they should not
be penalized by the same government by the imposition
of excessive taxes they can ill afford and would
eventually result in the forfeiture of their properties,
under the principle of social justice. (Reyes v. Almazor
GRS 49839-46, April 1991)
2. Equal Protection of the Law
EQUAL PROTECTION CLAUSE (Article III, Section 1)
No person shall be deprived of life, liberty, or property
without due process of law, nor shall any person be
denied the equal protection of the laws.

All persons similarly situated must be

similarly treated both as to rights conferred and
responsibility imposed.

Equality and uniformity in taxation requires

that taxable articles or kinds of property of the same
class shall be taxed at the same rate.

5.

Sotelo, MS

authority

Constitutional Limitations

ILLUSTRATION:

the

Requisites of a valid classification(S-A-G-E):

a.
b.
c.

Based upon a Substantial distinction

Germane to the purposes of law
Not limited to Existing conditions only

NOTES |7

TAX1

d.

Apply equally to all members of the class

TWO WAYS EQUAL PROTECTION CLAUSE CAN BE

VIOLATED
1) When classification is made where there should be none
ex. When the classification does not rest upon
substantial distinctions that make for real difference
2) When no classification is made where a classification is
called for
ex. When substantial distinctions exist but no
corresponding classification is made on the basis thereof

him for the privilege of delivering a sermon. The

power to tax the exercise of a privilege is the power to
control or suppress its enjoyment.
The power to impose a license tax on the exercise of
these freedoms is indeed as potent as the power of
censorship which this Court has repeatedly struck down.
It is not a nominal fee imposed as a regulatory measure
to defray the expenses of policing the activities in
question. It is in no way apportioned. It is flat license tax
levied and collected as a condition to the pursuit of
activities whose enjoyment is guaranteed by the
constitutional liberties of press and religion and
inevitably tends to suppress their exercise. Such is the
inherent vice and evil of a flat license tax. (American
Bible Society v. Manila GR L-9637, April 1957)

The fact that there is no other person in the locality

who exercises such a designation or calling does not
make the ordinance discriminatory and hostile, inasmuch
as it is and will be applicable to any person or firm who
exercises such calling or occupation named or
designated as installation manager. (Shell Co. v. Vano,
94 Phil 387)

5.
Non-Impairment of Contracts
NON IMPAIRMENT CLAUSE (Art III. Sec 10, 1987
Constitution)
No law impairing the obligation of contracts shall be
passed.

3. Freedom of the Press

FREEDOM OF SPEECH AND OF THE PRESS (Art III, Section
4, 1987 Constitution)
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.

What constitutes impairment of an obligation arising from

contract?

Any change in the terms or conditions of the

contract, without the consent of the party affected,
which weakens his position, right or available
remedies; any deviation from its terms which
diminishes the rights of any party to the agreement.

There is curtailment of press freedom and freedom

of thought and expression if a tax is levied in order to
suppress this basic right of the people under the
constitution.

The VAT is, however, different. It is not a license tax.

It is not a tax on the exercise of a privilege, much
less a constitutional right. It is imposed on the sale,
barter, lease or exchange of goods or properties or
the sale or exchange of services and the lease of
properties purely for revenue purposes. To subject
the press to its payment is not to burden the
exercise of its right any more than to make the press
pay income tax or subject it to general regulation is
not to violate its freedom under the Constitution. (PPI
v. de Ocampo GR 115931, 30 October 1995)

4.

Non-Infringement of Religious Freedom and

Worship
(Art III, Sec 5, 1987 Constitution)
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.
The constitutional guaranty of the free exercise and
enjoyment of religious profession and worship carries
with it the right to disseminate religious information. Any
restraint of such right can only be justified like other
restraints of freedom of expression on the grounds that
there is a clear and present danger of any substantive
evil which the State has the right to prevent.
A tax on the income of one who engages in religious
activities is different from a tax on property used or
employed in connection with those activities. It is one
thing to impose a tax on the income or property of a
preacher. It is quite another thing to exact a tax from

Sotelo, MS

Some believe that the non-impairment

clause will only be violated if and when the taxing
authority was a party to the contract in person. The
reason for this is when tax laws are passed; it
imposes a new tax exemption or withdraws one.
What essentially is being changed is the relationship
between the government and the private individual
and not between the two private individuals.
RULES ON THE NON-IMPAIRMENT:
1) If the exemption was granted for valuable
consideration and it is granted on the basis of a
contract.
> cannot be revoked
2) If the exemption is granted by virtue of a contract,
wherein the government enters into a contract with a
private corporation
> cannot be revoked unilaterally by the government
3) If the basis of the tax exemption is a franchise granted
by Congress and under the franchise or the tax
exemption is given to a particular holder or person
> can be unilaterally revoked by the government

The rule does not apply to public utility

franchises. According to Sec 11, Art XI of the
constitution, no public utility franchise or right shall
be granted except under the condition that it shall be
granted except under the condition that it is subject
to amendment, alteration or repeal by the Congress
when the common good so requires.

Congress could impair the companys

legislative franchise by making it liable for income
tax. The Constitution provides that a franchise is
subject to amendment, alteration or repeal by the
Congress when the public interest so requires. RA
3247 itself provides that the franchise is subject to
amendment, etc. by Congress. The enactment of RA
5431 had the effect of withdrawing the companys
exemption from income tax. The exemption was

NOTES |8

TAX1

restored by the enactment of RA 6020. (Cagayan

Electric Power & Light Co. v. Commissioner GR L60126, 25 September 1985)

actually, directly, and exclusively used for

religious, charitable, or educational purposes shall be
exempt from taxation.

Non-Imprisonment for Non-Payment of Poll Tax

(Art. III, Sec 20): No person shall be imprisoned for
debt or non-payment of a poll tax.

WHAT TAXES ARE COVERED?: The phrase

exempt from taxation should not be interpreted to
mean exemption from all kinds of taxes. The
exemption is only from the payment of taxes
assessed on such properties as property taxes as
contradistinguished from excise taxes. A donees gift
tax is not a property tax but an excise tax imposed
on the transfer of property by way of gift inter vivos.
(Lladoc v. CIR, GR L-19201, 16 June 1965)

6.

WHAT IS A POLL TAX? It is a nominal

capitation tax imposed on inhabitants residing within
a territory, without regard to their property or
occupation.

HISTORICAL ORIGIN: the predecessor of the

poll tax is the cedula of the Spanish regime which
was deemed a symbol of oppression of the Filipinos
then.
7. Origin of Appropriation, Revenue, Tariff Bills
(Art. VI, Section 24):
(1) Every bill passed by the Congress shall embrace
only one subject which shall be expressed in the title
thereof.
(2) No bill passed by either House shall become a law
unless it has passed three readings on separate days,
and printed copies thereof in its final form have been
distributed to its Members three days before its passage,
except when the President certifies to the necessity of its
immediate enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no
amendment thereto shall be allowed, and the vote
thereon shall be taken immediately thereafter, and the
yeas and nays entered in the Journal.
(Art. VI, Section 25[4]):
A special appropriations bill shall specify the purpose for
which it is intended, and shall be supported by funds
actually available as certified by the National Treasurer,
or to be raised by a corresponding revenue proposal
therein.
(Art. VI, Section 39 [3]):
All money collected on any tax levied for a special
purpose shall be treated as a special fund and paid out
for such purpose only. If the purpose for which a special
fund was created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the general funds
of the Government.
8. Veto Power of the President
(Art. VI, Section 27[2]):
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.
9. Uniformity and Progressiveness
(Art. VI, Section 28[1]):
The rule of taxation shall be uniform and equitable.
The Congress shall evolve a progressive system of
taxation.
10. Exemption of Properties ACTUALLY, DIRECTLY
and EXCLUSIVELY used for religious, charitable
and educational purposes
(Art. VI, Section 28[1]):
Charitable institutions, churches and personages or
convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements,

Sotelo, MS

WHAT MUST BE PROVEN?: The 1935 and the

1973 Constitutions differ in language as to the
exemption of religious property from taxes as they
should not only be exclusively but also actually
and directly used for religious purposes.
Exemption from taxation is not favored and is never
presumed, so that if granted, it must be strictly
construed against the taxpayer. There must be proof
of the actual and direct use of the lands, buildings,
and improvements for religious (or charitable)
purposes to be exempted from taxation. (Abra v.
Hernando GR L-29336, 31 August 1981)

TEST OF EXEMPTION: While the Court allows

a more liberal and non-restrictive interpretation of
the phrase exclusively ised for educational
purposes, reasonable emphasis has always been
made that exemption extends to facilities which are
incidental to and reasonably necessary for the
accomplishment of the main purposes. While the
second floors use, as residence of the director, is
incidental to education; the lease of the first floor
cannot by any stretch of imagination be considered
incidental to the purposes of education. The test of
exemption from taxation is the use of the property
for purposes mentioned in the Constititution. (Abra
Valley College v. Aquino L-3906, 15 June 1988)

The exemption in favor of the convent in the

payment of land tax refers to the home of the priest
who presides over the church and who has to take
care of himself in order to discharge his duties. The
exemption includes not only the land actually
occupied by the Church but also the adjacent ground
destined to the ordinary incidental uses of man. A
vegetable garden, thus, which belongs to a convent,
where its use is limited to the necessity of the priest,
comes under the exemption. Further, land used as a
lodging house by the people who participate in
religious festivities, which constitutes an incidental
use in religious functions, likewise comes within the
exemption. It cannot be taxed according to its
former use, i.e. a cemetery. (Roman Catholic Bishop
of Nueva Segovia v. Provincial Board of Ilocos Norte,
51 Phil 352)

To determine whether an enterprise is a

charitable institution/entity or not, the elements
which should be considered include the statute
creating the enterprise, its corporate purposes, its
constitution
and
by-laws,
the
methods
of
administration, the nature of the actual work
performed, the character of the services rendered,
the indefiniteness of the beneficiaries, and the use
and occupation of the properties. a charitable
institution does not lose its character as such and its
exemption from taxes simply because it derives
income from paying patients, whether out-patient, or

NOTES |9

TAX1

confined in the hospital, or receives subsidies from

the government, so long as the money received is
devoted or used altogether to the charitable object
which it is intended to achieve; and no money inures
to the private benefit of the persons managing or
operating the institution. (Lung Center of the
Philippines v. QC, GR 144104, 29 June 2004)

a.

Direct Double or Duplicate Taxation

this is objectionable or prohibited because this
constitutes a violation of substantive due process.
ELEMENTS:

Taxing twice

The same subject or object

By the same public authority

Within the same jurisdiction

For the same purpose

In the same taxing period

11. Grant of Tax Exemptions

(Art. VI, Section 28[4]):
No law granting any tax exemption shall be passed
without the concurrence of a majority of all the
Members of the Congress.

b.

Indirect Duplicate Taxation not legally

objectionable. The absence of one or more of the
above-mentioned elements makes the double
taxation indirect.

12. Flexible Tariff Clause

(Sec. 28[2], Art. VI, 1987 Constitution)
The Congress may, by law, authorize the President to
fix within specified limits, and subject to such limitations
and restrictions as it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the national
development program of the Government.
(Flexible Tariff Clause, SEC. 401 Tariff and Customs
Code)
In the interest of national economy, general welfare
and/or national security, the President upon the
recommendation of the National Economic and
Development Authority is empowered:
1) To increase, reduce or remove existing
protective rates of import duty, provided that
the increase should not be higher than 100% ad
valorem
2) To establish import quota or to ban imports of
any commodity
To impose additional duty on all imports not
exceeding 10% ad valorem.

13. Tax

Exemptions Granted to Non-Stock, NonProfit Educational Institutions

(Art 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.
Double Taxation

1.

Definition: Taxing the same person, property,

business, object twice when it should only be taxed once.

c.

Domestic this arises when the taxes are

imposed by the local or national government (within
the same state)
d.
International refers to the imposition of
comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter for
identical periods
3.
1)
2)
3)
4)
5)

Means Employed to Avoid Double Taxation

Tax deductions
Tax credits
Provide for exemption
Enter into treatise with other states
Allowance on the principle of reciprocity

TAX CREDIT
EXAMPLES:

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 on the finished products.

In the case of a resident citizen or domestic

corporation whose income sources within a foreign
country is also taxable under Philippine law, the tax to be
paid to such foreign country may, under certain
limitations, be claimed as a credit against the Philippine
tax on the same income.

Foreign Tax Credit Method - An amount allowed as a

deduction of the Philippine Income tax on account of
income taxes paid or incurred to foreign countries. It is
given to a taxpayer in order to provide a relief from too
onerous a burden of taxation in case where the same
income is subject to a foreign income tax and the
Philippine Income tax.

IS DOUBLE TAXATION PROHIBITED IN THE PHILS?

No, there is no Constitutional prohibition

against double taxation. It is not favored but
permissible. (Pepsi Cola Bottling Co. v. City of
Butuan, GR L-22814, 28 August 1968)

How is the credit for foreign taxed paid arrived at?

TAXABLE INCOME
(Foreign Source)
TOTAL TAXABLE
INCOME
(Foreign + Phil Source)

Double taxation becomes obnoxious only

when the taxpayer is taxed twice for the benefit of
the same government entity. (Commissioner vs.
Lednicky (GR L-18169, L-18286, L-21434; 31 July
1964)
2.

Kinds of Double Taxation

Sotelo, MS

Step 1: Get the maximum allowable foreign tax credit under

the Philippine law

X PHILIPPINE TAX ON =
THE TOTAL INCOME
(Total Taxable
Income x 30%)

LIMIT on
FOREIGN TAX
CREDIT

EXAMPLE:
Income
Income
Income
Income

from A:
from B :
From C:
from Phil:

2000
3000
1000
4000

at
at
at
at

20%
10%
30%
30%

NOTES |10

TAX1

P6000
P10000

P3000

Further, a license tax may be levied upon

a business or occupation although the land used
in connection therewith is subject to property
tax.(Villanueva v. Iloilo, GR L-265621, 28
December 1968)

1800

Step 2: To credit foreign tax against Philippine tax, deduct

the foreign tax credit (per formula) from Philippine tax.
Philippine Tax:
Foreign Tax:
Tax due after credit:

P3000
- P1800
P1200

TAX DEDUCTIONS
EXAMPLES:

- Vanishing deductions in order to mitigate the

burdensome effect of double taxation on the same
property that is the subject of two or more transfers
pertaining to two or more transfers pertaining to two or
more decedents.

Foreign Tax Deduction Method - foreign tax as an

itemized deduction. It is where you deduct the
summation of foreign tax actually paid and/or what is
due the Philippine tax, whichever is lower.
EXAMPLE:
Income
Income
Income
Income

from A:
from B :
From C:
from Phil:

2000
3000
1000
4000

at
at
at
at

20%
40%
30%
30%

Step 1: Determine the actual foreign tax paid and what is

supposedly due the Philippines.
Countries
A
B
C

PH tax due
600
900
300

Foreign Tax Paid

400
1200
300

TOTAL FOREIGN TAX ACTUALLY PAID: P1600

Step 2: To credit foreign tax against Philippine tax, deduct
the total foreign tax actually paid (per formula)
from
Philippine tax.
Philippine Tax:
Foreign Tax paid:
P1600
Tax due after credit:

P3000
P1400

TAX EXEMPTION

1.

Definition: is the immunity, privilege, from financial

charge of burden to which others are subjected.

An ordinance imposing a municipal tax on

tenement houses was challenged because the
owners already pay real estate taxes and also
income taxes under the NIRC. The Supreme
Court held that there was no double taxation.
The same tax may be imposed by the National
Government as well as the local government.
There is nothing inherently obnoxious in the
exaction of license fees or taxes with respect to
the same occupation, calling or activity by both
the state and a political subdivision thereof.

Sotelo, MS

Constitutional grants of tax exemptions are selfexecuting. The reason for this is that a
constitutional
provision
declaring
certain
properties are tax exempt does not need
legislative enactment to put it into effect. This is
in consonance with the presumption that
provisions of the Constitution are generally selfexecuting; otherwise, it will be within the power
of the legislature to ignore or practically nullify
the directions of the fundamental law. (DOJ
Opinion No. 130, 1987)
The Host Agreement, in specifically exempting
the WHO from indirect taxes, contemplates
taxes which, although not imposed upon or paid
by the Organization directly, form part of the
price paid or to be paid by it. This is made clear
in Section 12 of the Host Agreement which
provides While the Organization will not, as a
general rule, in the case of minor purchases,
claim exemption from excise duties, and from
taxes on the sale of movable and immovable
property which form part of the price to be paid,
nevertheless, when the Organization is making
important purchases for official use of property
on which such duties and taxes have been
charged or are chargeable the Government of
the Republic of the Philippines shall make
appropriate administrative arrangements for the
remission or return of the amount of duty or
tax. Section 12, although referring only to
purchases made by the WHO, elucidates the
clear intention of the Agreement to exempt the
WHO from indirect taxation.(CIR v. Gotamco,
GR L-31092, 27 February 1987)

2. KINDS
According to Manner of Creation
1) Express or affirmative exemption
When certain persons, property or transactions are,
by express provision, exempted from all certain
taxes, either entirely or in part.
2) Implied exemption or exemption by omission
When a tax is levied on certain classes of persons,
properties, or transactions without mentioning the
other classes.
3) Contractual
Agreed to by the taxing authority in contracts
lawfully entered into them under enabling laws. (i.e.:
treaty, licensing ordinance)
According to Scope or Extent
1) TOTAL
When certain persons, property or transactions are
exempted, expressly or impliedly from all taxes
2) PARTIAL
When certain persons, property or transactions are
exempted, expressly or impliedly from certain taxes,
either entirely or in part.
According to Source
1)
2)

Consitutional
Statutory

According to Object

NOTES |11

1.
2.
3.

Principle Governing Exemptions

In the construction of tax statutes, exemptions are

not favored and are construed strictissimi juris
against the taxpayer.
he who claims exemption should prove by
convincing proof that he is exempted.
Taxation is the rule and exemption is the exemption
Exemption is not presumed
Constitutional grants of tax exemption are self
executing
Tax exemption are personal and cannot be
delegated.
Exemption generally covers direct tax, unless
otherwise provided.

4.

The word remit means to desist or refrain from

exacting, inflicting or enforcing something as well as
to restore what has already been taken. The
remission of taxes due and payable to the exclusion
of taxes already collected does not constitute unfair
discrimination. Such a set of taxes is a class by itself
and the law would be open to attack as class
legislation only if all taxpayers belonging to one
class were not treated alike. [Juan Luna Subd. V.
Sarmiento, 91 Phil 370]
The condition of a tax liability is equivalent to and is
in the nature of a tax exemption. Thus, it should be
sustained only when expressly provided in the law.
[Surigao Consolidated Mining v. Commissioner of
Internal Revenue, 9 SCRA 728]

Tax amnesty

Other Forms of Tax Exemption

a. Condonation
b. Amnesty
c. Incentives

Tax remission or tax condonation

TAX1

Personal granted directly in favor of certain

persons
Impersonal granted directly in favor of certain class
of property

Tax amnesty, being a general pardon or intentional

overlooking by the State of its authority to impose
penalties on persons otherwise guilty of evasion or
violation of a revenue to collect what otherwise
would be due it and, in this sense, prejudicial
thereto. It is granted particularly to tax evaders who
wish to relent and are willing to reform, thus giving
them a chance to do so and thereby become a part
of the new society with a clean slate. [Republic v.
Intermediate Appellate Court, 196 SCRA 335]
Like tax exemption, tax amnesty is never favored
nor presumed in law. It is granted by statute. The
terms of the amnesty must also be construed
against the taxpayer and liberally in favor of the
government.

Tax amnesty v. tax condonation v. tax exemption

A tax amnesty, being a general pardon or intentional

overlooking by the Statute of its authority to impose
penalties on persons otherwise guilty of evasion or
violation of a revenue or tax law, partakes of an
absolute forgiveness or waiver by the Government of
its right to collect what otherwise would be due it

Sotelo, MS

and, in this sense, prejudicial thereto,

particularly to tax evaders who wish to relent and
are willing to reform are given a chance to do so and
therefore become a part of the society with a clean
slate.
Like a tax exemption, a tax amnesty is never favored
nor presumed in law, and is granted by statute. The
terms of the amnesty must be strictly construed
against the taxpayer and literally in favor of the
government. Unlike a tax exemption, however, a tax
amnesty has limited applicability as to cover a
particular taxing period or transaction only.
There is a tax condonation or remission when the
State desists or refrains from exacting, inflicting or
enforcing something as well as to reduce what has
already been taken. The condonation of a tax liability
is equivalent to and is in the nature of a tax
exemption. Thus, it should be sustained only when
expressed in the law.
Tax exemption, on the other hand, is the grant of
immunity to particular persons or corporations of a
particular class from a tax of which persons and
corporations generally within the same state or
taxing district are obliged to pay. Tax exemptions
are not favored and are construed strictissimi juris
against the taxpayer.

CONSTITUTIONAL RESTRICTION:
No law granting any tax exemption shall be passed without
the concurrence of a majority of all members of Congress.
(Sec. 28 (4) ART VI)
PROV. OF NUEVA ECIJA vs. IMPERIAL MINING

> Basis or test for real property taxation is use and

not ownership. Thus, it does not matter who the
owner of the property is even if it is not tax exempt
entity, as long as it is being used for religious,
charitable or educational purposes, then it is tax
exempt.
Conversely, even if the property taxation is owned
by the government if the beneficial use has been
granted, for consideration or otherwise, to a taxable
person, then the property is subject to tax.
BASIC FORMS OF ESCAPE FROM TAXATION
1)
2)
3)
4)
5)
6)

SHIFTING
CAPITALIZATION
TRANSFORMATION
AVOIDANCE
EXEMPTION
EVASION

I. SHIFTING
Shifting is the transfer of the burden of a tax by the
original payer or the one on whom the tax was
assessed or imposed to someone else
Process by which such tax burden is transferred from
statutory taxpayer to another without violating the
law

> It should be borne in mind that what is transferred

is not the payment of the tax, but the burden of the
tax

> Only indirect taxes may be shifted; direct taxes

cannot be shifted
WAYS OF SHIFTING THE TAX BURDEN

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TAX1

1) FORWARD SHIFTING
When the burden of the tax is transferred from a
factor of production through the factors of
distribution until it finally settles on the ultimate
purchaser or consumer.
Example:
Manufacturer or producer may shift tax assessed to
wholesaler, who in turn shifts it to the retailer, who
also shifts it to the final purchaser or consumer
2) BACKWARD SHIFTING
When the burden of the tax is transferred from the
consumer or purchaser through the factors of
distribution to the factors of production
Example:
Consumer or purchaser may shift tax imposed on
him to retailer by purchasing only after the price is
reduced, and from the latter to the wholesaler, or
finally to the manufacturer or producer
1) ONWARD SHIFTING
When the tax is shifted two or more times either
forward or backward
Example:
Thus, a transfer from the seller to the purchaser
involves one shift; from the producer to the
wholesaler, then to retailer, we have two shifts; and
if the tax is transferred again to the purchaser by the
retailer, we have three shifts in all.
Impact and Incidence of Taxation

Impact of taxation is the point on which a tax is

originally imposed. In so far as the law is concerned,
the taxpayer is the person who must pay the tax to
the government. He is also termed as the statutory
taxpayer-the one on whom the tax is formally
assessed. He is the subject of the tax

Incidence of taxation is that point on which the tax

burden finally rests or settle down. It takes place
when shifting has been effected from the statutory
taxpayer to another.

Statutory Taxpayer

The Statutory taxpayer is the person required by law

to pay the tax or the one on whom the tax is
formally assessed. In short, he or she is the subject
of the tax.

In direct taxes, the statutory taxpayer is the one who

shoulders the burden of the tax while in indirect
taxes, the statutory taxpayer is the one who pay the
tax to the government but the burden can be passed
to another person or entity.
Relationship between impact, shifting, and incidence
of a tax

II.

The impact is the initial phenomenon, the shifting is

the intermediate process, and the incidence is the
result. Thus, the impact in a sales tax (i.e. VAT) is on
the seller (manufacturer) who shifts the burden to
the customer who finally bears the incidence of the
tax.

Impact is the imposition of the tax; shifting is the

transfer of the tax; while incidence is the setting or
coming to rest of the tax.

CAPITALIZATION

Sotelo, MS

III.
-

IV.

Reduction is the price of the taxed object

equal to the capitalized value of future taxes on the
property sold
> This is a special form of backward shifting, where
the burden of future taxes which the buyer may
have to pay is shifted back to the seller in the form
of reduction in the selling price

TRANSFORMATION
The manufacturer in an effort to avoid losing his
customers, maintains the same selling price and
margin of profit, not by shifting the tax burden to his
customers, but by improving his method of
production and cutting down or other production
cost, thereby transforming the tax into or earn
through the medium of production.
TAX AVOIDANCE

Also known as tax minimization

not punished by law
Tax avoidance is the exploitation of the taxpayer of
legally permissible alternative tax rates or methods
of assessing taxable property or income in order to
avoid or reduce tax liability

DELPHERS TRADERS CORP vs. IAC (157 SCRA 349)

> The Supreme Court upheld the estate planning

scheme resorted to by the Pacheco family in
converting their property to shares of stock in a
corporation which they themselves owned and
controlled. By virtue of the deed of exchange, the
Pacheco co-owners saved on inheritance taxes. The
Supreme Court said the records do not point
anything wrong and objectionable about this estate
planning scheme resorted to. The legal right of the
taxpayer to decrease the amount of what otherwise
could be his taxes or altogether avoid them by
means which the law permits cannot be doubted.
Example:
Following the holding period rule in capital gains
transaction, by postponing the sale of the capital asset
until after twelve months from date of acquisition you
can reduce the tax on the capital gains by 50%
V.

TAX EXEMPTION see supra

VI. TAX EVASION

It is also known as tax dodging

It is punishable by law
Tax evasion is the use by the taxpayer of illegal or
fraudulent means to defeat or lessen the payment of
tax.

ELEMENTS OF TAX EVASION

Tax avoidance and tax evasion are the two most
common ways used by taxpayers in escaping from taxation.
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. Tax evasion, on
the other hand, is a scheme used outside of those lawful
means and when availed of, it usually subjects the taxpayer
to further or additional civil or criminal liabilities.
Tax evasion connotes the integration of three
factors: (1) the end to be achieved, i.e., the payment
of less than that known by the taxpayer to be legally
due, or the non-payment of tax when it is shown that

NOTES |13

TAX1

a tax is due; (2) an accompanying state of mind which

is described as being "evil," in "bad faith," "willfull,"
or "deliberate and not accidental"; and (3) a course of
action or failure of action which is unlawful. (CIR v.
ESTATE OF BENIGNO TODA, GR 147188, 14 September 2004)

6) Tax code
7) Revenue regulations
8) Administrative issuances
9) BIR rulings
10) Local tax ordinances

INDICIA of FRAUD IN TAX EVASION

1) Failure to declare for taxation purposes true and actual
income derived from business for two (2) consecutive years;
or
2) Substantial underdeclaration of income tax returns of the
taxpayer for four (4) consecutive years coupled with
unintentional overstatement of deductions

B. Nature of Tax Laws

Civil not penal in nature
Tax laws are civil and not penal in nature, although
there are penalties provided for their violation.
The purpose of tax laws in imposing penalties for
delinquencies is to compel the timely payment of taxes
or to punish evasion or neglect of duty in respect
thereof.
Republic v. Oasan, 99 Phil 934: The war profits tax is
not subject to the prohibition on ex post facto laws as the
latter applies only to criminal or penal matters. Tax laws
are civil in nature.

EVIDENCE TO PROVE TAX EVASION

> Since fraud is a state of mind, it need not be

proved by direct evidence but may be proved from
the circumstances of the case.

CREDITABLE WITHHOLDING TAX

The creditable withholding tax is an amount that is
withheld from income payments. However, this amount is
only an estimate of the income tax that should be paid. The
payee is still required to file an income tax return on that
particular income; however, he need only pay the difference
between the estimated amount withheld and the real amount
of tax due. That is why the tax is creditable one no longer
needs to pay the amount that has already been withheld.
If there is an excess on what was withheld, then the
taxpayer may apply for refund or tax credit certificate.
FINAL WITHOLDING TAX
The FWT is a tax wherein the payer withholds an
amount from the payees income, and pays this amount to
the government instead on behalf of the payee. The payee
then no longer needs to file an income tax return for this
income.

Not political in nature

Internal revenue laws are not political in nature.
They are deemed to be laws of the occupied territory
and not of the occupying enemy.
Thus, our tax laws continued in force during the
Japanese occupation. Hilado v. Collector, 100 Phil. 288):
It is well known that our internal revenue laws are not
political in nature and, as such, continued in force during
the period of enemy occupation and in effect were
actually enforced by the occupation government. Income
tax returns that were filed during that period and income
tax payments made were considered valid and legal.
Such tax laws are deemed to be the laws of the occupied
territory and not of the occupying enemy.
INTERPRETATION OF TAX LAWS
Application of tax laws

General rule: Tax laws are prospective in operation

because the nature and amount to the tax could not
be foreseen and understood by the taxpayer at the
time the transactions which the law seeks to tax was
completed

Exception: While it is not favored, a statute may

nevertheless operate retroactively provided it is
expressly declared or is clearly the legislative intent.
But a tax law should not be given retroactive
application when it would be harsh and oppressive.

Directory and mandatory provisions of tax laws

A. Source of Tax Laws

1) Statutes
2) Presidential decrees
3) Executive orders
4) Constitution
5) Court decisions

Sotelo, MS

Directory provisions are those designed merely for

the information or direction of office or to secure
methodical and systematic modes of proceedings.

Mandatory provisions are those intended for the

security of the citizens or which are designed to
ensure equality of taxation or certainty as to the
nature and amount of each persons tax.

The omission to follow mandatory provisions renders

invalid the act or proceeding to which it relates while
the omission to follow directory provisions does not
involve such consequence. [Roxas v. Rafferty, 37
Phil 958]

Construction of tax laws

1) Rule when legislative intent is clear

NOTES |14

Tax statutes are to receive a reasonable construction

with a view to carrying out their purpose and intent.
They should not be construed as to permit the
taxpayer easily to evade the payment of taxes.
2) Rule when there is doubt
No person or property is subject to taxation unless
within the terms or plain import of a taxing statute. In every
case of doubt, tax statutes are construed strictly against the
government and liberally in favor of the taxpayer.
Taxes, being burdens, are not to be presumed
beyond what the statute expressly and clearly declares.
3) Provisions granting tax exemptions
Such provisions are construed strictly against the
taxpayer claiming tax exemption.
4) Not to encourage avoidance or evasion
The purpose of tax is to impose taxes, not to
enhance tax avoidance.

TAX1
It is widely accepted that the interpretation placed upon a
statute by the executive officers, whose duty is to enforce it,
is entitled to great respect by the courts. Nevertheless, such
interpretation is not conclusive and will be ignored if
judicially found to be erroneous. Thus, courts will not
countenance administrative issuances that override, instead
of remaining consistent and in harmony with, the law they
seek to apply and implement. As held in the case of People
vs. Lim, the rules and regulations issued by administrative
officials to implement a law cannot go beyond the terms and
provisions of the latter. (Philippine Bank of Communications
v. CIR, January 28 1999)

Power of the Commisioner

SEC. 4. Power of the Commissioner to Interpret Tax Laws
and to Decide Tax Cases. - The power to interpret the
provisions of this Code and other tax laws shall be under the
exclusive and original jurisdiction of the Commissioner,
subject to review by the Secretary of Finance. (NIRC)
C.
-

TAX REGULATIONS
These are regulations promulgated by the Secretary
of Finance in order to implement the provisions of
the Tax Code.

REQUISITES OF TAX REGULATIONS

1. reasonable
2. within the authority conferred
3. not contrary to law

4.

must be published in the OG or in a newspaper of

general circulation.

D. TAX RULINGS
They are the best guess of the moment and
incidentally often contain such well-considered and
sound law, but the courts have held that they do not
prevent an entire change of front at any time and
are merely advisory sort of an information service
to the taxpayer (Quiazon and Lucban)
EXCEPTIONS TO NON-RETROACTIVITY OF RULINGS
Revocation, modification of revenue of any rules and
regulations promulgated by the Sec. of Finance or CIR shall
not have retroactive effect if it will be prejudicial to the
taxpayer, except:
1.
2.
3.

where the taxpayer deliberately misstates or omits

material facts from his return or in any document
required of him by the BIR
where the facts subsequently gathered by the BIR
are materially different from the facts on which the
ruling is based
where the taxpayer acted in bad faith

Principle of Legislative Approval of an Admin Interpretation

it is a situation where the legislature may have
approved the interpretation of tax statutes by
administrative agencies through re enactment.
Doctrine of Implications
what is plainly implied in the language of a statute is
as much a part of it as that which is expressed.

Sotelo, MS

NOTES |15