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ATENEO CENTRAL BAR OPERATIONS 2007

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SUMMER REVIEWER

to the other
PART I – GENERAL PRINCIPLES
• Applies only to entities exercising
government functions (acta jure
TAXATION – power inherent in every sovereign imperii)
State to impose a charge or burden upon persons,
properties, or rights to raise revenues for the use and
support of the government to enable it to discharge CONSTITUTIONAL LIMITATIONS
its appropriate functions A. Direct
1) Due process
SCOPE OF TAXATION Should not be harsh, oppressive,
•

TAXATION IS: or confiscatory (Substantive)

! Unlimited, By authority of valid law
•

! Far-reaching, (Substantive)
! Plenary Must be for a public purpose
•

! Comprehensive (Substantive)
! Supreme Imposed
• within territorial
jurisdiction (Substantive)
STAGES OF TAXATION: (LAP) No arbitrariness in assessment
•

1. Levy and collection (Procedural)

2. Assessment Right to notice and hearing
•

3. Payment (Procedural)
2) Equal protection
Basic Principles of a Sound Tax System All persons subject to legislation
•

1. Fiscal Adequacy shall be treated alike, under like

2. Theoretical Justice circumstances and conditions
3. Administrative Feasibility both in privileges conferred and
liabilities imposed.
INHERENT LIMITATIONS (SPING) Power to tax includes power to
•

1) Situs or territoriality of taxation classify provided:

2) Must be for a Public purpose (a) Based on substantial
Test is whether proceeds will be
•
distinction
used for something which is the (b) Apply to present and future
duty of the State to provide. conditions
Legislature is not required to
•
(c) Germane to purpose of law
adopt a policy of “all or none.” (d) Apply equally to all members of
Incidental benefit to individual
•
the same class
does not defeat exemption 3) Non-impairment clause
3) International comity Rules
•

Property of a foreign State of

•
(a) When government is party to
government may not be taxed by contract granting exemption
another " cannot be withdrawn
4) Non-delegability of the taxing power without violating non-
Contemplates
•
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amount, coverage, and situs of granted by law " withdrawal
tax; does not violate
Distinguish from power to assess
• (c) When exemption granted
and collect under a franchise " may be
Exemptions: (a) presidential
• revoked; Consti provides that
taxing powers; (b) local franchise is subject to
governments amendment, alteration, or
5) Exemptions of Government agencies repeal by Congress.
Taking money from one pocket
• 4) Must be uniform and equitable

—Advisers: Atty. Serafin Salva do r, Atty. Micha el Dana Mo ntero, Atty. Gaud enc io Mend oza ; Head: Julie Ann B.
Domino, Juan J. P. Enriquez III; Und erstud ies: Rac helle T. Sy, Ald win Me nd oza, Timo thy John Bata n —

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• Uniform: all articles or properties ACTUALLY, DIRECTLY and EXCLUSIVELY

of the same class taxed at same USED for charitable, religious and
rate educational purposes shall be exempt from
• Equity: apportionment must be taxation
more or less just in the light of • Pertains only to real estate tax.
taxpayer’s ability to shoulder tax • Test of exemption: actual use of the
burden property, not ownership
5) Non-imprisonment for non-payment • Use of word “exclusively” means
of poll tax “primarily” rather than “solely.”
• Taxpayer may be imprisoned for • Exemption extends to property incidental
non-payment of other kinds of to or reasonably necessary for the
taxes where the law so expressly accomplishment of the purposes
provides. mentioned.
6) Congress shall evolve a progressive 11) Tax exemption of all revenues and assets of
system of taxation (a) non-stock, non-profit educational
• As resources of the taxpayer institutions
becomes higher, his tax rate (b) used ACTUALLY, DIRECTLY AND
likewise increases (ex. Income EXCLUSIVELY for educational
tax) purposes
• Constitution does not prohibit • Exemption covers income, property,
regressive taxes; this is a donor’s tax, and customs duties
directive upon Congress, not a (distinguish from previous which pertains
justiciable right. only to property tax)
7) All appropriation, revenue or tariff bills shall • Revenue must both be (a) derived from
originate exclusively in the House of an activity in pursuance of educational
Representatives, but the Senate may purpose; and (b) proceeds must be used
propose or concur with amendments for the same purpose (ex. hospital
• It is the bill, not the law, that must adjunct to medical school tax exempt)
originate from House; bill may undergo (ex. Interest income not exempt).
extensive changes in Senate • Income exempt provided it is used for
• Rationale: members of House are more maintenance or improvement of
sensitive to local needs. institution.
8) Freedom of religion • Distinguish from tax treatment of (a)
• Activities simply and purely for proprietary educational institutions
propagation of faith are exempt (e.g. sale (Preferential Tax); and (b) government
of bibles and religious articles by non- educational institutions (exempt, ex. UP)
stock, non-profit organization at minimal 12) Delegated authority of President to impose
profit). tariff rates, import and export quotas,
• Tax is unconstitutional if it operates as a tonnage and wharfage dues
prior restraint on exercise of religion • delegated by Congress
• Income even of religious organizations • through a law
from any activity conducted for profil or • subject to Congressional limits and
from any of their property, real or restrictions
personal, regardless of disposition of • within the framework of national
such income, is taxable development program
9) Freedom of press/expression
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invalid. be passed with concurrence of Congress -
• If fee is only for purpose of defraying cost majority of all members voting separately
of registration and not for exercise of • Relative majority (majority of quorum) is
privilege, no violation. sufficient to withdraw exemption.
10) Charitable institutions, churches, and 14) No use of public money or property for
parsonages or convents appurtenant thereto, religious purposes except if priest is assigned
mosques and non-profit cemeteries and all to armed forces, penal institutions,
lands, buildings and improvements government orphanage or leprosarium

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15) Special purpose - special fund for said (c) without regard to their property,
purpose, balance goes to general funds occupation or business
16) Veto power of the President - revenue/tariff Ex. Community Tax (Cedula)
bill 2) property tax –
17) Power of review of the SC (a) imposed on property, real or personal
18) Power of Local Government to create their (b) in proportion to its value or other
own sources and levy taxes, fees, charges reasonable method of apportionment
19) Just share of local government in national Ex. Real estate tax
revenue which shall be automatically 3) excise, privilege tax - (different from the

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released. excise tax in Taxation II)
20) Tax exemption of all revenues and assets of (a) imposed upon performance of an act, the
(a) proprietary or cooperative educational enjoyment of a privilege or the engaging
institutions in an occupation, profession or business
(b) subject to limitations provided by law Ex. Income tax, VAT, estate tax, donor’s tax
21) Tax exemption of grants, endowments, B. As to who bears the burden
donations or contributions USED 1) Direct – the tax is imposed on the person
ACTUALLY, DIRECTLY and EXCLUSIVELY who also bears the burden thereof
for educational purposes Ex. Income tax, community tax, estate tax
2) Indirect – imposed on the taxpayer who
CIR v. CA (298 SCRA 85) shifts the burden of the tax to another
Ex. VAT, specific tax, percentage tax,
Facts: YMCA is a non-stock, non-profit institution, customs duties
which conducts various programs and activities C. As to determination of amount
beneficial to the public pursuant to its religious, 1) Specific – tax imposed and based on a
educational and charitable objective. In 1980, YMCA physical unit of measurement, as by head,
earned an income of more than P600K from leasing number, weight, length or volume
out a portion of its premises to small shop owners Ex. Tax on distilled spirits, fermented
and P47K from parking fees. liquors, cigars
2) Ad Valorem - tax of a fixed proportion of the
Issue: Is the rental income from real property owned value of property with respect to which the
by the YMCA subject to income tax? tax is assessed; requires intervention of
assessor.
Held: YES, the exemption claimed by YMCA is Ex. Real estate tax, excise tax on cars, non-
expressly disallowed by the last paragraph of then essential goods
§27 of the NIRC. Furthermore, Art. XIV, §4 (3) of the D. As to purpose
Constitution only exempts YMCA from property taxes 1) General, fiscal or revenue - imposed for the
NOT income tax. YMCA cannot be considered as an general purpose of supporting the
“educational institution” within the purview of the government
above-cited article. The term “educational institution” Ex. Income tax, percentage tax
under the Education Act of 1982 refers to schools. 2) Special or regulatory - imposed for a
The school system is synonymous with formal special purpose, to achieve some social or
education, which refers to hierarchically structured economic objectives
and chronologically graded learnings organized and Ex. Protective tariffs or customs duties on
provided by the formal school system and for which imported goods intended to protect local
certification is required in order for the learner to industries
progress through grades or more to higher levels. E. As to authority imposing the tax
Nothing in the Articles of Incorporation
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that it is an educational government
institution. Ex. National internal revenue taxes, custom
duties
Classification of Taxes 2) Municipal or local - imposed by the
A. As to subject matter of object municipal corporations or local governments
1) personal, poll, capitation tax – Ex. Real estate tax, occupation tax
(a) fixed amount
(b) individuals residing within specified
territory

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F. As to graduation of rate (Three systems of taxes accrue is given the owner

taxation) to the general of the expropriated
1) Proportional - based on a fixed percentage benefit of the property
of the amount of the property, income or citizens of the
other basis to be taxed taxing State
Ex. Real estate tax, VAT, percentage tax Persons Applies to all Only particular
2) Progressive or graduated - tax rate affected persons, property is
increases as the tax base or bracket property and comprehended
increases excises that
Ex. Income tax, estate tax, donor’s tax may be
3) Regressive - tax rate decreases as the tax subject
base increases thereto
4) Degressive - increase of rate is not
proportionate to the increase of tax base TAX DISTINGUISHED FROM LICENSE FEE
• SITUS OF TAXATION - the place of taxation, the
TAX LICENSE FEE
country that has the power to levy and collect the
tax. Source Exercise of Emanate from the police
Taxing power power of the State
Purpose Raise Regulation
TAX DISTINGUISHED FROM POLICE POWER
revenue
Object Persons, Right to exercise a
TAX POLICE POWER (in
property and privilege
the form of a FEE)
privilege
Purpose Raise revenue Exercise to promote
Amount no limit only necessary to carry
public welfare through
out regulation
regulation
Amount of No limit Limited to the cost of
exaction regulation, issuance
• Distinction lies in the primary purpose:
of license, or
• License fee if primary purpose is to
surveillance regulate and the excess of the amount
collected from the cost to carry out the
Superiority Contracts may Contracts may be
regulation is minimal and incidental.
of be impaired impaired
• Tax if primary purpose, or at least one of
contracts unless (a)
the real and substantial purposes is to
government is
raise revenue.
party to
• If amount is too high for regulation, it would
contract
be a tax; unless imposed on non-useful
granting
exemption; or occupations or businesses.
(b) involves
franchise
• Purpose of distinction: limitations and
exemptions apply only to one and not to the
Transfer Taxes paid Allows merely the
other (ex. Exemption from taxation does not
of form part of the restraint on the
include exemption from fee)
property public funds exercise of property
rights rights
TAX DISTINGUISHED FROM DEBT
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TAX DEBT
TAX DISTNGUISHED FROM EMINENT DOMAIN
Source Law; legal Based on contract
TAX EMINENT DOMAIN obligation
Purpose Raise The taking of Personal Assignable
revenue property for public
use
Compensation Payment of Just compensation

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Generally not May be the subject

subject to of TAX DISTINGUISHED FROM TOLL
compensation/set- compensation/set-
off off TAX TOLL
Kind of Demand of Demand of
Imprisonment is No imprisonment demand sovereignty ownership
sanction for non- for non-payment Purpose support of Collection for the
payment government use of property
Amount no limit – depends Fair return of the
on need of the cost of the property
government or improvement
GENERAL RULE: Taxes cannot be the subject of
compensation or set-off
* A person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to or TAX DISTINGUISHED FROM CUSTOMS DUTY
greater than the tax being collected. The collection of
tax cannot await the results of a lawsuit against the TAX CUSTOMS
government. DUTY
Coverage More comprehensive kind of tax
Reasons: than customs duty
a) lifeblood theory Object Persons, prop, etc goods imported
b) taxes are not contractual obligation (absence or exported
of consent of taxpayer)
c) taxpayer and government are not mutual
DOCTRINE OF EQUITABLE RECOUPMENT
debtors and creditors of each other
1) refund of a tax illegally or erroneously collected
or overpaid by a taxpayer
EXCEPTIONS:
2) such tax refund is barred by prescription
1) Both claims already became overdue and
3) tax presently being assessed against a taxpayer
demandable as well as fully liquidated " there
4) may be recouped or set-off against the tax barred
must have already been an act of appropriation
by prescription
by the government (legislative) of funds for
not allowed in Philippines, reason - LIFE BLOOD
payment of the debt.
2) Tax overpayment (BIR’s obligation to refund or
CONCEPT OF DOUBLE TAXATION
set-off arises from time tax was paid)
Kinds of Double Taxation
3) If the case involves local government taxes
A. DIRECT DUPLICATE
taxing same person, property or right
•
TAX DISTINGUISHED FROM SPECIAL
twice
ASSESSMENT
for the same purpose
•

by the same taxing authority

•

TAX SPECIAL
within the same jurisdiction or taxing
•
ASSESSMENT
district
Imposed persons, Only on land within the same taxable period
•

on properties, etc. and they must be of the same kind or

•

Why regardless of Public improvement character of tax

imposed public that benefits the land B. INDIRECT DUPLICATE
improvementQuickTime™ and a Exists if any of the elements for Direct
•
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taxation is not present
government of public •

improvement # No constitutional prohibition on double taxation.

When Regular exaction Exceptional as to However, where there is direct duplicate taxation
imposed time and locality then there may be violation of the constitutional
Basis Necessity Benefits obtained precepts of equal protection and uniformity in
taxation.

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TAX TREATY AS A MODE OF ELIMINATING
DOUBLE TAXATION:
1) EXEMPTION METHOD – the income or capital
which is taxable in the state of source or situs is
exempted in the state of residence, although in
some instances it may taken into account in
determining the rate of tax applicable to the tax
payer’s remaining income or capital (ex. Tax
Sparing Credit scheme)
2) CREDIT METHOD – the tax paid in the state of
source is credited against the tax levied in the
state of residence
Afisco Insurance Corp v. CA (G.R. No. 112675,
Jan. 25, 1999)
Petitioners are local non-life insurance corps. Which
formed a “pool” in order to enter into a Reinsurance
Treaty with a German company. BIR assessed
deficiency taxes against the “pool” on the ground that
it is considered a partnership taxable as a corp.
Petitioners insist that the pool is a mere agent, not
acting on its own and therefore, cannot be taxed as a
corp., there being no risk undertaken by the pool, no
common fund and no control exercised by its board in
the management of its fund.
Issue (1) : Is the Pool Taxable as a Corp?
taxpayer’s property. As long as the power to tax
does not violate any constitutional or statutory
provisions, said power can be a power to destroy.
But for all its plenitude, the power to tax is not
unconfined as there are restrictions. Adversely
effecting as it does property rights, both the due
process and equal protection clauses of the
Constitution may properly be invoked to invalidate in
appropriate cases a revenue measure. If it were
otherwise, there would be truth to the dictum that “the
power to tax involves the power to destroy.” The web
or unreality spun from Justice Marshall’s 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 v. Almanzor (1991), citing
Sison v. Ancheta (1984); Obillos v. CIR (1985)].
Tax Avoidance (Tax Minimization) – tax saving
device that is legally permissible
Tax Evasion (Tax Dodging) – connotes fraud
through the use of pretenses and forbidden devices
to lessen or defeat taxes; must be willful and
intentional.

Held (1): YES. Pursuant to §24 of the NIRC, the
pool is included within the definition of “domestic
corps.” Which comprises even unregistered
partnerships and associations. In this case, the
ceding cos. Entered into an association that would
handle all business under the Treaty. It has a
common fund and an executive board to manage its
affairs. Moreover, even if the pool itself did not issue
any policies on its own, its work was indispensable to
the business of the ceding companies and the
German Co,
Issue (2): Is there double taxation?
Held(2 ): NO. Double taxation means taxing the
same person twice by the same jurisdiction for the
same thing. The pool is a taxable entity distinct from
the individual corporate entities of the ceding
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different from the tax on the dividends received by
the said companies.
Power to Tax Involves Power to Destroy [Chief
Justice Marshall, McCullough v. Maryland, 4 L.Ed.
579 (1819)]
The imposition of a valid tax could not be judicially
restrained merely because it would prejudice a
CIR vs. The Estate of Benigno Toda, GR No.
147188, Sept. 14, 2004
Facts: This Court is called upon to determine in
this case whether the tax planning scheme adopted
by a corporation constitutes tax evasion that would
justify an assessment of deficiency income tax.
CIC authorized Toda, Jr., President and owner
of 99.991% of its issued and outstanding capital
stock, to sell the Cibeles Building and the two
parcels of land on which the building stands for an
amount of not less than P90M. Toda then
purportedly sold the property for P100 M to Rafael
Altonaga, who, in turn, sold the same property on
the same day to RMI for P200M. These 2
transactions were evidenced by Deeds of Absolute
Sale. For the sale of the property to RMI, Altonaga
paid capital gains tax in the amount of P10M.
CIC filed its corporate annual ITR for the year
1989, declaring, among other things, its gain from
the sale of real property in the amount of
P75,728.021. Toda sold all his shares. He died 3
yrs. later.
The BIR sent an assessment notice and
demand letter to the CIC for deficiency income tax
for the year 1989 in the amount of P79,099,999.22,
representing the tax, surcharge, & interest on the

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