1

Notes In Taxation I
By: Atty. Khaliquzzaman M. Macabato, CPA
Professor, MSU-College of Law

I. Concept, Underlying Basis and Purpose of Taxation

Taxation is a mode of raising revenue for public purpose.

(Judge Cooley, Taxation, 4th Ed. P.72).

It is a mode by which government make exactions for revenue

in order to support their existence and carry out their legitimate
objectives. The term taxation refers to either or both i. the power to
tax or ii. the act or process by which the taxing power is exercised.

On the other hand, Professor Cooley define taxes as enforced

proportional contributions from persons and property, levied by the
State by virtue of its sovereignty for the support of the government
and for all its public needs.( 1 Cooley 62)

Theory or underlying basis of taxation:

- Taxation proceeds from the theory that without money, the

government cannot pay its expenses and it cannot, therefore,
exist. That the existence of the Government is a necessity is
the theory that underlies the power of taxation. The
government has to call upon its citizen and residents to
assume monetary burdens and pay taxes so that it can
perform its functions, meet its widely expanding services
and carry on its legal as well as constitutional functions.
Thus, in one case decided by the U. S Supreme Court ( Nicol
vs. Ames), it was held that taxation involves not only the
power to destroy but also the power to keep alive.

Taxes as Lifeblood of the nation-

- Taxes are the lifeblood of the nation. Their primary purpose

is to generate funds for the State to finance the needs of the
citizenry and to advance the common weal. (NPC vs.
 Province of Albay)
- Without taxation, government can neither exist nor last.
- Taxes are the lifeblood of the government and their prompt
and certain availability are an imperious need(Comm. Vs.
Pineda). Upon Taxation depends the Governments ability
to serve the people for whose benefit taxes are collected
(Vera vs. Fernandez).
- Taxes are the lifeblood of the nation through which the
government agencies continue to operate and with which the
state effects its functions for the welfare of its constituents.
(CIR vs. CTA, G.R. 1066611, July 21, 1994; 234 SCRA
348.)

Symbiotic Relation of the State and its inhabitants, basis of

taxation.

- It is settled, according to Professor Cooley, that taxation is

based on the reciprocal duties of protection and support
between the State and its citizens as well as residents, and on
the sovereign power as well as jurisdiction by State over its
people and property. The taxpayer is presumed to have
received benefits and protection to life, liberty, and property
from the Government for which they have to reciprocate by
paying taxes to support the existence of the Government.

While it is true that not all taxpayers receive benefits from

the Government, the theory is that they are presumed to have
received such benefits even in an unequal proportions for
uniformity in this respect is impossible of attainment.
Nowadays, it is hardly believable to conclude that there are
taxpayers who receive no benefits at all from Government-
sponsored projects, all of which improvements are used,
directly or indirectly by all people or inhabitants. In Gomez
vs. Palomar (L-23645, Oct. 29, 1968). it was held that as
long as the tax is for public purpose, it matters not whether a
particular taxpayer stands to be benefited by the tax
imposed.

- Taxation is the indispensable and inevitable price 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 ones hard-earned income to the taxing authorities,
every person who is able must contribute his share in
running of the government, for its part, it is expected to
respond in the form of tangible or intangible benefits
intended to improve the lives of the people and enhance
 their relation their moral and material values. This
symbiotic relationship is the rationale of taxation and should
dispel the notion that it is an arbitrary method of exaction by
those in the seat of power.. (Comm. Vs. Algue, Inc.)

Taxation is an inherent prerogative of the taxing authority.

- In Antero vs. Ruben Ancheta, the SC declared that the power

to tax, an inherent prerogative, has to be availed of to assure
the performance of vital state functions. It is the source of
the bulk of public funds. To paraphrase a recent decision,
taxes, being the lifeblood of the government, their prompt
and certain availability is of the essence,
- Revenues, therefore, derived from taxes are intended primarily
to finance the government and its activities and are exempt
from execution ( Mun. of Makati vs. CA).

The dynamism of government, as well as the expanding aims,

correspondingly added new dimensions to the concept of taxation.
Gone were the days where one can seriously question the use of
taxation to attain what, traditionally, police power measures only
could cover, such as social justice and the equitable distribution of
wealth, economic progress and the protection of local industries as
well as public welfare and similar objectives.

Thus, in one case ( Republic vs. Bacolod-Murcia Milling Co., et

al.) the defendants refused to pay the balance of the taxes due under
R. A. No. 632 ( a law levying tax on sugar production to support the
Philippine Sugar Institute) on the ground that considering tha the
Institute had acquired and operated a sugar refinery at a tremendous
loss, the funds created by the tax under R. A. 632 were no longer for
the defendants benefit and interest. The Supreme Court rejected
defendants claim and held that R. A. 632 was not so much an exercise
of the power of taxation nor the imposition of a special assessment,
but the exercise of the police power for general welfare of the entire
country. Thus, it is clear that taxpayer need not derive direct benefit
from the tax, the paramount consideration being the welfare of the
nation or the greater portion of its population.

Another example of the exercise of taxation, in conjunction

with police power, is the imposition of anti-dumping duties imposed
on imported product to protect our local products and industry.

Taxes effectively imposed and collected may be utilized to

finance project ( like housing projects for the homeless) designed to
 uplift the condition of the common tao and thus implement the social
justice program of the government.

II. Principles of a Sound Tax System; Canons of Taxation

The tax Commission of the Philippines, in its 1938 reports,

characterize a sound tax system as follows:

1. Fiscal Adequacy- which means that sources of revenues must

be adequate to meet Government expenditures and their
variations;
2. Theoretical Justice- Which means that the taxes must be
based on ability to pay; and
3. Administrative Feasibility- which means that-
a) The tax law must be clear and concise;
b) It is capable of proper enforcement;
c) It is not burdensome; and
d) It is convenient as to time and manner of payment.

The cannons of taxation of Adam Smith can be summarized as

follows:
1) Ability to pay;
2) Certainty and simplicity;
3) Convenience as to time and manner of payment;
4) Economical to administer; and
5) Adequate to meet the fiscal requirement of government.

The non-observance of these cannons, which are merely

intended to make the tax system sound, will not render the tax
impositions by the taxing authority invalid, except to the extent that
specific constitutional or statutory limitations are impaired.
Accordingly, an exaction in kind or in services, instead of money,
although perhaps violative of administrative feasibility, may not
outright be legally objectionable ( see 51 Am. Jur. 40) since no
specific constitutional or statutory limitations against it exist. An
inequitable tax measure, however, may be declared void because of
the constitutional provision requiring taxation to be equitable. (Art.
VI, Sec. 28, Phil. Constitution)

III. Scope and limitation of Taxation

Professor Cooley has described the wide spectrum of the power

to tax as one that reaches to every trade or occupation, to every
object of industry, use or enjoyment, to every species of possession;
and it imposes a burden which, in case of failure to discharge, may be
followed by seizure or confiscation of property. No attribute of
sovereignty is more pervading and at no point does the power of
government affect more constantly and intimately all the relations of
life than through exactions made under it. Others would simply refer
to the power of taxation as being unlimited, plenary, comprehensive
and supreme.

The power to tax is an attribute of sovereignty. In fact, it is the

strongest of all the power of government. But for all its plenitude, the
power to tax is not unconfined as there are restrictions. Adversely
affecting as it does property rights, both the due process and equal
protection clauses of the Constitution may properly invoked to
invalidate in appropriate cases a revenue measure. If it were
otherwise, there will be truth to a 1903 dictum of Chief Justice
Marshall that the power to tax involves the power to destroy. The
web of unreality spin from the Marshalls famous dictum was brushed
away by one stroke of Mr. Justice Holmes pen, thus: The Power to
tax is not the power to destroy while this court sits. So it is in the
Philippines. (Reyes vs. Almanzor, G.R. No. L-49839, April 26,1991).

In the same vein, the due process clause may be invoked where
the taxing statute is so arbitrary that it finds no support from the
constitution. And obvious example is where it can be shown to
amount to confiscation of property. That would be a clear abuse of
power. It then become the duty of the Court to say that such an
arbitrary act amounted to the exercise of an authority not conferred.
(ibid).

Limitations of Taxation

Taxation is subject to established limitations, such as those that

are inherent in the power itself or mandated by the constitutional
precept.
I. Inherent limitations on the power of taxation

1. Taxation is for Public purpose

2. Legislative in character
3. Territorial in nature
4. Subject to international comity
5. Exemption of government entities must be respected.

A violation of these inherent limitations can amount to the

taking of property without due process of law. (Pepsi-Cola vs.
Municipality of Tanauan, 69 SCRA 460); hence, it can be said that
any tax law contravening any limitation of taxation, in effect, will
likewise be validly struck down as unconstitutional.

Nature of Taxation

Different authorities on the subject of taxation, sometimes,

referred to the nature of taxation as the attributes, tenets, principles,
due process, basic characteristics, elements, requisites, or inherent
limitations of taxation.

1. Taxation is for a public purpose. - The proceeds of the tax must

be used (a) for support of the State or (b) for some recognized
objects of government or directly to promote the welfare of the
community.

The tax is for public purpose if it is designed to support

the services of Government and the recognized public needs.
The tax must affect the area as a community rather than as
individuals. (Lowell vs. City of Boston, 111 Mass. 454.)

It was held that in order that a tax be for public purpose,

the proceeds thereof must be used for the support of the
Government, for some of the recognized objects of the country.

In Pascual vs. Sec. of Public Works ( 110 Phil 331), the

Supreme Court ruled that the legislature is without the power to
appropriate public revenues for anything but public purpose. x
x x Said the SC, incidental advantage to the public or the State,
which results from the promotion of private enterprises or
business, does not justify their aid by the use of public money.
Thus, where, for instance, the land on which projected feeder
roads are to be constructed belong to private persons, an
appropriation made by Congress for that purpose is null and
void, and a donation to the government, made over five (5)
months after the approval and effectivity of the Act for the
purpose of giving a "semblance of legality to the
appropriation, does not cure the basic defect. Hence, it can be
said that whether or not a public purpose exist is determined
at the time of the enactment of the law and not at the time of its
implementation.

If taxes were spend for private ends, then it would be

robbery. Thus, Justice Miller in Loan Association Vs. Topeka
(30 Wall 655) said: To lay with one hand the power of
government on the property of the citizen, and with the other
bestow it upon favored individuals to aid private enterprises and
build up private fortunes, is nonetheless a robbery because it is
 done under a form of law and is called taxation. This is not
legislation. It is a decree under legislative form.

On the other hand, the use of tax proceeds for putting up

experimental facilities to increase sugar production and benefit
that Industry (Lutz vs. Araneta, 98 Phil. 148); for granting
assistance to the BSP and GSP (City of Baguio vs. De la Rosa,
97 Phil, 994); for the support of public educational system (see
Gomez vs. Palomar, 25 SCRA 827); and other special public
purposes, without any part of such money being channeled
directly to private interest, cannot seriously be assailed.

Additionally, the Supreme Court ruled in Lutz vs.

Araneta, that taxation may be used to implement an object of
police power, being a legitimate aim of Government. In
Commissioner vs. Algue, Inc (158 SCRA 9), it was held that
the mere fact that a particular taxpayer received no special or
immediate benefit is of moment for it is the general good that
matters in taxation. The symbiotic relation between the taxing
authority and the subject is enough to justify the imposition. In
Valentin Tio vs.Videogram Regulatory Board, et. al. (151
SCRA 208) the SC declare, that it is beyond serious question
that tax does not cease to be valid merely because it regulates,
discourage or even definitely deters the activity taxed. The
power to impose taxes is one so unlimited in force and so
searching in extent, that the courts scarcely venture to declare
that it is subject to any restrictions whatever, except such as rest
in the discretion of the authority which exercise it.

In another case, it was held that the Anti-TB Stamp Law

is an exercise of the power to tax and it is an excise tax levied
upon the privilege of using the mails. It was also held that the
eradication of the dreaded disease like tuberculosis is a public
purpose.

2. Taxation is inherently legislative. Even in the absence of any

constitutional provision, the power falls to the legislature as
part of the more general power of law-making Like police
power (for public good or welfare) and eminent domain (for
public purpose), taxation is a inherent power of sovereignty
(Luzon Stevedoring Co. vs. CA, 163 SCRA 647). It follows that
it is also legislative in character and a legislative prerogative.
But, these powers are not inherent in, but merely delegated by
constitutional mandate or by law to, local governments.

i) The power can also be exercised by Local government units

(as a delegated power), independently of legislation, but
 subject to such limitations and guidelines as may be
provided by law. ( see Constitution, Art. X, Sec 5);
ii) By virtue of amendment No. 6 to the 1973 Constitution, the
President was given concurrent legislative authority
independent of the defunct Batasang Pambansa, which he
exercised through the issuance of Presidential decrees
and executive orders even after the lifting of Martial
Law; and
iii) Under the Transitory Provisions of the 1987 Constitution,
The incumbent President shall continue to exercise
legislative powers until the first Congress elected under
the New Constitution is convened. (Art. XVIII, Sec. 6
Constitution). This power was exercised through the
issuance of executive orders; and
iiii) Pres. Corazon C. Aquino, under the Freedom Constitution,
immediately after the EDSA Revolution in 1986,
exercised legislative power until the ratification of the
1987 Constitution.

Extent of the authority of the legislative taxing power.

(a) To determine the nature (kind), object (purpose) extent

(amount or rate), coverage (subjects and objects) and situs
(place) of the tax imposition;
(b) To grant tax exemptions or condonations ( see Petro vs.
Pililla, 198 SCRA); and
(c) To specify or provide for administrative, as well as judicial,
remedies that either the government or the taxpayers may
avail themselves of in the proper implementation of tax
measure.

Being legislative in nature, the power to tax may not be

delegated, except

a) To local; governments (to be exercised by the local

legislative bodies thereof) or political subdivisions ( see
Unjieng vs. Pastones, 42, Phil. 818);
b) When allowed by the Constitution; e.g. Executive power to
fix tariff rates, etc.

- The Congress may, by law authorize the President subject to

such limitations and restrictions as it may impose, to fix,
within specified limits, tariff rates, import or export quota
and tonnage and wharfage dues, and other duties or imposts
within the framework of national development program of
the Government. (See Sec. 28(1), Art. VI, Id.)
 c) When the delegation relates merely to administrative
implementation that may call for some degree of
discretionary powers under a set of sufficient standard
express by law ( see Cervantes vs. Auditor General, 197
SCRA 771).

Stated otherwise, authorities on taxation state that the

power to tax may exceptionally be delegated, subject to such
well-settled limitations as-

a) The delegation shall not contravene any constitutional

provision or the inherent limitations of taxation
b) The delegation is authorized either by the constitution or
a validly enacted legislative measures or statute; and
c) The delegated power to tax, except when expressly
authorized by the Constitution, should only be exercised
by local legislative body of local or municipal
government concerned.

It has been said that the power of taxation may be

delegated to local governments in respect of matters of local
concern. By inevitable inference, the legislative power to
create political corporations for purposes of self government
carries with it the power to confer on such local government
agencies the power to tax. And, the plenary nature of the
taxing power thus delegated would not suffice to invalidate
the said law as confiscatory and oppressive. In delegating
authority, the State is not limited to exact measure of the
power which is exercised by itself. X X X Thus,
municipalities may be permitted to tax subjects, which for
reasons of public policy the State has not deemed wise to
tax for general purposes (Pepsi-Cola Bottling Co. of the
Phil. vs. Mun. of Tanauan, 69 SCRA 460).

The assessment and collection of taxes duly levied are

executive or administrative function, and these aspect of
taxation are not covered by the non-delegation rule (see
infra).

3. Taxation is territorial- The general rule is that the taxing power

cannot go beyond the territorial limit of the taxing authority.

Thus, the situs or of taxation is important. Situs of

taxation is the State or country which has jurisdiction to tax the
person, property, activity or interest. In short, situs of taxation
is the place of taxation.

The following are the places (situs) of taxation of various

taxes-

1) Property tax

a) In case of real property, it is the place where it is

located regardless of domicile or citizenship of the
owner. Mortgages over real property are likewise,
taxed in the place where such property is situated.

b) If the personal property is intangible like credits,

bonds and bank deposits, the general rule is that it
is taxable in the domicile of the owner under the
maxim mobilia sequuntur personam. This rule
proceeds from the theory that intangibles do not
admit of an actual location and may easily be
transferred from one place to another so that the
possibility of escaping taxes is great, thus needing
a fixed situs for taxation. (Wells Fargo vs.
Collector, 40 O.G. 159). This rule of mobilia
sequuntur personam is not absolute because it
must yield to actual presence of and control over
the property. Thus, it was held that shares of stock
can be taxed at the domicile of the shareholder and
also at the principal place of business (domicile)
of the corporation. (Ibid.) The rule was set forth
that the maxim of mobilia sequuntur personam
has been decided as mere fiction of law having its
origin in considerations of general convenience
and public policy and cannot be applied to limit or
control the right of the State to tax property within
its jurisdiction and must yield to established fact
or legal ownership, actual presence and control
elsewhere and cannot be applied if to do so would
result in inescapable and patent injustice. (Ibid.)

c) In the case of Shell Co. of the Philippines vs. Mun.

of Sipocot, L-12680, March, 1959, the
Municipality of Sipocot, Camarines Sur, levied by
ordinance, pursuant to R.A. 1435, additional tax
on oil sold or distributed within the limits of the
municipalitys territory. Does the ordinance
subject to tax oil sold by the Shell Co. of the
Philippines stored in Sipocot deposit and delivered
outside Sipocot to the Shell customer? It was held
 that sold means consummated sale and the latter
is consummated upon delivery of the oil. Delivery
being made outside Sipocot, the sale of the oil is
not subject to the ordinance. It was likewise held
that the word distributed had the same meaning
as sold.

d) Thus, the real property tax under the Real Property

Tax Code cannot be imposed on real property
located abroad, although owned by Filipino
citizens (see Am. Jur. 458). Reason: the property
do not have situs in the Philippines.

2. Income tax- Residence and/or citizenship of the taxpayer, as

well as sources of income.

3. Poll or residence tax Residence or domicile of the persons

taxed

Note: It would be violative of the rule on territoriality for

the Philippine poll tax to be imposed even on its non-
resident citizens (see Am Jur. 88)

4. Transfer taxes The tax situs is the residence or citizenship

or location of the property. The reason is that the activity or
privilege to transfer property is exercised in the Philippines.

5. Business and occupation taxes Place where the act is done

or occupation is pursued regardless of the domicile of the
owner or proprietor and regardless of the location of the
property used for the business.

Thus, In the case of Allied Thread Co., Inc. vs. City

Mayor of Manila (133 SCRA, 343), The Supreme Court
ruled that x x x The power to levy an excise (tax) upon the
performance of an act or the engaging in an occupation does
not depend upon the domicile of the person subject to the
excise tax not upon the physical location of the property and
in connection with the act or occupation taxed, but depends
upon the place in which the act is performed or occupation
engaged in.

6. Excise taxes The tax situs can be the place -

 a) Where the privilege is exercised;
b) Where the taxpayer is a national of; or
c) Where the taxpayer has residence.

The taxing authority is given wide latitude in the

selection of the appropriate criteria; among the
circumstances often considered are

i. The nature of the tax, the extent of the benefit that may
be derived by the taxpayer (see Wells Fargo Bank
& Union Trust Co. vs. Coll., 70 Phil 325; Meralco
vs. Yatco, 69 Phil 69); and
ii. Equity Principles (see Art. VI, Sec. 28, Constitution)

But, unless otherwise stated, the tax situs is deemed to be

the place where the privilege is exercised. However, under
the provisions of the National Internal Revenue Code all
three criteria (nationality, residence, and place where the
privilege is exercised) are used in the levy of income tax, as
well as estate and gift taxes, but not of business taxes ( see
Business taxes provisions of the NIRC ).

Factors considered in determining Situs of Taxation-

1. Kinds of taxes;
2. Nature of the Property
3. Jurisdiction by the taxing power and State control over
the property taxed;
4. Protection and benefits, actual or presumed; and
5. Residence or domicile of the taxpayer.

Cases on Situs of Taxation:

Where incidents are attended to in the Philippines-

It was held that where the insured resides in

the Philippines, the risk insured against being in the
Philippines and other incidents of the contract were to be
attended in the Philippines, the tax shall be imposed upon
the insured regardless of whether the insurance contract is
executed in a foreign country and withj a foreign
corporation. ( Manila Electric Co. vs. Yatco, 69 Phil., 89 )

Where broker is subject to tax for sale abroad-

 In the case of A. Soriano Y Cia vs. Collector, (54 O.G.
1938), it was held that where a broker received commissions
for negotiating and consummating sales in Japan for
produced from mining properties in the Philippines, such
broker shall be subject to payment of brokers tax, his
privilege to act as broker being recognized by Philippine
Laws. NOTE: Brokers are now subject to VAT

7. Taxation is subject to International Comity- The

Philippine Constitution, under the so-called incorporation
clause, has expressly adopted the generally accepted
principles of international law as part of the law of the land
(Art. II, Sec. 2, 1987 Contitution). Under international
comity, a State must recognize the generally accepted tenets
of international law, among which is the sovereign equality
of all states and their freedom from suit without their
consent. Even where one state enters with anothers territory,
there is an implied understanding that the former does not
subject itself to the authority and jurisdiction of the latter.
Hence, the principle of international comity limit the
authority of a government to effectively impose taxes on
sovereign state and its instrumentalities, as well as on its
property held, and activities undertaken, in that capacity

Although the this principle of international comity is not

covered directly or expressly by a constitutional provisions or
limitations, the Supreme Court had the opportunity to rule in
Pepsi-Cola vs. Mun. of Tanauan (69 SCRA 460), x x x that a
violation thereof would contravene the general clause on due
process (Art. III, Sec. 1, 1987 Constitution), and any tax
thereby levied shall amount to taking of property without due
process of law. The Court, further, held that the constitutional
injunction against deprivation of property without due process
of law may not be passed over under the guise of the taxing
powers, except when the taking of the property is in the lawful
exercise of the taxing power, as when: (1) the tax is for a public
purpose; (2) the rule on uniformity of taxation is observed; (3)
either the person or property taxed is within the jurisdiction of
the government levying the tax; and (4) in the assessment and
collection of certain kinds of taxes, a notice and opportunity for
hearing are provided. In a way, therefore, the due process
clause can be said to be the constitutional basis for these
inherent limitations.

So, in observance of international comity, property of

foreign sovereign cannot be a subject of Philippine taxation.
 Likewise, persons and properties exempt under International
Law like salaries of ambassadors and residences of Foreign
State are exempt under our domestic law in obedience to
international comity.

8. Exemption of Government entities must be

respected.

Government agencies performing governmental function

are exempt from taxation. But, there is no law prohibiting the
government from taxing it self. Thus, certain taxes are imposed
on the government, such as the Value-Added Tax (VAT). Being
an excise tax, the producer or the seller of goods or services
may shift the burden to the succeeding buyer or until it reaches
the ultimate users. Thus, in this sense, the producer or the seller
may shift the burden to the government agencies if they
happened to be the buyer of goods or services.

May the Government tax itself?

IN Standard Oil Co.. vs. Posadas,( 55 Phil. 715), It was

held that tax statutes of the State are not construed to include its
own property or that of its municipal corporation as subject to
taxes although the terms of the statutes do not exempt them
from taxation. The sovereign may not ordinarily tax itself or its
subdivisions unless it appears from the tax statutes themselves
that it subjects itself or any subdivision or instrumentality
thereof to such statutes.

Under present practice, the State, in the exercise of

sovereignty does not tax itself or any of its political
subdivisions but the State may tax itself or any of its
government owned or controlled corporations exercising
proprietary functions. Hence, the GSIS and DBP are subject to
income taxes.

II. Constitutional Limitations on the power to tax.

Taxation, being an inherent

power of the State, need not
be cloth with any constitutional authority for it to be exercised
by the sovereign state. Instead, constitutional provisions are
meant and intended more to regulate and define, rather than to
grant, the power emanating therefrom.

The constitution provides for limitations upon the power

to tax. These are

1) Observance of the due process and equal protection

clauses in the constitution.

a) Thus, the Constitution provides that- 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 laws. (Sec. 1, Art. III, 1987 Constitution)

Due process clause-

Due process in taxation may involve previous notice and

hearing. It may also refer to exercise of taxation within the
territorial jurisdiction of the taxing authority. If a tax is levied
for private purpose, the taxpayer is deprived of his property
without due process of law. (22 J. Nolledo, Bar Reviewer in
Taxation, 1998, 13th Edition).

In the following instances, due process is said to be

denied in the exercise of taxation.

1. If by giving the tax law retroactive effect, there would be

harshness or oppressiveness;

2. If the taxpayer is denied the right to question an

assessment;

3. If a tax is levied for private purpose; and

4. If the taxing authority is exercised beyond its territorial

limits.

In one case ( Pepsi-Cola Bottling Co. of the Philippines,

Inc. vs. Mun. of Tanauan, L-31156, Feb. 27, 1976), The SC
observed:
Due process is usually violated where the tax
imposed is for a private as distinguished from public
purpose; a tax imposed on property outside the state, i.e.,
extra territorial taxation, and arbitrary or oppressive methods
are used in assessing and collecting taxes. But, a tax does
not violate the due process clause, as applied to particular
taxpayer, although the purpose of the tax will result in injury
rather than benefit to such taxpayer. Due process does not
require that the property subject to the tax or the amount of
tax to be raised should be determined by judicial injury, and
notice and hearing as to amount of tax and the manner in
which it shall be apportioned are generally not necessary to
due process of law.

Denial of the equal protection clause-

There is denial of equal protection of law if there is

discrimination that finds no support in reason. It suffices
that (there is equal protection) the laws operate equally and
uniformly on all persons under similar circumstances or that
all persons must be treated in the same manner, the
conditions not being different, both in privileges conferred
and the liabilities imposed. Favoritism and undue
preference cannot be allowed. For the principle is that
equal protection and security shall be given to every person
under circumstances, which if not identical, are analogous.
If law be looked upon in terms of burden or charges, those
that fall within a class should be treated in the same fashion,
whatever restrictions cast on some of the group equally
binding on the rest. (Sison vs. Ancheta, G. R. No. 59431,
July 25, 1984) The equal protection clause is, of course,
inspired by the noble concept of approximating the ideal of
the laws benefit being available to all and the affairs of men
being governed by the serene and impartial uniformity,
which is of the very essence of idea of law. The equality is
not a disembodied equality. The Constitution does not
require things which are different in fact or opinion to be
treated in law as though they were the same. Hence, the
constant reiteration of the view that classification if rational
in character is allowable. (Ibid) The State is free to select
the subject of taxation, and it has been repeatedly held that
inequalities which result from a singling out of one
particular class for taxation, or exemption infringe no
constitutional limitation. (Ibid) A kindred principle is
uniformity and equality of taxation. The rule of uniformity
does not call for perfect uniformity or perfect equality
because this hardly attainable. Equality and uniformity in
taxation means that all taxable articles or kinds of property
of the same class shall be taxed at the same rate. The taxing
power has the authority to make reasonable and natural
classifications for purposes of taxation. Where the
differentiation complained of conforms to the practical
 dictates of justice and equity, it is not discriminatory within
the meaning of the constitutional clause and therefore
uniform. (Ibid).

Taxpayers may be classified into different categories.-

It is enough that the classification must rest upon

substantial distinctions that make real differences. In the
case of gross income taxation embodied BP 135, the
discernible basis of classification is the susceptibility of the
income to the application of generalized rules removing all
deductible items for all taxpayers within the class and fixing
a set of reduced tax rates to be applied to all of them.
Taxpayers who are recipients of compensation income are
set apart as a class. As there is practically no overhead
expense, these taxpayers are not entitled to make deductions
for income tax purposes because they are in the same
situation more or less. On the other hand, in the case of
professionals in the practice of their calling and businesses,
there is no uniformity in the costs or expenses necessary to
produce their income. It would not be just then to disregard
the disparities by giving all of them zero deduction and
indiscriminately impose on all alike the same tax rate in the
basis of gross income. This an ample then for the Batasang
Pambansa to adopt the gross system of income taxation to
compensation income, while continuing the system of net
income taxation as regard professional and business income.
(Sison vs. Anceta, supra).

2) Non-impairment of the obligations of contracts.

- No law impairing the obligations of contracts shall be passed.

(Sec. 10, Id.)

3) Non imprisonment for non-payment of poll tax.

- No person shall be imprisoned for debt or non-payment of a

poll tax. (Sec. 20, Id.)

4) Non-infringement of religious freedom.

a. No law shall be made respecting an establishment of

religion, or prohibiting the free exercise thereof, and the
exercise and enjoyment of religious profession and
worship without discrimination or preference, shall be
 allowed x x x (Sec. 5, Id.)

b. It has been held that it is unconstitutional to impose

license fee upon the distribution and sale of bibles and
other religious literature by a religious and non-profit
organization. To rule otherwise would be to impair the
free exercise and enjoyment of religious profession and
worship as well as the right of dissemination of religious
beliefs. (See American Bible Society vs. City of Manila,
L-9637, April 30, 1957.)

5) Executive power to veto any separate item or items in a

revenue or tariff bill.

- 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. (Sec. 27(2), Art. VI, 1987 Constitution.)

6) The rule of taxation shall be uniform and equitable. The

congress shall evolve a progressive system of taxation.

- How does the authority to classify taxpayer be exercised?

The taxing power has the authority to make a

reasonable and natural classification for purposes of taxation
but the governments act must not be prompted by a spirit of
hostility, or at the very least discrimination that finds no support
in reason. It suffices then that the laws operate equally and
uniformly on all persons under similar circumstances or that all
persons must be treated in the same manner, the conditions not
being different both in the privileges conferred and the
liabilities imposed. (Reyes vs. Almanzor, G.R. No. L-49839,
April 26, 1991).

- Uniformity, defined-

Uniformity is tat principle by which all taxable

articles or kinds of property of the same class shall be taxed
at the same rate. (Reyes vs. Almanzor, G.R. No. L-49839,
April 26, 1991.)

- Equitable and progressive, meaning of-

 Taxationis said to be equitable when the burden
falls on those better able to pay. Taxation is progressive
when its rate goes up depending on the resources of the
person affected. (Reyes vs. Almanzor, G.R. No. L-49839,
April 26, 1991)

- Uniformity Rule Distinguished From Equality In Taxation-

Uniformity of taxation means, as already indicated,

that the properties or persons of the same class must be taxed at
the same rate while equality in taxation means that the tax must
be imposed based on ability to pay or in proportion to the
relative value of the taxable property. Courts, however, have
interchangeably used the two terms.

- Instances where uniformity of taxation has been

upheld:

1. A license tax was imposed on boarding stables for race

horses. It was held that the imposition is valid although
other boarding stables are not subject to license tax.
(Manila Race Horse Owners Association vs. De la
Fuente, 88 Phil. 60.)

2. Uniformity is attained if the rates of taxes imposed on

fishing privileges are classified according to the kind of
fishing apparatus used by persons who apply for the
privilege. (U.S. vs. Sumulong, 30 Phil. 381; cited in
Sinco, p. 578.)

3. Uniformity is likewise observed is a statute imposes a tax

of two pesos a square meter or fraction thereof on every
billboard or sign anywhere in the country. (Churchill vs.
Conception, 34 Phil. 969; Sinco, p. 578.)

4. There is no violation of the uniformity rule if sales tax is

imposed on the sales of lumber on the basis of gross
selling price while operators or proprietors of sawmills
who buys logs to be sawn or cut into lumber are subject
to tax on their sales based only on the 33 1/3% of this
gross cost of logs purchased there being two classes of
taxpayers involved. (Lion Tiong vs. Collector L-10964,
Feb. 27, 1959.) Note: Under RA 6110, computation of
 the sales tax above on 33 1/3% of the gross cost of logs
was repealed. The VAT has superseded the sales tax.

5. Wholesale dealers in oil are not illegally discriminated

against by an occupation tax which is not exacted of
wholesale dealers in such other articles or merchandise
as sugar, bacon, coal, iron, and other things. (Sinco, p.
579 citing Southern Oil Co. vs, Texas, 217 U.S. 114)

6. Ordinances imposing fees at different rates within each

class on foot peddlers and peddlers using carts or
wagons are valid. (Kneeland vs. Pittsbur, 10 Cent, 421.)

7. Classification of cities according to population for

purposes of taxation is valid. (Sinco, p. 579.) So also, it
was held that a law granting a certain city the power to
tax certain businesses or occupations, withholding such
power from other cities does not violate the uniformity
rule, it being the legislative domain to authorize any city
what occupations to tax and withhold the same from
other cities. (Punzalan vs. Mun. Board of Manila, 50
O.G. 2485.)

8. An ordinance imposing a graduated license tax upon

hotels depending on the number of rooms used for
accommodation of the public is valid. (St. Luis vs.
Briber, 7 Mo. Anno. 69.)

9. Condonation of taxes due and payable excluding

therefrom taxes already collected does not violate the
uniformity rule because the property of persons
exempted constitute a class by themselves, determination
of which is within the legislative domain. (Juan Luna
Subdivision, Inc. vs. Sarmiento, 91 Phil. 371.)

10. The Supreme Court held that there is no constitutional

injunction against granting tax exemptions to particular
persons. What the fundamental law forbids, observed
the Supreme Court, is the denial of equal protection,
such as through unreasonable discrimination or
classification. (Comm. vs. Botelho Shipping Corp., et al.,
June 29, 1967.)

11. Imposing tax on the occupation of installation managers

is not discriminatory even if it happens that there is only
one installation manager in the municipality. (Shell Co.
 vs. Mun. of Cordova, 50 O.G. 1046.)

12. In one case, the constitutionality of the Anti-TB Stamp

Law was assailed as denying equal protection of the law.
The trial court held the law invalid on the ground that it
singles out tuberculosis to the exclusion of other diseases
which, it is said, are equally a menace to public health.
The Supreme Court reversing the trial court and
upholding the validity of the Anti-TB Stamp Law said
that it is never a requirement of equal protection that all
evils of the same gems be eradicated or none at all.
Observed the SC: If the law presumably hits the evil
where it is most felt, it is not to be overthrown because
there are other instances to which it might have been
applied. (Gomez vs. Palomar, L-23645, October 29,
1968.)

- Cases Where Uniformity Of Taxation Was Not Adhered

To-

1. An ordinance of the city of Manila levying ad valorem tax

on all motor vehicles registered within the City was held
as violative of the uniformity rule because the ordinance
applies only to those vehicles registered in Manila and
not to those vehicles which come to Manila temporarily
and therefore, these vehicles also contribute to the
deterioration of the city streets. (Association of Customs
Brokers, Inc. vs. Municipality Board, L- 4376, 1953.)

2. A tax upon receipts of corporations operating taxicabs not

levied upon individuals or partnerships engaged in
similar business is invalid, the discrimination not being
justified by any difference in the source of receipts or in
the situation or character of the property employed.
(Quaker City Cab Co. vs. Pennsylvania, 277 U.S. 389.)

3. A City ordinance imposing P50.00 permit fee upon an

alien seeking employment is invalid for being excessive
(not a police measure but a revenue measure) because it
failed to consider substantial differences among aliens
required to pay it. The same amount of P50.00 is being
exacted upon any employed alien, whether a casual or
permanent employee, or whether lowly or highly paid.
(See Villegas vs. Hui Chienf Tsai, 86 SCRA 270.)

7) Executive power to fix tariff rates, etc. subject to

 statutory limitations or restrictions.

- The Congress may, by law, authorize the President subject to

such limitations and restrictions as it may impose, to fix,
within specified limits, tariff rates, import or export quotas,
and tonnage and wharfage dues, and other duties or impost
within the framework of the national development program
of the Government. (See Sec. 28(1), Art. VI, Id.)

8) Exemption from property tax of non-profit cemeteries,

charitable institutions, churches and parsonages or convents
appurtenant thereto, mosque and all lands, buildings and
improvements used exclusively, actually and directly for
religious, charitable or educational purposes. (See Sec.
28(3), Art. VIII, Id.)
- Nature of exemption of property used for religious,
charitable, etc. purposes-

The exemption of churches, non profit cemeteries,

lands, buildings and improvements used exclusively for
charitable, religious or educational purposes refers only to
exemption from property tax. Thus, if the church receives
donation, donors (and donees) taxes must be duly paid
because these taxes are not property but excise taxes. (see
Fr. Casimiro Lladoc vs, Commissioner of Internal Revenue,
L-19201, 16, June 1965.) Note: Pd No. 69 eliminated the
donees tax.

It was held that the residence of the Catholic

Archbishop of Manila 80 to 100 meters away from the
Cathedral Church was tax exempt. (Catholic Church vs.
Hastings, 5 Phil. 701.)

- The tax exemption covers property taxes only; accordingly, a

conveyance of such exempt property can be subject to
transfer taxes. (see Hodges vs. Municipal Board of Iloilo
City, 19 SCRA 28.) Special levies or assessments, not being
taxes, are not covered by the exemption (see Apostolic
Prefect vs. City Treasurer of Baguio, 71 Phil. 547.) But, the
Local Government Code, extends the exemption to special
assessments.

- Exemption extends to facilities incidental and reasonably

necessary for the accomplishment of said religious, etc.
Purpose.
 The exemption in favor of property used exclusively
for charitable purposes is not limited to property actually
indispensable therefor (Cooley on Taxation, Vol. 2, p.
1430), but extends to facilities which are incidental to and
reasonably necessary for the accomplishment of said
purpose, such as in the case of hospitals, a school for
training nurses, a nurses home, property used to provide
housing facilities for interns, residents doctors,
superintendents, and other members of hospital staff and
recreational facilities for students, nurses, interns, and
residents (84 C.J.S. 621), such as athletic fields,
including a farm used for the inmates of the institution
[Cooley on Taxation, Vol. 2, p.430]. (Herrera vs. Q.C. Board
of Assessment Appeals, 3 SCRA 186).

An adjacent ground or vegetable garden destained

to the incidental use of the parish priest in his ordinary life is
tax exempt. Likewise, a lot formerly a cemetery used as
lodging place for those who participate in religious
ceremonies for the dead is exempt from tax, there being
incidental use in religious functions. (Bishop of Nueva
Segovia vs. Provincial Board of Ilocos Norte, 51 Phil. 252.)

- In the case of Abra Valley College, Inc. vs. Aquino (G.R. No.
39086, June 15, 1988 {162 SCRA 106}, it was held that the
portion of the school building which was being used for the
residence of the school director was exempted from the real
property tax, but another portion thereof which was being
leased to a marketing firm for commercial purposes was
subjected to tax.

- The test of exemption is the use of the property.

The 1987 Constitution specifically requires that the

property be actually and directly used for religious,
educational or charitable purposes. It would thus appear that
idle land of, or property let to others for unlike purposes
although owned by, religious, educational and charitable
institutions could be subject to real estate tax. The test,
therefore, is use. (Abra Valley College, Inc. vs. Aquino, 162
SCRA 106) The issue of title or ownership is not relevant;
accordingly, a piece of real property that is leased for a
consideration by a religious entity, which is then used by the
latter actually, directly and exclusively for religious,
educational or charitable purposes would be exempt from
 property taxes. (see Roman Catholic Church vs. Hastings, 5
Phil. 701; Bishop of Nueva Segovia vs. Provincial Board, 51
Phil. 352, but, see Opinion of Secretary of Justice of 14
January 1941).

9) 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. (Sec. 4(3) Art. XIV, 1987
Constitution.)

- The above provision covers exemption from tax of revenues

and exemption from customs duties of importation.

- Meaning of the term exclusively.

The term exclusively means primarily, not

Solely (Herrera vs. Board of Assessment Appeals, 3 SCRA
186). Thus, the admission of pay patients does not detract
from the charitable character of a hospital, if all its funds are
devoted exclusively to the maintenance of the institution as a
public charity (84 C.J.S. 617);see also 51 Am. Jur. 607;
Cooley on Taxation, Vol. 2, p.1562; 144 A.L.R. 1489-1492).
In other words, where rendering charity is its primary
object, and the funds derived from payments made by
patients able to pay are devoted to the benevolent purposes
of the institution, the mere fact that a profit has been made
will not deprived the hospital of its benevolent character
(Praire Du Chian Sanitarium Co. vs. City of Praire Du
Chian, 242 Wis. 262, 7NW[2d] 832, 144 A.L.R. 1480). The
fact, therefore, that a hospital, which is a charitable
institution, admits paying patients does not bar it from
claiming that it is devoted exclusively to benevolent
purposes, if the income derived from pay patients is devoted
to improvement of charity wards which represents two-third
(2/3) of the bed capacity of the hospital, aside from out-
charity patients who come only for consultation.

10) Subject to conditions prescribed by law, all grants,

endowments, donations, or contributions used actually,
directly, and exclusively for educational purposes shall
be exempt from tax. (Sec. 4(4); Art. XIV, 1987
Constitution).

11)Tax money collected for special purpose must be applied

only for that purpose.
- 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.
(Sec. 29 (3), Art. VI, Id.)

- The Supreme Court ruled in Gascon vs. Republic Planters

Bank (158 SCRA 626) that the stabilization fees collected
by the State (PHILSUCOM) for the promotion of the sugar
industry were in the nature of taxes and no implied trust was
created for the benefit of sugar producers. Thus, the revenue
derived therefrom are to be treated as a special fund to be
administered for the purpose intended. No part thereof may
be used for the exclusive benefit of any private person or
entity but for the benefit of the entire sugar industry. Once
the purpose is achieved, the balance if any remaining, is to
be transferred to the general funds of the government. (See
Art. VI, Sec 29, par. 3, 1987 Constitution).

12) Prohibition against use of public funds for sectarian

purposes.

- No public money or property shall be appropriated, applied,

paid, or employed, directly or indirectly, for the use, benefit,
or support of any sect, church, denomination, sectarian
institution, or system of religion, or of any priest, preacher,
minister, or other religious teacher, or dignitary as such,
except when such priest, preacher, minister, or dignitary is
assigned to the armed forces, or to any penal institution, or
government orphanage or leprosarium. (Sec 29 (2), Art VI,
Id.)

13) No law granting any tax exemption shall be passed

without the concurrence of a majority of all the members
of the Congress. (Sec. 28(4) Art VI, Id.)

- Note the use of the words majority of all the members of the
Congress, not just majority of a quorum. A tax exemption
being an exception to an imperative power of taxation, it
needs a bigger vote in the legislature.*

Asked in the 1989 Bar Exam. The Question is: Does the
Constitution provide for any limitation on the exercise of
the power of Congress to grant tax exemption? Explain.
14) No money shall be paid out of the treasury except in
pursuance of an appropriation made by law. (Sec. 29(1),
Art VI, Id.)

15)All appropriation, revenue or tariff bills, bills

authorizing increase of public debt x x x shall originate
exclusively in the House of Representatives, but the
Senate may propose or concur with amendments. (Sec.
24, Art. VI, Id.)

16)Non-impairment by Congress of the Supreme Court

jurisdiction to review, revise, reverse, modify or affirm
on appeal or certiorari final judgements or decrees of
inferior courts in, among others, all cases involving the
legality of any tax, impost, assessment or toll or any
penalty imposed in relation thereof. (Sec. 2 and 5, Art.
VIII, Id.)

17) Miscellaneous-

- The provisions on appropriation in sec. 25 of Art. VI of the

`1987 Constitution can also be considered as constitutional
limitation on the power to tax. Thus, among others, the
Congress may not increase the appropriations recommended
by the President for the operation of the Government as
specified in the budget; no provision or enactment shall
embrace in the general appropriations bill unless it relates
specifically to some particular appropriation therein; 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; in
general, there should be no transfer of appropriations;
discretionary funds appropriated for particular officials shall
be disbursed only for public purposes to be supported by
appropriate vouchers and subject to such guidelines as may
be prescribed by law, etc.

- Taxation is subject to and subordinated by constitutional

provisions and precepts; hence such set of rules as those
affecting Due process (Pipsi-Cola Vs. Mun. of Tanauan, 69
SCRA 460), Separation of Church and the State (See
Garces vs. Estenzo, L-53487, 25 May 1981), as well as the
non-impairment clause (where the taxing authority binds
itself in contracts), may also affect, although indirectly,
 taxation. In this context, it has been said that taxation is the
weakest of all the three sovereign powers of government as
distinguished from the scope of area that taxation can cover
and reach over which matter it is concededly the strongest(
See Sison vs. Ancheta, G.R.59431, 25 July 1984, 130 SCRA
654).

- The Supreme Court in American bible Society Vs. City of

Manila held: 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
restraint of freedom of expression, on the ground that there
is a clear and present danger of any substantive evil which
the State has the right to prevent. x x x. It is true, the price
asked for the religious articles was in some instances a little
bit higher than the actual cost of the same, but this cannot
mean that plaintiff was engaged in the business or
occupation of selling merchandise for profit. For this
reason, the provision of City Ordinance No. 2529, as
amended, which requires the payment of license fee for
conducting the business of general merchandise, cannot be
applied to plaintiff society for, in doing so, it would impair
its free exercise and enjoyment of its religious profession
and worship, as well as its right of dissemination of religious
beliefs. Upon the other hand, City Ordinance No 3000, as
amended, which requires the obtention of the Mayors
Permit before any person can engage in any business, trades,
occupations enumerated therein, does not impose any charge
upon enjoyment of a right granted by the Constitution, nor
tax the exercise of religious practices. Hence it cannot be
considered unconstitutional, even if applied to plaintiff
society. But Ordinance No. 2529 is not applicable to
plaintiff and the City of Manila is powerless to license or tax
the business of plaintiff society involved therein, for the
reason above stated, Ordinance No. 3000 is also in
applicable to said business, trade or occupation of the
plaintiff.

x x x.

We do not mean to say that religious groups and the

press are free from all financial burdens of government ( See
Grosjean vs. American Press Co., 297 U.S. 233, 250, 80 L.
Ed. 660, 668, 56 S. Ct. 444). We have here something quite
different, for example, from a tax on the income of one who
engages in religious activities or a tax on the property used
 or employed in connection with these activities. It is one
thing to impose a tax on the income or property of of a
preacher. It is quite another thing to exact a tax from him
for the privilege of delivering sermon. The tax imposed by
the City of Jeannette is a flat license tax, payment of which
is conditioned of the exercise of these constitutional
privileges. The power to tax the exercise of a privilege is
the power to control or suppress its enjoyment. Those who
can tax the exercise of this religious practice can make its
exercise so costly as to deprive it of the resources necessary
for its maintenance.

It is contended, however, that the fact that the license

tax can suppress or control the activity is unimportant if it
does not do so. But that is to disregard th nature of this tax.
It is a license tax, a flat license tax imposed on the exercise
of a right granted by the Bill of rights. The power to impose
a license tax on the exercise of these freedom 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 a flat
license tax levied and collected as 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. That is almost uniformly
recognized as the intent vice and evil of this flat license tax.

The taxing power of the State must yield to the non-

impairment clause.-

The tax exemption based on public policy can be

revoked at anytime. If the tax exemption is based on
contract, it cannot be revoked if the revocation would
amount to an impairment of the obligations of contracts. As
already noted with respect to limitations on the power to tax,
the taxing power of the State must yield to the non-
impairment clause, A legislative franchise that grants a tax
exemption in consideration of a payment of a certain
percentage of gross receipt or earning, is contact that may
not be impaired but the franchise itself may be amended or
repealed by the Congress when the common good so
requires. (see Jose N. Nolido, p.83, Bar Reviewer in
Taxation, 1988 13th Revised Edition).

IV. Aspect of Taxation

 The aspects (also referred to as the phases, process, stages of, or steps
in, taxation) are the following:

1. Levy Which is the act of imposition by the legislature such as by its

enactment of the law. The Term is understood to include not only the
mandate on when and how the tax is imposed but also, whenever it may
be appropriate, the grant of tax exemptions, tax amnesties or tax
condonations. The latter (tax exemptions, etc.), like tax impositions are
themselves subject to due observance of the limitations of taxation (see
Commissioner vs. Botelbo Shipping Corporation, 20 SCRA 487; 51 Am.
Jur. 509).

2. Assessment and Collection - Which is the act of administration and

implementation of the tax law by the executive through its
administrative agencies. The term assessment which means notice
and demand for payment of tax liability, should not be confused with
assessment relative to real property taxation, which refers to the listing
and valuation of taxable real property.

3. Payment Which means the act of compliance by the taxpayer, including

such options, schemes, or remedies as may be legally open or available
to him.

V. Taxes may be classified as follows-

1. According to Subject Matter or Object:

a. Personal, capitation or poll taxes- Taxes of fixed amount upon

residents or persons of certain class without regard to their
property or business ( e.g. the basic community tax).

b. Property taxes - Taxes assessed on the things or property of a

certain class (e.g. real estate taxes).

c. Excise or license taxes- Taxes on the privilege, occupation or

business not falling within the classification of poll taxes or
property taxes ( e.g. internal revenue taxes or customs duties).

2. According to burden or incidence-

a. Direct taxes Taxes which are demanded from persons who are
primarily burdened to pay them (e.g. income, estate, and donors
taxes).
 b. Indirect taxes - Taxes levied upon transactions or activities before
the articles subject matter thereof reach the consumers to whom the
burden of the tax may ultimately be charged or shifted (e.g., VAT).

A direct tax is a tax for which a taxpayer is directly liable on

the transaction or business it engages in. Examples are customs
duties and ad valorem taxes paid by the oil companies to the Bureau
of Customs for their importation of crude oil, and specific and ad
valorem taxes they pay to the BIR upon converting the crude oil into
petroleum products. On the other hand, indirect taxes are taxes
primarily paid by persons who can shift the burden upon someone
else. For example, the excise and ad valorem taxes that oil
companies pay the BIR upon removal of petroleum products from its
refinery can be shifted to its buyer by adding said taxes to the cash
cost and/or selling price. ( See Maceda vs. Macaraeg, Jr., 223 SCRA
217).

In Commissioner of Internal Revenue vs. Tour Specialists,

Inc., (G.R. 66416, March 21, 1990), the Supreme Court held that
Direct taxes are those that are demanded from the very person who,
it is intended or desired, should pay them, while indirect taxes are
those that are demanded in the first instance from one person in the
expectation and intention that he can shift the burden to someone
else.

Indirect tax cannot be shifted to a tax exempt entity-

The Court further declared that The contractors tax is

payable by the contractor but in the last analysis it is the owner of the
building that shoulders the burden of the tax because the same is
shifted by the contractor to the owner as a matter of self-preservation.
Thus, it is an indirect tax. And it an indirect tax on the WHO (
World Health Organization) because, although it is payable by the
contractor, the latter can shift its burden on the WHO. In the last
analysis it is the WHO that will pay the tax indirectly through the
contractor and it certainly cannot be said that this tax has no bearing
upon the World Health Organization.(see Commissioner of Internal
Revenue vs. Tour Specialists, Inc., (G. R. 66416, March 31, 1990).

3. According to Determination of Amount (Tax Rates)-

a. Specific taxes Taxes imposed per head, unit or number, or by

weight or volume and which require no assessment beyond a
listing and classification of the subject or articles to be taxed (e.g.
 certain excise tax under the NIRC; see Tan vs. Mun. of Pagbilao, 7
SCRA 887).

b. Ad valorem taxes Taxes based upon the value of the article subject
to tax ( e.g. certain taxes on mineral products under the NIRC).

4. According to purpose-

a. General or Fiscal Taxes imposed for general puposes of the

government (e.g. Income taxes).

b. Special, Regulatory or Sumptuary- Taxes imposed for a particular

legitimate object of government (e.g. the education fund tax under
the Real Property Taxation of the Local Government Code).

An imposition may partake the nature of both a revenue

measure and a regulatory fee. In such a case, the real intendment
and the primary and substantial purpose of the law must be
inquired into from which it may be held to be one or the other
depending on the statutes predominant objective (see Cooley on
Taxation, 2 Ed. 592; see also Calalang vs. Lorenzo, 97 Phil. 212).

In exempting the Philippine Air Lines (which was by its

Charter exempt from all taxes) from motor vehicle registration
fees, the Court held that since the fees imposed are mainly used
for revenue and only a fifth thereof is retained by the Land
Transportation Commission for regulation, the same should be
considered taxes rather than as license fees (Philippine Air Lines
vs. Romeo Edu, et. al., G.R. No. 41383, 15 August 1988, 164
SCRA 320). In an earlier case, only the portion of a permit fee in
excess of the cost of regulation was held to be a tax (Villegas vs.
Hsiu, 86 SCRA 270).

A margin levy on foreign exchange was held to be police

power measure to strengthen the countrys international reserve
rather than a tax (Esso Standard Eastern, Inc. vs. Commissioner,
G.R. Nos. 28508-09, 7 July 1989, 175 SCRA 149). An amount
imposed by the Energy Regulatory board on petroleum products
to augment the resources of the Oil Stabilization Fund under
Presidential Decree No. 1956 was not considered, with Mr. Justice
Paras dissenting, as an act of taxation (Lozano vs. Energy
Regulatory Board, G.R. Nos. 95119-21, 18 December 1990,
SCRA 363).

5. According to Scope or Authority Imposing the Tax-

 a. National- Taxes imposed by the national government (e.g. internal
revenue taxes and customs duties). The real property tax under
the then Real Property Tax Code, the Supreme Court held in
Meralco Securities vs. Central Board of Assessment Appeals (L-
46245, 31 May 1982, 114 SCRA 260), is a national tax since the
tax has always been imposed by the national government and
enforced by throughout the Philippines.

b. Municipal or Local Taxes imposed by local governments (e.g.

business taxes that may be imposed under the Local Government
Code).

6. According to Graduation (Tax Base and Rate)-

a. Progressive- The tax rate increases as the tax base increases (e.g.
Income tax).

b. Regressive- The tax rate decreases as the tax base increases.

c. Mixed- The tax rate are partly progressive and partly regressive.

d. Proportionate- The tax rates are fixed (in amounts or in percentage)

on a flat tax base.

Taxes may also be classified according to purpose as a) fiscal or

b) regulatory; and according to scope as a) general or b) special.
While it may be true that certain impositions may partake of the
nature of both taxes (for revenue) and fee (for regulation), so termed
as regulatory taxes, it would be more appropriate to consider their
real essence. If the imposition is principally for regulation, then it
must be considered a license fee; otherwise a tax.

Tax distinguished from debt-

Tax Debt

1. Based on law . 1.Based on

contracts.
2. Covers imprisonment. 2.Involves no
imprisonment.
3. Not assignable. 3.Assignable.
4. Generally payable in money. 4.May be paid in money
or
in kind.
5.Not subject to compensation as a rule 5.Subject to compensation.
6. Does not draw interest unless delinquent. 6. Draws interest if stipulated
or in case of delay.
7.With special prescriptive periods in the 7. Prescriptive periods are
Tax Code. found in general laws like
The Civil Code or Rules
Of Court.

Can Internal revenue taxes be the subject of set-off or compensation?

No, as a general rule. But if a taxpayer is entitled to refund

which is covered by a specific appropriation provided for by law,
compensation may take place.

May a tax be considered a debt.?

In the following cases, a tax is considered a debt:

1. A tax is a debt for purposes of remedies for its enforcement;

2. For purposes of allowing interest on delinquent tax as a
deduction from gross income, a tax is an indebtedness;
3. If the payment of the tax is secured by a bond;
4. If the taxpayer is entitled to refund of tax paid and such
refund is covered by an appropriation provided for by
special law. (see doctrine of equitable recoupment).

Tax distinguished from toll-

Tax Toll

1. Demand of sovereignty. 1. Demand of Proprietorship.

2. Imposed only by the State. 2. Imposed by the government
or a private person or entity.

Taxes Distinguished from special assessment-

 Special Assessment Tax

1. Levied on land. 1. Levied on land and other

2. In some States, it cannot be
made the personal liability
of the taxpayer.
3. Based solely on benefits.
4 . Exceptional as to time and
locality
properties, etc.
2. It is made the personal liability
of the taxpayer.
3. Not based solely on benefits.
4. Not exceptional as to time and
locality.

Taxes distinguished from custom duties; from revenues-

Taxes are distinguished from customs duties in that customs

duties are taxes but not all taxes are customs duties making taxes
broader in scope. In the case of Nestle Philippines, Inc. vs. Court of
Appeals, (G.R. No. 134114, July 6, 2001), it was held that Custom
duties is the name given to taxes on importation of commodities, the
tariff or tax assessed upon merchandise imported from, or exported to, a
foreign country.

Tax is distinguished from revenue in that revenues refer to all

sums coming into the State treasury whether from taxes or other kinds of
impositions, charges, fees like license and permit fees and donations.
Revenue is also referred to as the fruit or effect of tax.

License fee vs. tax-

License fee Tax

1. Regulatory measure. 1. Revenue measure.

2. Imposed in the exercise of 2. Imposed in the exercise
of
the police power. Taxation.
3 . Non-payment as a rule renders 3. Non-payment does not
the business illegal. Necessarily render the
business illegal.
 4. Limited to cover only cost of 4. Not so limited.
Regulation.

There may be a tax that is both regulatory and revenue measure.

There may also be taxes imposed in the exercise of both the police
power and the power of taxation like taxes imposed by the Sugar
Adjustment Act.

The term tax frequently applies to all exactions of monies

which become public funds. It is loosely used to include levies for
revenue as well as levies for regulatory purposes such that license fees
are frequently called taxes although license fee is a legal concept
distinguishable from tax; the former is imposed in the exercise of police
power primarily for purposes of regulation, while the latter is imposed
under the taxing power for purposes of raising revenues. Thus, if the
generating of revenue is the primary purpose and regulation is merely
incidental, the imposition is a tax but if the regulation is the primary
purpose, the fact that incidentally revenue is also obtained does not make
the imposition a tax.

VI. Interpretation and Construction of Tax Statues-

The established rule in statutory construction are equally

applicable to tax statutes; after all, the primordial considerations is,
every time, the legislative intent. But where doubts exist in determining
that intent, the doubt must be resolved liberally in favor of the taxpayers
and strictly against the taxing authority (Comm. Vs. Firemans Ins. Co.,
G.R. No.-L-30644, 09 March 1987, 148 SCRA 315). This rule,
however, does not extend to cases involving the issue of the validity of
the tax law itself which, in every case, presumed valid. The same may
be said of on the issue of tax power. Under Art. X, Sec. 5 of the
Constitution, a broader delegation of tax powers has been conferred to
local governments subject only to such limitations as the national
legislature would provide. That the power exists is then the rule, the
limitation of such power the exception, and so it must be that such spirit
and intendment govern in the interpretation and construction of law. This
principle should all the more be true in national taxation where the
power to tax is not merely conferred but inherent in sovereignty.

Mandatory Character of Constitutional provision

In the case of Marcelino vs. Cruz , (121 SCRA 57) The

 Supreme Court held that the established rule is that constitutional
provisions are to be considered as mandatory unless by express
provision or by necessary implication, a different intention is
manifest. A directory provision, the Court explained, is generally
intended merely for expediency or convenience such that to have it
enforced strictly may cause more harm than by disregarding it.

In the case of statutory enactments, those dealing on the

aspects of levy and compliance are generally treated as mandatory
and those that are intended merely for administrative feasibility as
directory.

Construction of tax laws-

The following are the rules on the construction of tax laws:

1. Provisions intended for the security of the citizen or taxpayer or to

insure equality or uniformity of taxation are mandatory.

2. Provisions that are designed to inform administrative officers on

the tax matters are generally directory.

3. If the intent or meaning of the tax statute is not clear, or is doubtful

as to whether a taxpayer is covered by the tax obligation, the law
shall be construed against the Government because revenue laws
impose special burdens. (see Marindoque Iron Mines Agents, Inc.
vs. Hinabangan, Samar, L-18924, 30 June 1964; Luzon
Stevedoring vs. Trinidad, 43 Phil. 803).

4. Where the intent to tax is clear and the taxpayer claims that he is
exempt from the tax obligation, the tax shall be construed against
the taxpayer and in favor of the government because the power of
taxation is necessary to the existence of such government (Jai-alai
Corp. vs. Collector, 57 O.G. 2490, see also Commissioner vs.
Filipinas Cia de Seguros, L-14880, 29 April 1960.)

5. Rules on the interpretation of customs and tariff laws do not apply

to trade agreements, the former rules being promulgated in the
exercise of the power of taxation while trade agreements are
entered into in the exercise of police power. (Comm. vs. Valencia,
54 O.G. 3505.)

6. If the tax law is repealed, taxes assessed before repeal of the law
 may still be collected unless the repealing law is made retroactive.
(Jovito vs. Collector, L-9352, November 29, 1956.) This ruling
was reiterated in subsequent cases.

7. Tax exemptions are strictly construed except in the following

cases:

a. If the law provides for liberal construction;

b. In the case of special laws applying to special cases;
c. If the exemptions refer to public property;
d. In case of exemptions granted to entities organized for
charitable, religious and educational purposes.

8. Tax laws are given retroactive effect if there is a clear legislative

intent in that regard. (Lorenzo vs. Posadas, 64 Phil. 353.) It has
been held that tax laws shall have prospective effect only unless
there is a clear provision to the contrary.(Maria Castro vs.
Collector, L-12174, 28 December 1962). If the retroactive effect
would be harsh or oppressive, the same transgress the
constitutional limitation of due process. (Republic vs. Oasan Vda
de Fernandez, L-9141, 25 September 1956.)

Taxes, being a burden, cannot be presumed beyond what the

applicable statute expressly and clearly declares.

The rule is that in case of doubt, tax statutes are construed

strictly against the Government and liberally in favor of the taxpayer
for taxes, being burdens, are not to be presumed beyond what the
applicable statute expressly and clearly declares. (See Republic vs.
IAC, G. R. No. 69344, 26 April 1991.)

Tax exemptions are not favored in law-

Tax exemptions cannot be created by implication because

exemption from taxation are highly disfavored in law and one who
claims exemption from tax must be able to justify his claim by
clearest grant of organic or statute law. An exemption from the
common burden cannot be permitted to exist on vogue implication.
(Collector vs. Manila Jockey Club, Inc.., L-875, March 23, 1956,
Petroleum Co. vs. Llanes, 49 Phil.466).

Tax exemptions are never presumed.

Tax exemptions are construed strictly against the taxpayer and

in favor of the public because exemptions are never presumed. (Esso
standard Eastern, Inc. vs. Commissioner, L-21841, 28 October
1966). As the power of taxation is a high prerogative of sovereignty,
the relinquishment is never presumed and any reduction or
diminution thereof with respect to its mode or its rate must be strictly
construed, and the same must be coached in clear and unmistakable
terms in order that it may be applied. (Luzon Stevedoring Corp. vs.
Court of Appeals, G. R. 30232, 29 July 1988).

To illustrate: Under the Mutual Defense Agreement between

the United States of America and the Republic of the Philippines, a
provision therein stated that no tax of any kind or description will be
levied on any material, equipment or supplies which may be
purchased or otherwise acquired in connection with a construction
project, was held not to exempt the oil used by private contractors of
the project in the operation of their machines or other equipment in
pursuance of their contracts. Said the Supreme Court: The exeption
contained in the tax statutes must be strictly construed against the one
claiming the exemption because the law does not look with favor on
tax exemption s and that he who would seek to be, thus, privileged
must justify it by words too plain to be mistaken and too categorical
to be misinterpreted. (Commissioner of Internal Revenue vs. P.J.
Kiener Company, ltd., 65 SCRA 143).

Likewise, an exemption from taxes in the importation of

engines and spare parts to be used by passenger or cargo vessels has
been held not to include taxes on the importation of engines and parts
used by tugboats which are neither passenger not cargo vessels.
(Luzon Stevedoring Company vs. Court of Tax Appeals, G.R. No.
30232, 29 July 1988, 163 SCRA 647).

Tax exemption cannot be established by mere implication but it

must be clearly expressed; exemptions are highly disfavored in
law.

A grant of tax exemption for manufacture and sale of certain

type of machine does not include the manufacture and sale of articles
produce by said machine. There is no way to dispute the cardinal rule
in taxation that exemptions therefrom are highly disfavored in law
and he who claims tax exemption must be able to justify his claim or
right. The exemption cannot be established by mere implication but
it must be clearly expressed (Wonder Mechanical Engineering
Corporation vs. Court of Tax Appeals, et. al., 64 SCRA 555). But the
tax exemption of the World Health Organization from indirect and
direct taxes was held to preclude the imposition of the contractors
tax on the construction of its building by an independent contractor
since the burden of the tax, said the court, is invariably shifted to the
owner (Commissioner of Internal Revenue vs. Gotamco & Sons, G.R.
No. 31092, 27 February 1987, 148 SCRA 36).

Statute will not be construed as imposing a tax unless it does so

clearly, expressly and unambiguously; A taxing act are not to be
extended by implication.

The better rule in interpreting tax laws has been reiterated in

the case of Commissioner of Internal Revenue vs, Court of Tax
Appeals and Ateneo de Manila, G.R. No. 115349, 18April 1997, 82
SCAD 45, 271 SCRA 605, where the Supreme Court states:
Petitioner Commissioner of Internal Revenue erred in applying the
principle of tax exemption without first applying the well-settled
doctrine of strict interpretation in the imposition of taxes. It is
obviously both illogical and impractical to determine who are
exempted without first determining who are covered by the aforesaid
provisions. The Commissioner should have determine first if private
respondent was covered by Section 205, applying the rule of strict
interpretation of laws imposing taxes and other burdens on the
populace, before asking Ateneo to prove its exemption therefor. The
Court takes this occasion to reiterate the hornbook doctrine in the
interpretation of tax laws that statute will not be construed as
imposing a tax unless it does so clearly, expressly and
unambiguously. Taxes cannot be imposed without clear and express
words for that purpose accordingly. The general rule requiring
adherence to the letter in construing statutes applies with peculiar
strictness to laws and the provisions of taxing act are not to extended
by implication.

Equity, basis for tax exemption.

Likewise, no exemption unless authorized by statute can be

granted solely on the grounds of equity. But equity can be used as a
basis for statutory exemption; thus, at times the law authorizes the
condonation of taxes on equitable considerations. ( see Sec. 276 and
277, Local Government Code).

Claims for refund of customs duties take the nature of tax

exemptions that must be construed strictissimi juris against the
claimants.
 Custom duties is the name given to taxes on the importation
and exportation of commodities, the tariff or tax assessed upon
merchandise imported from, or exported to, a foreign country. Any
claim for refund of customs duties, therefore, take the nature of tax
exemptions that must be construed strctissimi juris against the
claimants and liberally in favor of the taxing authority. This power of
taxation being a high prerogative of sovereignty, its relinquishment is
never presumed. Any reduction or diminution thereof with regard to
its mode or its rate must be strictly construed, and the same must be
couched in clear and unmistakable terms in order that it may be
applied. (Nestle Philippines, Inc. vs. C.A., G.R. No. 134114, 6 July
2001).

Classification of Tax Exemptions-

Tax exemption may be classified into- a. Tax exemption by

express provisions in the constitution, statutes, treaties, franchise or
similar legislative acts; b. Tax exemption by implied or by omission
of tax laws and statues; and c. Contractual tax exemption.

Where a law levies a tax, so also must the tax exemption be

explicit in the law.

There is no tax by silence but, where the law levies a tax, so

also must the tax exemption be explicit in the law. While exemptions
are not presumed, the government, however, unless otherwise
expressed, is deemed not subject to law imposing taxes ( see SSS vs.
Bacolod City, 115 SCRA 412) but there is no prohibition against the
government taxing itself. (see Bisaya Land Transportation Co., Inc.
vs. Collector of Internal Revenue, L-11812, 29 May 1959, 105 Phil.
1338).

Contractual exemption distinguished from exemption granted

under franchise.

Contractual exemptions are those agreed to by the taxing

authority in contract lawfully entered into by them under enabling
laws. These exemptions must not be confused with the tax
exemptions granted under franchises which are not contracts within
the purview of the non-impairment clause of the constitution (see
Cagayan Electric Co. vs. Commissioner, G.R. No. L-601026, 25
Sept. 1985). In entering into a contract, the government sheds its
cloak of authority and waives its governmental immunity; a franchise
is a special privilege conferred by governmental authority, acting as
such on an undertaking that is within the scope of governmental
functions. Contractual tax exemptions covering matters that are not
essentially government in nature, such as those contained in
government bonds or debentures, unlike in franchises, may not be
revoked without impairing the obligations of contracts (see
Casanovas vs. Hord, 8 Phil. 125).

A legislative franchise partakes of the nature of a contract.

Incidentally, in the case of legislative franchise, the Supreme

Court, had this to say: A legislative franchise partakes of the nature
of a contact. (Commissioner of Internal Revenue vs. Court of Tax
Appeals, 195 SCRA 445). In the case of the Province of Misamis
Oriental vs. Cagayan Electric Power and Light Company, Inc., it
was held: So was the exemption upheld in favor of Carcar Electric
and Ice Plant Company when it was required to pay the corporate
franchise tax under Section 259 of the Internal Revenue Code, as
amended by R. A. 39 (Carcar Electric and Ice Plant vs. Collector of
Internal Revenue, 53 O.G. [No. 4] 1068). Such exemption is part of
the inducement for the acceptance of the franchise and the rendition
of public service by the grantee. As a charter is in the nature of a
private contract, the imposition of another franchise tax on the
corporation by the local authority would constitute an impairment of
the contract between the government and the Corporation.
Franchises spring from contracts between the sovereign power and
private citizens made upon valuable considerations, for purposes of
individual advantages as well as public service. It is generally
considered that the obligation resting upon the grantee to comply
with the terms and conditions of the grant constitutes a sufficient
consideration for the grant of franchise by the state. Such being the
case, the franchise is the law between the parties and they are bound
by the terms thereof.

Instances where exemptions are liberally construed in favor of

the grantee:

1. When the law so provides for such liberal construction;

2. Exemptions from certain taxes granted under special

circumstances to special classes of persons;

3. Exemptions in favor of the government, its political

subdivisions or instrumentalities; and

4. Exemption to traditional exemptees, such as those in favor of

religious and charitable institutions, etc. (see Cooley on
taxation, 1414).
 Provisions
Granting exemptions to government agencies
may be construed liberally in favor of non-taxability of such
agencies.

In a case where the Supreme Court uphold the exemption

to the National Power Corporation, the Court said: It is a recognized
principle that the rule on strict interpretation does not apply in case of
exemptions in favor of the government political subdivision or
instrumentality. The basis for applying the rule of strict construction
to statutory provisions granting tax exemptions or deductions, even
more obvious than with reference to the affirmative or levying
provisions of tax statutes, is to minimize differential treatment and
foster impartiality, fairness and equity of treatment among taxpayers.
The reason for the rule does not apply in the case of exemptions
running to the benefit of government itself or its agencies. In such
case, the practical effect of an exemption is merely to reduce the
amount of money that has to be handled by government in the course
of its operations. For these reasons, provisions granting exemptions
to government agencies may be construed liberally in favor of non-
taxability of such agencies. (Maceda vs. Macaraig, 197 SCRA 771).

Nature of partial refund of specific tax.

Where the law authorizes a partial refund of tax, the same

partakes of the nature of a tax exemption and therefore, it cannot be
allowed unless granted in a most explicit and categorical language.
Well-settled is the rule that exemption to be recognized, the grant
must be clear and expressed; it cannot be made to rest on vague
implications. (Insular Lumber Co. vs. Court of Appeals, L-31057, 29
May 1981).

Nature and effect of tax condonation.

Condonation of tax liability is construed as equivalent to

and is in the nature of tax exemption. Being so, it should be
sustained only when expressed in explicit terms and it cannot be
extended beyond the plain meaning of the terms. (Surigao
Consolidated Mining Co. vs. Collector, L-14878, 26 December
1963).

Tax Statute offering rewards are liberally construed in

favor of awardees.

 InCrispin Penid, et. al. Vs. Cesar Virata (L-44204, 25
March 1983, 121 SCRA 1-6), the government was able assess and
collect substantial amount on percentage carriers taxes from a
number of shipping companies from the year 1957 to 1965 as a result
of confidential information given to the BIR by petitioner Penid. In
paying the 25% informers reward under RA 2338, the Secretary of
Finance deducted therefrom the sum of P216,848.04 paid by one of
the firms, Pan Fil. Co., Inc., on the ground that this taxpayer-
company had not been cited in the confidential information. Also
excluded were collections for 1957-1959 and March 9, 1962 to 1965,
since petitioners information covered only the period from 1960 to
March 8, 1962. The Supreme Court held:

1. The exclusion of collections for taxes from Pan Fil.

Co., Inc. is not correct under Sec. 1 of RA 2338 (as implemented by
Sec. 4 of Finance Regulation No. 1), What is vital is that the
information given had led to or had been instrumental in the
discovery of the fraud upon or violation of any of the provisions of
the Internal Revenue or Tariff and Customs Law and that such
discovery resulted in the recovery or collection of revenues,
surcharges, and fees. The inclusion of Pan Fil., Co., Inc. among the
firms investigated was the direct, logical and necessary consequence
of the information given by petitioner.

To sustain otherwise is to derogate from the basic tenet

that statutes offering rewards must be liberally construed in favor of
informers with mere technicality yielding to the substantive purpose
of the law.

2. Petitioners reward should not, however, extend to

taxes accruing after 1962 since the non-payment after that date up to
1965 was because of the protest filed by the shipping forms with the
Tax Court in the Royal Inter-Ocean Lines case where their position
was that the carriers percentage tax on foreign exchange receipts
should be based on the parity conversion rate of $1.00 to P2.00 and
not the free market rate.

Tax statutes offering amnesty are also liberally construed in

favor of the taxpayer.

Tax statutes offering amnesty are also liberally construed

in favor of the taxpayer. In the case of Commissioner of Internal
Revenue vs. The Hon. Court of Appeals, R.O.H. Auto Products
Philippines, Inc. and the Hon. Court of Tax Appeals (G.R. No.
108358; 20 January 1995, 58 SCAD 604, 240 SCRA 368), the
Supreme Court said: If, as the Commissioner argues, Executive Order
No. 41 had not been intended to include 1981-1985 tax liabilities
already assessed (administratively prior to 22 August 1986), the law
could have simply so provided in its exclusionary clauses. It did not.
The conclusion is unavoidable, and it is that the executive order has
been designed to be in the nature of general grant of tax amnesty
subject only to the cases specifically excepted by it.

It
might not be amiss to recall that the taxable period
covered by the amnesty include the years immediately preceding the
1986 revolution during which time there had been persistent calls, all
too vivid to be easily forgotten, for civil disobedience, most
particularly in the payment of taxes, to the Martial Law regime. It
should be understandable then that those who ultimately took over
the reigns of government following the successful revolution would
promptly provide for broad, and not a confined, tax amnesty.

But,
in an earlier case decided by Supreme Court, the
court said: A tax amnesty, much like tax exemption, is never
favored nor presumed in law and if granted by statute, the terms of
the amnesty like that of a tax exemption must be construed strictly
against the taxpayer and liberally in favor of the tax authority. (
People vs. Castaneda, Jr., G.R. No. 46881, 15 September 1988). In
order to enjoy the benefits of the tax amnesty statute, the taxpayers
must show that they have individually complied with and come
within the terms of that statute. (ibid)

Tax amnesty is waiver by Governments right to collect

taxes.

A tax amnesty, being a general pardon or intentional

overlooking by the State of its authority to impose penalties on
persons otherwise guilty of evasion or violation of a revenue or tax
law, partakes of an absolute forgiveness or waiver by the government
of its right to collect what otherwise would be due it. ( Republic vs.
IAC, G. R. No. 69344, 26 April 1991).

Basis of tax exemptions under a treaty:

Tax exemption under treaty may be based -

1. On the principle of reciprocity;
2. On the Principle of comity;
3. On the desire to avoid the rigor of double taxation.
VII. Some Important Doctrines In Taxation

1. Prospective application of Tax Laws

Taxes may be imposed retroactively by law

but unless so expressed by such law, these taxes must only be
imposed prospectively (Hydro resources vs. Court of Appeals,
G.R. NO. 80276, 21 December 1990, 192 SCRA 604). The ex
post facto rule proscribed by the constitution, except for the
penalty imposed (not interest), would be inapplicable in taxation.
Said the Supreme Court in the case of Hidalgo vs. Collector (100
Phil. 288): Tax Laws are neither political nor penal in nature,
and they are deemed laws of the occupied territory rather than of
the occupying enemy. A harsh retroactivity of the law, however,
may make it inequitable and violative of the Constitution;
likewise, due process is violated if the tax is oppressive.

Inone case, the War Profits Tax Law (RA

55) was questioned as ex post facto because of its retroactive
effect. The Supreme Court said that the prohibition against ex
post facto laws applies only to criminal or penal law matters and
not to laws which concern civil matters. Our tax laws are civil in
nature. (Fernandez vs. Oasan Vda de Fernandez, L-9141, 24
September 1956). It was, thus held that our tax laws are not
penal laws although there are penalties provided for their
violation.

2. Taxes are Impriscriptible

Unless otherwise provided by the tax law itself, taxes are

imprescriptible (Commissioner vs. Ayala Securities Corporation,
L-29485, 21 November 1980).

Certain provisions of the National Internal Revenue Code

provide for statutes of limitation (see Secs. 203 and 222) in the
assessment and collection of taxes imposed therein. In
Commissioner vs. Ayala Securities Corporation, (101 SCRA
231), supra, however, the prescriptive periods therein contained
were considered to be applicable only to those taxes that were
thereunder required to be reported or returned by the taxpayer for
tax purposes. The Court thus held that the then 25% surtax
imposed on unreasonably accumulated surplus profits of
 corporations (Sec. 25, NIRC) is imprescriptible and there is no
time limit on the right of the Commissioner to assess the same.
Where, however, the taxpayer, although not required, files a
return and declares his tax liability, then the prescriptive periods
may become operative. (see Collector vs. Bisaya Land
Transportation Co., L-12100, 29 May 1958).

Law on prescription being a remedial measure, should be

liberally construed in order to afford protection to taxpayers
against unreasonable examination, investigation and
assessment..

For the purpose of safeguarding taxpayers from any

unreasonable examination, investigation or assessment, our tax
law provides a statute of limitations in the collection of taxes.
Thus, the law on prescription, being a remedial measure, should
be liberally construed in order to afford such protection. A
corollary, the exceptions to the law on prescription should
perforce be strictly construed. (Commissioner of Internal
Revenue vs. C.A., G. R. No. 104171, 24 February 1999).

Tariff and Custom Code does not express any general statute
of limitation.

The Tariff and Customs Code does not express any

general statute of limitation; it provide, however, that when
articles have entered and passed free of duty or final adjustment
of duties made, with subsequent delivery, such entry and passage
free of duty or settlement of duties will, after the expiration of
one year from date of the final payment of duties, in the absence
of fraud or protest, be final and conclusive upon all parties,
unless the liquidation of the import entry was merely tentative
(Sec. 1603).

Five (5) years prescriptive periods for both assessment and

collection of taxes prescribed by the Local Government Code.

The Local Government Code prescribes prescriptive

periods of five (5) years for both assessment and collection of
taxes (see Secs. 194 and 270, LGC, infra) unlike that which
obtained under the then Local tax Code and the Real Property
Tax Code.

3. Double Taxation.
 Double taxation means taxing twice for the
same year, a property or interest within the territory, when it
should be taxed but once, for the same purpose and with the same
kind or character of tax. A common example of double taxation
is taxing corporate income and shareholders dividends from the
same corporation. There is no constitutional prohibition against
double taxation although double taxation, whenever and
wherever possible must be avoided to prevent injustices as well
as unfairness. (De Villata vs. Stanley, 32 Phil. 541). It was held
that rule against double taxation cannot be invoked where one tax
is imposed by the state and the other by the city upon the same
occupation, calling or activity, it being widely recognized that
there is nothing inherently obnoxious in this exaction by both the
state and a political Subdivision thereof. (Punsalan vs. Mun.
Board of Manila, L-4817, 26 May 1954).

There would be no double taxation where a

lessor of property has to reckon with and pay a real state on the
leased premises, a real estate dealers tax based on rental receipts,
and an income tax on such rentals, these impositions being of
different character and purposes (see Villarama vs. City of Iloilo,
26 SCRA 578). There is also no double taxation when a tax is
imposed on soap and other similar products of a taxpayer and
another tax on the storage of copra, a raw material for the
taxpayers product. (see Procter & Gamble Philippines vs.
Municipality of Jagna, 94 SCRA 894).

Double Taxation is one of Direct Duplicate Taxation.

Double taxation is on of direct duplicate

taxation when the levies are made by the same taxing authority;
otherwise, the case is merely one of indirect duplicate taxation
(or not an obnoxious double taxation). (Commissioner vs.
Lednicky, 11 SCRA 603).

ouble Taxation is not a valid defense against the

D
validity of a tax measure.

Standing alone and not forbidden by our fundamental

law, double taxation is not a valid defense against the validity of
a tax measure (Pepsi-Cola vs. Tanauan, 69 SCRA 460). But
from it might emanate such defense against taxation as
oppressiveness and inequality of the tax.
Some of the measures that are normally adopted by a sovereign
taxing authority in order to avoid the resulting inequities of
double taxation; they include the following:

1) Treaty provisions against double taxation;

2) Reciprocity provisions, and

3) Tax Credit provisions.

Tax credit or exemption to avoid double taxation-

In view of different places of taxation of property tax

and income tax, an inequitable situation may exist where the
taxpayer pays twice the same taxes to two different jurisdictions.
To avoid the harshness of this situation, recourse has been made
to treaty stipulations for reciprocal exemption or tax credit. Our
Supreme Court held that a resident foreigner who derives solely
his income from the Philippines is not entitled to tax credit and
deduction of foreign income tax from his income. (Commissioner
vs. Lednicky, L-18169, 18286, and 21434, 31 July 1964).

4. Tax evasion and tax avoidance.

Tax evasion and tax avoidance are two most common

ways used by tax payers in escaping from taxation.

Tax evasion refers to fraudulent or forbidden scheme or

devices designed to lessen or defeat taxes. It is criminally
punishable law. (Yutivo Sons Hardware Co. vs. CTA, L-13203, 28
January 1965). Examples of acts constituting tax evasion are
intentionally decreasing the income and intentionally increasing,
without basis, deductions from taxable income; (e.g. increasing,
without basis, expenses, exemptions, etc.).

Tax avoidance refers to the legal means to lessen or

altogether avoid taxes. It is not punished by law. Example of a
tax avoidance is availing of all deductions allowed by law. If the
taxpayer is in doubt of whether an item is deductible or not
because the law or regulation is silent on the point, then he must
deduct the same and if it turns out that the item is not deductible,
he is not guilty of tax evasion; rather, he practiced tax avoidance.
Tax provisions on trusts, capital gains and donor taxes provide
 bases for tax avoidance, (see infra. ).

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 arm length. Tax evasion, upon 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.

A tax evader breaks the law, a tax avoider sidesteps it.

(Schultz & Harris on American Public Finance). The
organization of a corporation prompted more on the mitigation of
tax liabilities than for legitimate business purposes could, for
example, constitute one of tax evasion. (see Norton and Harrison
& Co. vs. Comm., L-36772, 25 June 1984; see also Comm. vs.
Rufino, G.R. Nos. L-33665-68, 27 February 1987, 148 SCRA
42).

In Delpher Trades Corporation, (157 SCRA 349), the

Supreme Court ruled: An estate Planning (conveyance of
property to a family corporation for shares) within the means
sanctioned by Sec. 35 (now Sec. 34) of the Tax Code has been
held to be one of tax avoidance.

5. Doctrine of Equitable Recoupment

Equitable recoupment is a common law doctrine to the

effect that a claim for refund barred by prescription may be
allowed to offset unsettled tax liabilities should be pertinent only
to taxes arising from the same transaction on which an
overpayment is made and underpayment is due. The doctrine
finds no sound application to cases where the taxes involved are
totally unrelated.

Under this doctrine, the mandatory provision in the NIRC

(see Sec. 229, NIRC) requiring that a refund must be in writing
and filed within two years from payment of taxes, cannot should
not be a constraint against the application of the doctrine even
where the period had already lapsed. In deed, the application of
this principle is based on equity rather than of law.

But,in one case, the Supreme Court altogether rejected

the doctrine. Said the Court: it was not convinced of the
wisdom and propriety thereof, and that it may work to tempt
 both the collecting agency and the taxpayer to delay and neglect
their respective pursuits of legal action within the period set by
law. (Collector vs. University of Santo Tomas, 104 Phil. 1062).

6. Set-off of Taxes

- Taxes not generally subject to set-off

Well-settled is the general rule that, based on public

policy, no set-off or compensation is admissible against demands
for taxes levied for general purposes or local government
purposes. But, this rule admits of exception. Consequently,
where both the claims of government and the taxpayer against
each other have already become due and demandable as well as
fully liquidated, a set-off may be allowed. Thus, a taxpayer who
has been assessed municipal taxes may assign in favor of the
municipality a final judgement obtained by him against the said
municipality to cover the assessment. (see Domingo vs. Garlitos,
8 SCRA 443, 29 June 1963, see Art. 1279, 1290, Civil Code).

- Taxes are not generally subject to set-off; Reasons for the

general -

1. The reason on which the general rule is based is that, taxes

are not in the nature of contracts between the parties but
grow out of a duty to, and are the positive acts of the
government, to the making and enforcing of which, the
personal consent of individual taxpayers in not required.
The government and taxpayer are not mutually creditors
and debtors of each other and a claim for taxes is not such a
debt, demand, contract or judgement as is allowed to be set-
off.

2. Furthermore, if the taxpayer can properly refuse to pay tax

when called upon by the Collector, because he has claim
against the governmental body which is not included in the
tax levy, it is plain that some legitimate and necessary
expenditure must be curtailed. If the taxpayers claim is
disputed, the collection of the tax must await and abide the
result of a lawsuit, and meanwhile, the financial affairs of
government will be thrown in great confusion. (Republic vs.
Mambulao Lumber Co., 4 SCRA 622, 28 February 1962,
citing 47 Am. Jur. 766-767; Francia vs. IAC, 162 SCRA 753
[1088]; Cordero vs. Gonda, 18 SCRA 331, 15 October
1966; Caltex Phil., Inc. vs. Commission on Audit, 208 SCRA
726 [1992].)
 - Collection of taxes cannot await the results of a lawsuit
against the government.

In Philex Mining Corporation, (G.R. No. 125704,

28 August 1998). the Court held: We have consistently
ruled that there can be no off-setting of taxes against the
claims that the taxpayer may have against the government.
A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the
tax being collected. The collection of a tax cannot await the
results of a law suit against the government.

- Taxes due from taxpayers are considered paid through the

delivery of negotiable certificate of indebtedness issued
by the Philippine Government.

But,
in Republic vs. Sampaguita Pictures, Inc.
(G.R. No. 35238, 21 April 1989, 172 SCRA 623), the
Supreme Court allowed taxes due from taxpayer to be
considered paid through the delivery of negotiable certificate
of indebtedness issued by the Philippine Government which
had therefore already been presented and surrendered to the
National Treasurer.

7. Taxpayer Suit-

- Tax payer suit; when allowed.

In the case of Pascual vs. Sec. of Public Works, (110

Phil. 331, citing 11 Am. Jur. 761), Supreme Court ruled that it is
only when an act complained of, which may include legislative
enactment, directly involves the legal disbursement of public
funds derived from taxation that taxpayer suit may be
allowed.

- Cases where taxpayers suit is considered by the

Supreme Court to be improper:

1. A suit questioning the inaction of the Commission on

Elections to call special election. (Lozada and Igot vs.
Commission on Elections, (L-59068, 27 January
1983);or
 2. A suit to stop the Commission on Elections from holding
an exercise of suffrage. (Dumlao vs. Commission on
Elections, 95 SCRA 392); or

3. A suit where the disbursement does not involve funds

raised from taxation. (Gonzalez vs. Marcos, 65 SCRA )
Part II

NATIONAL TAXATION

Income Taxation

Sources of National Revenue-

1. Taxes derived from or levied under the National Internal

Revenue Code; and

2. Taxes derived from or levied under the Tariff and Customs

Code.

Internal Revenue Taxes imposed by the NIRC-

The following are taxes imposed under the NIRC: i. income

tax, ii. transfer (estate and donors) taxes, iii. value-added tax, iv.
other percentage taxes, v. excise taxes, vi. documentary stamp taxes,
and vii. such other taxes as are or hereafter may be imposed and
collected by the Bureau of Internal Revenue. (see Sec. 21, NIRC)

The National Internal Revenue Code, brief history:

Before the enactment of Commonwealth Act 466, in 1939, the

income tax laws that were operative in our jurisdiction were Revenue
Act of 1913, a law approved by the Congress of the United States on
October 3, 1913 but made effective as of March 1, 1913, and Act
No.2339 of 1916 of the same US Congress which was incorporated in
Act 2711, the Administrative Code of 1916. In June 15, 1939 the
National Assembly approved Commonwealth Act No. 466, thereby
codifying our internal revenue laws for the first time. This law,
commonly known as the National Internal Revenue Code took effect
on July 1, 1939, although the provisions that pertain to income tax
were made retroactive to January 1, 1939.

Later, the same Commonwealth Act No. 466, as amended by

R.A. No. 6110 (The Omnibus Tax Law), signed into law by the
President on August 4, 1969 and by P.D. No. 69, issued on
 November 24, 1972, and subsequently presidential decrees which
introduced extensive changes thereto, underwent series of further
amendments culminating in the issuance on June 3, 1977 of P.D. No.
1158, otherwise known as The National Internal Revenue Code of
1977. P.D. 1158 consolidated and codified into a single tax code all
the internal revenue laws embodied in Commonwealth Act No. 466
and various laws and presidential decrees.

Furthermore, the National Internal Revenue Code 1977

underwent series of amendments effected by several presidential
decrees, acts enacted by the defunct Batasang Pambansa and
Executive Orders of then President Corazon C. Aquino under the
Freedom Constitution, as well as enactments of Congress after the
ratification of the 1987 Constitution.

Finally, On December 11, 1997, a new Tax Code (R.A. No. 8424
otherwise known as the National Internal Revenue Code of 1997),
was signed into law by then President Fidel V. Ramos to further
introduce some important tax reforms, particularly in the area of
income taxes and excise taxes. R.A. 8424 took effect on January 1,
1998.

Meaning of the term Income-

There is no law, rules regulation or jurisprudence that provides

for a comprehensive definition of the term income. But in its
broadest sense, the term income means ALL WEALTH WHICH
FLOW INTO THE TAXPAYER OTHER THAN AS A MERE
RETURN OF CAPITAL (see Sec. 36, Rev. Regs No.2). It is the
gain derived from capital, labor, or from both combined. (Eisner vs.
vs. Macomber, 252 U.S. 189, 1920). It is an amount of money (it
may be in kind coming to a person or corporation within a specified
time, whether as payment for services, interest, or profit from
investment. An income means cash received or its equivalent, it
cannot cover unrealized increments in the value of property. It is
distinct from capital(Fisher vs. Trinidad, 43 Phil. 973).

Accordingly, an amount received other than from employment

of ones labor or capital such as donation or inheritance is not
included in the term income.

Essential difference between capital and income-

The essential difference between capital and income is that

capital is fund; income is a flow. Capital is wealth, while income is
the service of wealth. The fact is that property is the tree, income is
the fruit; labor is a tree, income the fruit. Capital is a tree, income the
fruit. (Vicente Madrigal, et. al. Vs. James Rafferty, 38 Phil. 414).

Meaning of the term gross income-

In general, the term gross income means all income from

what ever sources derived, including (but not limited to)
compensation for services, including fees, commissions, and similar
items; gross income from trade or business; gains derived from
dealing in property; interest; rents; royalties; dividends; annuities;
prizes and winnings; pensions; and partners distributive share of the
gross income of general partnership. (see Sec. 32[A], NIRC of 1997).

Section 32[A] adopted the global concept in defining gross
income by including compensation income. It enumerates the items
falling under the term without excluding other items not mentioned
but which are considered in the determination of gross income.

Thus, gross income consists of all the gains, profits, and

income of a taxpayer during a taxable year of whatever kind and in
what ever form derived from any source, whether legal or illegal,
except items of gross income (passive income) subject to final income
tax (e.g. Sec. 24[B,C,D].); and income exempt from taxation
(exclusions) under the law. (see H.S De Leon, The National Internal
th
Revenue Code. Annotated, 7 Ed., p.203)

What forms of income are covered by the phrase income

derived from whatever source mentioned in Subsec. A, 1st
Paragraph of Sec. 32?

The phrase income derived from whatever source in

Subsection A, 1st par. covers all other forms of income not falling
under any of the items of income enumerated in Subsection B. It
discloses a legislative policy to include all income under our laws,
irrespective of the voluntary or involuntary action of the taxpayer in
producing the gain. (Gutierrez vs. Coll., CTA Case No. 65, 31 August
1965). Accordingly, income derived from expropriation of ones
property and from gambling is taxable. (ibid.).

Items Excluded from Gross Income:

Following are items excluded from gross income and shall be

exempt from taxation:
 1. Life Insurance;
2. Amount received by insured as return of premium;
3. Gift, Bequest, and devises;
4. Compensation for injuries or sickness;
5. Income exempt under treaty;
6. Retirement benefits, Pension, Gratuities, etc.; and
7. Miscellaneous Income.

Meaning of the term taxable income

This term means the pertinent items of gross income specified

under the National Internal Revenue Code, as amended, less the
deductions and/or personal exemption, if any authorized by law to be
deducted from the gross income (Sec. 31, NIRC). In short, this term
refers to the tax base.

Classification of Taxable Income-

Taxable income may be classified into-

1. Passive income;
- hey are subject to a separate and final tax at fixed rates
T
with a maximum of 20% and a minimum of 5%, such as
interest from bank deposits and yield or any other monetary
benefit from deposits substitute (Sec. 22[Y].) and from trust
fund and similar arrangements, royalties, prizes and other
earnings, dividends received by an individual who is a
citizen or resident alien from domestic corporation, etc. and
the share of the distributable net income of an individual
partner in a business partnership or in the net income of an
association, etc. which is treated as a corporation for tax
purposes, and capital gains from sales of shares of stock and
from sales of real property classified as capital assets. (Sec.
24, Subsections B,C,D.)

3. Compensation Income;

- Income derived as a result of employee-employer

relationship. This class of income is taxable at the rates
provided for in Sec 24 [A].

4. Non- compensation or business income.

 - Income derived in the exercise of profession, callings, or
conduct of trade or business.

How income tax is levied.

In general, income tax are levied and paid through a self-

assessment or self-computed system otherwise known as the pay-as-
you-file income tax procedure (Chapter IX, Title II, NIRC). Under
this procedure the taxpayer himself or his authorized representative
computes and prepares his own income tax return, files the same with
the BIR and pay the tax due thereunder at the time the return is filed.
Inasmuch as the rates of tax are fixed by law, the role of the tax
official is purely to determine the accuracy of the taxpayers
assessment of his tax liability.

Additionally, income taxes on certain types of income are

levied and collected through withholding at source. Basically, there
are two types of withholding, they are the creditable withholding
system and the final withholding system.

1. Creditable withholding system- under this system, the

payor withholds from the payee the corresponding amount
of withholding tax, issue to the payee the corresponding tax
statement showing the amount of income payment and the
amount of tax withheld therefrom; the payee reports the
income in his income tax return and credits the amount of
tax withheld from him in computing for the amount of
income tax still due from his total taxable income.

2. Final withholding system under this system, the payor

also withholds from the payee the corresponding amount of
withholding tax, issues to the payee a withholding tax
statement showing the amount of income payment and the
amount of tax withheld therefrom, but with the feature of
finality of the tax payment because the payee is not
anymore required to report the income in his income tax
return as the tax withheld is considered by law as final
payment of his income tax due on the income (see Chap.
IX, Title II and sec. 57(B) NIRC, for creditable withholding
tax system and Section 57(A) for final withholding system;
also see Sec. 58, NIRC).

Income tax is also computed either on a global or

schedular basis. Example of schedular income tax procedure is the
schedular basis. Example of schedular income tax procedure is the
income on capital gains from sale or disposition of real property held

as capital asset where the vendor-transferor is an individual (Sec.

24[D], NIRC). Under this system the vendor-transferor files a capital
gains tax return on a per transaction basis rather than on the basis of
taxable period. Otherwise, all income derived during a taxable period,
except such income subject to final withholding tax, shall be reported
by the taxpayer in his income tax return for the corresponding taxable
period under a system known as the global concept of income
taxation.

Finally, income tax is also levied, based on taxable

income, i.e., on the tax base, using either a single tax rate or a unitary
progressive tax rates, depending on the type of taxable income. To
illustrate, interest income from Philippine currency bank deposit is
taxed at 20% based on the gross amount of the interest (Sec. 24[B]1,
NIRC). Whereas income derived from business, trade, practice of
profession or employment, etc., is taxed based on an amount, net of
allowable deductions, at a unitary progressive rates ranging from 5%
to 32, effective January 1, 2000. The applicable rates differ
depending on the type of income and the tax classification of the
taxpayer (see Sec. 24 to 28, NIRC).

Income Tax on Individuals-

Classes of persons taxed as individuals:

a. Resident citizens

A resident citizen is subject to income tax on taxable

income defined in Sec. 31, of the NIRC derived from all sources
within and without the Philippines, other than income subject to
tax under Subsections (B), (C), and (D) of this Section. [See Sec.
24 (A)(1)(a)].

Other than items of income subject to schedular income

taxation or final withholding tax system, the income tax
treatment of a resident citizen is based on taxable income, i.e. net
of deductions. The taxable base is adjusted gross income, i.e.,
net of personal exemption and income tax paid, if any was paid,
net of personal exemption and income tax paid, if any was paid,
to the national government of a foreign country where he derived
the income during the same taxable year.

The income tax rate applicable on the taxable of resident

citizen are the progressive rate ranging from 5% to 34%. [Sec.
24(A)]. On the other hand, certain taxable (passive) income of
resident citizen shall be subject to final tax ranging from 5% to
20%, depending on the type of income. [see Sec 24(B)(1) to (2)];
Capital gains from sale of shares of stock not traded in the stock
exchange are subject schedular rate of 5% for an amount not
exceeding P100,000.00 and 10% for the excess thereof, based on
the net capital gains realized. [see Sec. 24(C)]; And capital gains
from sale of real property classified as capital asset, is taxed at
6% based on the gross selling price or the current fair market
value (FMV), whichever is higher.

b. Non-resident citizens-

Sec. 22[E], NIRC defines the term non-resident citizens as

follows, it means:

1. A non-resident citizen means one who establishes to the

satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein.

2. A citizen of the Philippines who leaves the Philippines

during the taxable year to reside abroad, either as an
immigrant or for employment on a permanent basis.

3. A citizen of the Philippines who works and derives income

from abroad and whose employment thereat requires him
to be physically present abroad most of the time during the
taxable year.

4. A citizen who has been previously considered as non-

resident citizen and who arrives in the Philippines at any
time during the taxable year to reside permanently in the
Philippines shall likewise be treated as a non-resident
citizen for the taxable year in which he arrives in the
Philippines with respect to his income derived from
sources abroad until the date of his arrival in the
Philippines.

5. The taxpayer shall submit proof to the commissioner to

 5. The taxpayer shall submit proof to the commissioner to
show his intention of leaving the Philippines permanently
abroad or to return to and reside in the Philippine, as the

case maybe, for purposes of this Section.

Accordingly, a Filipino citizen who leaves the Philippines

during the taxable year to reside abroad permanently and a
contract worker whose contract of employment is renewed from
time to time within or during the taxable year under such
circumstances as to require him to be physically present abroad
most of the time during the taxable year, shall be considered a
non resident citizen for such taxable year with respect to the
income he derived from foreign sources from the date he actually
departed from the Philippines. A contract worker whose contract
worker whose contract of employment is renewed from time to
time shall qualify as a nonresident citizen only if his Physical
presence abroad during the taxable year amount to one hundred
eighty-three (183) days or more (Sec. 2(c), Rev. Regs. No. 1-79).

Individual citizen of the Philippine who is residing outside

the Philippines including overseas contract workers referred to in
Subsection (C) of Section 23 hereof are subject to income tax on
taxable income defined in Section 31 of the NIRC derived from
all sources within the Philippines, except income subject to tax
under Subsections (B), (C), and (D) of this Section. [see Sec.
24[(A)(1)(b), NIRC.]

The income tax rate applicable on the taxable income of a

non resident citizen is the same as those applicable to resident
citizen. [see Sec. 24 (A)]. On the other hand, certain taxable
(passive) income of nonresident citizen shall be subject to final
tax ranging from 5% to 20%, depending on the type of income.
[see Sec 24(B)(1) to (2)]; Capital gains from sale of shares of
stock not traded in the stock exchange are subject to the
schedular rate of 5% for an amount not exceeding P100,000.00
and 10% for the excess thereof, based on the net capital gains
realized. [see Sec. 24(C)]; And capital gains from sale of real
property classified as capital asset, is taxed at 6% based on the
gross selling price or the current fair market value (FMV),
whichever is higher.

c. Resident Aliens

A resident alien means an individual whose

resident is within the Philippines and who is not a citizen thereof.
(Sec. 22[F], NIRC.). The term resident is a technical in the sense
 (Sec. 22[F], NIRC.). The term resident is a technical in the sense
that the same is not based alone on physical presence in the
Philippines but most importantly by his intention as to his
presence. A mere transient or sojourner is considered

nonresident. An alien who comes to th Philippines and whose

intention as to his stay is indefinite is considered resident. An
alien whose stay in the Philippines is for a definite purpose which
by its nature may be promptly accomplished is considered
nonresident (Sec. 5, Rev. Regs. No. 2).

A resident alien individual is subject to

income tax on his taxable income defined in Section 31, NIRC,
other than income subject to tax under Subsection (b), (C), and
(D) of this Section, derived for each taxable year from all sources
within the Philippines, [Sec. 24(c)]

d. Non-resident aliens

A non-resident alien means an individual whose

residence is not the Philippines and who is not a citizen thereof.
(Sec. 22[G], NIRC.) Non-resident aliens may either be-

1. engaged in trade or business (the term denotes habituality

or sustained activity) in the Philippines and he is deemed
as so engaged if the aggregate stay in the Philippines
exceeds 180 days for each calendar year; or

2. not engage in trade or business in the Philippines (Sec.

25, NIRC).

Both are, however, subject to income tax with respect to

only to income derived from all sources within the Philippines
(Sec. 25, NIRC).

Nonresident Alien Engaged in Trade or Business:

A nonresident alien engaged in trade or business in the

Philippines shall be subject to an income tax in the same manner
as an individual citizen and a resident alien individual, on taxable
income received from all sources within the Philippines. A
nonresident alien individual who shall come to the Philippines
and stay therein for aggregate period of more than one hundred
eighty (180) days during any calendar year shall be deemed a
nonresident alien doing business in the Philippines, Section
22(G) of the NIRC. (see Sec. 25[A(1)], NIRC.).
 Nonresident alien engaged in trade or business or in the
exercise of profession in the Philippines shall be entitled to a
personal exemption in the amount equal to the exemptions
allowed in the income tax law in the country of which he is a
subject or resident, to citizen of the Philippines not residing in
such country, not to exceed the amount fixed in this Section as
exemption for citizen or residents of the Philippines. [see Sec.
35(D)].

Except for the limitations on deductions provided in

Subsection (C)(2) of Section 34 (i.e. an alien individual taxpayer
engaged in trade or business in the Philippine is allowed to
deduct from his gross income the allowable deductions for taxes
provided in Paragraph (2) of Subsection (C) of Section 34 of the
NIRC only if and to the extent that they are connected with
income derived from sources within the Philippines), a resident
alien individual doing business in the Philippines, who do not
earn his income solely from compensation income arising from
personal services rendered under an employee-employer
relationship, shall be allowed the deductions from his gross
income the allowable deductions enumerated in Section 34 of the
NIRC. [See Sec. 34, Subsecs. (A toM)

With regards to certain passive income, like those

provided in Sec 24, Subsecs. (B,) of the NIRC (except prizes
amounting to Ten Thousand Pesos [P10,000.00] or less which
shall be subject to tax under Subsection (A)(1) of Section 24);
and other winnings (except PCSO and Lotto winnings), of a
nonresident alien individual engaged in trade shall be taxed at
20% on the total amount thereof: Except the following income
which shall be taxed with their corresponding rate of tax as
provided in Subsec. (A)(2) of Section 25 of the NIRC:

1. Royalties on books as well as other literary works, and

royalties on musical compositions shall be subject to
a final tax of ten percent (10%);

2. Cinematographic films and similar works shall be

subject to the twenty five percent (25%) final tax
provide under Sec. 28 of the NIRC;

3. Interest income from long-term deposit or investment

evidence by certificate in such form prescribed by the
Bangko Sentral ng Pilipinas (BSP) shall be exempt
from the tax imposed under this subsection. In case of
 from the tax imposed under this subsection. In case of
pre-termination, however, of the deposit before the
fifth (5th) year, a final tax shall be imposed on the
entire income and shall be deducted and withheld by
the depository bank from the proceeds of long term

investment certificate based on the remaining amount

there of as follows:

Four (4) years to less than five (5) years 5%

Three years (3) years to less than four (4) years
12%; and

Less
than three (3) years 20%. (see subsection
(A)(2), Sec. 25, NIRC.)

Capital gains realized from sale, barter or exchange of

shares of stock in domestic corporations not traded through the
local stock exchange, and real properties shall be subject to the
tax prescribe under Subsections (C) and (D) of section 24 as
follows:

1. Capital Gains from Sale of Shares of Stock not Traded

in the Stock Exchange:
Not over P100,000.00 . . . . . . . . . . . . . . . . 5%
On any amount in excess of P100,000.00. . 10%
(see Subsec. (C), Sec. 24, NIRC.)

2. Capital Gains from Sale of Real Property . . 6% based

on the gross selling price or current fair market value
(FMV) as determined by the Commissioner of the
BIR (Sec. 6(E)), whichever is higher. (see Sec. 24(D),
NIRC.)

Nonresident Alien Individual Not Engaged in Trade or

Business.

Except for Capital gains realized by nonresident

alien individual not engaged in trade or business in the
Philippines from shares of stock in domestic corporation and real
property which are subject to income tax prescribed under
Subsections (C) and (D) of Section 24, (NIRC), all other taxable
income of nonresident alien individual not engage in trade in the
Philippines shall be levied, collected and paid for each taxable
 Philippines shall be levied, collected and paid for each taxable
year upon the entire income received from all sources within the
Philippines at a tax equal to twenty five percent of such income..
[see Sec. 25(B), NIRC]. Moreover, a nonresident individual alien
not engaged in trade in the Philippines is not entitled to claim for
the allowable deductions provided in Sections 34 and the

personal exemptions provided in Section 34 because the basis for

their tax is their entire gross income from all sources with in the
Philippines

On the other hand, capital gains realized by a nonresident

alien individual not engaged in trade or business in the
Philippines from sale of shares of stock in any domestic
corporation and real property shall be subject to the income tax
prescribed by Subsection (C) and (D) of Section 24. [see
Sec25(B). (See earlier discussion of this notes for tax base and
rate of taxes.)

Alien Individual Employed by Regional of Area Headquarters

and Regional Operating Headquarters of Multinational
Companies-

This
class of taxpayer is taxes at Fifteen
(15%) of their gross income derived from salaries, wages,
annuities, compensation, and other emoluments, such as
honoraria and allowances from such regional or area
headquarters and regional operating headquarters. Provided,
however, That the same tax treatment shall apply to Filipinos
employed and occupying the same position as those of aliens
employed the by these multinational companies.

The term multinational company means a

foreign firm or entity engaged in international trade with
affiliates or subsidiaries or branch offices in the Asia-Pacific
Region and other foreign markets. [see Section 25(D)].

Any income earned from all other sources within the

Philippines by this class of individual alien employee shall be
subject to the pertinent income tax, as the case may be, imposed
nd
under the NIRC. [see Section 25(E), 2 paragraph, NIRC.]

Alien Individual Employed by Offshore Banking Units-

A tax equal to fifteen percent (15%) of gross

 A tax equal to fifteen percent (15%) of gross
income is imposed on this class of individual taxpayer on their
income as salaries, wages, annuities, compensation, remuneration
and emoluments, such as honoraria and allowances from such
offshore banking units. Provided, however, that such tax
treatment shall apply to Filipinos employed and occupying the
same position as those aliens employed by these offshore banking
units.

Any income earned from all other sources within the

Philippines by this class of individual alien employee shall be
subject to the pertinent income tax, as the case may be, imposed
under the NIRC. [see Section 25(E), 2nd Paragraph, NIRC.]

Alien Individual Employed by Petroleum Service Contractors and

subcontractor.

A tax of fifteen percent (15%) from income earned as

salaries, wages, annuities, compensation, remuneration and
other emoluments, such as honoraria and allowance, received
from such contractors or subcontractor by alien individual
who is a permanent resident of a foreign country but
employed and assigned in the Philippines by a foreign service
contractor or by foreign subcontractor engaged in petroleum
operations in the Philippines. Provided, however, that the
same tax treatment shall apply to Filipino employed and
occupying the same position as an alien employed by
petroleum service contractor and subcontractor.

Any income earned from all other sources within the

Philippines by this class of individual alien employee shall be
subject to the pertinent income tax, as the case may be,
imposed under the NIRC. [see Section 25(E)].
E. Estate

This term refers to the assets and liabilities left by the

deceased individual which shall pass to his heirs by way of
hereditary succession. Income of the estate is subject to
income tax and the obligation to pay for the tax may either
rest upon the administrator of the estate or the beneficiaries of
the estate, depending on whether or not the estate settlement is
subject to testamentary or intestate proceeding, i.e. there is a
judicial proceedings for the settlement of the estate.

If there is a judicial proceeding for the settlement of the

estate, the administrator thereof is required to file the income
 estate, the administrator thereof is required to file the income
tax return in the name of the estate and pay the tax on its
income, if any is due. Hence for income tax purposes the
estate acquires a distinct personality. However, if there is no
judicial proceeding for the settlement of the estate, no income
tax return is required to be filed in the name of the estate but
rather the income thereof shall be directly taxable to its
beneficiaries, i.e. the beneficiaries shall report their shares
from the income of the estate in their respective income tax
returns. Hence, in the latter situation, the estate does not
acquire, for income tax purposes, a distinct legal personality.
(Sec. 209-210, Rev. Regs. No. 2.)

If the estate is settled judicially and, accordingly, is

required to file an income tax return, the tax due shall be
computed in the manner as an individuals (Sec. 61, NIRC),
except in connection with personal exemption which shall be
limited only to twenty thousand pesos (P20,000.00) (Sec. 62,
NIRC), and deduction from gross income where, in addition
to allowable deductions under Section 34 of the NIRC, the
estate is further allowed to deduct income to be distributed to
its beneficiary but the amount so allowed as deduction shall
be included in computing the taxable income of the
beneficiaries, whether distributed or not to them. [Sec. 61(A)].

Furthermore, in case the income received by estates of

the deceased person during the period of administration or
settlement of the estate, and in the case of income which, in
the discretion of the fiduciary, may be either distributed or
accumulated, an additional deduction in computing the
taxable income of the estate or trust the amount of the income
of the estate or trust for its taxable year, which is properly
paid or credited during such year to any legatee, heir or
beneficiary but the amount so allowed as a deduction shall be
included in computing the taxable income of the legatee, heirs
or beneficiary. [Sec. 61(B)].

E. Trust

A trust is a legal arrangement o contract

whereby there is a trustor, a trustee and a beneficiary. The
trustor entrusts property for the administration by the trustee
and for the benefit of the designated beneficiary. For income
tax purposes, the trusts treated as distinct taxable entities, are
those created by will or by trust deeds where the transfer of
property to such trusts is irrevocable and the income of which
 property to such trusts is irrevocable and the income of which
is to be accumulated for a designated beneficiaries other than
the grantor . Hence, a revocable trust or grantors trust is not
treated as distinct taxable entity. The income from this kind
of trust shall be directly taxable against the grantor.

A taxable trust is treated in the same manner

and on the same basis as a taxable individual (see Sec. 61,
NIRC), except that only twenty thousand (P20,000.00) is
allowed as exemption allowed to taxable trust and the
deduction from gross income where, in addition to allowable
deductions under Section 34 of the NIRC, the estate is further
allowed to deduct income to be distributed to its beneficiary
but the amount so allowed as deduction shall be included in
computing the taxable income of the beneficiaries, whether
distributed or not to them. [Sec. 61(A)].

Furthermore, in case the income received by

(estates) or trust of the deceased person during the period of
administration or settlement of the estate, and in the case of
income which, in the discretion of the fiduciary, may be either
distributed or accumulated, an additional deduction in
computing the taxable income of the estate or trust the amount
of the income of the estate or trust for its taxable year, which
is properly paid or credited during such year to any legatee,
heir or beneficiary but the amount so allowed as a deduction
shall be included in computing the taxable income of the
legatee, heirs or beneficiary. [Sec. 61(B)].

Income tax Return for Individuals

What are the returns that Individual income taxpayers are

required to file?

The following are required to file income tax return as

individuals:

1. Individuals whose income are derived from Compensation

income only. (BIR Form 1701A);

2. Individuals whose income are derived from the exercise of

profession and business or mixed income (both professional
and business). (BIR Form 1701); and
 3. Non-Nonresident Citizens. (BIR Form 1701C).

Who are the individuals required to file an income tax

Return?

The
following individuals are required to file an
income tax return: [see Sec. 51(A)(1) & (4), NIRC.]

a. Resident Filipino citizen, on his income derived from all

sources within and without the Philippines;

b. Nonresident Filipino citizen, on his income from all sources

within the Philippines;

c. Resident alien, on his income derived from sources within

the Philippines; and

d. Nonresident alien engaged in trade or business or in the

exercise of profession in the Philippines, on his income
derived from sources within the Philippines.

Who are not required to file an income tax return?

The following individuals are not required to file an
income tax return: [see Sec. 51(A)(2), NIRC.]

a. An individual whose gross income does not exceed his total

personal and additional exemption for dependents under
Sec. 24: Provided, the Resident citizens and any alien
individual engaged in business or practice of profession
within the Philippines shall file an income tax return,
regardless of the amount of gross income;

b. An individual with respect to pure compensation income, as

define in Section 32(A)(1), derived from sources within
the Philippines, the income on which has been correctly
withheld under the provisions of Section 79, NIRC:
Provided: That an individual deriving compensation
concurrently from two or more employers at any time
during the taxable year shall file an income tax return;
Provided, further, That an individual income derived from
sources within the Philippines exceeds Sixty thousand
pesos (P60,000.00) shall also file an income tax return;
 c. An individual whose sole income has been subjected to
final withholding tax pursuant to Section 57(A) of the
NIRC;

d. Alien employees of regional or area headquarters of multi-

national corporation with respect to income referred to
under Section 25(C) of the NIRC;

e. Alien employed by offshore banking units with respect to

income under Section 25(D), of the NIRC;

f. Alien employees of service contractors and subcontractors

engaged in petroleum exploration in the Philippines with
respect to income referred to under Section 25(E) of the
NIRC; and

g. An individual who is exempt from income tax pursuant to

the provisions of the NIRC and other laws, general or
special.

Example of this category is a non resident

alien not engaged in trade, business or practice of profession
in the Philippines whereby the tax (at the rate of 20%) based
on gross amount thereof, is to be withheld at source as final
tax. (see Section 25(B). Another example are individuals
covered by international agreements whereby the Philippines
is a signatory like the agreement under the United Nations, the
Asian Development Bank, etc.

What return shall an individual exempt to file income tax return

under the provisions of Section 51(A)(2) may file?

Any individual not required to file an income tax return

pursuant to the provisions of Section 51(A)(2), may be required
to file an information return pursuant to rules and regulations
prescribed by the Secretary of Finance, upon recommendation of
the Commissioner of BIR. [See Section 51(A)(3), NIRC].

Filing of income tax return/payment of income tax.

The income tax due per return shall be paid at the same
time the return is filed, under the system known as pay-as-you-
file. The return shall be filed with an authorized bank, the
Revenue District Office, Collection Agent, or duly authorized
 Revenue District Office, Collection Agent, or duly authorized
Treasurer of the city or municipality in which such person has
legal residence or principal place of business in the Philippines,
or if there be no legal residence or place of business in the
Philippines, with the office of the Commissioner. [see Sec.
51(B)]. Filing and payment shall not be later than April 30
following the close of the previous calendar year. [see Section
51(C)(1), NIRC].

Consolidated Return for husband and wife.

Married individuals, whether citizens, resident or

nonresident aliens, who do not derive income purely from
compensation, shall file a consolidated return for both spouses,
but if it is impracticable for the spouses to file a single return,
each spouse may file a separate return of income but the returns
so filed shall be consolidated by the BIR for purposes of
verification for the taxable year. [see Sec. 51(D)].

Income of unmarried minor; when included in the return of the

parent- [see Sec. 51(E), NIRC]

The income of unmarried minors derived from property

received from a living parent shall be included in the return of the
parent, except:

1. When the donors tax has been paid on such property; or

2. When the transfer of such property is exempt from donors

tax.

Who will file for return of a taxpayer who is unable to file his
return by reason of disability or otherwise?

Ifthe taxpayer is unable to make his return, the return

maybe made by his duly authorized agent or representative or by
the guardian or other person charged with the care of his person
or property, the principal and his representative or guardian
assuming the responsibility of making the return and incurring
penalties provided for erroneous, false or fraudulent returns. [see
Sec. 51(F), NIRC].

Effect when an individuals signature is affixed to a return-

The fact that an individuals signature is signed to a filed return shall
be a prima facie evidence for all purposes that the return was
actually signed by him. [see Sec. 51(G),NIRC.].

INCOME TAX ON CORPORATIONS

Corporation.-

The term corporation for income tax purposes is

broader compared with its meaning under the Corporation Law.
For income tax purposes, the term corporation includes
partnerships, no matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion),
associations or insurance companies, but not include general
professional partnerships and joint venture or consortium formed
for the purpose of undertaking construction project or engaged in
petroleum, coal, geothermal and other energy operations pursuant
to an operating or consortium agreement under a service contract
with the government. General professional partnerships formed
by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from
engaging in trade or business. [see Sec. 22(B), NIRC.].

Classes of Corporations-

1. Domestic Corporation.-

This refers to corporation created or organized in

the Philippines under its laws. (see Sec. 22(C), NIRC.].

2. Foreign Corporation.-

This refers to corporation created and

organized under the law of a foreign country. [see Sec. 22(D),
NIRC.]. Foreign corporations are further classified into
resident and nonresident corporations.

a. Resident foreign corporation.- A Foreign Corporation

engaged in trade or business in the Philippines. [see
Sec. 22(H), NIRC.].
 b. Nonresident foreign corporation.- A foreign
corporation not engaged in trade or business within
the Philippines. [see Sec. 22(I). NIRC.].
axable situs of income of a foreign corporation.-
T

A foreign corporation, whether engaged or not in

trade or business in the Philippines, is taxable only on income
derived from all sources within the Philippines. [see Sec. 23(F),
NIRC.]`

Income tax returns for corporations.-

Corporations are required to file interim quarterly

income tax returns (BIR Form 1702Q) for the first three quarters
of each taxable year and a final adjustment return (BIR Form
1702) for the entire taxable year.

The Quarterly Return.-

The interim quarterly income tax return shall be filed

within sixty (60) days following the close of each quarter.
Computation of quarterly gross income, deductions, and income
taxes shall be on cumulative basis. [see Sec. 75, NIRC.] The tax
due per return shall be paid at the same time the return is filed,
following the pay-as-you-file system. (see Sec. 77, NIRC.).

The Final Adjustment Return.-

It shall also file a final adjustment income tax return

covering the result of operation for the entire taxable year. The
quarterly income tax, computed on a cumulative basis, shall be
credited against the income tax due per final adjustment return.
The balance of the tax due per final adjustment return, if any,
shall be paid at the same time the return is filed (see Sec. 76,
NIRC.). The deadline for filing of the final adjustment income
tax return is on the fifteenth (15th) day of April, or on or before
the fifteenth (15th) day the fourth (4th) month following the close
of the fiscal year, as the case may be.

The cumulative computation of corporate income taxes; how it
operates.-
 Under this concept, the gross income, deductions and the
income tax due per quarter shall be computed on a cumulative
basis. Thus, in computing for income tax due as of the second
quarter, consolidate the gross income, deductions and net income
for the first and second quarter. Compute the income tax due on
the consolidated net income and credit against the consolidated
tax due as of the second quarter the income tax paid as of the
preceding first quarter.

In the computation of income tax due per the final

adjustment income tax return, compute the net income for the
entire taxable year, compute the tax due therefrom, and credit the
income taxes paid during the preceding quarters. The balance, if
any, shall then be paid at the same time the final adjustment
return is filed.

Ifcredits for quarterly income taxes previously

paid exceeds the income tax due per the final adjustment return,
the excess credit may be either refunded or credited outright, at
the option of the corporation. Availment of the option, i.e.,
whether for outright credit or for cash refund of the excess credit
must be shown in the final adjustment return by checking the
appropriate box provided therefor.

In the event that the corporation avails for outright

credit of the excess payments per final adjustment return due to
excess credit per quarterly income tax returns, the said excess
credits may be applied against the income tax due for the
following quarter(s) of the following year(s) until the same has
been fully credited. If the excess credit per final adjustment
return shall be deducted from the income tax due for the first
quarter of the following year, a copy of the said final adjustment
return should be attached with the quarterly return for the first
quarter of said following taxable year.

It
is not necessary for the Corporation to secure
from the BIR a tax credit certificate for purposes of crediting
excess credit. But the excess credits may be used only against
the income taxes due from the corporation, i.e., It may not be
applied in payment of other national internal revenue taxes.

Should the Corporation wishes to use such excess

credit for payment of its other national internal revenue taxes, it
may request for the issuance of a Tax Credit Certificate instead of
 may request for the issuance of a Tax Credit Certificate instead of
using the same outright credit against income tax liabilities for
subsequent quarter/year. Unless the said Tax Credit Certificate
has been issued, such excess credits may not be used in payment
of other taxes.

Partnership.-

For income tax purposes, partnerships are classified into-

1. General Professional partnerships.-

This classification of partnership refers to

general professional partnership formed by individuals for the
sole purpose of exercising their common profession, no part
of the income of which is derived from engaging in trade or
business. [see Sec. 22(B), NIRC.]. General professional
partnerships are not subject to tax as corporation. Rather,
individual members thereof shall be liable for income tax only
in their separate and individual capacities. Accordingly, each
partner shall report as gross income his distributive share,
actually or constructively received, in the net income of the
partnership. [see Sec. 26, 1st and 3rd paragraphs, NIRC.]

How does the distributive share of a partners

computed?

The distributive share of the partners is

determined after the net in come of the partnership has been
determined, i.e. the net income of the partnership is computed
in the same manner as a corporation. (See Sec.26, 2nd
paragraph, NIRC.).

2. Other partnerships.-

These entities are subject to corporate-

income taxation system previously discussed in this work.
They are partnerships other than general professional
partnership defined in Section 22 (B) of the NIRC.
Corporation exempt from corporate income tax.-

The following corporations are exempt from corporate income

tax (see Sec. 30, NIRC):

(A) Labor, agricultural or horticultural organization not organized

principally for profit;
(B) Mutual savings bank not having a capital stock represented
by shares, and cooperative bank without capital stock
organized and operated for mutual purposes and without
profit;
(C) A beneficiary society, order or association, operating for the
exclusive benefit of the members such as fraternal
organization operating under the lodge system, or mutual
aid association or a non-stock corporation organized by
employees providing for the payment of life, sickness,
accident, or other benefits exclusively to the members of
such society, order, or association, or non-stock
corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the
benefit of its members;
(E) Non-stock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans, no
part of its net income or assets shall belong to or inure to
the benefit of any member, organizer, officer or their
dependents;
(F) Business league, chamber of commerce, or board of trade, not
organized for profit and no part of the net income of which
inure to the benefit of any private stockholder or
individual;
(G) Civic league or organization not organized for profit but
operated exclusively for promotion of social welfare;
(H) A non-stock and non profit educational institution;
(I) Government educational institution;
(J) Farmers or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual or cooperative
telephone company, or like organization of purely local
character, the income of which consists solely of
assessments, dues, and fees collected from members for
the sole purpose of meeting its expenses; and
(K) Farmers, fruit growers, or like association organized and
operated as a sales agent for the purpose of marketing the
product of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on
the basis of the quantity of produce finished by them.
 Exception to the income tax exemption enjoyed by these
organizations.-

Notwithstanding exemption from income tax of the

foregoing organizations, however, income of whatever kind and
character from any of their properties, real or personal, or from
any of their activities conducted for profit, regardless of the
disposition made of such income, shall be subject to income
tax. (see Sec. 30, last paragraph, NIRC.)

What are the requirements to establish income tax

exemption?-

In order for an exempt organization could claim for

exemption said organization shall apply for such tax exemption
with the Commissioner of Internal Revenue. Its application
must be accompanied with the following documents:

a. Copy of the charter or articles of Incorporation;

b. Copy of the by-laws;
c. Latest financial statement of the organization; and
d. Affidavit showing the character of the organization, th
purpose for which it was organized, its actual activities,
sources of its income and its disposition, whether or not
any of its income is credited to surplus or inures to or
may inure to the benefit of any private stockholder or
individual, and in general, all facts relating to its
operations which affect its right to exemption.

The application will be evaluated by the Bureau of

Internal Revenue. Accordingly, the applicant shall be notified in
writing, whether or not it qualifies for exemption from income
tax. In the event the applicant is found to be eligible for
exemption, a certificate of exemption from income tax shall be
issued by the BIR to the applicant organization. Thereafter, the
organization shall not anymore file corporate income tax return.

What kind of return is required for an exempt corporation to file?

Every corporation which has duly established its

eligibility for exemption from income tax shall file an annual
information return, in lieu of the quarterly and final adjustment
 information return, in lieu of the quarterly and final adjustment
tax return required of taxable corporation, under a BIR form
prescribed thereof (BIR Form No. 17.02-A) on or before April 15
following the close of the previous year or on or before the
fifteenth (15th) day of the fourth (4th) month following the close
of the fiscal year, depending on the accounting period regularly
employed in keeping its books of accounts (see Sec. 43, NIRC).
The information return shall state its gross income and expenses
incurred during the preceding year. The information return shall
be accompanied with a certification showing that there has not
been any substantial change in its by-laws, articles of
incorporation, manner of operation and activities as well as
sources and disposition of income. (see Sec. 24, Rev. Regs. No. 2,
as amended by Re Regs. No. 7-64).

Revenue of exempt corporation/organization not embraced by

their exemption; its tax treatment; how will it be reported?

An exempt corporation/organization shall also file

separate corporate income tax returns and pay the corresponding
income taxes for its revenues derived during any part of their
taxable year which are not embraced by the tax exemption
(supra), i.e., like- i. Income from real or personal property or ii.
from any activity conducted for profit. It shall file the regular
quarterly and final adjustment income tax returns discussed
elsewhere in this work.

In the computation of the taxable income derived from

such taxable sources, if entitled to deductions for certain
expenses, only that portion of expenses directly attributable to or
allocable to the said taxable revenues shall be deducted
therefrom. [see Sec. 34, NIRC, for rules on deductibility of
certain expenses].

However, if the only taxable income derived during the

taxable year pertains to items of income subject to final schedular
tax procedures, the normal quarterly and annual corporate income
tax returns shall no longer be filed. Thus, If the income consists
of interest income from Philippine currency bank deposits,
deposit substitutes and similar arrangements, etc. which are
subject to final withholding tax procedure (supra), there is no
need to file the corporate income tax returns.
1