1. CITY OF MILWAUKEE v.
MILWAUKEE & SUBURBAN TRANSPORT CORPORATION aside the realty tax account of MIAA for it insists that MIAA is a GOCC whose tax exemption privilege has been
6 Wis. 2d 299 (1959)
TAXATION, DEFINED:
"The power by which the sovereign raises revenue to defray the necessary expenses of government. Taxation is
merely a way of apportioning the cost of government among those who in some measure are privileged to enjoy its
benefits and must bear its burdens. The purpose of taxation on the part of government is to provide funds or property
with which to promote the general welfare and protection of its citizens... "
FACTS:
The M&S Transport Corp. is formerly a company that offers railway transportation. After the invention of
cars/automobiles, the railway/track is sought to be repaved as streets, and widened, to accommodate the tire-wheeled
transportation (trackless trolleys). The City of Milwaukee adopted 'concersion ordinances' that would burden the
transport company to pay "license fees". Thee M&S Transport Corporation agreed by entering into a contract. The city
undertook to repave and widen streets and bear the expense of the obligation, formerly that of the company. The city
also obligated itself to prohibit parking of automobiles along portions of the routes.
The trial court reasoned that the fees did not constitute a tax for revenue but, rather, compensation for the costs
assumed and services rendered by the city. It took judicial notice of the fact that the city has been put to the expense
of acquiring property for off-street parking, and that the ordinances reveal substantial benefits proceeding to the
company and a concurring disadvantage and expense to the city.
ISSUE:
Whether the "license fees" exacted under these ordinances constitute a tax for revenue (Taxation Power) or a charge
for regulation (Police Power) or a contract.
RULING:
The "license fees" exacted by the City of Milwaukee constitute a tax for revenue, not a charge for regulation.
There is a sharp distinction between a municipal license for revenue and one for regulation under the police power.
The proceedings may be the same in the two cases, though the purpose is essentially different. If the purpose is
regulation the imposition ordinarily is an exercise of the police power - looking toward the health, morals, safety, or
general welfare of the community; while if the purpose is revenue the imposition is an exercise of the taxing power and
is a tax.
We do not read out of these ordinances the same evidence of expense and disadvantage to the city that the trial court
did. The city agreed to restore the track zone and where expenses for repairs or supervision were anticipated, the
company in fact agrred to pay a lump sum of money.
The basic argument of the city on appeal is that the ordinances in question are binding contracts entered into between
the city and the company, and that the legislature has no power to impair the obligation of such contracts. It is well
established that the control of streets and highways is a governmental function. The reason for this is that `the highways
belong to the state,' and are subject to its control and regulation.
It is undisputed that a municipal corporation has no inherent power to grant a franchise or license to use the streets
and that its authority is limited to that conferred upon it expressly or by implication by the state constitution or the
legislature. A contract to which a municipal corporation is a party, relating to a public and governmental matter, may,
however, be revoked by the legislature with the consent of the other party without thereby violating the right of the
municipality.'"
2. Case: Mactan Cebu International Airport Authority v. Marcos GR No. 120082, Sept. 11, 1996
Facts: Mactan Cebu International Airport Authority (MIAA) was created by virtue of RA No. 6958. The law mandated
that MIAA shall encourage, promote and develop international and domestic air traffic in Central Visayas and Mindanao
Regions as a means of making the regions centers of international trade and tourism and as a means to accelerate
the development of transportation and communication in the country; and to upgrade the services and facilities of the
airports and to formulate internationally acceptable standards of airport accommodation and service. MIAA enjoyed
the privilege of exemption from payment of realty taxes as provided in Section 14 of the Charter (Note: exempt from
realty taxes imposed by National Government or any of its political subdivisions, agencies and instrumentalities). The
OIC of the Office of the Treasurer of Cebu City, however, demanded payment for realty taxes on several parcels of
land belonging to MIAA located in Barrio Apas, Kasambagan and Lahug in the total amount of P2,229,078.79.
Petitioner contended that the demand for payment is baseless and unjustified, citing Section 14 of RA 6958 and Section
133 of the Local Government Code putting limitations on the taxing powers of the local government units on
instrumentalities of the national government performing governmental functions. Cebu City refused to cancel and set
withdrawn by virtue of Section 193 (GOCCs are taxable) and 234 (realty taxes exemption are withdrawn from the
GOCCs) of the LGC. The City issued a warrant of levy against the properties of MIAA, thus it paid its tax account
under protest and filed a Petition of Declaratory Relief with the RTC of Cebu and contended that the taxing powers of
the LGU do not extend to the levy of taxes of any kind of instrumentality of the national government. Cebu City remained
firm that MIAA is a GOCC and not an instrumentality. The RTC dismissed the petition, ruling that the tax exemption of
GOCCs under the New LGC is repealed thus it is safe to infer that the tax exemption has been expressly repealed.
Issue: Whether or not MIAA must pay realty taxes to the City of Cebu under the New LGC?
Ruling: Yes. The SC established that MIAA can stand in the same footing as an agency or instrumentality but it must
show that the parcels of land are any of those enumerated in Section 234 of the New LGC either by virtue of ownership,
character, or use of the property. Congress did not even expanded the scope of the exemption in Section 234 to include
real property owned by other instrumentalities or agencies of the government, including GOCCs whose charter
provided an exemption. The power to tax is the most effective instrument to raise needed revenues to finance and
support myriad activities of the LGU for the delivery of basic services essential to the promotion of the general welfare
and the enhancement of peace, progress, and prosperity of the people. The withdrawal of tax exemption privileges
granted to GOCCs and other units of government were such that privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated enterprises, and there was a need for this entities to share in the
requirements of the development, fiscal, or otherwise by paying the taxes and other charges due from them. The
MCIAA cannot claim that it was never a taxable person under its charter for its exemption was only with respect to the
realty taxes, a conclusive proof of the legislative intent to make it a taxable person subject to all taxes except real
property tax.
3. MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY v. HON. FERDINAND J. MARCOS
G.R. No. 120082, September 11, 1996
FACTS:
According to Section 14 of the Mactan Cebu International Airport Authority’s (MCIAA) charter, it is exempt
from tax imposed by the National Government or any of its political subdivisions, agencies, and instrumentalities. On
October 1994, Eustaquio Cesa (OIC of the Office of the City Treasurer – Cebu) demanded that MCIAA pay realty taxes
imposed on parcels of land owned by MCIAA. The realty taxes amounted to P2,229,078.79. MCIAA contended that
they are exempt from paying realty taxes under Section 14 of RA 6958 and that under the Local Government Code, it
is an instrumentality of the government performing governmental functions. MCIAA also said that Section 122 of the
Local Government Code limits the taxing power of LGUs. However, the City of Cebu countered that MCIAA is a
government-controlled corporation whose tax exemption has been withdrawn by Section 193 and 234 of the LGC. As
a result, MCIAA was compelled to pay realty taxes under protest then filed a petition for declaratory relief with the RTC
of Cebu. The RTC dismissed the petition because the LGC expressly cancelled the tax exemption of GOCCs. MCIAA
filed a motion for reconsideration, but it was also denied.
ISSUE:
Whether the City of Cebu has the power to impose realty taxes on MCIAA and its properties.
RULING:
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very
nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which
imposes the tax on the constituency who are to pay it. Nevertheless, effective limitations thereon may be imposed by
the people through their Constitutions. Our Constitution, for instance, provides that the rule of taxation shall be uniform
and equitable, and Congress shall evolve a progressive system of taxation. Accordingly, tax statutes must be construed
strictly against the government and liberally in favor of the taxpayer. But since taxes are what we pay for civilized
society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimi juris against the taxpayers and liberally in favor of the taxing authority. A
claim of exemption from tax payment must be clearly shown and based on language in the law too plain to be
mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception. However, if the grantee of the
exemption is a political subdivision or instrumentality, the rigid rule of construction does not apply because the practical
effect of the exemption is merely to reduce the amount of money that has to be handled by the government in the
course of its operations.
The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative
bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority conferred by Section
5, Article X of the Constitution. Under the latter, the exercise of the power may be subject to such guidelines and
limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy.
There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from the payment of realty
taxes imposed by the National Government or any of its political subdivisions, agencies, and instrumentalities.
Nevertheless, since taxation is the rule and exemption therefrom the exception, the exemption may thus be withdrawn
at the pleasure of the taxing authority. The only exception to this rule is where the exemption was granted to private
parties based on material consideration of a mutual nature, which then becomes contractual and is thus covered by
the non-impairment clause of the Constitution.
The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the exercise by local government
units of their power to tax, the scope thereof or its limitations, and the exemption from taxation.
4. G.R NO 167330
September 18,2009
Philippine Health Care Providers v. CIR
Facts:
PHCP is an entity engaged in the operation and maintenance of health services for the sick people. CIR on
the other hand is a government body responsible for collecting taxes. On January 27,2000; CIR sent a demand letter
to PHCP demanding PHCP to pay deficiency VAT as well as deficiency documentary stamp tax (DST) for the years
1996-1997 ( as mandated by sec 185 of the 1997 tax code of the Philippines).
PHCP filed a petition for review in the court of tax appeals with the prayer of exempting itself from paying
those said taxes, of which the Court of Tax appeals partially granted the complaint and only excluded the payment of
the DST.
CIR appealed the case to the CA which ruled in favor of CIR, which led the case to be appealed to the SC.
Issue:
Whether PHCP should be exempted form paying the DST as mandated by sec 185 of the 1997 tax code.
Held:
Yes. PHCP should be exempted from paying the DST because it is not an insurance company, PHCP is an
entity with the primary purpose of providing health services for the sick. Sec 185 of the Tax code of the Philippines
requiring the payment of documentary stamp tax, is imposed only on a company engaged in the business of fidelity
bonds and other insurance policies. Petitioner as a health maintenance organization, is a service provider and not an
insurance company.
The two entities differ in such a way that a HMO’s concern is more on the distribution of health care services.
Unlike an insurance company which is mainly concerned of the risk and loss of its insured, thereby indemnifying the
latter in case of any contingent events.
5. Sison vs Ancheta
GR No. L-59431, 25 July 1984
Facts: Section 1 of BP Blg 135 amended the Tax Code and petitioner Antero M. Sison, as taxpayer, alleges that "he
would be unduly discriminated against by the imposition of higher rates of tax upon his income arising from the exercise
of his profession vis-a-vis those which are imposed upon fixed income or salaried individual taxpayers. He
characterizes said provision as arbitrary amounting to class legislation, oppressive and capricious in character. It
therefore violates both the equal protection and due process clauses of the Constitution as well asof the rule requiring
uniformity in taxation.
Issue: Whether or not the assailed provision violates the equal protection and due process clauses of the Constitution
while also violating the rule that taxes must be uniform and equitable.
Held: The petition is without merit.
On due process - it is undoubted that it may be invoked where a taxing statute is so arbitrary that it finds no support in
the Constitution. An obvious example is where it can be shown to amount to the confiscation of property from abuse
of power. Petitioner alleges arbitrariness but his mere allegation does not suffice and there must be a factual foundation
of such unconsitutional taint.
On equal protection - it suffices that the laws operate equally and uniformly on all persons under similar circumstances,
both in the privileges conferred and the liabilities imposed.
On the matter that the rule of taxation shall be uniform and equitable - this requirement is met when the tax operates
with the same force and effect in every place where the subject may be found." Also, :the rule of uniformity does not
call for perfect uniformity or perfect equality, because this is hardly unattainable." When the problem of classification
became of issue, the Court said: "Equality and uniformity in taxation means that all taxable articles or kinds of property
of the same class shall be taxed the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation..." As provided by this Court, where "the differentation" complained of "conforms
to the practical dictates of justice and equity" it "is not discriminatory within the meaning of this clause and is therefore
uniform."
6. Tio vs Videogram Regulatory Board, 151 SCRA 208
Facts:
On September 1, 1986, Valentino on his own behalf and purportedly on behalf of other videogram operators adversely
affected, filed a petition assailing the constitutionality of Presidential Decree No. 1987 entitled “ An Act Creating the
Videogram Regulatory Board” with broad powers to regulate and supervise the videogram industry. The rationale
behind the enactment of the aforesaid Decree may be summarized in its 8th whereas clause stating that grave
emergencies orrodimg the moral values of the people and betraying the national economic recovery program
necessitate the adoption of bold measures with dispatch. On October 23, 1986, the Greater Manila Theaters
Association, Integrated Movie Producers, Importers and Distributors Association of the Philippines, and Philippine
Motion Pictures Producers Association were permitted by the Supreme Court to intervene in the case over Tio’s
opposition upon the allegations that intervention was necessary for the complete protection of their rights and that their
“survival and very existence is threatened by the unregulated proliferation of film piracy”.
Issues:
1. Whether or not the imposition of the 30% tax is a rider and the same not germane to the subject matter of the law
2. Whether or not the tax imposed is harsh, confiscatory, oppressive and in violation of the due process of the
constitution
Rulings:
1. No, the tax is not a rider and is germane to the purpose and subject if the law. The Constitutional requirement that
“ every bill shall embrace only one subject which shall be expressed in the title thereof” is sufficiently complied with if
the title be comprehensive enough to include the general purpose which a statute seeks to achieve. In addition, the
requirement is satisfied if all the parts of the statute are related and germane to the subject matter expressed in the
title.
2. No, the tax imposed is not harsh, confiscatory oppressive and in violation of the due process of the constitution. It
is axiomatic that a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters
the activities taxed. In addition, the tax imposed is also a revenue measure.
7. Arturo Tolentino v. Secretary of Finance and Commissioner of Internal Revenue
G.R. No. 115455; October 30, 1995
FACTS: The Philippine Press Institute, Inc. (PPI) contends that by removing the exemption of the press from the VAT
while maintaining those granted to others, the law discriminates against the press. At any rate, it is averred, “even
nondiscriminatory taxation of constitutionally guaranteed freedom is unconstitutional”, citing in support of the case of
Murdock v. Pennsylvania. Chamber of Real Estate and Builders Associations, Invc., (CREBA), on the other hand,
asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies transactions as covered or exempt
without reasonable basis and (3) violates the rule that taxes should be uniform and equitable and that Congress shall
“evolve a progressive system of taxation”.
ISSUE: Whether or not, based on the aforementioned grounds of the petitioners, the Expanded Value-Added Tax Law
should be declared unconstitutional.
RULING: No. With respect to the first contention, it would suffice to say that since the law granted the press a privilege,
the law could take back the privilege anytime without offense to the Constitution. The reason is simple: by granting
exemptions, the State does not forever waive the exercise of its sovereign prerogative. Indeed, in withdrawing the
exemption, the law merely subjects the press to the same tax burden to which other businesses have long ago been
subject. The PPI asserts that it does not really matter that the law does not discriminate against the press because
“even nondiscriminatory taxation on constitutionally guaranteed freedom is unconstitutional.” The Court was speaking
in that case (Murdock v. Pennsylvania) of a license tax, which, unlike an ordinary tax, is mainly for regulation. Its
imposition on the press is unconstitutional because it lays a prior restraint on the exercise of its right. The VAT is,
however, different. It is not a license tax. It is not a tax on the exercise of a privilege, much less a constitutional right.
It is imposed on the sale, barter, lease or exchange of goods or properties or the sale or exchange of services and the
lease of properties purely for revenue purposes. To subject the press to its payment is not to burden the exercise of
its right any more than to make the press pay income tax or subject it to general regulation is not to violate its freedom
under the Constitution.
Anent the first contention of CREBA, it has been held in an early case that even though such taxation may affect
particular contracts, as it may increase the debt of one person and lessen the security of another, or may impose
additional burdens upon one class and release the burdens of another, still the tax must be paid unless prohibited by
the Constitution, nor can it be said that it impairs the obligation of any existing contract in its true legal sense. It is next
pointed out that while Section 4 of R.A. No. 7716 exempts such transactions as the sale of agricultural products, food
items, petroleum, and medical and veterinary services, it grants no exemption on the sale of real property which is
equally essential. The sale of food items, petroleum, medical and veterinary services, etc., which are essential goods
and services was already exempt under Section 103, pars. (b) (d) (1) of the NIRC before the enactment of R.A. No.
7716. Petitioner is in error in claiming that R.A. No. 7716 granted exemption to these transactions while subjecting
those of petitioner to the payment of the VAT. Finally, it is contended that R.A. No. 7716 also violates Art. VI, Section
28(1) which provides that “The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation”. Nevertheless, equality and uniformity of taxation mean that all taxable articles or kinds of property
of the same class be taxed at the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation. To satisfy this requirement it is enough that the statute or ordinance applies
equally to all persons, firms, and corporations placed in similar situation. Furthermore, the Constitution does not really
prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it simply provides is that Congress
shall “evolve a progressive system of taxation.” The constitutional provision has been interpreted to mean simply that
“direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be minimized.” The mandate to
Congress is not to prescribe, but to evolve, a progressive tax system.
8. ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., petitioners,
vs.
COURT OF TAX APPEALS and CIR, respondents.
G.R. No. L-25043 April 26, 1968
Facts:
Antonio, Eduardo and Jose Roxas, brothers and at the same time partners of the Roxas y Compania,
inherited from their grandparents several properties which included a 19,000 hectares of agricultural land located at
Nasugbu , Batangas. After the WWII, the tenants expressed their desire to purchase the farmland they have been
tilting and occupying for generations. With the help of the Government, they persuaded the Roxas siblings to sell
13,500 hectares for the amount of P2,079,048.47 plus P300,000.00 for survey and subdivision expenses. The tenants,
however, did not have enough funds, so the Roxas siblings agreed to a purchase by installment and contracted with
the Government to pay its loan from the proceeds of the yearly amortizations paid by the farmers.
In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and
P29,500.71. Fifty percent of said net gain was reported for income tax purposes as gain on the sale of capital asset
held for more than one year pursuant to Section 34 of the Tax Code.
Subsequently, the CIR demanded from the brothers the payment of deficiency income taxes resulting from
the sale, 100% of the profits derived therefrom was taxed. The Commissioner of Internal Revenue contends that Roxas
y Cia. could be considered a real estate dealer because it engaged in the business of selling real estate. The business
activity alluded to was the act of subdividing the Nasugbu farm lands and selling them to the farmers-occupants on
installment.The brothers protested the assessment but the same was denied. On appeal, the Court of Tax Appeals
sustained the assessment. Hence, they appealed to the Supreme Court.
Issue:
Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100% taxable?
Ruling:
No. It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them
for generations was not only in consonance with, but more in obedience to the request and pursuant to the policy of
our Government to allocate lands to the landless. It was the bounden duty of the Government to pay the agreed
compensation after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among
the farmers at very reasonable terms and prices. However, the Government could not comply with its duty for lack of
funds. Obligingly, Roxas y Cia. shouldered the Government's burden, went out of its way and sold lands directly to the
farmers in the same way and under the same terms as would have been the case had the Government done it itself.
For this magnanimous act, the municipal council of Nasugbu passed a resolution expressing the people's gratitude.
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with
caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest
the tax collector kill the "hen that lays the golden egg". And, in order to maintain the general public's trust and
confidence in the Government this power must be used justly and not treacherously. It does not conform with the sense
of justice in the instant case for the Government to persuade the taxpayer to lend it a helping hand and later on to
penalize him for duly answering the urgent call.
In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34
of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the sale thereof is capital
gain, taxable only to the extent of 50%.
9. Commissioner of Internal Revenue
v.
Algue Inc. and the Court of Tax Appeals
G.R. No. L-28896, February 17, 1988
“Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other
hand such collection should be made in accordance with law as any arbitrariness will negate the very reason for
government itself.”
FACTS:
Algue Inc. on January 1965 received a letter from the Commission of Internal Revenue assessing a total
amount of PhP 83,183.85 as delinquency income taxes. Algue Inc. filed a letter of protest which requested a
reconsideration. On March 12, 1965, a warrant of distraint and levy was presented to Algue Inc., but BIR did not take
action on the protest. Algue filed a petition for review with the Commission of Internal Revenue with the Court of Tax
Appeals. Commissioner of Internal Revenue contends that the claimed deduction of PhP 75,000.00 was properly
disallowed because it was not an ordinary reasonable or necessary business expense. However, the Court of Tax
Appeals sees it differently because it agreed with Algue Inc. because the amount had been legitimately paid by the
company. Commissioner of Internal Revenue claims that the payments of the company were fictitious because the
payees are members of the same family in control of Algue and that the payment was for promotional fees.
ISSUE:
 Whether the Collector of Internal Revenue correctly disallowed PhP 75,000.00 deduction claimed by
Algue Inc.
RULING:
The Supreme Court agrees with the Court of Tax Appeals and states that the amount of promotional fees
was not excessive. Sec. 30 of the Tax Code states that the deductions from gross income is allowed in general – all
ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business including
a reasonable allowance for salaries or other compensation for personal services rendered. Most of the payees were
not in the regular employ of Algue nor were they controlling stockholders. Taxes are what we pay for civilization society.
Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. Despite the
natural reluctance to surrender part of one’s hard earned income to the taxing authorities, every person who is able to
must contribute his share in the running of the government. The government, on its part, is expected to respond in the
form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and
material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is
an arbitrary method of exaction by those in the seat of power.
 The CTA Division partially granted Nippon’s claim for tax refund but reduced the same to only P2,614,
Taxation is a requirement in all democratic regimes that it be exercised reasonably and in accordance with 296.84, contending that Nippon failed to show that the recipients of its services were nonresidents doing business
the procedure. If not then the taxpayer has a right to complain the courts will then come to his succor. The tax collector outside the Philippines; thus, Nippon’s purported sales could not qualify as zero-rated sales. The CTA likewise ordered
may be stopped in his tracts if the taxpayer can demonstrate that the law has not been observed. the CIR to issue a tax credit certificate to Nippon. However, prior to its receipt of the decision of the CTA partially
granting its refund claim, Nippon filed a motion to withdraw, considering that the BIR has already acted on its
The appealed decision of the Court of Tax Appeal is hereby affirmed. administrative claim and has thereby issued a tax credit certificate. According to the BIR, Nippon should receive a tax
refund of P21, 675, 128.91, clearly worth P19,060,832.07 larger than that determined by the CTA. The CTA granted
10. Commissioner of Internal Revenue v. Pilipinas Shell petroleum Corporation
the motion to withdraw despite having already decided on Nippon’s claim for tax refund, citing Section 3 of Rule 50
GR No. 197945, July 9, 2018
which allows withdrawal in the discretion of the court. The CIR opposed the CTA in granting Nippon’s motion to
Dicang JOSEPH B.
withdraw, hence this petition.
Facts:
ISSUE: May the CIR assail the validity of the Tax Credit Certificate issued by its subordinate in the BIR?
Respondents Pilipinas Shell Petroleum Corporation (Shell) and Petron Corporation (Petron) are domestic
corporations engaged in the production of petroleum products and are duly registered with the Board of Investments
RULING
(BOI) under the Omnibus Investments Code of 1987.
Yes. Clearly, the interest of the government, and, more significantly, the public, will be greatly prejudiced by
Respondents separately sold bunker oil and other fuel products to other BOT-registered entities engaged in the export
the erroneous grant of refund – at a substantial amount at that – in favor of Nippon. Hence, under these circumstances,
of their own manufactured goods (BOI export entities). These BOT-registered export entities used Tax Credit
the CTA Division should not have granted the motion to withdraw.
Certificates (TCCs) originally issued in their name to pay for these purchases.
To proceed with this mode of payment, the BOT-registered export entities executed Deeds of Assignment in favor of
The CIR is not estopped from assailing the validity of the Tax Credit Certificate which was issued by her
respondents, transferring the TCCs to the latter. Subsequently, the Department of Finance (DOF), through its One
subordinates in the BIR. In matters of taxation, the government cannot be estopped by the mistakes, errors or
Stop Shop Inter-Agency Tax Credit and Duty Drawback Center (DOF Center), approved the Deeds of Assignment.
omissions of its agents for upon it depends the ability of the government to serve the people for whose benefit taxes
In its collection letters of the petitioner dated April 22, 1998 (1998 Collection Letters) addressed to respondents'
are collected. Citing the case of Visayas Geothermal Power Company vs. CIR, taxes are the nation’s lifeblood through
respective presidents, the BIR pointed out that respondents partly paid for their excise tax liabilities during the Covered
which government agencies continue to operate and with which the State discharges its functions for the welfare of its
Years using TCCs issued in the names of other companies; invalidated respondents' tax payments using said TCCs;
constituents. Therefore, estoppel does not apply to the government, especially on matters of taxation.
and requested respondent Shell and respondent Petron to pay their delinquent tax liabilities
Issue: Whether the petitioner's attempts to collect the alleged deficiency excise taxes from respondents are valid.
Rulling: Petitioner's attempts to collect the alleged deficiency excise taxes from respondents are void and ineffectual
because (a) the Issues regarding the transferred TCCs' validity, respondents' qualifications as transferees of said 12. CIR v Dash Engineering Philippines, Inc., GR No. 154145, December 11, 2013
TCCs, and respondents' use of the TCCs to pay for their excise tax liabilities for the Covered Years, had already been
settled with finality in the 2007 Shell Case and 2010 Petron Case, and could no longer be re-litigated on the ground of FACTS: Dash Engineering Philippines, Inc. (DEPI) is a duly-registered corporation duly registered authorized to do
res judicata in the concept of conclusiveness of judgment; (b) petitioner's resort to summary administrative remedies business in the Philippines as an ecozone IT export enterprise. It is also a VAT-registered entity engaged in the export
without a valid assessment was not in accordance with the prescribed procedure and was in violation of respondents' sales of computer-aided engineering and design.
right to substantive due process; and (c) none of petitioner's collection efforts constitute a valid institution of a judicial
remedy for collection of taxes without an assessment, and any such judicial remedy is now barred by prescription.
DEPI filed its monthly and quarterly value-added tax (VAT) returns for the period from January 1, 2003 to June 30,
WHEREFORE, premises considered, the Court DENIES the petition of the Commissioner of Internal Revenue in G.R. 2003. On August 9, 2004, it filed a claim for tax credit or refund representing unutilized input VAT attributable to its
No. 197945 and AFFIRMS the Decision dated February 22, 2011 and Resolution dated July 27, 2011 of the Court of zero-rated sales. Because Commissioner of Internal Revenue (CIR) failed to act upon the said claim, respondent was
Tax Appeals en banc in CTA En Banc Case No. 535. compelled to file a petition for review with the CTA on May 5, 2005.
SO ORDERED.
11. CIR vs. Nippon Express Phils.,
CIR argues that the judicial claim was filed out of time because DEPI failed to comply with the 30-day period referred
771 SCRA 27
to in Section 112(D) (now subparagraph C) of the NIRC, where such prescribed periods in Section 112 is mandatory
and jurisdictional. While DEPI claims that such periods are merely directory, and that the petition was filed on time
FACTS because it was made after the lapse of the 120-day period and within the two-year period referred to in Section 229.
Respondent Nippon Express (Phils.) Corporation is a domestic corporation primarily engaged in the
international and domestic air and sea freight, distribution and unloading of general cargoes and all kinds of goods and
merchandise, and the operation of container depots, warehousing, and packing facilities. It is a Value-Added Tax- ISSUE: Whether the 120+30-day period under Section 112 mandatory and jurisdictional?
registered entity and as such, it filed its quarterly VAT returns for the years 2002 and 2003, respectively. Accordingly,
during this period, it has incurred an input VAT from its zero-rated sales amounting to P28, 405, 167.60, from which HELD: YES.
only P3, 760, 660.74 was applied as tax credit. As a consequence, Nippon claimed a refundable excess input VAT,
otherwise known as an unutilized input VAT, of P24, 644, 506.86, through an administrative claim for refund filed before The Court has held time and again that taxes are the lifeblood of the government and, consequently, tax laws must be
the Bureau of Internal Revenue (BIR). A day later, Nippon filed a judicial claim for tax refund by way of a petition for faithfully and strictly implemented as they are not intended to be liberally construed. Petitioner CIR is entirely correct
review before the Court of Tax Appeals (CTA). Petitioner Commissioner of Internal Revenue (CIR) thereafter contested in its assertion that compliance with the periods provided for in Sec 112 is indeed mandatory and jurisdictional. The
that the amounts being claimed by Nippon as unutilized input VAT were not properly documented hence must be right to appeal to the CTA from a decision or "deemed a denial" decision of the Commissioner is merely a statutory
denied. privilege, not a constitutional right. The exercise of such statutory privilege requires strict compliance with the
conditions attached by the statute for its exercise.
(Explanation: Although respondent filed its administrative claim with the BIR on August 9, 2004 before the expiration
of the two-year period in Section l 12(A), it undoubtedly failed to comply with the 120+ 30-day period in Section l l 2(D)
(now subparagraph C) which requires that upon the inaction of the CIR for 120 days after the submission of the
documents in support of the claim, the taxpayer has to file its judicial claim within 30 days after the lapse of the said
period. The 120 days granted to the CIR to decide the case ended on December 7, 2004. Thus, DEPI had 30 days
therefrom, or until January 6, 2005, to file a petition for review with the CTA. Unfortunately, DEPI only sought judicial
relief on May 5, 2005 when it belatedly filed its petition to the CT A, despite having had ample time to file the same,
almost four months after the period allowed by law. As a consequence of DEPI's late filing, the CTA did not properly
acquire jurisdiction over the claim.)
13. G.R. No. L-22074 April 30, 1965
THE PHILIPPINE GUARANTY CO., INC., v. THE COMMISSIONER OF INTERNAL REVENUE and THE COURT
OF TAX APPEALS
FACTS:
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts with
foreign insurance companies not doing business in the Philippines. Thereafter, the PGCI agreed to cede to the foreign
reinsurers a portion of the premiums on insurance it has originally underwritten in the Philippines, in consideration for
the assumption by the foreign insurers of the liability on an equivalent portion of the risks insured. These reinsurance
contracts were signed by PGCI in Manila and by the foreign reinsurers outside the Philippines.
The total premiums ceded to the foreign reinsurers are: P842,466.71 in 1953, and P721,471.85 in 1954.
These premiums were excluded by PGCI from its gross income when it filed its income tax returns for 1953 and 1954.
It also did not withhold or pay tax on them.
On a letter dated April 13, 1959, the Commissioner of Internal Revenue assessed against Philippine
Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums the amount of 230,673 and 234,364 for 1953
and 1954, respectively.
PGCI protested the assessment on the ground that reinsurance premiums ceded to foreign reinsurers not
doing business in the Philippines are not subject to withholding tax. Its protest was denied and it appealed to the Court
of Tax Appeals.
The Court on Tax Appeals affirmed the decision with modification on the amount payable. It held that PGCI
shall pay the respective sums of P202,192.00 and P173,153.00 or the total sum of P375,345.00 as withholding income
taxes for the years 1953 and 1954, plus the statutory delinquency penalties thereon, with costs.
PGCI appealed to the Supreme Court arguing that the reinsurance premiums in question did not constitute
income from sources within the Philippines because the foreign reinsurers did not engage in business in the
Philippines, nor did they have office here.
ISSUE:
Whether reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines are subject
to withholding tax.
HELD:
Yes, Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within
the Philippines. The reinsurance premiums were income created from the undertaking of the foreign reinsurance
companies to reinsure PGCI against liability for loss under original insurances. Hence, such undertaking took place in
the Philippines. These insurance premiums, thus, came from sources within the Philippines, therefore subject to
corporate income tax. Furthermore, such provision provides that a foreign corporation is not required to engage in
business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is performed
or done in the Philippines. What is controlling is not the place of business but the place of activity that created an
income.
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary
burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy
to defend its shores from invasion, a corps of civil servants to serve, public improvement designed for the enjoyment
of the citizenry and those which come within the State's territory, and facilities and protection which a government is
supposed to provide. Considering that the reinsurance premiums in question were afforded protection by the
government and the recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such
reinsurance premiums and reinsurers should share the burden of maintaining the state.
The Supreme Court affirmed the decision appealed from, and ordered the PGCI to pay to the CIR the sums
of P202,192.00 and P173,153.00, or a total amount of P375,345.00.
15. FILM DEVELOPMENT COUNCIL OF THE PHILIPPINES v. COLON HERITAGE REALTY CORPORATION, G.R.
No. 203754, June 16, 2015
FACTS:
In 1993, the City of Cebu, in the exercise of its power to impose amusement tax under the Local Government
Code (LGC) in accordance with the Constitutional policy on local autonomy, passed City Ordinance No. LXIX or the
Revised Omnibus Tax Ordinance of the City of Cebu (tax ordinance). The tax ordinance mandated proprietors, lessees
or operators of theatres, cinemas, concert halls, circuses, boxing stadia, and other places of amusement to pay an
amusement tax equivalent to 30% of the gross receipts of admission fees to the City Treasurer.
Meanwhile, on June 7, 2002, Congress passed RA 9167 creating the Film Development Council of the
Philippines (FDCP). Under Section 13 of the law, producers of graded “A” and “B” films shall be entitled to an incentive
equivalent to the amusement tax imposed and collected by cities and municipalities in Metropolitan Manila and highly
urbanized and independent component cities. Producers of graded “A” films will receive 100% of the amusement tax
which may otherwise accrue to the cities and municipalities; whereas, producers of graded “B” films will receive 65%
of the amusement tax and the remaining 35% shall accrue to the funds of the FDCP. Section 14, on the other hand,
provided that the proprietors, operators, or lessees of theatres or cinemas shall withheld the deducted amusement tax
and remits it to the FDCP which shall reward the same to the producers.
From the time RA 9167 took effect, all but the City of Cebu complied. Hence, the FDCP through the Solicitor
General sent demand letters for the unpaid amusement tax rewards on January 2009 to the cinema proprietors and
operators in Cebu City. The demands, however, were unheeded. Meanwhile, the government of the City of Cebu also
asserted its claim over the amounts demanded by the FDCP. Therefore the City filed on May 18, 2009 before RTC
Branch 14 a petition for declaratory relief with application for a writ of preliminary injunction. The petition sought the
declaration of Sections 13 and 14 of RA 9167 as invalid and unconstitutional. Similarly, Colon Heritage Realty
Corporation filed before RTC Branch 5 a case against FDCP seeking to declare Section 14 of RA 9167 as
unconstitutional.
The trial court (RTC Branch 14) ruled that Sections 13 and 14 of RA 9167 violated Section 5, Article X of the
1987 Constitution. Similarly, Branch 5 also ruled that Section 14 was unconstitutional. Both trial courts held that
Sections 13 and 14 were contrary to the basic policy in local autonomy that all taxes, fees, and charges imposed by
Local Government Units (LGU) shall accrue exclusively to the LGU as enshrined in Section 5, Article X of the 1987
Constitution.
ISSUES:
(1) Whether or not the trial courts (RTC Branches 5 and 14) gravely erred in declaring Secs. 13 and 14 of
RA 9167 invalid for being unconstitutional.
(2) Whether or not the grant of amusement tax reward incentive is a tax exemption.
RULING:
[1. The Court ruled that RA 9167 violates local fiscal autonomy.]
The Supreme Court upheld the trial courts rulings. Based on the authority provided by the provisions of
the LGC, the City of Cebu passed its Revised Omnibus Tax Ordinance in 1993. Then, after almost a decade of cities
reaping benefits from this imposition, Congress, through RA 9167, amending the LGC, among others, transferred this
income from the cities and municipalities to petitioner FDCP, which proceeds will ultimately be rewarded to the
producers of graded films.
For FDCP, the amendment (RA 9167) is a valid legislative manifestation of the intention to remove from the
grasp of the taxing power of the covered LGUs all revenues from amusement taxes on graded “A” or “B” films which
would otherwise accrue to the LGUs. An evaluation of the provisions in question, however, compels the Court to
disagree. The Court held that the challenged provision reveals that the power to impose amusement taxes was
NOT removed from the covered LGUs. In other words, per RA 9167, covered LGUs still have the power to levy
amusement taxes, albeit at the end of the day, they will derive no revenue therefrom. As a matter of fact, it is only
through the exercise by the LGU of said power that the funds to be used for the amusement tax reward can be raised.
Without said imposition, the producers of graded films will receive nothing from the owners, proprietors and lessees of
cinemas operating within the territory of the covered LGU.
The Court believed that such provisions are in clear contravention of the constitutional command that
taxes levied by LGUs shall accrue exclusively to said LGU and is repugnant to the power of LGUs to apportion
their resources in line with their priorities. Through the application and enforcement of Section 14 of RA 9167, the
income from the amusement taxes levied by the covered LGUs did not and will under no circumstance accrue to them,
not even partially, despite being the taxing authority. Congress, therefore, clearly overstepped its plenary
legislative power, the amendment being violative of the fundamental law’s guarantee on local autonomy.
[2. Grant of amusement tax reward incentive: not a tax exemption.]
 The amusement tax reward is not, as the lower court posited, a tax exemption. Exempting a person or
entity from tax is to relieve or to excuse that person or entity from the burden of the imposition. Here, however, it cannot
be said that an exemption from amusement taxes was granted by Congress to the producers of graded films. Take
note that the burden of paying the amusement tax in question is on the proprietors, lessors, and operators of the
theatres and cinemas that showed the graded films.
Simply put, both the burden and incidence of the amusement tax are borne by the proprietors, lessors, and
operators, not by the producers of the graded films. The transfer of the amount to the film producers is actually a
monetary reward given to them for having produced a graded film, the funding for which was taken by the national
government from the coffers of the covered LGUs. Without a doubt, this is not an exemption from payment of tax.
16. PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant appellees
G.R. No. L-31156 February 27, 1976 69 SCRA 460
FACTS:
Pepsi-Cola commenced a complaint with preliminary injunction to declare Section 2 of Republic Act No. 2264,
otherwise known as the Local Autonomy Act, unconstitutional as an undue delegation of taxing authority as well as to
declare Ordinances Nos. 23 and 27 denominated as "municipal production tax" of the Municipality of Tanauan, Leyte,
null and void. Ordinance 23 levies and collects from soft drinks producers and manufacturers a tax of one-sixteenth
(1/16) of a centavo for every bottle of soft drink corked, and Ordinance 27 levies and collects on soft drinks produced
or manufactured within the territorial jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each gallon
(128 fluid ounces, U.S.) of volume capacity. Aside from the undue delegation of authority, appellant contends that it
allows double taxation, and that the subject ordinances are void for they impose percentage or specific tax.
ISSUE: Are the contentions of the appellant tenable?
RULING:
No. On the issue of undue delegation of taxing power, it is settled that the power of taxation is an essential and inherent
attribute of sovereignty, belonging as a matter of right to every independent government, without being expressly
conferred by the people. It is a power that is purely legislative and which the central legislative body cannot delegate
either to the executive or judicial department of the government without infringing upon the theory of separation of
powers. The exception, however, lies in the case of municipal corporations, to which, said theory does not apply.
Legislative powers may be delegated to local governments in respect of matters of local concern. By necessary
implication, the legislative power to create political corporations for purposes of local self-government carries with it
the power to confer on such local governmental agencies the power to tax.
Also, there is no validity to the assertion that the delegated authority can be declared unconstitutional on the theory
of double taxation. It must be observed that the delegating authority specifies the limitations and enumerates the taxes
over which local taxation may not be exercised. The reason is that the State has exclusively reserved the same for its
own prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law, so that double taxation
becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity or by the
same jurisdiction for the same purpose, but not in a case where one tax is imposed by the State and the other by the
city or municipality.
On the last issue raised, the ordinances do not partake of the nature of a percentage tax on sales, or other taxes in
any form based thereon. The tax is levied on the produce (whether sold or not) and not on the sales. The volume
capacity of the taxpayer's production of soft drinks is considered solely for purposes of determining the tax rate on the
products, but there is not set ratio between the volume of sales and the amount of the tax.
17. PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC. v. CITY OF BUTUAN
FACTS
Pepsi Cola assails Municipal Order No. 110 as amended by Municipal Order No. 122, both series of 1960.
It sought to collect the sums it had paid to the City of Butuan under protest and to prevent the enforcement of the
municipal order.
Its warehouse in the City of Butuan served as a storage for its products the “Pepsi-Cola” soft drinks for sale
to customers in the City of Butuan and all the municipalities in the Province of Agusan. On August 16, 1960, the City
of Butuan enacted Ordinance No. 110 which was subsequently amended by Ordinance No. 122 and became effective
November 28, 1960.
The ordinance, as amended, imposed a tax on any person, association, etc., of P0.10 per case of 24 bottles
of Pepsi-Cola and the plaintiff paid under protest the amount of P4,926.63 from August 16 to December 31, 1960 and
the amount of P9,250.40 from January 1 to July 30, 1961. The tax only applied to sales by agents of consignees of
outside dealers while sales by local dealers were exempted.
ISSUES
Whether or not the disputed ordinance is null and void because:
(1) it partakes of the nature of an import tax;
(2) it amounts to double taxation; NO MERIT
(3) it is excessive, oppressive and confiscatory; NO MERIT
(4) it is highly unjust and discriminatory; and
(5) section 2 of Republic Act No. 2264, upon the authority of which it was enacted, is an unconstitutional delegation of
legislative powers. NO MERIT
RULING
Yes, the tax levied is null and void because it is discriminatory. The tax was violative of the uniformity
requirement of the Constitution because only sales by agents and consignees of outside dealers were subject to the
tax. The uniformity essential to the valid exercise of the power of taxation does not require identity or equality under
all circumstances or negate the authority to classify the objects of taxation.
It is true that the uniformity essential to the valid exercise of the power of taxation does not require identity
or equality under all circumstances, or negate the authority to classify the objects of taxation.5 The classification made
in the exercise of this authority, to be valid, must, however, be reasonable6 and this requirement is not deemed satisfied
unless: (1) it is based upon substantial distinctions which make real differences; (2) these are germane to the purpose
of the legislation or ordinance; (3) the classification applies, not only to present conditions, but, also, to future conditions
substantially identical to those of the present; and (4) the classification applies equally all those who belong to the
same class.
If its purpose was merely to levy a burden upon the sale of soft drinks or carbonated beverages, there is no
reason why sales thereof by sealers other than agents or consignees of producers or merchants established outside
the City of Butuan should be exempt from the tax.
18. HON. EXEC. SEC. v. SOUTHWING HEAVY INDUSTRIES, et al.
G.R. No. 164171
FACTS:
On December 12, 2002, President Arroyo issued EO 156 entitled “Providing for a comprehensive industrial policy and
directions for the motor vehicle development program and its implementing guidelines,” which prohibits the importation
into the country, inclusive of the Special Economic and Freeport Zone or the Subic Bay Freeport (SBF or Freeport), of
used motor vehicles, subject to a few exceptions. Southwing Heavy Industries, Inc. was one of the entities that
instituted a declaratory relief case, seeking the declaration of the unconstitutionality of Article 2, Sec. 3.1 of EO 156.
Additionally, Southwing Heavy Industries also sought that judgment be rendered: (1) directing the government officials
involved to allow the importation of used motor vehicles; (2) ordering the Land Transportation Office and its
subordinates inside the Subic Special Economic Zone to process the registration of the imported used motor vehicles;
and (3) in general, to allow the unimpeded entry and importation of used motor vehicles subject only to the payment
of the required customs duties. The RTC of Olongapo City held that such provision constitutes an unlawful usurpation
of legislative power vested by the Constitution with Congress. The petitioners appealed to the CA, but the CA denied
the petition and sustained the finding of the RTC.
ISSUE: Whether or not the President’s act of issuing the EO constitutes unlawful usurpation of the power of the
Congress vested by the Constitution.
HELD:
No. Delegation of legislative powers to the President is permitted in Section 28(2) of Article VI of the Constitution. It in detail NAPOCOR’s tax exceptions. PD 380 specified that NAPOCOR’s exemption includes all taxes, etc. imposed
provides: “directly or indirectly.” PD 938 dated May 27, 1976 further amended the aforesaid provision by integrating the tax
(2) The Congress may, by law, authorize the President to fix within specified limits, and subject to exemption in general terms under one paragraph.
such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage
and wharfage dues, and other duties or imposts within the framework of the national development
program of the Government. ISSUE:
Whether or not NPC has ceased to enjoy indirect tax and duty exemption with the enactment of PD 938 on May 27,
Such delegation confers upon the President quasi-legislative power, which may be defined as the authority delegated
1976 which amended PD 380 issued on January 11, 1974
by the law-making body to the administrative body to adopt rules, and regulations intended to carry out the provisions
of the law and implement legislative policy. To be valid, an administrative issuance, such as an executive order, must
comply with the following requisites:
(1) Its promulgation must be authorized by the legislature; RULING:
(2) It must be promulgated in accordance with the prescribed procedure;
(3) It must be within the scope of the authority given by the legislature; and No, it is still exempt.
(4) It must be reasonable.
NAPOCOR is a non-profit public corporation created for the general good and welfare, and wholly owned by the
EO 156 satisfied the 1st and 2nd requisites of a valid administrative order, but failed to satisfy the 3rd and 4th requisites government of the Republic of the Philippines. From the very beginning of the corporation’s existence, NAPOCOR
because it exceeded the scope of its application by extending the prohibition to the Freeport, which RA 7227 considers enjoyed preferential tax treatment “to enable the corporation to pay the indebtedness and obligation” and effective
to some extent, a foreign territory – when the scope should be limited to the domestic industry. Moreover, to apply the implementation of the policy
proscription to the Freeport would not serve the purpose of the EO. Hence, Art. 2, Sec. 3.1 of EO 356 is declared Enunciated in Section 1 of RA 6395.
VALID insofar as it applies to the Philippine territory outside the presently fenced-in former Subic Naval Base area and
VOID with respect to its application to the secured fenced-in former Subic Naval Base area. From the preamble of PD 938, it is evident that the provisions of PD 938 were not intended to be interpreted liberally
to enhance the tax-exempt status of NAPOCOR.
19. CENON CERVANTES V. AUDITOR GENERAL
G.R. No. L-4043, May 26, 1952
It is recognized that the rule on strict interpretation does not apply in the case of exemptions in favor of government
FACTS: Cenon Cervantes served in 1949 as the general manager of the National Abaca and other Fibers Corporation
political subdivision or instrumentality. In the case of property owned by the state or a city or other public corporations,
(NAFCO). In the same year, the NAFCO Board of Directors granted 400 pesos per month as allowance to Cervantes
as general manager of NAFCO. However, the allowance as granted was disapproved by the Control Committee of the the express exception should not be construed with the same degree of strictness that applies to exemptions contrary
Government Enterprises Council under Executive Order no. 93 upon recommendation by the NAFCO auditor and to the policy of the state, since as to such property “exception is the rule and taxation the exception.”
concurrence by NAFCO auditor general. The disapproval was based on two grounds. First, it violates the charter of
NAFCO limiting manager’s salary to only 15,000 pesos a year. Second, NAFCO is in a precarious financial condition. 21. Commissioner of Internal Revenue vs. Central Luzon Drug Corporation
Cervantes argued before the Court that Executive Order no. 93 is void because it is based on R.A. no 51 which G.R. No. 159647 April 15, 2005
constitutes undue delegation of legislative power to the executive by providing as one of the powers of the Control
Committee, the power to pass upon the program of activities and the yearly budget of expenditures approved by the Facts: Respondents operated six drugstores under the business name Mercury Drug. From January to December
directors of the corporation. 1996 respondent granted 20% sales discount to qualified senior citizens on their purchases of medicines pursuant to
ISSUE: Whether Executive Order no. 93 is void because it is based on a law which constitutes undue and illegal RA 7432 for a total of ₱ 904,769.
delegation of legislative power to the executive branch
HELD: NO. R.A. No. 51 is constitutional. It is not illegal delegation of legislative power to the executive as argued by Respondent filed its annual Income Tax Return for taxable year 1996 declaring therein net losses. Respondent also
Cervantes but a mandate for the President to streamline all GOCC’s operation. Executive Order 93 is valid because it filed with petitioner a claim for tax refund/credit of ₱ 904,769.00 allegedly arising from the 20% sales discount. Unable
is based on a valid law. to obtain affirmative response from petitioner, respondent elevated its claim to the Court of Tax Appeals. The court
The rule is that so long as the Legislature "lays down a policy and a standard is established by the statute" there is no dismissed the same but upon reconsideration, the latter reversed its earlier ruling and ordered petitioner to issue a Tax
undue delegation. Republic Act No. 51 in authorizing the President of the Philippines, among others, to make reforms Credit Certificate in favor of respondent citing that Sec. 229 of RA 7432 deals exclusively with illegally collected or
and changes in government-controlled corporations, lays down a standard and policy that the purpose shall be to meet erroneously paid taxes but that there are other situations which may warrant a tax credit/refund.
the exigencies attendant upon the establishment of the free and independent government of the Philippines and to
promote simplicity, economy and efficiency in their operations. The standard was set and the policy fixed. The CA affirmed Court of Tax Appeal's decision reasoning that RA 7432 required neither a tax liability nor a payment of
President had to carry the mandate. This he did by promulgating the executive order in question which does not taxes by private establishments prior to the availment of a tax credit. Moreover, such credit is not tantamount to an
constitute an undue delegation of legislative power. unintended benefit from the law, but rather a just compensation for the taking of private property for public use.

20. Maceda vs Macaraig (1991)
FACTS:
Commonwealth Act 120 created NAPOCOR as a public corporation to undertake the development of hydraulic power
and the production of power from other sources. RA 358 granted NAPOCOR tax and duty exemption privileges. RA
6395 revised the charter of the NAPOCOR, tasking it to carry out the policy of the national electrification and provided
Issue:
May respondent, despite incurring a net loss, still claim the 20% sales discount as a tax credit?
Ruling: Yes, it is clear that Sec. 4a of RA 7432 grants to senior citizens the privilege of obtaining a 20% discount on
their purchase of medicine from any private establishment in the country. The latter may then claim the cost of the
discount as a tax credit. Such credit can be claimed even if the establishment operates at a loss.

A tax credit generally refers to an amount that is “subtracted directly from one’s total tax liability.” It is an “allowance
against the tax itself” or “a deduction from what is owed” by a taxpayer to the government.
A tax credit should be understood in relation to other tax concepts. One of these is tax deduction – which is subtraction
“from income for tax purposes,” or an amount that is “allowed by law to reduce income prior to the application of the
tax rate to compute the amount of tax which is due.” In other words, whereas a tax credit reduces the tax due, tax
deduction reduces the income subject to tax in order to arrive at the taxable income. A tax credit is used to reduce
directly the tax that is due, there ought to be a tax liability before the tax credit can be applied. Without that liability,
any tax credit application will be useless. There will be no reason for deducting the latter when there is, to begin with,
no existing obligation to the government. However, as will be presented shortly, the existence of a tax credit or its
grant by law is not the same as the availment or use of such credit. While the grant is mandatory, the availment or
use is not. If a net loss is reported by, and no other taxes are currently due from, a business establishment, there will
obviously be no tax liability against which any tax credit can be applied. For the establishment to choose the immediate
availment of a tax credit will be premature and impracticable.
22. SECRETARY OF FINANCE CESAR B. PURISIMA AND COMMISSIONER OF INTERNAL REVENUE KIM S.
JACINTO-HENARES vs. REPRESENTATIVE CARMELO F. LAZATIN AND ECOZONE PLASTIC ENTERPRISES
CORPORATION
G.R. No. 210588 November 29, 2016
Facts: Secretary of Finance Cesar V. Purisima, pursuant to his authority to interpret tax laws and upon the
recommendation of petitioner Commissioner of Internal Revenue (CIR) Kim S. Jacinto-Henares, signed Revenue
Regulation (RR) 2-2012 on February 17, 2012 in response to reports of smuggling of petroleum and petroleum
products.
The RR requires the payment of value-added tax (VAT) and excise tax on the importation of all petroleum and
petroleum products coming directly from abroad and brought into the Philippines, including Freeport and economic
zones (FEZs).It then allows the refund of any VAT or excise tax paid if the taxpayer proves that the petroleum
previously brought in has been sold to a duly registered FEZ locator and used pursuant to the registered activity of
such locator. An FEZ locator must first pay the required taxes upon entry into the FEZ of a petroleum product, and
must thereafter prove the use of the petroleum product.
Carmelo F. Lazatin, in his capacity as Pampanga First District Rep, filed a petition for prohibition and injunction against
the petitioners to annul and set aside RR 2-2012. Lazatin posits that RA 9400 treats the Clark Special Economic Zone
and Clark Freeport Zone (Clark FEZ) as a separate customs territory and allows tax and duty-free importations of raw
materials, capital and equipment into the zone. Thus, the imposition of VAT and excise tax, even on the importation of
petroleum products into FEZs, directly contravenes the law.
The RTC declared RR 2-2012 unconstitutional. RR 2-2012 violates RA 9400 because it imposes taxes that, by law,
are not due in the first place. Since RA 9400 clearly grants tax and duty-free incentives to Clark FEZ locators, a
revocation of these incentives by an RR directly contravenes the express intent of the Legislature. In effect, the
petitioners encroached upon the prerogative to enact, amend, or repeal laws, which the Constitution exclusively
granted to Congress.
Issue: Whether RR 2-2012 is valid and constitutional
Ruling: RR 2-2012 is invalid and unconstitutional because: a) it illegally imposes taxes upon FEZ enterprises, which,
by law, enjoy tax-exempt status, and b) it effectively amends the law (i.e., RA 7227, as amended by RA 9400) and
thereby encroaches upon the legislative authority reserved exclusively by the Constitution for Congress.
The respondents argued that the power to enact, amend, or repeal laws belong exclusively to Congress. In passing
RR 2-2012, petitioners illegally amended the law - a power solely vested on the Legislature. The court agrees with the
respondents.
The power of the petitioners to interpret tax laws is not absolute. The rule is that regulations may not enlarge, alter,
restrict, or otherwise go beyond the provisions of the law they administer; administrators and implementors cannot
engraft additional requirements not contemplated by the legislature. It is worthy to note that RR 2-2012 does not even
refer to a specific Tax Code provision it wishes to implement. While it purportedly establishes mere administration
measures for the collection of VAT and excise tax on the importation of petroleum and petroleum products, not once
did it mention the pertinent chapters of the Tax Code on VAT and excise tax.
As RR 2-2012, an executive issuance, attempts to withdraw the tax incentives clearly accorded by the legislative to
FEZ enterprises, the *petitioners have arrogated upon themselves a power reserved exclusively to Congress, in
violation of the doctrine of separation of powers.
23. ABAKADA GURO PARTY LIST (FORMERLY AASJAS) OFFICERS SAMSON S. ALCANTARA AND ED
VINCENT S. ALBANO V. THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE
SECRETARY OF THE DEPARTMENT OF FINANCE CESAR PURISIMA, G.R. NO. 168056, SEPTEMBER 01, 2005
Facts: On May 24, 2005, RA No. 9337 was signed into law, which will became effective on July 1, 2005. This law
seeks to amend the provisions on National Internal Revenue Code. However, before its effectivity, ABAKADA Guro
Party List, et al., filed a petition for prohibition on May 27, 2005.
The petitioners alleged that Sections 4, 5, and 6 of RA 9337, amending Sections 106, 107, and 108 is
unconstitutional as it constitutes abandonment by Congress of its exclusive authority to fix the rate of taxes under
Article VI, Section 28(2) of the 1987 Philippine Constitution.
These questioned provisions contain a uniform proviso authorizing the President, upon recommendation of
the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after any of the following conditions
have been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has
been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 1⁄2%)
Likewise, Pimentel, Jr., et al., and Escudero, et al. contend in common that Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108, respectively, of the NIRC giving the President the stand-by authority to raise
the VAT rate from 10% to 12% when a certain condition is met, constitutes undue delegation of the legislative power
to tax.
Issue: Whether Secs. 4-6 of RA 9337 is unconstitutional as it constitutes an undue delegation of the legislative power
to tax.
Ruling: No, there is no undue delegation. The powers which Congress is prohibited from delegating are those which
are strictly, or inherently and exclusively, legislative. Purely legislative power, which can never be delegated, has been
described as the authority to make a complete law – complete as to the time when it shall take effect and as to whom
it shall be applicable – and to determine the expediency of its enactment.
The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts
upon which enforcement and administration of the increase rate under the law is contingent. The legislature has made
the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves the
entire operation or non-operation of the 12% rate upon factual matters outside of the control of the executive. Thus, it
is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions
specified by Congress. This is a duty which cannot be evaded by the President.
The legislative does not abdicate its functions when it describes what job must be done, who is to do it, and what is
the scope of his authority. For a complex economy, that may be the only way in which the legislative process can go
forward. A distinction has rightfully been made between delegation of power to make the laws which necessarily
involves a discretion as to what it shall be, which constitutionally may not be done, and delegation of authority or
discretion as to its execution to be exercised under and in pursuance of the law, to which no valid objection can be
made.
57. Commissioner of Internal Revenue vs. Central Luzon Drug Corporation
G.R. No. 159647 April 15, 2005 (Added case)
Facts: The City of Baguio has enacted the following ordinances:
1. No. 6-v, providing among other things for an amusement tax of P0.20 for every person entering a night club licensed
to do business in the city;
2. No. 11-V, providing for a property tax on motor vehicles kept and operated in the city;
Petitioner, a resident of the City of Baguio is holder of a municipal license for the operation of a night club called "El
Club Monaco. " As owner and operator of said night club, he has to pay to the National Government an amusement
tax on its total gross receipts and to the City of Baguio the annual license fee provided for in said Ordinance No. 6-V.
But in addition to said amusement tax and license fee, he has also been required to pay the amusement tax imposed
in that same ordinance, which amounted to the total sum of P254,80 for the first quarter of 1946. This sum he paid
under protest.
As owner of a six-passenger automobile for private use a Chevrolet Ford or Sedan kept and operated in the City of
Baguio petitioner has already paid the sum of P37 as registration fee for 1946 under the Revised Motor Vehicle Law.
But pursuant to Ordinance No. 11-V of said city he would also have to pay in addition an annual property tax of P15
on the same automobile.
Issue: The whole case boils down to this question: Is the City of Baguio empowered to levy a property tax on motor
and an amusement tax on night clubs?
Ruling: It is settled that a municipal corporation unlike a sovereign state is clothed with no inherent power of taxation.
The charter or statute must plainly show an intent to confer that power or the municipality, cannot assume it. And the
power when granted is to be construed in strictissimi juris. Any doubt or ambiguity that power must be resolved against
the municipality. Inferences, implications, deductions all these have no place in the interpretation of the taxing power
of a municipal corporation.
As the lower court has correctly interpreted it this provision simply means that the city of Baguio may impose taxes
only in those cases specifically provided in any law. In other words for authority to levy a tax on specific subjects one
must look elsewhere in the statute book. For had the provision been meant as a blanket authority to levy taxes, their
would have been no need for the phrase "as provided by law." The insertion of that phrase be speaks the legislative
intent to have the city exercise the law may provide.
There is of course no question as to the authority of the City of Baguio to collect a license fee on dance halls and night
clubs such authority being specifically given by section 260 of the Internal Revenue Code . As a matter of fact petitioner
has been paying such license fee without objection or protest. But what is objected to is the tax of P0.20 for every
person entering those amusement places as provided for in Ordinance No. 6-V and this tax is apart and distinct from
the license fee, for the ordinance itself says that it shall be in addition to the latter. This tax is not authorized by any
Act of the Legislature. It is therefore beyond the power of the City of Baguio. to levy.
24. ENGRACIO FRANCIA
v.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ
G.R. No. L-67649 June 28, 1988
Facts:
Engracio Francia is the registered owner of a residential lot situated at Barrio San Isidro, now District of Sta. Clara,
Pasay City, Metro Manila. On October 15, 1977, a portion of his property was expropriated by the national government
for the amount of P4,116.00.
Since 1963 up to 1977, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property was sold
at public auction by the City Treasurer of Pasay City to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the
highest bidder for the property. On March 3, 1979, Francia received a notice of hearing for the cancellation of his TCT
and the issuance of a new one in the name of Ho Hernandez.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint on January
24, 1980. On April 23, 1981, the lower court dismissed the amended complaint and ordered the issuance of a new
Transfer Certificate of Title in favor of the defendant Ho Fernandez over the parcel of land, and the plaintiff to pay
defendant Ho Fernandez the sum of P1,000.00 as attorney's fees.
The Intermediate Appellate Court affirmed the decision of the lower court in toto.
Francia filed a Petition for review before the Supreme Court arguing that respondent intermediate appellate court
committed a grave error of law in not holding petitioner's obligation to pay P2,400.00 for supposed tax delinquency
was set-off by the amount of P4,116.00 which the government is indebted to the former.
Issue:
Whether or not the tax delinquency of Francia has been extinguished by legal compensation.
Ruling:
No. By legal compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of each
other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided
by Article 1279
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 lawsuit against the government.
Taxes are not in the nature of contracts between the party and party but grow out of duty to, and are the positive acts
of the government to the making and enforcing of which, the personal consent of individual taxpayers is not required
Internal revenue taxes cannot be the subject of compensation because government and taxpayer are not mutually
creditors and debtors of each other under Article 1278 of the Civil Code and a "claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be set-off."
25. EMILIO Y. HILADO, PETITIONER, VS. THE COLLECTOR OF INTERNAL REVENUE AND THE COURT OF
TAX APPEALS, RESPONDENTS; G.R. No. L-9408, October 31, 1956;Bautista Angelo J
Facts:
On March 31, 1952, petitioner filed his income tax return for 1951 with the treasurer of Bacolod City wherein he claimed,
among other things, the amount of P12,837.65 as a deductible item from his gross income pursuant to General Circular
No. V-123 issued by the Collector of Internal Revenue. On the basis of said return, an assessment notice demanding
the payment of P9,419 was sent to petitioner, who paid the tax in monthly installments, the last payment having been
made on January 2, 1953.
Meanwhile, on August 30, 1952, the Secretary of Finance, through the Collector of Internal Revenue, issued General
Circular No. V-139 which not only revoked and declared void his general Circular No. V-123 but laid down the rule that
losses of property which occurred during the period of World War II from fires, storms, shipwreck or other casualty, or
from robbery, theft, or embezzlement are deductible in the year of actual loss or destruction of said
property. The deduction was disallowed and the CIR demanded from him P3,546 as deficiency income tax for said
year. The petition for reconsideration filed by petitioner was denied so he filed a petition for review with the CTA. The
SC affirmed the assessment made by the CIR. Hence, this appeal.
Issues:1. Whether Hilado can claim compensation during the war; and
2. Whether the internal revenue laws can be enforced during the war.
Ruling:
1. No. Assuming that said amount represents a portion of the 75% of his war damage claim which was not paid, the
same would not be deductible as a loss in 1951 because, according to petitioner, the last installment he received from
the War Damage Commission, together with the notice that no further payment would be made on his claim, was in
1950. In the circumstance, said amount would at most be a proper deduction from his 1950 gross income. In the
second place, said amount cannot be considered as a "business asset" which can be deducted as a loss in
contemplation of law because its collection is not enforceable as a matter of right, but is dependent merely upon the
generosity and magnanimity of the U. S. government. As of the end of 1945, there was absolutely no law under which
petitioner could claim compensation for the destruction of his properties during the battle for the liberation of the
Philippines. And under the Philippine Rehabilitation Act of 1946, the payments of claims by the War Damage
Commission merely depended upon its discretion to be exercised in the manner it may see it, but the non-payment of
which cannot give rise to any enforceable right.
2. Yes. It is well known that our internal revenue laws are not political in nature and as such were continued in force
during the period of enemy occupation and in effect were actually enforced by the occupation government. As a matter
of fact, income tax returns were filed during that period and income tax payment were effected and considered valid
and legal. Such tax laws are deemed to be the laws of the occupied territory and not of the occupying enemy.

26.Planters Products, Inc. v. FertiPhil Corp., G.R. No. 166006, 14 March 2008
Facts: Planters Product Inc (PPI) and Fertiphil Corp. were corporation engaged in importation and distribution of
fertilizers, pesticides and other agricultural chemicals. On June 3, 1985, President Marcos issued LOI No. 1465 wherein
it directed Fertilizer and Pesticide Authority (FPA) to add in its pricing formula an additional capital contribution of not
less than 10 peso per bag to be collected from those engaged in distribution and importation of fertilizers, pesticides
and agricultural chemicals. In accordance with LOI 1465, the capital contribution shall be collected in favor of PPI and
the collection of it will be continued until PPI will be viable. However, after the 1986 revolution, FPA voluntarily stopped
collecting the capital contribution from Fertiphil Corp. After which, Fertiphil questioned the constitutionality of LOI No.
1465 assailing that it was not for public purpose and demanded for a refund of the capital contribution the have paid.
Issue: Whether LOI No. 1465 constitutes a valid legislation pursuant to the exercise of taxation for public purpose?
Ruling:
No, the levy imposed under LOI No. 1465 was not for a public purpose. First, the LOI expressly provided that the levy
be imposed to benefit PPI, a private company. The purpose is explicit from Clause 3 of the law. Second, the LOI
provides that the imposition of the ₱10 levy was conditional and dependent upon PPI becoming financially "viable."
This suggests that the levy was actually imposed to benefit PPI. Third, the RTC and the CA held that the levies paid
under the LOI were directly remitted and deposited by FPA to Far East Bank and Trust Company, the depositary bank
of PPI. Fourth, the levy was used to pay the corporate debts of PPI. Thus, PPI shall not profit from an unconstitutional
law. Justice and equity dictate that PPI must refund the amounts paid by Fertiphil.
27. HON. RAMON D. BAGATSING, ET AL. v. HON. PEDRO A. RAMIREZ and the FEDERATION OF MANILA
MARKET VENDORS, INC.
74 SCRA 306 December 17, 1976
FACTS: On June 12, 1974, the Municipal Board of Manila enacted Ordinance No. 7522, "AN ORDINANCE
REGULATING THE OPERATION OF PUBLIC MARKETS AND PRESCRIBING FEES FOR THE RENTALS OF
STALLS AND PROVIDING PENALTIES FOR VIOLATION THEREOF AND FOR OTHER PURPOSES." Ramon D.
Bagatsing, approved the ordinance on June 15, 1974.
On February 17, 1975, Federation of Manila Market Vendors, Inc. filed before the Court of First Instance of Manila,
presided over by Judge Ramirez, seeking the declaration of nullity of Ordinance No. 7522. Ramirez rendered its
decision on August 29, 1975, declaring the nullity of Ordinance No. 7522 of the City of Manila on the primary ground
of non-compliance with the requirement of publication under the Revised City Charter.
Aside from non-compliance with the publication requirement, the Federation of Manila Market Vendors, Inc. bewails
that the market stall fees imposed in the disputed ordinance are diverted to the exclusive private use of the Asiatic
Integrated Corporation since the collection of the fees had been let by the City of Manila to the corporation in a
“Management and Operating Contract.”
ISSUE: Does the delegation of the collection of taxes to a private entity (Asiatic Integrated Corporation) invalidates a
tax ordinance and defeats its public purpose?
RULING: No. The assumption is saddled on erroneous premise. The fees collected do not go direct to the private
coffers of the corporation. Ordinance No. 7522 was not made for the corporation but for the purpose of raising
revenues for the city. That is the object it serves. The entrusting of the collection of the fees does not destroy the
public purpose of the ordinance. So long as the purpose is public, it does not matter whether the agency through
which the money is dispensed is public or private. The right to tax depends upon the ultimate use, purpose and object
for which the fund is raised. It is not dependent on the nature or character of the person or corporation whose interme-
diate agency is to be used in applying it. The people may be taxed for a public purpose, although it be under the
direction of an individual or private corporation.
28. GOMEZ v. PALOMAR (GR No. L-23645, October 29, 1968 / 25 SCRA 827)
FACTS:
Petitioner Benjamin Gomez mailed a letter at the post office in San Fernando, Pampanga which did not bear
the special anti-TB stamp required by the RA 1635 otherwise known as the Anti-Tuberculosis Stamp Law. The law in
question requires an additional 5 centavo stamp for every mail being posted, and no mail shall be delivered unless
bearing the said stamp. As a consequence, it was returned to the petitioner.
Petitioner now assails the constitutionality of the statute claiming that RA 1635 is violative of the equal
protection clause because it constitutes mail users into a class for the purpose of the tax while leaving untaxed the rest
of the population and that even among postal patrons the statute discriminatorily grants exemptions.
The petitioner further argues that the tax in question is invalid, first, because it is not levied for a public
purpose as no special benefits accrue to mail users as taxpayers, and second, because it violates the rule of uniformity
in taxation.
ISSUES:
1. Whether the Anti-TB Stamp Law unconstitutional, for being allegedly violative of the equal protection clause?
2. Whether the tax in question is invalid for not being levied for a public purpose?
3. Whether the tax in question in violates the rule of uniformity in taxation by the infringement by the imposition
of a flat rate rather than a graduated tax?
HELD:
1. No. It is settled that the legislature has the inherent power to select the subjects of taxation and to grant
exemptions. This power has aptly been described as "of wide range and flexibility." Indeed, it is said that in
the field of taxation, more than in other areas, the legislature possesses the greatest freedom in
classification. The reason for this is that traditionally, classification has been a device for fitting tax programs
to local needs and usages in order to achieve an equitable distribution of the tax burden.
The classification of mail users is based on the ability to pay, the enjoyment of a privilege and on
administrative convenience. Tax exemptions have never been thought of as raising revenues under the
equal protection clause.
2. No. If by public purpose the petitioner means benefit to a taxpayer as a return for what he pays, then it is
sufficient answer to say that the only benefit to which the taxpayer is constitutionally entitled is that derived
from his enjoyment of the privileges of living in an organized society, established and safeguarded by the
devotion of taxes to public purposes. Any other view would preclude the levying of taxes except as they are
used to compensate for the burden on those who pay them and would involve the abandonment of the most
fundamental principle of government — that it exists primarily to provide for the common good.
According to the trial court, the money raised from the sales of the anti-TB stamps is spent for the
benefit of the Philippine Tuberculosis Society, a private organization, without appropriation by law. But as
the Solicitor General points out, the Society is not really the beneficiary but only the agency through which
the State acts in carrying out what is essentially a public function. The money is treated as a special fund
and as such need not be appropriated by law.
3. No. A tax need not be measured by the weight of the mail or the extent of the service rendered. We have
said that considerations of administrative convenience and cost afford an adequate ground for classification.
The same considerations may induce the legislature to impose a flat tax which in effect is a charge for the
transaction, operating equally on all persons within the class regardless of the amount involved.
29. WENCESLAO PASCUAL v. SECRETARY OF PUBLIC WORKS +
GR No. L-10405, Dec 29, 1960
FACTS:
An item of Republic Act No. 920, which appropriates P85,000 for the construction, reconstruction, repair,
extension and improvement of projected feeder roads, believed to be a private streets of a private subdivision was
questioned by the Petitioner, Governor Wenceslao Pascual, in his capacity as taxpayer. Pascual alleged that the
appropriation of such construction with public funds is illegal and, therefore, void ab initio for it would greatly enhance
or increase the value of the aforementioned subdivision and will relieve the Owner- Respondent, Jose Zulueta (who,
at the time of the passage and approval of said Act, was a member of the Senate of the Philippines) from burden of
constructing his subdivision streets or roads. He contends that the continuous construction of said projected feeder
roads being undertaken by the Bureau of Public Highways, unless restrained by the court, will allow the respondent to
execute, comply with, follow and implement the illegal provision of law, "to the irreparable damage, detriment and
prejudice not only to the petitioner but to the Filipino nation." He then instituted an action for declaratory relief, with
injunction enjoining parties respondent from making and securing any new and further releases on the aforesaid item
of Republic Act No. 920 and from making any further payments out of said illegally appropriated funds. Respondents
moved to dismiss the petition upon the ground that petitioner had "no legal capacity to sue", and that the petition did
"not state a cause of action". He also contends that the donation of the property made to the government few months
after the enforcement of the law is beneficial not only to the government but also to those residents of the subdivision.
Lower court dismissed the case and dissolved the writ of preliminary injunction. Hence this appeal.
ISSUE: Whether the appropriation item under R.A 920 is constitutional.
RULING:
"Generally, under the express or implied provisions of the constitution, public funds may be used only for a
public purpose. The right of the legislature to appropriate funds is correlative with its right to tax, and, under
constitutional provisions against taxation except for public purposes and prohibiting: the collection of a tax for one
purpose and the devotion thereof to another purpose, no appropriation of state funds can be made for other than a
public purpose. * * *
Referring to the P85,000.00 appropriation for the projected feeder roads in question, the legality thereof
depended upon whether said roads were public or private property when the bill, which, later on, became Republic Act
No. 920, was passed by Congress, or, when said bill was approved by the President and the disbursement of said
sum became effective, or on June 20, 1953 (see section 13 of said Act). Inasmuch as the land on which the projected
feeder roads were to be constructed belonged then to respondent Zulueta, the result is that said appropriation sought
a private purpose, and, hence, was null and void.
"In the determination of the degree of interest essential to give the requisite standing to attack the
constitutionality of a statute the general rule is that not only persons individually affected, but also taxpayers, have
sufficient interest in preventing the illegal expenditure of moneys raised by taxation and may therefore question llw
constitutionality of statutes requiring expenditure of public moneys." (11 Am. Jur. 761; italics supplied.)
30. WALTER LUTZ, as Judicial Administrator of the Intestate of the deceased Antonio Jayme Ledesma Vs.
ANTONIO ARANETA, as collector of Internal Revenue, G.R No. L-7856. December 22, 1955
FACTS:
Walter Lutz in his capacity as the Judicial Administrator of the intestate of the deceased Antonio Jayme Ledesma,
seeks to recover from the Collector of the Internal Revenue the total sum of P 14, 666.40 paid by the estate as taxes,
under section 3 of Commonwealth Act No. 567, also known as the Sugar Adjustment Act, for the crop years 1948-
1949 and 1949-1950.
Commonwealth Act. 567 Section 2 provides for an increase of the existing tax on the manufacture of sugar on a
graduated basis, on each picul of sugar manufacturer; while section 3 levies on the owners or persons in control of the
land devoted to the cultivation of sugarcane and ceded to others for consideration, on lease or otherwise - "a tax
equivalent to the difference between the money value of the rental or consideration collected and the amount
representing 12 per centum of the assessed value of such land. It was alleged that such tax is unconstitutional and
void, being levied for the aid and support of the sugar industry exclusively, which in Lutz’ opinion is not a public purpose
for which a tax may be constitutionally levied. The action was dismissed by the CFI thus Lutz appealed directly to the
Supreme Court.
ISSUE:Whether or not the tax imposition in the Commonwealth Act No. 567 is unconstitutional.
RULING:
Yes, the Supreme Court held that the fact that sugar production is one of the greatest industry of our nation, sugar
occupying a leading position among its export products; that it gives employment to thousands of laborers in the fields
and factories; that it is a great source of the state's wealth, is one of the important source of foreign exchange needed
by our government and is thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion,
protection and advancement, therefore redounds greatly to the general welfare. Hence it was competent for the
legislature to find that the general welfare demanded that the sugar industry be stabilized in turn; and in the wide field
of its police power, the law-making body could provide that the distribution of benefits therefrom be readjusted among
its components to enable it to resist the added strain of the increase in taxes that it had to sustain.
The subject tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the
threatened sugar industry. In other words, the act is primarily a valid exercise of police power.
31. Menorca, Adrianne Shane M.
Ferrer vs. Bautista 760 SCRA 65
G.R. No. 210551, June 30, 2015
Facts: The City of Quezon passed two ordinances, the first one was the Socialized Housing Tax of QC allowing the
imposition of special assessment (1/2 of the assessed valued of land in excess of P100k) and the second one was
Ordinance No. SP-2235, S-2013 on Garbage Collection Fees imposing fees depending on the amount of the land or
floor area).
Jose Ferrer, as a registered owner of a property in Quezon City questioned the validity of the city ordinances.
According to Ferrer:
The city has no power to impose the tax, the SHT violates the rule on equality because it burdens real property owners
with expenses to provide funds for the housing of informal settlers. The SHT is confiscatory or oppressive.Also, he
assails the validity of the garbage fees imposition because:
It violates the rule on double taxation.It violates the rule on equality because the fees are collected from only domestic
households and not from restaurants, food courts, fast food chains, and other commercial dining places that spew
garbage much more than residential property owners.
Issue: WON the ordinances were valid.
Ruling: 1st ordinance: Socialized Housing Tax of Quezon City is VALID.
Cities have the power to tax
It must be noted that local government units such as cities has the power to tax. The collection for the socialized
housing tax is valid. It must be noted that the collections were made to accrue to the socialized housing programs and
projects of the city.
The imposition was for a public purpose (exercise of power of taxation + police power)
In this case, there was both an exercise of the power to tax (primary) and police power (incidental). Removing slum
areas in Quezon City is not only beneficial to the underprivileged and homeless constituents but advantageous to the
real property owners as well.
The situation will improve the value of the their property investments, fully enjoying the same in view of an orderly,
secure, and safe community, and will enhance the quality of life of the poor, making them law-abiding constituents and
better consumers of business products.
There is no violation of the rule on equality
Note: There is a substantial distinction between: real property owner and an informal settler. In fact, the Supreme Court
said that the disparity is so obvious. It is inherent in the power to tax that a State is free to select the subjects of taxation.
Inequities which result from a singling out of one particular class for taxation or exemption infringe no constitutional
limitation.
All these requisites are complied with: An ordinance based on reasonable classification does not violate the
constitutional guaranty of the equal protection of the law. The requirements for a valid and reasonable classification
are: (1) it must rest on substantial distinctions; (2) it must be germane to the purpose of the law; (3) it must not be
limited to existing conditions only; and (4) it must apply equally to all members of the same class.
The ordinance is not oppressive or confiscatory
The ordinance is also not oppressive since the tax rate being imposed is consistent with the UDHA (Urban
Development and Housing Act of 1992). While the law authorizes LGUs to collect SHT on properties with an assessed
value of more than P50,000.00, the questioned ordinance only covers properties with an assessed value exceeding
P100,000.00. As well, the ordinance provides for a tax credit equivalent to the total amount of the special assessment
paid by the property owner beginning in the sixth (6th) year of the effectivity of the ordinance.
2nd ordinance: The imposition of garbage fee is INVALID.
Note: There was no violation of double taxation but there was a violation of the rule on equity.
There is no violation of double taxation: the garbage fees are not taxes
In Progressive Development Corporation v. Quezon City, the Court declared that:
"if the generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if
regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition a
tax."
Contention of Ferrer: that the imposition of garbage fee is tantamount to double taxation because garbage collection
is a basic and essential public service that should be paid out from property tax, business tax, transfer tax, amusement
tax, community tax certificate, other taxes, and the IRA of the Quezon City Government. All these are valid taxes. The
garbage fees are license fees
Footnote: In order to constitute double taxation in the objectionable or prohibited sense the same property must be
taxed twice when it should be taxed but once; both taxes must be imposed on the same property or subject-matter, for
the same purpose, by the same State, Government, or taxing authority, within the same jurisdiction or taxing district,
during the same taxing period, and they must be the same kind or character of tax.
There is a violation of the rule on equality: no substantial distinction
There is no substantial distinction between an occupant of a lot, on one hand, and an occupant of a unit in a
condominium, socialized housing project or apartment, on the other hand.
Most likely, garbage output produced by these types of occupants is uniform and does not vary to a large degree; thus,
a similar schedule of fee is both just and equitable.
The garbage fees or rates are unjust and inequitable
A resident of a 200 sq. m. unit in a condominium or socialized housing project has to pay twice the amount than a
resident of a lot similar in size; unlike unit occupants, all occupants of a lot with an area of 200 sq. m. and less have to
pay a fixed rate of Php100.00; and the same amount of garbage fee is imposed regardless of whether the resident is
from a condominium or from a socialized housing project.
The classifications are not germane to the purpose of the ordinance
The declared purpose is: "promoting shared responsibility with the residents to attack their common mindless attitude
in over-consuming the present resources and in generating waste."
Instead of simplistically categorizing the payee into land or floor occupant of a lot or unit of a condominium, socialized
housing project or apartment, respondent City Council should have considered factors that could truly measure the
amount of wastes generated and the appropriate fee for its collection. Factors include, among others, household age
and size, accessibility to waste collection, population density of the barangay or district, capacity to pay, and actual
occupancy of the property.
SC:
→ Validity of Socialized Housing Tax of Quezon City is upheld.
→ Ordinance No. SP-2235, S-2013, which collects an annual garbage fee on all domestic households in Quezon City,
is unconstitutional and illegal.
32. ARTURO M. TOLENTINO and ARTURO C. MOJICA vs. COMMISSION ON ELECTIONS, SENATOR RALPH G.
RECTO and SENATOR GREGORIO B. HONASAN
G.R. No. 148334 January 21, 2004
FACTS: President Gloria Macapagal-Arroyo nominated then Senator Teofisto T. Guingona, Jr. ("Senator Guingona")
as Vice-President. Congress confirmed the nomination of Senator Guingona who later took his oath. The Senate
passed Resolution No. 84 certifying to the existence of a vacancy in the Senate. It called on COMELEC to fill the
vacancy through a special election to be held simultaneously with the regular elections on 14 May 2001. Twelve
Senators, with a 6-year term each, were due to be elected in that election. Resolution No. 84 further provided that the
"Senatorial candidate garnering the 13th highest number of votes shall serve only for the unexpired term of former
Senator Teofisto T. Guingona, Jr.," for 3 years. Ralph Recto and Gregorio Honasan ranked 12th and 13th, respectively
in the said election.
Arturo Tolentino and Arturo Mojica, as voters and taxpayers, filed the instant petition for prohibition against
COMELEC. Petitioners sought to enjoin COMELEC from proclaiming with finality the candidate for Senator receiving
the 13th highest number of votes as the winner in the special election for a single three-year term seat. Petitioners
claim that if held simultaneously, a special and a regular election must be distinguished in the documentation as well
as in the canvassing of their results.
On 20 July 2001, after COMELEC had canvassed the results from all the provinces, it issued a resolution
declaring "official and final" the ranking of the 13 Senators proclaimed in Resolution No. 01-005. The 13 Senators took
their oaths of office on 23 July 2001.COMELEC, Honasan, and Recto all claim that a special election to fill the seat
vacated by Senator Guingona was validly held on 14 May 2001. COMELEC and Honasan further raise preliminary
issues on the mootness of the petition and on petitioners’ standing to litigate. Honasan also claims that the petition,
which seeks the nullity of his proclamation as Senator, is actually a quo warranto petition and the Court should dismiss
the same for lack of jurisdiction.
ISSUE: Whether the petitioners have standing to litigate.
HELD: Honasan questions petitioners’ standing to bring the instant petition as taxpayers and voters because
petitioners do not claim that COMELEC illegally disbursed public funds. Neither do petitioners claim that they sustained
personal injury because of the issuance of Resolution. "Legal standing" or locus standi refers to a personal and
substantial interest in a case such that the party has sustained or will sustain direct injury because of the challenged
governmental act.
This doctrine of standing to litigate will indeed bar the instant petition. However, in questioning the validity of
special election, petitioners assert harm classified as “generalized grievance.” Neither have petitioners alleged, in their
capacity as taxpayers, that the Court should give due course to the petition because in the special election held on 14
May 2001 "tax money [was] ‘x x x extracted and spent in violation of specific constitutional protections against abuses
of legislative power’ or that there [was] misapplication of such funds by COMELEC or that public money [was] deflected
to any improper purpose." They failed to establish direct injury they suffered from the said governmental act. However,
the Court relaxed the requirement on standing and exercised its discretion to give due course to voter’s suit involving
the right of suffrage. The Court has the discretion to take cognizance of a suit which does not satisfy the requirement
of legal standing when paramount interest is involved.
33. PABLO C. SANIDAD and PABLITO C. SANIDAD vs COMELEC & NATIONAL TREASURER G.R. No. L-44640
| October 12, 1976
FACTS:
On September 2, 1976, President Ferdinand E. Marcos issued PD 991 to call for a national referendum on October
16, 1976 through the so-called Citizens Assemblies (“barangays”). Its primary purpose is to resolve the issues of
martial law (as to its existence and length of effectivity). On September 22, the president issued another proclamation
(P.D. 1033) to specify the questions that are to be asked during the referendum on October 16. The first question is
whether or not the citizen wants martial law to continue, and the second one asks for the approval on several proposed
amendments to the existing Constitution.
Pablo and Pablito Sanidad filed for prohibition with preliminary injunction to enjoin the COMELEC from holding and
conducting the Referendum Plebiscite on October 16, and to declare without force and effect Presidential Decree Nos.
991 and 1033, insofar as they propose amendments to the Constitution. Petitioners contend that the president has no
power to propose amendments to the new constitution, as such, the referendum-plebiscite has no legal basis.
The Solicitor General contends that petitioners have no standing to sue, and that the issue raised is political in nature
– and thus it cannot be reviewed by the court.
ISSUE:
Do the petitioners posses locus standi as taxpayers to challenge the constitutionality of PD 991 and PD 1033?
HELD:
The petitioners Pablo and Pablito Sanidad possess locus standi to challenge the constitutional premise of PD 991,
1031, and 1033. It is now an ancient rule that the valid source of a stature Presidential Decrees are of such nature-
may be contested by one who will sustain a direct injuries as a result of its enforcement. At the instance of taxpayers,
laws providing for the disbursement of public funds may be enjoined, upon the theory that the expenditure of public
funds by an officer of the State for the purpose of executing an unconstitutional act constitutes a misapplication of such
funds.
The breadth of PD 991 carries all appropriation of Five Million Pesos for the effective implementation of its purposes.
PD 1031 appropriates the sum of Eight Million Pesos to carry out its provisions.
The interest of the petitioners as taxpayers in the lawful expenditure of these amounts of public money sufficiently
clothes them with that personality to litigate the validity of the Decrees appropriating said funds. Moreover, as regards
taxpayer's suits, this Court enjoys that open discretion to entertain the same or not. For the present case, We deem it
sound to exercise that discretion affirmatively so that the authority upon which the disputed Decrees are predicated
may be inquired into.
34.Jumamil vs. Café, et al.
[GR 144570, 21 September 2005]
Facts: In 1989, Vivencio V. Jumamil, in his capacity as taxpayer of the Municipality of Panabo, Davao del Norte
questioned the official acts of the public respondents, Mayor Jose Café and the members of the Sangguniang Bayan
of Panabo, Davao del Norte in passing the following ordinances and entering into the lease contracts with private
respondents.
-Municipal Resolution 7, Series of 1989 (Resolution 7). Resolution 7, enacting Appropriation Ordinance 111,
provided for an initial appropriation of P765,000 for the construction of stalls around a proposed terminal
fronting the Panabo Public Market which was destroyed by fire.
-Subsequently, Resolution 49, series of 1989 (Resolution 49), denominated as Ordinance 10, appropriating
a further amount of P1,515,000 for the construction of additional stalls in the same public market.
Prior to the passage of these resolutions, Mayor Cafe had already entered into contracts with those who
advanced and deposited (with the municipal treasurer) from their personal funds the sum of P40,000 each. Some of
the parties were close friends and/or relatives of Cafe, et al.
Despite the petition for declaratory relief with prayer for preliminary injunction and writ of restraining order
before the Regional Trial Court (RTC) of Panabo, Davao del Norte, the construction was nevertheless finished,
rendering the prayer therefor moot and academic. The leases of the stalls were then awarded by public raffle which,
however, was limited to those who had deposited P40,000 each. Thus, the petition was amended anew to include the
57 awardees of the stalls as private respondents.
Jumamil alleges that Resolution Nos. 7 and 49 were unconstitutional because they were passed for the
business, occupation, enjoyment and benefit of private respondents, (some of which were close friends and/or relative
of the mayor and the sanggunian, who deposited the amount of P40,000.00 for each stall,) and with whom also the
mayor had a prior contract to award the would be constructed stalls to all private respondents; that resolutions and
ordinances did not provide for any notice of publication that the special privilege and unwarranted benefits conferred
on the private respondents may be availed of by anybody who can deposit the amount of P40,000; and that nor there
were any prior notice or publication pertaining to contracts entered into by public and private respondents for the
construction of stalls to be awarded to private respondents that the same can be availed of by anybody willing to
deposit P40,000.00. The Regional Trial Court dismissed Jumamil’s petition for declaratory relief with prayer for
preliminary injunction and writ of restraining order, On appeal, and on 24 July 2000 (CA GR CV 35082), the Court of
Appeals affirmed the decision of the trial court.
The CA held that petitioner had no standing to challenge the two resolutions/ordinances because he suffered
no wrong under their terms. It also concluded that "the issue (was) not the ordinances themselves but the award of the
market stalls to the private respondents on the strength of the contracts individually executed by them with Mayor
Cafe." Consequently, it ruled that petitioner, who was not a party to the lease contracts, had no standing to file the
petition for declaratory relief and seek judicial interpretation of the agreements.
Jumamil filed the petition for review on certiorari.
Issues 1. Whether Jumamil had the legal standing to bring the petition for declaratory relief
2. Whether the rule on locus standi should be relaxed.
Held
(1): Legal standing or locus standi is a party’s personal and substantial interest in a case such that he has sustained
or will sustain direct injury as a result of the governmental act being challenged. It calls for more than just a generalized
grievance. The term “interest” means a material interest, an interest in issue affected by the decree, as distinguished
from mere interest in the question involved, or a mere incidental interest. Unless a person’s constitutional rights are
adversely affected by the statute or ordinance, he has no legal standing.
Jumamil brought the petition in his capacity as taxpayer of the Municipality of Panabo, Davao del Norte and
not in his personal capacity. A taxpayer need not be a party to the contract to challenge its validity. Parties suing as
taxpayers must specifically prove sufficient interest in preventing the illegal expenditure of money raised by taxation.
The expenditure of public funds by an officer of the State for the purpose of executing an unconstitutional act constitutes
a misapplication of such funds. The resolutions being assailed were appropriations ordinances. Jumamil alleged that
these ordinances were “passed for the business, occupation, enjoyment and benefit of private respondents” (that is,
allegedly for the private benefit of respondents) because even before they were passed, Mayor Cafe and private
respondents had already entered into lease contracts for the construction and award of the market stalls. Private
respondents admitted they deposited P40,000 each with the municipal treasurer, which amounts were made available
to the municipality during the construction of the stalls. The deposits, however, were needed to ensure the speedy
completion of the stalls after the public market was gutted by a series of fires. Thus, the award of the stalls was
necessarily limited only to those who advanced their personal funds for their construction. Jumamil did not seasonably
allege his interest in preventing the illegal expenditure of public funds or the specific injury to him as a result of the
enforcement of the questioned resolutions and contracts. It was only in the “Remark to Comment” he filed in the
Supreme Court did he first assert that “he (was) willing to engage in business and (was) interested to occupy a market
stall.” Such claim was obviously an afterthought.
(2): Objections to a taxpayer's suit for lack of sufficient personality, standing or interest are procedural matters.
Considering the importance to the public of a suit assailing the constitutionality of a tax law, and in keeping with the
Court's duty, specially explicated in the 1987 Constitution, to determine whether or not the other branches of the
Government have kept themselves within the limits of the Constitution and the laws and that they have not abused the
discretion given to them, the Supreme Court may brush aside technicalities of procedure and take cognizance of the
suit. There being no doctrinal definition of transcendental importance, the following determinants formulated by former
Supreme Court Justice Florentino P. Feliciano are instructive: (1) the character of the funds or other assets involved
in the case; (2) the presence of a clear case of disregard of a constitutional or statutory prohibition by the public
respondent agency or instrumentality of the government; and (3) the lack of any other party with a more direct and
specific interest in raising the questions being raised.
But, even if the Court disregards Jumamil’s lack of legal standing, this petition must still fail. The subject
resolutions/ordinances appropriated a total of P2,280,000 for the construction of the public market stalls. Jumamil
alleged that these ordinances were discriminatory because, even prior to their enactment, a decision had already been
made to award the market stalls to the private respondents who deposited P40,000 each and who were either friends
or relatives of the mayor or members of the Sanggunian. Jumamil asserted that “there (was) no publication or invitation
to the public that this contract (was) available to all who (were) interested to own a stall and (were) willing to deposit
P40,000.” Respondents, however, counter that the “public respondents’ act of entering into this agreement was
authorized by the Sangguniang Bayan of Panabo per Resolution 180 dated 10 October 1988” and that “all the people
interested were invited to participate in investing their savings.” Jumamil failed to prove the subject ordinances and
agreements to be discriminatory. Considering that he was asking the Court to nullify the acts of the local political
department of Panabo, Davao del Norte, he should have clearly established that such ordinances operated unfairly
against those who were not notified and who were thus not given the opportunity to make their deposits. His
unsubstantiated allegation that the public was not notified did not suffice. Furthermore, there was the time-honored
presumption of regularity of official duty, absent any showing to the contrary.
35. WENCESLAO PASCUAL v. SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, G.R. NO. L-10405
FACTS: RA No. 920 was enacted for appropriating funds for the construction, reconstruction, repair, extension and
improvement of the Pasig feeder road terminals. When the law was passed, the feeder roads were only projected and
planned subdivision roads that are not yet constructed within the Antonio Subdivision situated at Pasig, Rizal. When
the roads were traced, none of them was connected to a government property or main highway and they were all
private property owned by Jose C. Zulueta. It was later found that the law was passed when Zulueta was still a member
of the Senate of the Philippines. Zulueta addressed a letter to the Municipal Council offering to donate the projected
feeder roads to the municipality on the condition that the donor would submit plans of the said roads and agree to
change the names of two of them. However, no deed of donation was executed and Zulueta wrote another letter calling
the approval of the RA 920, and the sum of P85000 appropriated. Pascual contended that the Congress were made
to believe that the projected feeder roads were public roads and not privately owned, and for a semblance of legality,
Zulueta even attached an alleged deed of donation. The law must be declared unconstitutional for the construction
would be burdened by the public funds and that it is Zulueta’s means of relieving himself from the burden of constructing
his subdivision at his own expense. Sec. of Public Works moved for the dismissal of the petition for the lack of capacity
to sue and cause of action. The RTC ruled that the law was not for public purpose but is actually for private.
ISSUE: Whether or not Pascual has a legal personality to sue.
RULING: Yes. The expenditure of public funds by an officer of the State for the purpose of administering an
unconstitutional act constitutes a misapplication of funds. Taxpayers have sufficient interest in preventing the illegal
expenditure of moneys raised by taxation and therefore can question the validity of the statutes requiring expenditure
of public money. While the US Supreme Court does not favor such, the relation between the people of the Philippines
and its taxpayers is closer from a domestic viewpoint and more fully direct in so far as the simple and unitary form of
national government is concerned. Citing Province of Tayabas v. Perez, taxpayers were allowed to intervene for the
purpose of contesting the price being paid to the owner as unduly exorbitant. In this case, Pascual is the provincial
governor of the province of Rizal and the taxpayers bear a substantial portion of the burden of taxation in the
Philippines.
36. LAND BANK v. EDUARDO CACAYURAN, G.R. No. 191667 April 17, 2013
FACTS: The Municipality of Agoo’s Sangguniang Bayan passed resolutions to implement a Redevelopment Plan to
redevelop the Agoo Public Plaza where the Imelda Garden and Jose Rizal Monument were located. For the first phase,
the SB passed Resolution No. 68-2005 which authorized Mayor Eufranio Eriguel to obtain a loan from Land Bank and
mortgage a 2,323.75 square meter lot as collateral. The resolution also assigned a portion of the IRA and monthly
income from the project in favor of Land Bank. The terms were approved, then Land Bank issued a loan of
P4,000,000.00 to the municipality and the money was used to construct 10 kiosks which were rented out after its
completion. For the second phase, a resolution was passed which approved the construction of a commercial center
on the Plaza Lot. Mayor Eriguel was authorized to obtain a loan from Land Bank again and he posted the same
securities as the first loan. The previous securities and warranties were ratified through a resolution, then Land Bank
granted a loan of P28,000,000.00. Some residents of the municipality objected to the second phase. The residents,
led by Eduardo Cacayuran, said that converting the Agoo Plaza into a commercial center is highly irregular, violative
of the law, and detrimental to public interests. They also contend that constructing the commercial center will desecrate
the historical park. As a result, the residents launched a signature campaign. Cacayuran also wrote a letter to Mayor
Eriguel, Vice Mayor Eslao, and members of the SB which expressed the clamor against the second phase of the
Redevelopment Plan. He also requested for relevant documents such as the resolutions and loan agreements.
Invoking his right as a taxpayer, Cacayuran filed a complaint against the officers and Land Bank. Land Bank claimed
that it is not a party to the conversion of the Agoo Plaza and that Cacayuran has no cause of action because he does
not have an interest to the loans. However, while the case was pending, the commercial center was completed and it
was known as Agoo’s People Center (APC). It was declared by the SB as patrimonial property of the Municipality.
ISSUE: Whether Cacayuran has standing to sue
HELD: A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money
is being deflected to any improper purpose, or that there is wastage of public funds through the enforcement of an
invalid or unconstitutional law. for a taxpayer’s suit to prosper, two requisites must be met namely, (1) public funds
derived from taxation are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or
some irregularity is committed; and (2) the petitioner is directly affected by the alleged act. First, although the
construction of the APC would be primarily sourced from the proceeds of the Subject Loans, which Land Bank insists
are not taxpayer’s money, there is no denying that public funds derived from taxation are bound to be expended as
the Municipality assigned a portion of its IRA as a security for the foregoing loans. Needless to state, the Municipality’s
IRA, which serves as the local government unit’s just share in the national taxes,32 is in the nature of public funds
derived from taxation. In any event, it is observed that the proceeds from the Subject Loans had already been converted
into public funds by the Municipality’s receipt thereof. Funds coming from private sources become impressed with the
characteristics of public funds when they are under official custody. Second, as a resident-taxpayer of the Municipality,
Cacayuran is directly affected by the conversion of the Agoo Plaza which was funded by the proceeds of the Subject
Loans. It is well-settled that public plazas are properties for public use. It can be used by anybody and no one can
exercise over it the rights of a private owner. In this light, Cacayuran had a direct interest in ensuring that the Agoo
Plaza would not be exploited for commercial purposes through the APC’s construction. In Mamba v. Lara, it has been
held that a taxpayer need not be a party to the contract to challenge its validity; as long as taxes are involved, people
have a right to question contracts entered into by the government.
37. Light Rail Transit Authority vs Central Board of Assessment Appeals
342 SCRA 692 [GR No. 127316 October 12, 2000]
Facts:
The LRTA is a government-owned and controlled corporation created and organized under EO 603, dated July 12,
1980 primarily responsible for the construction, operation, maintenance and/or lease of light rail transit system in the
Philippines, giving due regard to the reasonable requirements of the public transportation of the country. LRTA
acquired real properties, constructed structional improvements, such as buildings, carriage ways, passenger terminal
stations and installed various kinds of machinery and equipment and facilities for the purpose of its operations. For an
effective maintenance, operation and management, it entered into a contract of management with the MERALCO
transit organization in which the latter undertook to manage, operate and maintain the light rail transit system owned
by the LRTA subject to the specific stipulations contained in said agreement, including payments of a management
fee and real property taxes. That it commenced its operations in 1984, and that sometime that year, respondent-
appellee city of assessor of manila assessed the real properties of petitioner consisting of lands, buildings, carriage
ways and passenger terminal stations machinery and equipment which he considered real property under the real
property tax code, to commence with the year 1985. That petitioner paid its real property taxes on all its real property
holdings, except the carriage ways and passenger terminal stations including the land where it constructed on the
ground that the same are not real properties under the real property tax code, and if the same are real property, these
are for public use/purpose, therefore exempt from realty taxation which claim was denied by the respondent-appellee
city assessor of Manila.
Issue:
Whether petitioner's carriageways and passenger terminal stations are subject to real property taxes.
Held:
Yes.The petitioner’s carriageways and passenger terminal stations are subject to real property taxes.
The Supreme court held that, the improvements in question are real property due to its characteristics. For tax purposes
the concept of industrial accession as pointed out by LRTA is not important, rather it should be determined based on
the real property’s incidents and from its natural and legal effects. As illustrated in the case, the carriageways and
passenger terminal stations despite its attachment to public roads still shows its physical separability being elevated
structures and inaccessible to the public. The Court further pointed out that the accessibility of public roads are different
from the improvements since the latter are accessible to the train and its passengers.Furthermore, LRTA failed to show
proof that it can claim exemption from real property tax. An important law pointed out by the Court was E.O. No. 603
which created and organized LRTA, but it did not state that it can claim exemption from real property taxes. Article 4
of E.O. No. 603 only provides exemption as to direct and indirect taxes, duties or fees in connection with the importation
of equipment not locally available. The Court also held at this point that pretending that the national government owns
the improvements, LRTA cannot be granted exemption because it operates like a private corporation engaged in mass
transport industry; wherein it is clothed with corporate status and power in fulfilment of its proprietary purpose. Thus
LRTA is a taxable entity.
38. MCIAA v. MARCOS, G.R. NO. 120082, SEPTEMBER 11, 1996
Facts:
 Mactan Cebu International Airport Authority (MCIAA) was created by virtue of R.A 6958. It was mandated to
undertake the economical, efficient and effective control, management and supervision of MCIAA in the province of
Cebu. Since the time of its creation, it was exempted from paying “REALTY TAXES” in accordance with section 14 of
its charter.
On October 11, 1994, the office of treasurer of the city of Cebu demanded payment for realty taxes on
several parcels of land belonging to MCIAA, in the total amount of Php 2,229,078.79.
MCIAA contended that it was exempted from paying tax on the grounds that:
a. Pursuant to sec 14 of its charter, it was exempted from paying realty taxes; and
b. Pursuant to sec 133 (o) of the LGC, the LGU of Cebu city does not have any power to tax it, because it is
an instrumentality of the government.
(NOTE: Facts of the case was repeated).
Issue:
Whether MCIAA should be exempted from paying realty taxes.
Held:
No. MCIAA is not exempted from paying realty taxes. Although sec 133(o) of the LGC provides for its
exemption from being taxed. Sec 193 of the LGC, expressly withdraws tax exemption privilege granted to persons
whether natural or juridical, including GOCCs, except local water districts, cooperatives duly registered under R.A
6938, non stock and non profit hospitals and educational institutions. Clearly MCIAA does not fall within one of those
exemptions.
From the foregoing, MCIAA was now taxable. Moreover, sec 232 of the LGC, grants the provinces or
municipalities or cities within the Metropolitan Manila Area to levy on an annual ad valorem tax on real property such
as land, building and machinery and other improvements not specifically exempted. Furthermore, sec 234 of the LGC
specifically enumerates, what entities are exempted from paying tax, and of which MCIAA does not belong to. Hence,
MCIAA must pay its realty taxes.
39. Manila International Airport Authority vs. Court of Appeals, Paranque City G.R. No. 155650 July 20, 2006
FACTS:
MIAA received Final Notices of Real Estate Tax Delinquency from the City of Parañaque for the taxable years 1992 to
2001. MIAA’s real estate tax delinquency was estimated at P624 million.
The City of Parañaque, through its City Treasurer, issued notices of levy and warrants of levy on the Airport Lands and
Buildings. The Mayor of the City of Parañaque threatened to sell at public auction the Airport Lands and Buildings
should MIAA fail to pay the real estate tax delinquency.
MIAA filed with the Court of Appeals an original petition for prohibition and injunction, with prayer for preliminary
injunction or temporary restraining order. The petition sought to restrain the City of Parañaque from imposing real
estate tax on, levying against, and auctioning for public sale the Airport Lands and Buildings.
Paranaque’s Contention: Section 193 of the Local Government Code expressly withdrew the tax exemption privileges
of “government-owned and-controlled corporations” upon the effectivity of the Local Government Code. Respondents
also argue that a basic rule of statutory construction is that the express mention of one person, thing, or act excludes
all others. An international airport is not among the exceptions mentioned in Section 193 of the Local Government
Code. Thus, respondents assert that MIAA cannot claim that the Airport Lands and Buildings are exempt from real
estate tax.
MIAA’s contention: Airport Lands and Buildings are owned by the Republic. The government cannot tax itself. The
reason for tax exemption of public property is that its taxation would not inure to any public advantage, since in such a
case the tax debtor is also the tax creditor.
ISSUE: Whether Airport Lands and Buildings of MIAA are exempt from real estate tax under existing laws?
RULING:
Yes. Ergo, the real estate tax assessments issued by the City of Parañaque, and all proceedings taken pursuant to
such assessments, are void.
1. MIAA is Not a Government-Owned or Controlled Corporation
MIAA is not a government-owned or controlled corporation but an instrumentality of the National Government and thus
exempt from local taxation.
MIAA is not a stock corporation because it has no capital stock divided into shares. MIAA has no stockholders or voting
shares.
MIAA is also not a non-stock corporation because it has no members. A non-stock corporation must have members.
MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental functions.
MIAA is like any other government instrumentality, the only difference is that MIAA is vested with corporate powers.
40. MIAA VS. CITY OF PASAY, April 02, 2009, G.R. No. 163072
FACTS:
Petitioner Manila International Airport Authority (MIAA) operates and administers the Ninoy Aquino International Airport
(NAIA) Complex under Executive Order No. 903 (EO 903), otherwise known as the Revised Charter of the Manila
International Airport Authority, issued by then President Ferdinand E. Marcos. The NAIA Complex is located along the
border between Pasay City and Parañaque City. MIAA received Final Notices of Real Property Tax Delinquency from
the City of Pasay for the taxable years 1992 to 2001 and they also received notices of levy and warrants of levy from
the City of Pasay. With that, the MIAA filed with the CA a petition for prohibition and injunction with a prayer for
preliminary injunction or temporary restraining order. But the Court of Appeals upheld the power of the City of Pasay
to impose and collect realty taxes on the NAIA Pasay properties. MIAA then filed a motion for reconsideration, which
the Court of Appeals denied.
ISSUE:
Whether the NAIA Pasay properties of MIAA are exempt from real property tax.
RULING:
Yes, the NAIA Pasay properties of MIAA are exempt from real property tax because MIAA is not a GOCC but a
government instrumentality. Wherein it is performing essential public services and vested with corporate powers. In
addition, MIAA is not a GOCC because it is not organized as a stock or non-stock corporation and it is not required to
meet the test for economic violability under the Constitution.
41. Republic v. Parañaque, G.R. No. 191109, July 18, 2012, 677 SCRA 246
Facts of the case:
Philippines estate authority is a government corporation created by virtue of presidential decree 1084 under the regime
of ferdinand marcos which was transformed by virtue of executive order 525 otherwise known as philippine reclamation
authority under the administration of gloria macapagal aroyo.
The mandate of philippine reclamation authority is to reclaim several properties in manila bay and several properties
in paranaque city.
Now, the treasurer of paranaque city issued a warrant of levy against the pra in connection to the properties previously
reclaimed stating that there was an unpaid real property taxes.
The pra filed a petition before the rtc for temporary restraining order but the petition was denied by the rtc.
The pra then sent a letter to the treasurer of paranaque city requesting for the cancellation of the public auction of the
properties but the treasurer rationated he can no longer defer the auction since there was already consummation of
the sale.
Subsequently, the pra filed a petition to declare null and void the assessment and imposistion of real property taxes
on the properties but the rtc denied the petition.
Ruling of the supreme court:
The supreme court said that the philippine reclamation authority is just an instrumentality of the government mandated
to exercise their power to reclaim properties to futher maximize their use and to serve the public.
Although the pra may have authorized capital divided into shares, however, pra does not intend to distribute its
dividends to the members and in fact they do no have members. Pra also is not required to meet the test of economic
viability hence not exempted from the payment of real property taxes.
42. MCIAA V. CITY OF LAPU-LAPU
FACTS: Mactan-Cebu International Airport Authority (MCIAA) was created on July 31, 1990 under Republic Act No.
6958 and under its charter, it enjoyed exemption from realty taxes “imposed by the National Government or any of its
political subdivisions, agencies and instrumentalities” However, the Supreme Court rendered a decision in Mactan-
Cebu International Airport Authority vs. Marcos (the 1996 MCIAA case) declaring that upon the effectivity of Republic
Act No. 7160 (The Local Government Code of 1991 or “LGC”), MCIAA was no longer exempt from real estate taxes
because Section 234 of the LGC has withdrawn tax exemptions granted to GOCCs, like MCIAA.
Thus, in January 1997, respondent City of Lapu-Lapu issued to MCIAA a Statement of Real Estate Tax
assessing the lots comprising the Mactan International Airport in the amount of P162,058,959.52, and later amended
down to P151,376,134.66. MCIAA averred that the assessed amount covered real estate taxes on the lots utilized
solely and exclusively for public or governmental purposes such as the airfield, runway and taxiway, and the lots on
which they are situated. MCIAA also cited Manila International Airport Authority vs. Court of Appeals (the 2006 MIAA
case) where the Manila International Airport Authority had been described as a government instrumentality and not a
GOCC which exempts it from real estate taxes. It is alleged that the the 2006 MIAA case has overturned the 1996
MCIAA
case.
ISSUE: Whether MCIAA is government instrumentality, and thus, exempt from real estate taxes?
RULING: Yes. The Supreme Court, in the 2006 MIAA case which overrruled and superseded the 1996 MCIAA case
held that many government instrumentalities are vested with corporate powers but they do not become stock or non-
stock corporations, which is a necessary condition before an agency or instrumentality is deemed a government-owned
or controlled corporation. A government-owned or controlled corporation must be “organized as a stock or non-stock
corporation.” It was held that MIAA is not a stock corporation because “it has capital stock divided into shares”. MIAA
is also not a non-stock corporation because it has no members. MCIAA, with its many similarities to the MIAA, should
be classified as a governmentinstrumentality, as its properties are being used for public purposes. MCIAA is vested
with corporate powers but it is not a stock or non-stock corporation, which is a necessary condition before an agency
or instrumentality is deemed a government-owned or controlled corporation. Like MIAA, petitioner MCIAA has capital
under its charter but it is not divided into shares of stock. It also has no stockholders or voting shares.
Furthermore, airports are properties of public dominion owned by the State and the Republic may grant the
beneficial use of its real property to an agency or instrumentality of the national government. This happens when title
of the real property is transferred to an agency or instrumentality even as the Republic remains the owner of the real
property. Such arrangement does not result in the loss of the tax exemption. The Court in the 2006 MIAA case held
that MIAA is “merely holding title to the Airport Lands and Buildings in trust for the Republic” under Section 48, Chapter
12, Book I of the Administrative Code
which allows instrumentalities like MIAA to hold title to real properties owned by the Republic.
Property owned by the State are exempt from real property tax, except when the beneficial use
thereof has been granted to a taxable person. Therefore, as a governmental instrumentality, MCIAA, similar with MIAA,
is subject to the exemption from real property tax.
43. COMMISSIONER OF INTERNAL REVENUE vs. MARUBENI CORPORATION, G.R. No. 137377
December 18, 2001
FACTS:
Marubeni Corporation (Marubeni) is a foreign corporation organized and existing under the laws of Japan. It
is engaged in general import and export trading, financing and the construction business. It is duly registered
to engage in such business in the Philippines and maintains a branch office in Manila.
In 1985, Commissioner of Internal Revenue (CIR) issued a letter of authority to examine the books of accounts
of the Manila branch office of Marubeni for the fiscal year ending March 1985. In the course of the
examination, petitioner found respondent to have undeclared income from two (2) contracts in the Philippines,
both of which were completed in 1984. One of the contracts was with the National Development Company
(NDC) in connection with the construction and installation of a wharf/port complex at the Leyte Industrial
Development Estate in the municipality of Isabel, province of Leyte. The other contract was with the Philippine
Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage complex also at the
Leyte Industrial Development Estate.
In 1986, CIR’s revenue examiners recommended an assessment for deficiency income, branch profit remittance,
contractor's and commercial broker's taxes, which Marubeni protested.
CIR’s contention is that the contract was for a piece of work and since the projects called for the construction
and installation of facilities in the Philippines, the entire income therefrom constituted income from Philippine
sources, hence, subject to internal revenue taxes.
However, at that time (1986), the government promulgated E.O. 41 as amended by E.O. 64, that granted tax amnesty
for unpaid income taxes for years 1981 to 1985, to which Marubeni availed of.
After 10 years, CTA rendered a decision; that since Marubeni properly availed of the tax amnesty, the declard
deficiency taxes of Marubeni is deemed withdrawn. CIR appealed to CA, but CA affirmed the decision of CTA.
Contention of CIR:
What they really question here is that Marubeni is covered with contractor’s tax.
Petitioner argues that since the two agreements are turn-key, they call for the supply of both materials and
services to the client, they are contracts for a piece of work and are indivisible. The situs of the two projects
is in the Philippines, and the materials provided and services rendered were all done and completed within
the territorial jurisdiction of the Philippines. Accordingly, respondent's entire receipts from the contracts, including
its receipts from the Offshore Portion, constitute income from Philippine sources.
Contention of Marubeni Corporation:
Marubeni’s argument is that assuming it did not validly avail of the amnesty under the two Executive Orders,
it is still not liable for the deficiency contractor's tax because the income from the projects came from the
"Offshore Portion" of the contracts. The two contracts were divided into two parts, i.e., the Onshore Portion
and the Offshore Portion. All materials and equipment in the contract under the "Offshore Portion" were
manufactured and completed in Japan, not in the Philippines, and are therefore not subject to Philippine
taxes.
ISSUE:
Whether Marubeni Corporation is subject to a contractor’s tax?
RULING:
Qualified NO.
Clearly, the service of "design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning, coordination. . . " of the
two projects involved two taxing jurisdictions. These acts occurred in two countries — Japan and the
Philippines. While the construction and installation work were completed within the Philippines, the
evidence is clear that some pieces of equipment and supplies were completely designed and engineered
in Japan. The two sets of ship unloader and loader, the boats and mobile equipment for the NDC project
and the ammonia storage tanks and refrigeration units were made and completed in Japan. They were already
finished products when shipped to the Philippines. The other construction supplies listed under the Offshore
Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus, these were not
finished products when shipped to the Philippines. They, however, were likewise fabricated and manufactured
by the sub-contractors in Japan. All services for the design, fabrication, engineering and manufacture of
the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These
services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject
to contractor's tax.
44. Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC)
G.R. No. L-65773, April 30, 1987
FACTS:
British Overseas Airways Corp. (BOAC) is a 100% British Government owned corporation organized and existing
under the laws of the United Kingdom. It is engaged in the international airline business and a signatory of the Interline
Air Transport Association. It sells and operates air transportation service. During the periods when the case was filed
BOAC had no landing rights for traffic purposes in the Philippines and was not granted a Certificate of Public
Convenience to operate in the Philippines except for a temporary nine-month period partly in 1961-1962. However, it
did not carry passengers or cargo to or from the Philippines, but in the period covered by the assessment they
maintained a sales agent in the Philippines (Wamer Barnes and Company).
The CIR assessed BOAC the aggregate amount of 2 Million for deficiency of income taxes from 1959-1963. This was
protested by BOAC and a new assessment was submitted amounting to P853, 307 and BOAC paid the assessment
under protest. They later claimed a refund with the Tax Court.
The second case covered the assessment of a deficiency in income taxes and penalty for fiscal years 1968-1969 to
1970-1971 amounting to P549, 327. BOAC requested that the assessment be set aside. The CIR denied the refund
from the first and it also re-issued the assessment on the Second case.
BOAC filed a the second case with the Tax Court which reversed the findings of the CIR and stated that BOAC was
not subject to income taxes here the Philippines because they did not render services of transporting passengers or
freight during the period questioned.
ISSUE:
➢ Whether British Overseas Airways should be taxed for its conduct of business in Philippine Territory
RULING:
British Overseas Airways Corporation is a resident foreign corporation. The Supreme Court recognized that there is
no criterion as to what constitutes engaging in business. The term implies a continuity of commercial dealings and
arrangements and contemplates to that extent the performance of acts or works or the exercise of some of the functions
normally incident to and in progressive prosecution of commercial gain or for the purpose and object of the business
organization. BOAC during the period of assessment maintained a general sales agent in the Philippines and that
sales agent from 1959-1971 was engaged in issuing tickers, breaking down the whole trip into series of trips with
different airline companies, receiving fare from the whole trip and consequently allocating to the various airline
companies on the basis of their participation.
The activities are normally in the conduct of business. The revenue of sales ticket by BOAC in the Philippines
constitutes income from the Philippine sources. Source of income is the property, activity or service that produced the
income. For the source of income to be considered as coming from the Philippines the activity must be derived from
the Philippines. The sale of tickets was done in the Philippines and the activity produces income. The flow of wealth
proceeded from and occurred within Philippine Territory and it is enjoying such protection accorded by the Government.
In consideration of such protection, the flow of wealth should share the burden of supporting the government. The
absence of flight operations to and from the Philippines is not determinative of the source of income or the site of
income taxation. The test of taxability is the source and the source of income is the activity which produced the income.
Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom
was derived from a activity regularly pursued within the Philippines business and even if the BOAC tickets sold covered
the "transport of passengers and cargo to and from foreign cities", it cannot alter the fact that income from the sale of
tickets was derived from the Philippines. The word "source" conveys one essential idea that of origin, and the origin of
the income herein is the Philippines.
45. G.R. No. L-29646 November 10, 1978
MAYOR ANTONIO J. VILLEGAS, petitioner,vs.HIU CHIONG TSAI PAO HO and JUDGE FRANCISCO ARCA,
respondents.
FACTS: City Ordinance No. 6537 is entitled:
AN ORDINANCE MAKING IT UNLAWFUL FOR ANY PERSON NOT A CITIZEN OF THE PHILIPPINES TO BE
EMPLOYED IN ANY PLACE OF EMPLOYMENT OR TO BE ENGAGED IN ANY KIND OF TRADE, BUSINESS OR
OCCUPATION WITHIN THE CITY OF MANILA WITHOUT FIRST SECURING AN EMPLOYMENT PERMIT FROM
THE MAYOR OF MANILA; AND FOR OTHER PURPOSES. 3
*Section 1 of said Ordinance No. 6537 4 prohibits aliens from being employed or to engage or participate in any position
or occupation or business enumerated therein, whether permanent, temporary or casual, without first securing an
employment permit from the Mayor of Manila and paying the permit fee of P50.00 except persons employed in the
diplomatic or consular missions of foreign countries, or in the technical assistance programs of both the Philippine
Government and any foreign government, and those working in their respective households, and members of religious
orders or congregations, sect or denomination, who are not paid monetarily or in kind.
*On May 4, 1968, private respondent Hiu Chiong Tsai Pao Ho who was employed in Manila, filed a petition with the
Court of First Instance of Manila, Branch I, denominated as Civil Case No. 72797, praying for the issuance of the writ
of preliminary injunction and restraining order to stop the enforcement of Ordinance No. 6537 as well as for a judgment
declaring said Ordinance No. 6537 null and void.
*Petitioner Mayor Villegas argues that Ordinance No. 6537 cannot be declared null and void on the ground that it
violated the rule on uniformity of taxation because the rule on uniformity of taxation applies only to purely tax or revenue
measures and that Ordinance No. 6537 is not a tax or revenue measure but is an exercise of the police power of the
state, it being principally a regulatory measure in nature.
ISSUE:
RULLING: Ordinance No. 6537 is void because it does not contain or suggest any standard or criterion to guide the
mayor in the exercise of the power which has been granted to him by the ordinance.
The contention that Ordinance No. 6537 is not a purely tax or revenue measure because its principal purpose is
regulatory in nature has no merit. While it is true that the first part which requires that the alien shall secure an
employment permit from the Mayor involves the exercise of discretion and judgment in the processing and approval or
disapproval of applications for employment permits and therefore is regulatory in character the second part which
requires the payment of P50.00 as employee's fee is not regulatory but a revenue measure. There is no logic or
justification in exacting P50.00 from aliens who have been cleared for employment. It is obvious that the purpose of
the ordinance is to raise money under the guise of regulation.
46. CREBA vs. Executive Secretary Romulo, March 9, 2010
FACTS
Petitioner Chamber of Real Estate and Builders’ Associations, Inc. is an association of real estate developers and
builders in the Philippines assailing the constitutionality of Section 27 (E) of RA 8424 which imposes a Minimum
Corporation Income Tax (MCIT) of 2% of the gross income, on domestic corporations. The collection of said MCIT
begins on the fourth year after a corporation has commenced its operations. Allegedly, the MCIT was imposed to
prevent tax evasion by domestic corporations that are hiding behind the pretense of business losses. It is a means to
ensure that everyone will make some minimum contribution to the support of the public sector.
Petitioner CREBA now contends that the MCIT is unconstitutional because it is highly oppressive, arbitrary, and
confiscatory which amounts to deprivation of property without due process of law. It claims that pegging the tax base
of the MCIT to a corporation’s gross income is tantamount to a confiscation of capital because gross income, unlike
net income, is not "realized gain."
ISSUE: Does the MCIT violate the due process clause when it uses gross income as its tax base and thus deprives
domestic corporations of their capital?
RULING: NO. Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income.
Income means all the wealth which flows into the taxpayer other than a mere return on capital. However, the MCIT is
not a tax on capital. The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the
capital is not being taxed. Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal
net income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of
net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the
corporation’s gross income. The Court upheld the US Supreme Court’s decision in Okin vs. Commissioner which
declared that the congressional intent to ensure that corporate taxpayers would contribute a minimum amount of taxes
was a legitimate governmental end to which the AMT (US alternative minimum tax system) bore a reasonable relation.
Likewise, petitioner does not cite any actual, specific and concrete negative experiences of its members nor does it
present empirical data to show that the implementation of the MCIT resulted in the confiscation of their property. The
constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or property
without due process of law." Citing the case of Sison vs. Ancheta, the Court explained that the due process clause
may properly be invoked to invalidate, in appropriate cases, a revenue measure when it amounts to a confiscation of
property. But in the same case, the Court will not strike down a revenue measure as unconstitutional (for being violative
of the due process clause) on the mere allegation of arbitrariness by the taxpayer.
Like any other statute, tax legislation carries a presumption of constitutionality. In sum, petitioner failed to support, by
any factual or legal basis, its allegation that the MCIT is arbitrary and confiscatory. The Court cannot strike down a law
as unconstitutional simply because of its yokes.
47. City of Baguio v De Leon
FACTS: Fortunato de Leon appealed to the SC questioning the validity of an ordinance enacted by the Baguio City
Council to collect taxes from real estate dealers. The source of council’s power to create such ordinance is the
amending act (RA 329) of the Baguio Charter empowering the city to fix the license fee and regulate "business, trades,
and occupations as may be established or practiced in the City."
He was held liable as a real estate dealer with a property worth more than 10,000 but not in excess of 50,000. He was
obligated to pay a P50 annual fee. He was further "engaged in the rental of his property in Baguio"deriving income
therefrom during the period in 1958- 1962.
The complaint was thereafter filed by the City Attorney of Baguio for his failure to pay P300 as license fee covering the
period aforementioned.
ISSUE: Whether there is a violation of due process clause as the power to tax of the city of baguio results to double
taxation?
HELD:
As to why double taxation is not violative of due process, Justice Holmes made clear in this language: "The objection
to the taxation as double may be laid down on one side. ... The 14th Amendment [the due process clause] no more
forbids double taxation than it does doubling the amount of a tax, short of confiscation or proceedings unconstitutional
on other grounds." With that decision rendered at a time when American sovereignty in the Philippines was recognized,
it possesses more than just a persuasive effect. To some, it delivered the coup de grace to the bogey of double taxation
as a constitutional bar to the exercise of the taxing power. It would seem though that in the United States, as with us,
its ghost as noted by an eminent critic, still stalks the juridical state. In a 1947 decision, however, we quoted with
approval this excerpt from a leading American decision: "Where, as here, Congress has clearly expressed its intention,
the statute must be sustained even though double taxation results."
At any rate, it has been expressly affirmed by us that such an "argument against double taxation may not be invoked
where one tax is imposed by the state and the other is imposed by the city ..., it being widely recognized that there is
nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the same
occupation, calling or activity by both the state and the political subdivisions thereof.
48. CIR v. M.J. Lhuiller Pawnshop, Inc., 15 July 2003
On 1991, the CIR imposed a 5% lending investors tax through a Revenue Memorandum Order on pawnshops. It held
that pawnshops is lending money at interest and accepting personal property as security for the loan. Since pawnshops
are considered as lending investors effective, they also become subject to documentary stamp taxes. On 1997, the
Bureau of Internal Revenue (BIR) issued an Assessment Notice against Lhuillier demanding payment of deficiency
percentage.
Lhuillier filed an administrative protest with the Office of the Revenue Regional Director contending that neither the
Tax Code nor the VAT Law expressly imposes 5% percentage tax on the gross income of pawnshops; that pawnshops
are different from lending investors, which are subject to the 5% percentage tax under the specific provision of the Tax
Code; that RMO No. 15-91 is not implementing any provision of the Internal Revenue laws but is a new and additional
tax measure on pawnshops, which only Congress could enact, and that it impliedly amends the Tax Code, and that it
is a class legislation as it singles out pawnshops. On 1998, the BIR issued Warrant of Distraint and/or Levy against
Lhuilliers property for the enforcement and payment of the assessed percentage tax.
When Lhuiller's protest was not acted upon, they elevated it to the CIR which was also not acted upon. Lhuiller filed a
Notice and Memo on Appeal with the CTA.
On 2000, the CTA held the the RMOs were void and that the Assessment Notice should be cancelled.
The CIR filed a motion for review with the CA which only affirmed the CTA's decision thus this case in bar.
ISSUE: Whether pawnshops included in the term lending investors for the purpose of imposing the 5% percentage
tax under the NIRC.
RULING:
No.
Even if Revenue Memorandum were issued in accordance with the power of the CIR, they cannot issue administrative
rulings or circulars not consistent with the law sought to be applied. It should remain consistent with the law they intend
to carry out. Only Congress can repeal or amend the law.
In the NIRC, the term lending investor includes all persons who make a practice of lending money for themselves or
others at interest. A pawnshop, on the other hand, is defined under Section 3 of P.D. No. 114 as a person or entity
engaged in the business of lending money on personal property delivered as security for loans.
While it is true that pawnshops are engaged in the business of lending money, they are not considered lending
investors for the purpose of imposing the 5% percentage taxes citing the following reasons:
1. Pawnshops and lending investors were subjected to different tax treatments as per the NIRC.
2. Congress never intended pawnshops to be treated in the same way as lending investors.
3. Section 116 of the NIRC of 1977, as amended by E.O. No. 273, subjects to percentage tax dealers in securities and
lending investors only. There is no mention of pawnshops.
4. The BIR had ruled several times prior to the issuance of the RMOs that pawnshops were not subject to the 5%
percentage tax imposed by Section 116 of the NIRC of 1977. As Section 116 of the NIRC of 1977 was practically lifted
from Section 175 of the NIRC of 1986, and there being no change in the law, the interpretation thereof should not have
been altered.
49. THE PROVINCE OF ABRA vs. HONORABLE HAROLD M. HERNANDO, et al.
G.R. No. L-49336 August 31, 1981
FACTS:
The Provincial Assessor of Abra assessed the properties of the Roman Catholic Bishop of Bangued for real estate tax.
An action for declaratory relief was filed by the Bishop of Bangued claiming that he is exempted from paying such tax
since these properties are used "actually, directly and exclusively" as sources of support of the parish priest and his
helpers and also of him. A summary judgment was issued granting the exemption without hearing the side of the
Province of Abra.
The Province of Abra filed a Motion to Dismiss which was also denied. Hence, they filed a petition for certiorari and
mandamus alleging denial of procedural due process.
ISSUE:
1. Whether the properties of the Bishop of Bangued are exempt from real estate tax.
2. Whether the rights of the Province of Abra to due process is violated.
HELD:
1. No. The properties are not tax-exempt. The 1935 and 1973 Constitutions are worded differently.
Under Article VI, Section 22, paragraph 3 of the 1935 Constitution: "Cemeteries, churches, and parsonages or
convents appurtenant thereto, and all lands, building, and improvements used exclusively for religious, charitable, or
educational purposes shall be exempt from taxation."
The 1973 Constitution (Article VIII, Section 17, paragraph 3) added "charitable institutions, mosques, and non-profit
cemeteries" and required that for the exemption of "lands, buildings, and improvements," they should not only be
"exclusively" but also "actually" and "directly" used for religious or charitable purposes.
Here, there is no showing that the properties are “actually” and “directly” used for religious or charitable uses. It has
been the constant and uniform holding that exemption from taxation is not favored and is never presumed, so that if
granted it must be strictly construed against the taxpayer.
2. Yes. The right to due process was violated.
This case requires proof to demonstrate that there is compliance with the constitutional provision that allows an
exemption. Since respondent Judge accepted at its face the allegation of private respondent and denied the motion to
dismiss filed by the Province of Abra without a hearing, clearly shows Judge Hernando’s failure to abide by the
constitutional command of procedural due process.
50. FRANCIS A. CHURCHILL v. VENANCIO CONCEPCION, G.R. No. 11572, September 22, 1916
FACTS: During the American period, the Philippine Legislature was given the power of taxation under the Philippine
Bill. In accordance with this Philippine Bill, the Philippine Legislature enacted Act No. 2339 on February 27, 1914 which
imposed an annual tax of four pesos (P4) per square meter upon “electric signs, billboards, and spaces used for
posting or displaying temporary signs, and all signs displayed on premises not occupied by buildings.” The same was
subsequently amended by Act No. 2432 reducing the tax on such signs, billboards, etc., to two pesos (P2) per square
meter or fraction thereof.
Francis A. Churchill and Stewart Tait, co-partners of Mercantile Advertising Agency, were owners of a sign or billboard
containing an area of 52 square meters constructed on private property in the city of Manila and exposed to public
view. Based on the law, the property was tax amounting to P104. The tax was paid under protest and the plaintiffs
having exhausted all their administrative remedies instituted the present action under section against the Collector of
Internal Revenue to recover back the amount paid.
ISSUES:
[1] Whether the tax as imposed constitutes deprivation of property without compensation or due process of law because
it is confiscatory and unjustly discriminatory; and
[2] Whether the tax imposed is void for lack of uniformity, because it is not graded according to value.
RULING:
[1] The U.S. Supreme Court ruled that the Legislature having the power to impose a tax upon signs, signboards, and
billboards, then “the judicial cannot prescribe to the legislative department of the Government limitation upon the
exercise of its acknowledged powers.” The Philippine Legislature 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 exercises it. It 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 it, may be followed by seizure and sale or confiscation of property. No attribute of sovereignty is more
pervading, and at no point does the power of the government affect more constantly and intimately all the relations of
life than through the exactions made under it.
It was argued that the tax imposed was one that destroy their business and it was confiscatory. The Court, however,
ruled that it was not one of such character for the reason that the tax complained of falls far short of being confiscatory.
The Court found that once the cost, expenditure, and tax was deducted from the gains of the business it will still give
the business reasonable profits. Hence, the gains outweighs the losses of the business. Furthermore, the company
can still increase its prices to offset the tax which the company did not do. Consequently, it cannot be held that the
Legislature has gone beyond the power conferred upon it by the Philippine Bill in so far as the amount of the tax is
concerned.
[2] Uniformity in taxation means that all taxable articles or kinds of property, of the same class, shall be taxed at the
same rate. It does not mean that lands, chattels, securities, incomes, occupations, franchises, privileges, necessities,
and luxuries, shall all be assessed at the same rate. Different articles may be taxed at different amounts, provided the
rate is uniform on the same class everywhere, with all people, and at all times.
A tax is uniform when it operates with the same force and effect in every place where the subject of it is found.
“Uniformity,” as applied to the constitutional provision that all taxes shall be uniform, means that all property belonging
to the same class shall be taxed alike.
51. British American Tobacco v. Camacho, G.R. No. 163583, 15 April 2009
YNARES-SANTIAGO, J p:
Facts: RA 8240, entitled "An Act Amending Sections 138, 139, 140, and 142 of the NIRC, as Amended and For Other
Purposes", took effect on January 1, 1997. In the same year, Congress passed RA 8424 or The Tax Reform Act of
1997, re-codifying the NIRC.
Section 142 was renumbered as Section 145 of the NIRC. Paragraph (c) of Section 145 provides for four tiers of tax
rates based on the net retail price per pack of cigarettes. To determine the applicable tax rates of existing cigarette
brands, a survey of the net retail prices per pack of cigarettes was conducted. As such, new brands of cigarettes shall
be taxed according to their current net retail price while existing or "old" brands shall be taxed based on their net retail
price as of October 1, 1996.
To implement RA 8240, the Bureau of Internal Revenue (BIR) issued Revenue Regulations No. 1-97, which classified
the existing brands of cigarettes as those duly registered or active brands prior to January 1, 1997. New brands, or
those registered after January 1, 1997, shall be initially assessed at their suggested retail price until such time that the
appropriate survey to determine their current net retail price is conducted.
British American Tobacco introduced into the market Lucky Strike Filter,
Lucky Strike Lights and Lucky Strike Menthol Lights cigarettes, with a suggested retail price of P9.90 per pack.
Pursuant to Sec. 145 (c) quoted above, the Lucky Strike brands were initially assessed the excise tax at P8.96 per
pack.
BAT filed before the Regional Trial Court (RTC) of Makati, a petition for injunction with prayer for the issuance of a
temporary restraining order (TRO) and/or writ of preliminary injunction. Said petition sought to enjoin the
implementation of Section 145 of the NIRC, Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue
Memorandum Order No. 6-2003 on the ground that they discriminate against new brands of cigarettes, in violation of
the equal protection and uniformity provisions of the Constitution.
The trial court rendered a decision upholding the constitutionality of Section 145 of the NIRC, Revenue Regulations
Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-2003. The trial court also lifted the writ of
preliminary injunction.
Issue: Whether or not (1) Section 145 of the National Internal Revenue Code (NIRC), as recodified by Republic Act
(RA) 8424; (2) RA 9334, which further amended Section 145 of the NIRC on January 1, 2005; (3) Revenue Regulations
Nos. 1-97, 9-2003, and 22- 2003; and (4) Revenue Memorandum Order No. 6-2003 are violative of the equal protection
and uniformity clauses of the Constitution.
Ruling: No. The classification freeze provision has not been shown to be precipitated by a veiled attempt, or hostile
attitude on the part of Congress to unduly
favor older brands over newer brands. On the contrary, we must reasonably assume, owing to the respect due a co-
equal branch of government and as revealed by the Congressional deliberations, that the enactment of the questioned
provision was impelled by an earnest desire to improve the efficiency and effectivity of the tax administration of sin
products. For as long as the legislative classification is rationally related to furthering some legitimate state interest, as
here, the rational-basis test is satisfied and the constitutional challenge is perfunctorily defeated.
We do not sit in judgment as a supra-legislature to decide, after a law is passed by Congress, which state interest is
superior over another, or which method is better suited to achieve one, some or all of the state's interests, or what
these interests should be in the first place. This policy-determining power, by constitutional fiat, belongs to Congress
as it is its function to determine and balance these interests or choose which ones to pursue.
Time and again we have ruled that the judiciary does not settle policy issues. The Court can only declare what the law
is and not what the law should be. Under our system of government, policy issues are within the domain of the political
branches of government and of the people themselves as the repository of all state power. 74 Thus, the legislative
classification under the classification freeze provision, after having been shown to be rationally related to achieve
certain legitimate state interests and done in good faith, must, perforce, end our inquiry.
52. Commissioner of Customs v. Hypermix Feeds Corporation, G.R. No. 179579, February 1, 2012
53. ABAKADA Guro Party List v. Purisima, G.R. No. 166715, 14 August 2008
54, KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC., HERMINIGILDO C.
DUMLAO, GERONIMO Q. QUADRA, and MARIO C. VILLANUEVA, petitioners,
vs.
HON. BIENVENIDO TAN, as Commissioner of Internal Revenue, respondent.
G.R. No. 81311June 30, 1988
TOPIC: CONSTITUTIONAL LIMITATIONS – Equal Protection Clause
FACTS:
4 petitions have been consolidated because of the similarity of the main issues involved, which seek to nullify EO 273
issued by the President and which amended certain sections of the National Internal Revenue Code and adopted the
value-added tax (VAT, for short), for being unconstitutional in that its enactment is not alledgedly within the powers of
the President; that the VAT is oppressive, discriminatory, regressive, and violates the due process and equal protection
clauses and other provisions of the 1987 Constitution.
The VAT is a tax levied on a wide range of goods and services. It is a tax on the value, added by every seller, with
aggregate gross annual sales of articles and/or services, exceeding P200,00.00, to his purchase of goods and
services, unless exempt. VAT is computed at the rate of 0% or 10% of the gross selling price of goods or gross receipts
realized from the sale of services. EO 273 merely increased the VAT on every sale to 10%, unless zero-rated or
exempt. The petitioner Integrated Customs Brokers Association of the Philippines contend that EO 273 unduly
discriminates against customs brokers. The contested provision states:
Sec. 103. Exempt transactions. — The following shall be exempt from the value-added tax:
(r) Service performed in the exercise of profession or calling (except customs brokers) subject to the occupation tax
under the Local Tax Code, and professional services performed by registered general professional partnerships;
ISSUE: Whether or not the contested provision unduly discriminates against customs brokers.
HELD: No.
The phrase "except customs brokers" is not meant to discriminate against customs brokers. It was inserted in Sec.
103(r) to complement the provisions of Sec. 102 of the Code, which makes the services of customs brokers subject to
the payment of the VAT and to distinguish customs brokers from other professionals who are subject to the payment
of an occupation tax under the Local Tax Code. At any rate, the distinction of the customs brokers from the other
professionals who are subject to occupation tax under the Local Tax Code is based upon material differences, in that
the activities of customs brokers (like those of stock, real estate and immigration brokers) partake more of a business,
rather than a profession and were thus subjected to the percentage tax under Sec. 174 of the National Internal Revenue
Code prior to its amendment by EO 273. EO 273 abolished the percentage tax and replaced it with the VAT.
55. Tan v. Del Rosario, 3 October 1994
FACTS: Two consolidated cases assail the validity of RA 7496 or the Simplified Net Income Taxation Scheme ("SNIT"),
which amended certain provisions of the NIRC, as well as the Rules and Regulations promulgated by public
respondents pursuant to said law.
Petitioners posit that RA 7496 is unconstitutional as it allegedly violates the following provisions of the Constitution:
-Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only one subject which shall be expressed
in the title thereof.
- Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.
- Article III, Section 1 — No person shall be deprived of . . . property without due process of law, nor shall any person
be denied the equal protection of the laws.
As to equal protection, Tan, the petitioner, contends that Republic Act No. 7496 desecrates the constitutional
requirement that taxation "shall be uniform and equitable" in that the law would now attempt to tax single proprietorships
and professionals differently from the manner it imposes the tax on corporations and partnerships.
ISSUE: Whether or not the tax law is unconstitutional for violating due process and equal protection clause of the
constitution
HELD: NO. The due process clause may correctly be invoked only when there is a clear contravention of inherent or
constitutional limitations in the exercise of the tax power. No such transgression is so evident in herein case.
1. Uniformity of taxation, like the concept of equal protection, merely requires that all subjects or objects of taxation,
similarly situated, are to be treated alike both in privileges and liabilities. Uniformity does not violate classification as
long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to
achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and
(4) the classification applies equally well to all those belonging to the same class.
2. What is apparent from the amendatory law is the legislative intent to increasingly shift the income tax system
towards the schedular approach in the income taxation of individual taxpayers and to maintain, by and large, the
present global treatment on taxable corporations. The Court does not view this classification to be arbitrary and
inappropriate.
56. Abakada Guro Party List (Formerly Aasjas) Officers Samson S. Alcantara And Ed Vincent S Albano v. The
Honorable Executive Secretary Eduardo Ermita; Honorable Secretary Of The Department Of Finance Cesar
Purisima, G.R. No. 168056, September 01, 2005
Facts:
ABAKADA GURO Party List, et al., filed a petition for prohibition or questioning the constitutionality of Sections 4, 5
and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code
(NIRC).
Section 4 imposes a 10% VAT on sale of goods and properties;
Section 5 imposes a 10% VAT on importation of goods; and
Section 6 imposes a 10% VAT on sale of services and use or lease of properties;
These provisions contain a provision which authorizing the President, upon recommendation of the Secretary of
Finance, to raise the VAT rate to 12%, effective January 1, 2006, after specified conditions have been satisfied.
Issue:
Whether or not there is a violation of the due process and equal protection of the Constitution.
Ruling:
No, the power of the State to make reasonable and natural classifications for the purposes of taxation has long been
established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the amounts to
be raised, the methods of assessment, valuation and collection, the State’s power is entitled to presumption of validity.
As a rule, the judiciary will not interfere with such power absent a clear showing of unreasonableness, discrimination,
or arbitrariness.
The argument is pedantic, if not outright baseless. The law does not make any classification in the subject of taxation,
the kind of property, the rates to be levied or the amounts to be raised, the methods of assessment, valuation and
collection. Petitioners’ alleged distinctions are based on variables that bear different consequences. While the
implementation of the law may, yield-varying end results depending on one’s profit margin and value-added, the Court
cannot go beyond what the legislature has laid down and interfere with the affairs of business.
The equal protection clause does not require the universal application of the laws on all persons or things without
distinction. This might in fact sometimes result in unequal protection. What the clause requires is equality among equals
as determined according to a valid classification. By classification is meant the grouping of persons or things similar to
each other in certain particulars and different from all others in these same particulars.
59. Silvester Punsalan, et al. v. Municipal Board of City of Manila
G.R. No. L-4817
Facts: City of Manila Ordinance no. 3398 was approved by MBCM. This ordinance imposes a municipal occupation
tax on persons exercising various professions in the city and penalizes non-payment of the tax "by a fine of not more
than two hundred pesos or by imprisonment of not more than six months, or by both such fine and imprisonment in the
discretion of the court. The ordinance was enacted pursuant to paragraph (1) of section 18 of the Revised Charter of
the City of Manila (as amended by Republic Act No. 409), which empowers the Municipal Board of said city to impose
a municipal occupation tax, not to exceed P50 per annum, on persons engaged in the various professions
Punsalan, et al. questioned the validity of the said ordinance. They argue that since they are already paying their
occupation tax under sec.201 of the NIRC, and that they are being singled out as the City of Manila are the only
chartered city which imposed occupation taxes in addition to those imposed by the National Government, the said
ordinance and the law authorizing it constitute class legislation, are unjust and oppressive.
Issue: Whether the ordinance and the law is unjust and oppressive.
Held: No. In raising the hue and cry of "class legislation", the burden of plaintiffs' complaint is not that the professions
to which they respectively belong have been singled out for the imposition of this municipal occupation tax; and in any
event, the Legislature may, in its discretion, select what occupations shall be taxed, and in the exercise of that
discretion it may tax all, or it may select for taxation certain classes and leave the others untaxed.
Moreover, as the seat of the National Government and with a population and volume of trade many times that of any
other Philippine city or municipality, Manila, no doubt, offers a more lucrative field for the practice of the professions,
so that it is but fair that the professionals in Manila be made to pay a higher occupation tax than their brethren in the
provinces.
Plaintiffs make a distinction that is not found in the ordinance. The ordinance imposes the tax upon every person
"exercising" or "pursuing" — in the City of Manila naturally — any one of the occupations named, but does not say that
such person must have his office in Manila. What constitutes exercise or pursuit of a profession in the city is a matter
of judicial determination.
60. Tolentino v. Secretary of Finance, 25 August 1994
Facts: VAT is levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of
services. RA 7716 seeks to widen the tax base of the existing VAT system and enhance its administration by amending
the NIRC. There are various suits challenging the constitutionality of RA 7716 on various grounds
One contention is that RA 7716 did not originate exclusively in the House of Representatives as required by Art. VI,
Sec. 24 of the Constitution, because it is in fact the result of the consolidation of 2 distinct bills, H. No. 11197 and S.
No. 1630. There is also a contention that S. No. 1630 did not pass 3 readings as required by the Constitution.
Issue: Whether or not RA 7716 violates Art. VI, Secs. 24 and 26(2) of the Constitution
Held: The argument that RA 7716 did not originate exclusively in the HoR as required by Art. VI, Sec. 24 of the
Constitution will not bear analysis. To begin with, it is not the law but the revenue bill which is required by the
Constitution to originate exclusively in the HoR . To insist that a revenue statute and not only the bill which initiated the
legislative process culminating in the enactment of the law must substantially be the same as the House bill would be
to deny the Senate’s power not only to concur with amendments but also to propose amendments. Indeed, what the
Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills authorizing an increase of the
public debt, private bills and bills of local application must come from the HoR on the theory that, elected as they are
from the districts, the members of the House can be expected to be more sensitive to the local needs and problems.
The Constitution does not prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the bill from
the House, so long as action by the Senate as a body is withheld pending receipt of the House bill
The next argument of the petitioners was that S. No. 1630 did not pass 3 readings on separate days as required by
the Constitution because the second and third readings were done on the same day. But this was because the
President had certified S. No. 1630 as urgent. The presidential certification dispensed with the requirement not only of
printing but also that of reading the bill on separate days. That upon the certification of a bill by the President the
requirement of 3 readings on separate days and of printing and distribution can be dispensed with is supported by the
weight of legislative practice.
61. British American Tobacco Corporation v Finance Secretary Camacho, BIR Commissioner ParaynoG.R No.
163583 | April 15, 2009
Facts:
• British American Tobacco filed a Motion for Reconsideration for the Court’s decision in 2008
• Petitioner interposes that the assailed provisions:
(1) violate the equal protection and uniformity of taxation clauses of the Constitution,
(2) contravene Section 19,[1] Article XII of the Constitution on unfair competition, and
(3) infringe the constitutional provisions on regressive and inequitable taxation.
• Petitioner further argues that assuming the assailed provisions are constitutional, it is entitled to a downward
reclassification of Lucky Strike from the premium-priced to the high-priced tax bracket.
• Lucky Strike reiterates in its MR that the classification freeze provision violates the equal protection and uniformity of
taxation clauses because older brands are taxed based on their 1996 net retail prices while new brands are taxed
based on their present day net retail prices.
HELD: Petition is denied
• Without merit and a rehash of petitioner’s previous arguments before this Court
• The rational basis test was properly applied to gauge the constitutionality of the assailed law in the face of an equal
protection challenge
The classification is considered valid and reasonable provided that: (1) it rests on substantial distinctions; (2) it is
germane to the purpose of the law; (3) it applies, all things being equal, to both present and future conditions; and (4)
it applies equally to all those belonging to the same class.
• The classification freeze provision was inserted in the law for reasons of practicality and expediency.
o since a new brand was not yet in existence at the time of the passage of RA 8240, then Congress needed a uniform
mechanism to fix the tax bracket of a new brand.
o The current net retail price, similar to what was used to classify the brands under Annex “D” as of October 1, 1996,
was thus the logical and practical choice
• The classification freeze provision was in the main the result of Congress’s earnest efforts to improve the efficiency
and effectivity of the tax administration over sin products while trying to balance the same with other State interests
62. ASSOCIATION OF CUSTOMS BROKERS, INC. and G. MANLAPIT, INC vs.
THE MUNICIPALITY BOARD, THE CITY TREASURER, THE CITY ASSESSOR and THE CITY MAYOR, all of the
City of Manila
G.R. No. L-4376, May 22, 1953
FACTS:
The Association of Customs Brokers, Inc., which is composed of all brokers and public service operators of motor
vehicles in the City of Manila, and G. Manlapit, Inc., a member of said association, also a public service operator of
the trucks in said City, challenge the validity of Ordinance No. 3379 or “An Ordinance Levying a Property Tax on All
Motor Vehicles Operating Within the City of Manila” on the ground that (1) while it levies a so-called property tax it is
in reality a license tax which is beyond the power of the Municipal Board of the City of Manila; (2) said ordinance
offends against the rule of uniformity of taxation; and (3) it constitutes double taxation.
The respondents, represented by the city fiscal, contend on their part that the challenged ordinance imposes a property
tax which is within the power of the City of Manila to impose under its Revised Charter [Section 18 (p) of Republic Act
No. 409], and that the tax in question does not violate the rule of uniformity of taxation, nor does it constitute double
taxation.
The issues having been joined, the Court of First Instance of Manila sustained the validity of the ordinance and
dismissed the petition. Hence this appeal.
ISSUE:
Whether Ordinance No. 3379 is valid.
RULING:
No, it is invalid for levying an excise tax which is not within the scope of the City’s powers and for violating the rule on
uniformity.
Under section 70(b) of the Motor Vehicles Law (Act No. 3392):
“No further fees than those fixed in this Act shall be exacted or demanded by any public highway, bridge or ferry, or
for the exercise of the profession of chauffeur, or for the operation of any motor vehicle by the owner thereof: Provided,
however, That nothing in this Act shall be construed to exempt any motor vehicle from the payment of any lawful and
equitable insular, local or municipal property tax imposed thereupon. . .”
This provision should be construed as limiting the broad grant of power conferred upon the City of Manila by its Charter
to impose taxes, such that only property taxes may be imposed on motor vehicles operating within its territorial
jurisdiction.
Sec. 1 of Ordinance No. 3379 denominates the tax imposed as ad valorem (meaning tax proportional to value of the
property) and while as a rule an ad valorem tax is a property tax, such rule is not absolute. Rather, the character of the
tax (property v. excise) must be determined by its incidents, and from the natural and legal effect of the language
employed in the act or ordinance, and not by the name by which it is described, or by the mode adopted in fixing its
amount. Excise taxes are those imposed upon the performance of an act, enjoyment of a privilege, or the engaging in
an occupation.
The purpose of the ordinance is to raise funds for the repair, maintenance and improvement of the streets and bridges
in said city, something which the Motor Vehicles Law already addresses. The prohibition under sec. 70(b) is meant to
prevent municipal corporations from duplicating the levy since under sec. 73 of the same act, they already participate
in the distribution of the proceeds collected under the Motor Vehicles Law. “It is for this reason that we believe that the
ordinance in question merely imposes a license fee although under the cloak of an ad valorem tax to circumvent the
prohibition above adverted to.”
Moreover, the ordinance violates the rule of uniformity since “[i]t does not distinguish between a motor vehicle hire and
one which is purely for private use. Neither does it distinguish between a motor vehicle registered in the City of Manila
and one registered in another place but occasionally comes to Manila and uses its streets and public highways. The
distinction is important if we note that the ordinance intends to burden with the tax only those registered in the City of
Manila as may be inferred from the word "operating" used therein. The word "operating" denotes a connotation which
is akin to a registration, for under the Motor Vehicle Law no motor vehicle can be operated without previous payment
of the registration fees”.
63. Abakada Guro Party List v. The Honorable Executive Secretary Eduardo Ermita, G.R. No. 168056,
September 01, 2005
Facts: this case a consolidation of cases questioning the validity of R.A . 9337. One of the issues raised is that Whether
Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate Article VI, Section
28(1) of the Constitution. Article VI, Section 28(1) of the Constitution provides: The rule of taxation shall be uniform
and equitable. The Congress shall evolve a progressive system of taxation.
Ruling:
Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same
rate. Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere
with all people at all times. R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate
of 0% or 10% (or 12%) does not apply to sales of goods or services with gross annual sales or receipts not exceeding
₱1,500,000.00. Also, basic marine and agricultural food products in their original state are still not subject to the tax,
thus ensuring that prices at the grassroots level will remain accessible.
Progressive taxation is built on the principle of the taxpayer’s ability to pay. This principle was also lifted from Adam
Smith’s Canons of Taxation, and it states: I. The subjects of every state ought to contribute towards the support of the
government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which
they respectively enjoy under the protection of the state. The VAT is an antithesis of progressive taxation. By its very
nature, it is regressive. The principle of progressive taxation has no relation with the VAT system inasmuch as the VAT
paid by the consumer or business for every goods bought or services enjoyed is the same regardless of income. In
other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in the income
earned by a person or profit margin marked by a business, such that the higher the income or profit margin, the smaller
the portion of the income or profit that is eaten by VAT. A converso, the lower the income or profit margin, the bigger
the part that the VAT eats away. At the end of the day, it is really the lower income group or businesses with low-profit
margins that is always hardest hit.
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it
simply provides is that Congress shall ‘evolve a progressive system of taxation.’ The constitutional provision has been
interpreted to mean simply that ‘direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should
be minimized.’ (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the
mandate to Congress is not to prescribe, but to evolve, a progressive tax system.
64. Francis A.Churchill v. Venancio Concepcion
G.R. No. 11572, September 22, 1916
FACTS: Section 100 of Act No. 2339 imposed an annual tax of P4 per square meter upon electric signs, billboards,
and spaces used for posting or displaying temporary signs, and all signs displayed on premises not occupied by
buildings. This section was subsequently amended by Act No. 2432 by reducing the tax on such signs, billboards, etc.,
to P2 per square meter.
Francis A. Churchill and Stewart Tait, copartners doing business under the firm name of the Mercantile Advertising
Agency, owners of a sign or billboard containing an area of 52 square meters constructed on private property in the
city of Manila and exposed to public view, were taxed P104. The tax was paid under protest and they instituted the
action against the Collector of Internal Revenue to recover back the amount paid.
ISSUE: Whether the tax is void for lack of uniformity
RULING: Uniformity in taxation means that all taxable articles or kinds of property, of the same class, shall be taxed
at the same rate. It does not mean that lands, chattels, securities, incomes, occupations, franchises, privileges,
necessities, and luxuries, shall all be assessed at the same rate. Different articles may be taxed at different amounts,
provided the rate is uniform on the same class everywhere, with all people, and at all times. virtua1aw library
A tax is uniform when it operates with the same force and effect in every place where the subject of it is found. The
statute under consideration imposes a tax of P2 per square meter or fraction thereof upon every electric sign, bill-
board, etc., wherever found in the Philippine Islands. Or in other words, "the rule of taxation" upon such signs is uniform
throughout the Islands. The rule, which we have just quoted from the Philippine Bill, does not require taxes to be
graded according to the value of the subject or subjects upon which they are imposed, especially those levied as
privilege or occupation taxes.
65. Casanovas v. Hord, 8 Phil 125
Facts:
In January, 1897, the Spanish Government, in accordance with the provisions of the royal decree of the 14th of May,
1867, granted to the plaintiff certain mines in the said Province of Ambos Camarines, of which mines the plaintiff is
now the owner.
The Collector of Internal Revenue imposed tax on the properties, contending that they were valid perfected mine
concessions and it falls within the provisions of sec.134 of Act No. 1189 known as Internal Revenue Act. That section
is as follows:
SEC. 134. On all valid perfected mining concessions granted prior to April eleventh, eighteen hundred and ninety-nine,
there shall be levied and collected on the after January first, nineteen hundred and five, the following taxes:
2. (a) On each claim containing an area of sixty thousand square meters, an annual tax of one hundred pesos; (b) and
at the same rate proportionately on each claim containing an area in excess of, or less than, sixty thousand square
meters.
3. On the gross output of each an ad valorem tax equal to three per centum of the actual market value of such output.
The defendant accordingly imposed upon these properties the tax mentioned in section 134, which tax, as has before
been stated, plaintiff paid under protest. He brought an action against the defendant Collector of Internal Revenue to
recover the sum of Php. 9, 600 paid by him as taxes. Judgment was rendered in favor of the defendant, so the plaintiff
appealed.
Issue: Whether or Not Sec. 164 is void or valid.
Held:
The deed constituted a contract between the Spanish Government and the plaintiff. The obligation of which contract
was impaired by the enactment of sec. 134 of the Internal Revenue Law infringing sec. 5 of the Act of Congress which
provides that “no law impairing the obligation of contracts shall be enacted”.
Sec. 134 of theInternal Revenue Law of 1904 is void because it impairs the obligation of contracts contained in the
concessions of mine made by the Spanish Government. Judgment reversed.
66. RCPI v. Provincial Assessor of South Cotabato
G.R. No. 144486. April 13, 2005
FACTS
In 1957, Republic Act No. 2036 (RA 2036) granted RCP a fifty-year franchise. Sec. 14 of such law states that the
grantee (which is RCPI in this case) shall pay the same taxes as are now or may hereafter be required by law xxx on
real estate, buildings, among others. In consideration of the franchise, a tax equal to one and one-half per centum of
all gross receipts from the business transacted under this franchise by the grantee shall be paid to the Treasurer of
the Philippines each year x x. Said tax shall be in lieu of any and all taxes of any kind, nature or description levied,
established or collected by any authority whatsoever, municipal, provincial or national, from which taxes the grantee is
hereby expressly exempted. ("in lieu of all taxes clause")
The municipal treasurer of Tupi, South Cotabato assessed RCPI real property taxes from 1981 to 1985 on its radio
station building in Barangay Kablon, as well as on its machinery shed, radio relay station tower and its accessories,
and generating sets, based on the tax declarations filed by RCPI
RCPI opposed, contending that all its assessed properties are personal properties and thus exempt from the real
property tax. Assuming that the assessed properties are real property, they are still exempt from real property taxes
Section of Presidential Decree No. 464 states that to be taxable, the machinery should be attached to the real estate
and esse for manufacturing commercial, mining, industrial, or agricultural purposes. RCPI claimed that the assessed
properties are not used for manufacturing, commercial, industrial, or agricultural purposes. Therefore, RCPI is not
liable for real property tax on its machinery and radio equipment mounted as accessories to its relay tower. As RCPls
tax exemption covers only its radio equipment, machinery, and spare parts essential to its business, it is liable for realty
tax on its radio station building, radio station building, machinery shed, and relay station tower
ISSUE: WON RCPI tower, relay station building and machinery shed are exempted from tax?
RULING:
No, it is not exempt. RCPI contends that the "in lieu of all taxes clause" in its amended franchise exempts it from paying
all taxes other than franchise tax. It is thus no longer necessary to determine whether the tower, relay station building,
and machinery shed are radio equipment for purposes of exemption from the real estate tax.
The in lieu of all taxes clause in Section 14 of RA 2036, as amended by RA 4054, cannot exempt RCPI from the real
estate tax because the same Section 14 expressly states that RCPI shall pay the same taxes xxx on real estate,
buildings x x x. The in eu of all taxes clause in the third sentence of Section 14 cannot negate the first sentence of the
same Section 14, which imposes the real estate tax on RCPI. The Court must give effect to both provisions of the
same Section 14.
Moreover, The clear language of Section 14 states that RCPI shall pay the real estate tax, to wit: the grantee (which
is RCPI in this case) shall pay the same taxes as are now or may hereafter be required by law xxx on real estate,
buildings.
67. City Government of Quezon City v. Bayan Telecommunications, Inc.
[G.R. No.162015. March 6, 2006]
(digest-adopted)
FACTS
Respondent Bayan Telecommunications, Inc. (Bayantel) is a legislative franchise holder under Republic Act (R.A.) No.
3259 (1961) to establish and operate radio stations for domestic telecommunications, radiophone, broadcasting and
telecasting. Section 14 (a) of R.A. No. 3259 states: “The grantee shall be liable to pay the same taxes on its real
estate, buildings and personal property, exclusive of the franchise, xxx”. In 1992, R.A. No. 7160, otherwise known as
the “Local Government Code of 1991” (LGC) took effect. Section 232 of the Code grants local government units within
the Metro Manila Area the power to levy tax on real properties. Barely few months after the LGC took effect, Congress
enacted R.A. No. 7633, amending Bayantel’s original franchise. The Section 11 of the amendatory contained the
following tax provision: “The grantee, its successors or assigns shall be liable to pay the same taxes on their real
estate, buildings and personal property, exclusive of this franchise, xxx“. In 1993, the government of Quezon City
enacted an ordinance otherwise known as the Quezon City Revenue Code withdrawing tax exemption privileges.
ISSUE
Whether or not Bayantel’s real properties in Quezon City are exempt from real property taxes under its franchise.
RULING
YES. A clash between the inherent taxing power of the legislature, which necessarily includes the power to exempt,
and the local government’s delegated power to tax under the aegis of the 1987 Constitution must be ruled in favor of
the former. The grant of taxing powers to LGUs under the Constitution and the LGC does not affect the power of
Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the
constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing
powers, doubts must be resolved in favor of municipal corporations.
The legislative intent expressed in the phrase “exclusive of this franchise” cannot be construed other than
distinguishing between two (2) sets of properties, be they real or personal, owned by the franchisee, namely, (a) those
actually, directly and exclusively used in its radio or telecommunications business, and (b) those properties which are
not so used. It is worthy to note that the properties subject of the present controversy are only those which are
admittedly falling under the first category.
Since R. A. No. 7633 was enacted subsequent to the LGC, perfectly aware that the LGC has already withdrawn
Bayantel’s former exemption from realty taxes, the Congress using, Section 11 thereof with exactly the same defining
phrase “exclusive of this franchise” is the basis for Bayantel’s exemption from realty taxes prior to the LGC. In plain
language, the Court views this subsequent piece of legislation as an express and real intention on the part of Congress
to once again remove from the LGC’s delegated taxing power, all of the franchisee’s (Bayantel’s) properties that are
actually, directly and exclusively used in the pursuit of its franchise.
68. SMART COMMUNICATIONS v. CITY OF DAVAO SEPTEMBER 16, 2008
FACTS: The Tax Code of the City of Davao provides that, notwithstanding any exemption granted by law or special
law, businesses enjoying franchise at 75% shall pay 1% franchise tax of the gross annual receipts realized within the
territorial jurisdiction of Davao. Smart contended that its telecenter in Davao should be exempt from payment of
Franchise tax based on: a) issuance of franchise tax under RA 7294 shows legislative intent to exempt it; b) RA 7160
applies to exemptions already existing at the time of effectivity and not future exemptions (LGC withdrawing tax
exemptions to GOCCs); c) power of City to tax is limited to statutory limitations; d) imposing franchise taxes on those
entities that are granted exemption by law is a violation of the Constitutional provision against impairment of contracts.
The RTC ruled that exemptions must be construed against the taxpayer, thus Smart must pay the franchise tax to the
LGU. The power to tax of the City is not merely delegated but is granted under the Constitution, and while subject to
restriction, must be consistent with basic policy of local autonomy.
Issue: Whether or not Smart must pay franchise taxes to the City of Davao.
Whether or not withdrawing its tax exemption is a violation of the non-impairment clause.
Ruling: Yes. Months before the franchise was granted to Smart (exempting it from all local and national tax except
VAT), the Local Government Code of 1991 took effect. Section 137 provides that “Notwithstanding any exemption
granted by law or special laws…” the province may impose a tax on businesses enjoying a franchise, provided that
rate is less than or equal to 50% of the 1% of the annual receipt. Since Smart’s franchise was given after the LGC took
effect, then the exemption is withdrawn and it cannot invoke its non-inclusion in the withdrawal of exemption. Smart’s
contention that Congress intended for it to be exempt is untenable for there is no evidence shown to support it. The
doubt must be resolved in favor of the State, thus the exemption to pay franchise tax only applies to national taxes but
not on local taxes.
There is no violation of the non-impairment of contracts clause. A franchise is subject to express condition that it can
be amended, repealed or altered. The contract clause has never been a limitation of the exercise of the power of
taxation except when the exemption is for a valid consideration.
69. QUEZON CITY AND THE CITY TREASURER OF QUEZON CITY v. ABS-CBN BROADCASTING
CORPORATION
G.R. No. 166408, October 6, 2008
FACTS: The City Treasurer of Quezon City is responsible for the imposition and collection of taxes within the territorial
jurisdiction of Quezon City. Section 31, Article 13 of Quezon City’s Revenue Code provides that franchise taxes are to
be imposed on businesses operating within its jurisdiction. ABS-CBN was granted the franchise to install and operate
radio and TV broadcasting stations in the country under R.A. 7966. The law also provides that they should pay a
franchise tax equivalent to 3% of all gross receipts of the radio/TV businesses transacted under this franchise by the
grantee, its successors or assigns. This franchise tax shall be in lieu of all taxes on this franchise or earnings thereof.
ABS-CBN had been paying the local franchise tax imposed by Quezon City. However, it contended that it is not liable
to pay the local franchise tax. ABS-CBN paid the local franchise tax under protest from 1995 to 1997. ABS-CBN filed
a written claim for refund for the local franchise taxes paid to the city for 1996 and for the first quarter of 1997, which
amounted to P14,233,582.29. It sent a letter to the City Treasurer and reiterated their claim for the refund. There was
no response, so ABS-CBN filed a complaint before the RTC to nullify the imposition of local franchise tax because the
law is unconstitutional. It also prayed for the refund of local franchise tax amounting to P19,944,672.66. Quezon City
argued that the phrase “in lieu of all taxes” does not intend to prevail over a constitutional mandate which ensures the
viability and self-sufficiency of LGUs. The city also contended that the taxes paid to the local government were distinct
from taxes paid to the national government. Lastly, it said that the exemption of ABS-CBN was withdrawn when the
Congress passed the Local Government Code. ABS-CBN filed a supplemental complaint and claimed for a refund for
the local franchise tax paid in 1997, amounting to P2,731,135.81.
ISSUE: Whether the imposition of local franchise tax was an impairment of ABS-CBN’s contract with the government;
Whether the phrase “in lieu of all taxes” serves to exempt the company from paying local franchise tax
HELD:
The imposition of the local franchise tax was an impairment of ABS-CBN's contract with the government. The
imposition of another franchise on the corporation by the local authority would constitute an impairment of the former's
charter, which is in the nature of a private contract between it and the government. (nasa RTC ruling pero ito, kaso
kasi ung case nasa under ng Constitutional Limitations sa syllabus number IV eh. Nilagay ko nalang.)
The “in lieu of all taxes” provision does not exempt ABS-CBN from payment of local franchise tax. The power of the
local government of Quezon City to impose franchise tax is based on Section 151 in relation to Section 137 of the
LGC. Taxes are what civilized people pay for civilized society. They are the lifeblood of the nation. Thus, statutes
granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority.
The basis for the rule on strict construction to statutory provisions granting tax exemptions or deductions is to minimize
differential treatment and foster impartiality, fairness and equality of treatment among taxpayers. For exemptions from
taxation are not favored in law, nor are they presumed. They must be expressed in the clearest and most unambiguous
language and not left to mere implications.
70. American Bible Society vs City of Manila
G.R.No L-3967
Facts:
American Bible Society is a foreign, non-stock, non-profit, religious, missionary corporation duly registered and doing
business in the Philippines through its Philippine agency established in Manila.
American Bible Society has been distributing and selling bibles and/or gospel portions throughout the Philippines and
translating the same into several Philippine dialect so the City Treasurer of Manila informed American Bible Society
that it was violating several Ordinances for operating without the necessary permit and license, thereby requiring the
corporation to secure the permit and license fees and to avoid closing of its business, American Bible Society paid the
City of Manila its permit and license fees under protest.
American Bible filed a complaint, questioning the constitutionality and legality of the Ordinances 2529 and 3000, and
prayed for a refund of the payment made to the City of Manila. They contended that they had been in the Philippines
since 1899 and were not required to pay any license fee or sales tax and it never made any profit from the sale of its
bibles but the
City of Manila prayed that the complaint be dismissed, reiterating the constitutionality of the Ordinances in question.The
trial Court dismissed the complaint.American Bible Society appealed to the Court of Appeals.
Issue:
Whether or not American Bible Society liable to pay sales tax for the distribution and sale of bibles
Held:
No. The American Bible Society is not not liable to pay sales tax. The Supreme Court held that in the case at bar the
price asked for the bibles and other religious pamphlets was in some instances a little bit higher than the actual cost
of the same but this cannot mean that appellant was engaged in the business or occupation of selling said
“merchandise” for profit. For the reason that the provisions of City of Manila Ordinance No. 2529, as amended, cannot
be applied to appellant, for in doing so it would impair its free exercise and enjoyment of its religious profession and
worship as well as its rights of dissemination of religious beliefs.
The Supreme Court reversed the decision of the Court of Appeals and sentencing defendant return to plaintiff the sum
of P5,891.45 unduly collected from it.
71. TOLENTINO V. SECRETARY OF FINANCE
G.R. No. 115455 October 30, 1995
FACTS: Philippine press insitute contends that by removing the exemption of the press from the VAT while maintaining
those granted to others, the law discriminates against the press. At any rate, it is averred, "even nondiscriminatory
taxation of constitutionally guaranteed freedom is unconstitutional."
The Philippine Press institute questions the validity of the registration provisions of the VAT Law, R.A 7716 as a prior
restraint, because it imposes a generally applicable sales and use tax on the sale of religious materials by a religious
organization.
Issue:
Is R.A 7716 or the Expanded VAT unconstitutional?
Held:
No. R.A 7716 is not unconstitutional
VAT law is not a license tax. It is not a tax on the exercise of a privilege, much less a constitutional right. It is imposed
on the sale, barter, lease or exchange of goods or properties or the sale or exchange of services and the lease of
properties purely for revenue purposes. To subject the press to its payment is not to burden the exercise of its right
any more than to make the press pay income tax or subject it to general regulation is not to violate its freedom under
the Constitution.
The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for regulation. Its
imposition on the press is unconstitutional because it lays a prior restraint on the exercise of its right. Hence, although
its application to others, such those selling goods, is valid, its application to the press or to religious groups, such as
the Jehovah's Witnesses, in connection with the latter's sale of religious books and pamphlets, is unconstitutional. As
the U.S. Supreme Court put it, "it is one thing to impose a tax on income or property of a preacher. It is quite another
thing to exact a tax on him for delivering a sermon."
72. Philippine Press Institute, et al. v. Chato, et al.
G.R. No. 115754, August 25, 1994
FACTS:
These are a total of 10 motions seeking reconsideration of our decision dismissing the petitions filed in these cases
for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded Value-Added Tax Law.
Now it is contended by the Philippine Press Institute (PPI) that by removing the exemption of the press from the VAT
while maintaining those granted to others, the law discriminates against the press. At any rate, it is averred, “even
nondiscriminatory taxation of constitutionally guaranteed freedom is unconstitutional.”
ISSUE:
Does sales tax on bible sales violative of religious and press freedom?
RULING:
No. The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for regulation. Its
imposition on the press is unconstitutional because it lays a prior restraint on the exercise of its right. Hence, although
its application to others, such those selling goods, is valid, its application to the press or to religious groups, such as
the Jehovah’s Witnesses, in connection with the latter’s sale of religious books and pamphlets, is unconstitutional. As
the U.S. Supreme Court put it, “it is one thing to impose a tax on income or property of a preacher. It is quite another
thing to exact a tax on him for delivering a sermon.”
We have held that, as a general proposition, the press is not exempt from the taxing power of the State and that what
the constitutional guarantee of free press prohibits are laws which single out the press or target a group belonging to
the press for special treatment or which in any way discriminate against the press on the basis of the content of the
publication, and R.A. No. 7716 is none of these.
It would suffice to say that since the law granted the press a privilege, the law could take back the privilege anytime
without offense to the Constitution. The reason is simple: by granting exemptions, the State does not forever waive the
exercise of its sovereign prerogative.
VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege, much less a constitutional
right. It is imposed on the sale, barter, lease or exchange of goods or properties or the sale or exchange of services
and the lease of properties purely for revenue purposes.
To subject the press to its payment is not to burden the exercise of its right any more than to make the press pay
income tax or subject it to general regulation is not to violate its freedom under the Constitution
Even if the PBS distributes free bibles and therefore is not liable to pay the VAT does not excuse it from the payment
of this fee because it also sells some copies.
73. HOSPITAL DE SAN JUAN DE DIOS, INC. v. PASAY CITY
GR No. L-19871 February 28, 1966
FACTS:
Hospitla de San Juan de Dios (HOSPITAL) paid P826.60 and P879.90 under protest to the City of Pasay, as electrical
inspection fees under Ordinance No. 54. The said ordinance states that the City Electrician shall inspect all electric
wires, poles and other apparatus used for generating electricity, and it further states that churches and such other
religious institutions and buildings housing charitable organizations, are likewise subject to annual inspection but
exempted from the payment of inspection fees. HOSPITAL now claims that, as a charitable institution, it was exempt
from the payment of the inspection fees provided by the ordinance. However, Pasay City Mayor Pablo Cuneta and the
City Engineer refused to issue a building permit to make additional constructions applied for by appellant until after the
full payment of the electrical inspection fees assessed against it by City Engineer Ascaño. As a result, HOSPITAL filed
this case against the City of Pasay, the Mayor and the City Engineer.
ISSUE: Whether or not the HOSPITAL is a charitable institution and is therefore exempt from payment of the inspection
fees.
HELD: Yes.
The HOSPITAL was organized as a charitable institution and thus, the presumption is that it is operating as such. The
burden of proof is on the City of Pasay and other respondents to show that it is operating otherwise. Aside from the
HOSPITAL’s Articles of Incorporation showing that it had no capital stock and that no part of its net income, if any,
could inure to the benefit of any private individual, there is also a ruling of the Workmen’s Workmen's Compensation
Commissioner and the Undersecretary of Labor to the effect that the HOSPITAL is a charitable institution exempt from
the scope of the Workmen's Compensation Act; a written statement of its cashier that the HOSPITAL maintains two
free wards of sixty beds each; an admission to the effect that, in addition to the free wards just mentioned, the
HOSPITAL also maintains six free beds in the Pediatrics Section. The American Rule states that the general rule that
a charitable institution does not lose its charitable character and its consequent exemption from taxation merely
because recipients of its benefits who are able to pay are required to do so, where funds derived in this manner are
devoted to the charitable purposes of the institution, applies to hospitals. The Supreme Court held that the making of
profit does not destroy the tax exemption of a charitable institution. Needless to say, every responsible organization
must be so run as to at least, insure its existence, by operating within the limits of its own resources, especially its
regular income. In other words, it should always strive, whenever possible, to have a surplus.
74. Commissioner v. Court of Appeals, G.R. No. L-124043, October 14, 1998
FACTS OF THE CASE:
YMCA is a non-stock non-profit institution which conducts various programs and activities beneficial to the public
pursuant to its religious, educational and charitable objectives.
YMCA realized an income in the amount of P 676,829 from leasing out portion of its premises to small shop owners,
restaurants, canteens and parking fees.
Now the Commissioner of Internal Revenue issued an assessment against the YMCA in connection with the income
it earned as a result of the activities it is engaged in.
YMCA however protested the said assessment made by the Commissioner which the Commissioner denied the
protest.
YMCA filed a petition for review before the Court of Tax Appeals which was granted and the Court of Tax Appeals
ruled in favor of YMCA saying that, the leasing of the property to small shop owners are merely incidental to the
accomplishment of its objectives.
The Commissioner elevated the case before the Court of Appeals and reversed the decision of the CTA.
YMCA then filed a motion for reconsideration before the Court of Appeals and the appellate court reversed its ruling
saying it cannot depart from the finding of facts by the Court of Tax Appeals.
ISSUE OF THE CASE:
Whether the rental income by the YMCA taxable?
RULING OF THE CASE:
Section 27 of the NIRC states that:
Exemptions from tax on corporations.
The following organizations shall not be taxed under this Title in respect to income received by them as such ---
g) Civil League or organization not organized for profit but operated exclusively for the promotion of social welfare;
h) Club organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, no part of the
net income of which inures to the benefit of any private stockholder or member;
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted shall be
subject to the tax imposed under this Code. (as amended by Pres. Decree No. 1457)
The rental income is not exempt from taxation. The income received by the organization, as a rule, is exempt from
payment of tax in respect to the income received by them as such. However, the exemption does not apply to the
income derived from their properties, real or personal or from any of their activities.
What is exempted is not the institution itself but the lands, buildings, and improvements being used directly and
exclusively for religious, charitable or educational purposes.
75. Lung Center of the Philippines v. Quezon City, 433 SCRA 119 [2004]
FACTS: Lung Center of the Philippines is a non-stock and non-profit entity established by virtue of PD No. 1823. It is
the registered owner of the land on which the Lung Center of the Philippines Hospital is erected. A big space in the
ground floor of the hospital is being leased to private parties, for canteen and small store spaces, and to medical or
professional practitioners who use the same as their private clinics. Also, a big portion on the right side of the
hospital is being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden
Center.
When the City Assessor of Quezon City assessed both its land and hospital building for real property taxes, the Lung
Center of the Philippines filed a claim for exemption on its averment that it is a charitable institution with a minimum
of 60% of its hospital beds exclusively used for charity patients and that the major thrust of its hospital operation is to
serve charity patients.
The claim for exemption was denied, prompting a petition for the reversal of the resolution of the City Assessor with
the Local Board of Assessment Appeals of Quezon City, which denied the same. On appeal, the Central Board of
Assessment Appeals of Quezon City affirmed the local board’s decision, finding that Lung Center of the Philippines
is not a charitable institution and that its properties were not actually, directly and exclusively used for charitable
purposes.
Hence, the present petition for review with averments that the Lung Center of the Philippines is a charitable
institution under Section 28(3), Article VI of the Constitution, notwithstanding that it accepts paying patients and rents
out portions of the hospital building to private individuals and enterprises.
ISSUE: Is the Lung Center of the Philippines a charitable institution within the context of the Constitution, and
therefore, exempt from real property tax?
RULING: The Lung Center of the Philippines is a charitable institution. To determine whether an enterprise is a
charitable institution or not, the elements which should be considered include the statute creating the enterprise, its
corporate purposes, its constitution and by-laws, the methods of administration, the nature of the actual work
performed, that character of the services rendered, the indefiniteness of the beneficiaries and the use and
occupation of the properties.
However, under the Constitution, in order to be entitled to exemption from real property tax, there must be clear and
unequivocal proof that (1) it is a charitable institution and (2) its real properties are ACTUALLY,DIRECTLY and
EXCLUSIVELY used for charitable purposes.
While portions of the hospital are used for treatment of patients and the dispensation of medical services to them,
whether paying or non-paying, other portions thereof are being leased to private individuals and enterprises.
Exclusive is defined as possessed and enjoyed to the exclusion of others, debarred from participation or enjoyment.
If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes
but is subject to taxation. Therefore,mthe SC held that portions of the land leased to private entities as well as those
parts of the hospital leased to private individuals are not exempt from such taxes. 45 On the other hand, the portions
of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying,
are exempt from real property taxes.
76. ABRA VALLEY COLLEGE, INC., petitioner,
VS.
HON. JUAN P. AQUINO, JUDGE, COURT OF FIRST INSTANCE, ABRA, respondent.
G.R. No. L-39086, June 15, 1988
Facts:
Abra Valley Junior College, Inc. is the owner of the lot and buildings located in Bangued, Abra. A portion of its lot is
used as the permanent residence of the President and Director, Mr. Pedro V. Borgonia, and for commercial purposes,
because the ground floor of the college building is being used and rented by a commercial establishment, the Northern
Marketing Corporation. For non-payment of real estate taxes, the properties of Abra Valley Junior College was sold at
public auction for the satisfaction of the unpaid real estate taxes.
However, Abra Valley College contends that the primary use of the lot and building for educational purposes, and not
the incidental use, determines and exemption from property taxes under Section 22 (3), Article VI of the 1935
Constitution. Hence, the seizure and sale of subject college lot and building, which are contrary thereto as well as to
the provision of Commonwealth Act No. 470, otherwise known as the Assessment Law, are without legal basis and
therefore void.
On the other hand, private respondents maintain that the college lot and building in question which were subjected to
seizure and sale to answer for the unpaid tax are used: (1) for the educational purposes of the college; (2) as the
permanent residence of the President and Director thereof, Mr. Pedro V. Borgonia, and his family including the in-laws
and grandchildren; and (3) for commercial purposes because the ground floor of the college building is being used and
rented by a commercial establishment.
In this regard petitioner argues that the primary use of the school lot and building is the basic and controlling guide,
norm and standard to determine tax exemption, and not the mere incidental use thereof.
Issue:
Whether or not the lot portion of the college occupied by a commercial establishment and residence of the director
exempt from real estate tax.
Ruling:
The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution (Apostolic
Prefect v. City Treasurer of Baguio, 71 Phil. 547 [19411).
It must be stressed however, that while this Court allows a more liberal and non-restrictive interpretation of the phrase
"exclusively used for educational purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935 Philippine
Constitution, reasonable emphasis has always been made that exemption extends to facilities which are incidental to
and reasonably necessary for the accomplishment of the main purposes. Otherwise stated, the use of the school
building or lot for commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the use of
the second floor of the main building in the case at bar for residential purposes of the Director and his family, may find
justification under the concept of incidental use, which is complimentary to the main or primary purpose — educational,
the lease of the first floor thereof to the Northern Marketing Corporation cannot by any stretch of the imagination be
considered incidental to the purpose of education.
Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school building as well as the lot
where it is built, should be taxed, not because the second floor of the same is being used by the Director and his family
for residential purposes, but because the first floor thereof is being used for commercial purposes. However, since only
a portion is used for purposes of commerce, it is only fair that half of the assessed tax be returned to the school
involved.
77. Commissioner of Internal Revenue
v.
St. Luke’s Medical Center, Inc.
FACTS:
The petition in one case revolves around the issue of the enactment of section 27 (B) whicht takes proprietary non-
profit hospitals out of the income tax exemption and imposes a 10% tax on their income. The second case revolves
around the issue of factual matters which was dismissed outright by the Supreme Court.
St. Luke’s Medical Center is a hospital organized as a non-stock and non-profit corporation and among its corporate
purposes are: 1) to establish and operate a non-profit Christian charitable and scientific hospital for curative and
rehabilitative care; 2) to provide a career of health science education and provide medical services to the community
through organized clinics; 3) to carry on educational activities related to the maintenance and promotion of health. The
BIR assessed St. Luke’s taxes amounting to 76 billion which was later reduced by the BIR to 63 Billion. St. Luke’s filed
a protest and the BIR did not act on the protest which led them to appeal to the Court of Tax Appeals. Another protest
was file with the BIR for deficiency tax assessment and again the BIR did not act on it which led to the filing of another
case with the Court of Tax Appeals.
BIR contended that the NIRC imposed a 10% preferential tax rate on the income of proprietary non-profit hospitals
should be applied to St. Luke’s and that the provision amended the exemption on non-profit hospitals. BIR claimed
that St. Luke’s operated for profit because 13% of its revenues came from charitable purposes and that its board of
trustees and employees directly benefited from its profits. In 1998 they had 1.73 billion form patient services.
St. Luke’s contends that the BIR should not consider its total revenues because its free services to patients was 218
million.
The CTA granted the review and ordered St. Luke’s Medical Center to pay the income tax deficiency of 6 million.
ISSUE:
➢ Whether St. Luke’s is liable for the income tax deficiency under section 27 (B) which imposes a preferential tax rate
of 10% on their income.
RULING:
As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply
because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies
from the government, so long as the money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution.
The test of exemption is not strictly a requirement on the intrinsic nature or character of the institution. The test requires
that the institution use the property in a certain way, i.e. for a charitable purpose. The Constitution exempts charitable
institutions only from real property taxes. In the NIRC, Congress decided to extend the exemption to income taxes.
However, the way Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of
the Constitution. Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax. On
the other hand, Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that
the institution "actually, directly and exclusively" use the property for a charitable purpose.
St. Luke's failed to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from
all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does
not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St.
Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-
profit activities.
St. Luke's is therefore liable for deficiency income tax.
78. ABAKADA Guro Party List v. Hon. Exec. Sec. Ermita, 01 September 2005
79. John Hay Peoples Alternative Coalition et al. vs. Lim
G.R. No. 119775
October 24, 2003
FACTS
The meat of this petition is the validity of the tax exemption granted to Camp John Hay pursuant to the presidential
procalamation that it is a Special Economic Zone hence tax exempt.
Camp John Hay was an extension of Clark and Subic military reservations under the 1947 Philippines-United States
of America Military Bases Agreement. As such, it was one of the bases intended to be converted and developed as a
recreational area pursuant to the Bases Conversion and Development Act of 1992 (RA 7227). The Sangguniang
Panlunsod of Baguio City then passed a resolution requesting the Mayor to order the determination of realty taxes
which may otherwise be collected from real properties of Camp John Hay. Allegedly, the resolution was intended to
intelligently guide the sanggunian in determining its position on whether Camp John Hay be declared a Special
Economic Zone (SEZ), it (the sanggunian) being of the view that such declaration would exempt the camp's property
and the economic activity therein from local or national taxation. A month later, the sanggunian passed Resolution No.
255, seeking the issuance by then President Ramos of a presidential proclamation declaring an area of 288.1 hectares
of the camp as a SEZ in accordance with the provisions of R.A. No. 7227. President Ramos thereafter declared Camp
John Hay an SEZ. Consequently, Camp John Hay was granted tax exemption by virtue of its being a Special Economic
Zone.
Petitioners are now contending that RA 7227 does not grant tax exemptions to SEZs yet to be established in base
areas, unlike the grant under Section 12 thereof of tax exemption and investment incentives to the therein established
Subic SEZ. More importantly, petitioners contend that the tax exemption granted to Camp John Hay runs counter to
Article VI, Section 28 (4) of the Constitution which provides that "No law granting any tax exemption shall be passed
without the concurrence of a majority of all the members of Congress."
ISSUE: May tax exemption be granted without the concurrence of a majority of all the members of Congress as in the
case of mere presidential proclamation?
RULING: No. It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ which was granted by Congress
with tax exemption, investment incentives and the like. There is no express extension of the aforesaid benefits to other
SEZs still to be created at the time via presidential proclamation. xxx The incentives under R.A. No. 7227 are exclusive
only to the Subic SEZ, hence, the extension of the same to the John Hay SEZ finds no support therein.
It is the legislature, unless limited by a provision of the state constitution, that has full power to exempt any person or
corporation or class of property from taxation, its power to exempt being as broad as its power to tax. The challenged
grant of tax exemption would circumvent the Constitution's imposition that a law granting any tax exemption must have
the concurrence of a majority of all the members of Congress. If it were the intent of the legislature to grant to the John
Hay SEZ the same tax exemption and incentives given to the Subic SEZ, it would have so expressly provided in the
R.A. No. 7227.
The Court then declared that the grant by Proclamation No. 420 of tax exemption and other privileges to the John Hay
SEZ is void for being violative of the Constitution.
#80 G.R. No. 115852 October 30, 1995
PHILIPPINE AIRLINES, INC., v. THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL REVENUE
Facts: PAL was exempted from the payment of the VAT along with other entities by Section 103 of the National Internal
Revenue Code. PAL maintains that R.A. No. 7716 violates Art. VI, (1) of the Constitution which provides that "Every
bill passed by Congress shall embrace only one subject which shall be expressed in the title thereof." PAL contends
that the amendment of its franchise by the withdrawal of its exemption from the VAT is not expressed in the title of the
law.
Pursuant to 13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu of all other taxes, duties,
royalties, registration, license and other fees and charges of any kind, nature, or description, imposed, levied,
established, assessed or collected by any municipal, city, provincial or national authority or government agency, now
or in the future."
Issue: Whether RA7716 is unconstitutional?
Ruling: Congress thereby clearly expresses its intention to amend any provision of the NIRC which stands in the way
of accomplishing the purpose of the law.
PAL asserts that the amendment of its franchise must be reflected in the title of the law by specific reference to P.D.
No. 1590. It is unnecessary to do this in order to comply with the constitutional requirement, since it is already stated
in the title that the law seeks to amend the pertinent provisions of the NIRC, among which is §103(q), in order to widen
the base of the VAT. Actually, it is the bill which becomes a law that is required to express in its title the subject of
legislation. The titles of H. No. 11197 and S. No. 1630 in fact specifically referred to §103 of the NIRC as among the
provisions sought to be amended. We are satisfied that sufficient notice had been given of the pendency of these bills
in Congress before they were enacted into what is now R.A. No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PAL was rejected. R.A. No.
7354 contained a provision repealing all franking privileges. It was contended that the withdrawal of franking privileges
was not expressed in the title of the law. In holding that there was sufficient description of the subject of the law in its
title, including the repeal of franking privileges, this Court held:
To require every end and means necessary for the accomplishment of the general objectives of the statute to be
expressed in its title would not only be unreasonable but would actually render legislation impossible. [Cooley,
Constitutional Limitations, 8th Ed., p. 297] As has been correctly explained:
The details of a legislative act need not be specifically stated in its title, but matter germane to the subject as expressed
in the title, and adopted to the accomplishment of the object in view, may properly be included in the act. Thus, it is
proper to create in the same act the machinery by which the act is to be enforced, to prescribe the penalties for its
infraction, and to remove obstacles in the way of its execution. If such matters are properly connected with the subject
as expressed in the title, it is unnecessary that they should also have special mention in the title. (Southern Pac. Co.
v. Bartine, 170 Fed. 725)
81. Commissioner Of Internal Revenue v. De La Salle University, Inc., G.R. No. 196596, 9 November 2016
82. MANILA INTERNATIONAL AIRPORT AUTHORITY vs. COURT OF APPEALS
G.R. No. 155650 July 20, 2006
FACTS:
As operator of the international airport, MIAA administers the land, improvements and equipment within the NAIA
Complex. The MIAA Charter transferred to MIAA approximately 600 hectares of land. It further provides that no portion
of the land transferred to MIAA shall be disposed of through sale or any other mode unless specifically approved by
the President of the Philippines.
On June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of Parañaque. The Mayor
of the City of Parañaque threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to pay
the real estate tax delinquency estimated at P624 million.
MIAA filed with the Court of Appeals an original petition for prohibition and injunction, with prayer for preliminary
injunction or temporary restraining order. The petition sought to restrain the City of Parañaque from imposing real
estate tax on, levying against, and auctioning for public sale the Airport Lands and Buildings. MIAA contended that
Section 21 of the its Charter specifically exempts MIAA from the payment of real estate tax. They insist that it is also
exempt from real estate tax under Section 234 of the Local Government Code because the Airport Lands and Buildings
are owned by the Republic. To justify the exemption, MIAA invokes the principle that the government cannot tax itself.
MIAA points out that the reason for tax exemption of public property is that its taxation would not inure to any public
advantage, since in such a case the tax debtor is also the tax creditor.
The respondents on the other hand invoked Section 193 of the Local Government Code, which expressly withdrew the
tax exemption privileges of "government-owned and-controlled corporations" upon the effectivity of the Local
Government Code. Thus, respondents assert that MIAA cannot claim that the Airport Lands and Buildings are exempt
from real estate tax.
The petition was dismissed. MIAA filed for reconsideration which was also denied.
ISSUE:
Whether the land, improvements and equipment administered by MIAA within the NAIA Complex are tax-exempt.
HELD:
Yes. These properties are tax-exempt.
MIAA is not a government-owned or controlled corporation but an instrumentality of the National Government.
A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code which recognizes
the basic principle that local governments cannot tax the national government, which historically merely delegated to
local governments the power to tax. There is also no reason for local governments to tax national government
instrumentalities for rendering essential public services to inhabitants of local governments. The only exception is when
the legislature clearly intended to tax government instrumentalities for the delivery of essential public services for sound
and compelling policy considerations. There must be express language in the law empowering local governments to
tax national government instrumentalities. When local governments invoke the power to tax on national government
instrumentalities, such power is construed strictly against local governments.
83. Mactan Cebu International Airport Authority v. Hon. Ferdinand J. Marcos,
G.R. No. 120082, 11 September 1996
FACTS: Mactan Cebu International Airport Authority (MCIAA) was created by virtue of RA 6958. Since the time of its
creation, MCIAA enjoyed the privilege of exemption from payment of realty taxes in accordance with Section 14 of its
Charter. On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the Treasurer of the City
of Cebu, demanded payment for realty taxes on several parcels of land belonging to MCIAA in the total amount of
P2,229,078.79. MCIAA objected to such demand for payment claiming that, under Section 14 of RA 6958, MCIAA is
exempt from payment of realty taxes. It was also asserted that it is an instrumentality of the government performing
governmental functions.
The City of Cebu refused to cancel and set aside MCIAA’S realty tax account, insisting that the MCIAA is a government-
controlled corporation whose tax exemption privilege has been withdrawn by the Local Governmental Code of 1991
(LGC).
MCIAA paid its tax account “under protest” and thereafter filed a Petition for Declaratory Relief. MCIAA contended that
the taxing powers of local government units do not extend to the levy of taxes or fees of any kind on an instrumentality
of the national government. MCIAA insisted that while it is indeed a government-owned corporation, it nonetheless
stands on the same footing as an agency or instrumentality of the national government by the very nature of its powers
and functions.
The City of Cebu, however, asserted that MCIAA is not an instrumentality of the government but merely a government-
owned corporation performing proprietary functions. As such, all exemptions previously granted to it were deemed
withdrawn by operation of law, as provided under the LGC.
ISSUE: Whether MCIAA is vested with government powers and functions which place it in the same category as an
instrumentality or agency of the government. [Note: Supremacy of the National Government over Local Government]
RULING: MCIAA contended that it is an instrumentality of the national government; hence, its tax exemption privilege
under Section 14 of its Charter cannot be considered withdrawn with the passage of the LGC because Section 133
thereof specifically states that the taxing powers of local government units shall not extend to the levy of taxes of fees
or charges of any kind on the national government, its agencies and instrumentalities. Being an instrumentality of the
Government, MCIAA should be and actually is exempt from local taxes. Otherwise, its operation might be burdened,
impeded or subjected to control by a mere Local government. This doctrine emanates from the “supremacy” of the
National Government over local government. Following the said doctrine, the LGC provides that “the exercise of the
taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following xxx (o)
taxes, fees, or charges of any kind on the National Government , its agencies and instrumentalities, and Local
Government Units.” The LGC likewise provides some exemption from payment of Real Property Tax which includes
Real Property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial
use thereof had been granted, for reconsideration or otherwise, to a taxable person;
The Supreme Court, however, ruled that the MCIAA is not an instrumentality or agency of the National Government.
Therefore, MCIAA cannot invoke the doctrine of “supremacy of the National Government over the local government.”
In addition, since the tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons,
including government-owned and controlled corporations have been withdrawn upon the effectivity of the LGC, then
the MCIAA – as a mere government owned and controlled corporation – can no longer invoke the tax exemption from
its Charter. Furthermore, even if the MCIAA is an instrumentality of the national government, it cannot invoke the
doctrine of “supremacy of the National Government over the local government” since what are exempt from paying
real property tax are the real property of the Republic of the Philippines, or any of its political subdivisions.
84. WALTER LUTZ, as Judicial Administrator of the Intestate of the deceased Antonio Jayme Ledesma,
vs.
ANTONIO ARANETA, as collector of Internal Revenue,
G.R No. L-7856. December 22, 1955
FACTS:
Walter Lutz in his capacity as the Judicial Administrator of the intestate of the deceased Antonio Jayme Ledesma,
seeks to recover from the Collector of the Internal Revenue the total sum of P 14, 666.40 paid by the estate as taxes,
under section 3 of Commonwealth Act No. 567, also known as the Sugar Adjustment Act, for the crop years 1948-
1949 and 1949-1950.
Commonwealth Act. 567 Section 2 provides for an increase of the existing tax on the manufacture of sugar on a
graduated basis, on each picul of sugar manufacturer; while section 3 levies on the owners or persons in control of the
land devoted to the cultivation of sugarcane and ceded to others for consideration, on lease or otherwise - "a tax
equivalent to the difference between the money value of the rental or consideration collected and the amount
representing 12 per centum of the assessed value of such land. It was alleged that such tax is unconstitutional and
void, being levied for the aid and support of the sugar industry exclusively, which in Lutz’ opinion is not a public purpose
for which a tax may be constitutionally levied. The action was dismissed by the CFI thus Lutz appealed directly to the
Supreme Court.
ISSUE:Whether or not the tax imposition in the Commonwealth Act No. 567 is unconstitutional.
RULING:
Yes, the Supreme Court held that the fact that sugar production is one of the greatest industry of our nation, sugar
occupying a leading position among its export products; that it gives employment to thousands of laborers in the fields
and factories; that it is a great source of the state's wealth, is one of the important source of foreign exchange needed
by our government and is thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion,
protection and advancement, therefore redounds greatly to the general welfare. Hence it was competent for the
legislature to find that the general welfare demanded that the sugar industry be stabilized in turn; and in the wide field
of its police power, the law-making body could provide that the distribution of benefits therefrom be readjusted among
its components to enable it to resist the added strain of the increase in taxes that it had to sustain.
The subject tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the
threatened sugar industry. In other words, the act is primarily a valid exercise of police power.
85. Caltex Philippines v. Commission on Audit, 208 SCRA 726
#86 PHILIPPINE AIRLINES, INC. v. EDU
G.R. No. L- 41383, August 15, 1988
FACTS: Philippine Airlines (PAL) is a corporation engaged in the air transportation business under a legislative
franchise, Act No. 42739. Under its franchise, PAL is exempt from the payment of taxes.
Sometime in 1971, however, Land Transportation Commissioner Romeo F. Elevate (Elevate) issued a regulation
pursuant to Section 8, Republic Act 4136, otherwise known as the Land and Transportation and Traffic Code, requiring
all tax exempt entities, among them PAL to pay motor vehicle registration fees.
Despite PAL's protestations, Elevate refused to register PAL's motor vehicles unless the amounts imposed under
Republic Act 4136 were paid. PAL thus paid, under protest, registration fees of its motor vehicles. After paying under
protest, PAL through counsel, wrote a letter dated May 19,1971, to Land Transportation Commissioner Romeo Edu
(Edu) demanding a refund of the amounts paid. Edu denied the request for refund. Hence, PAL filed a complaint
against Edu and National Treasurer Ubaldo Carbonell (Carbonell).
The trial court dismissed PAL's complaint. PAL appealed to the Court of Appeals which in turn certified the case to the
Supreme Court.
ISSUE:Whether or not motor vehicle registration fees are considered as taxes.
RULING:Yes. Section 73 of Commonwealth Act 123 and Section 61 of the Land Transportation and Traffic Code
requires owners of vehicles to pay registration fee in the registration of their vehicles. The pupose of law is to raise
funds for the construction and maintenance of highways and to a much lesser degree, pay for the operating expenses
of the administering agency. The Court ruled that the fees may be regarded as taxes even though they also serve as
an instrument of regulation.
87. REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
CENTRAL AZUCARERA DEL DANAO, defendant-appellant.
G.R. No. L-19842 December 26, 1969
TOPIC: PURPOSES AND OBJECTIVES OF TAXATION – Promotion of General Welfare
FACTS: (4 separate cases were joined; the 3 other cases already decided)
During the five crop years mentioned in the law, defendant Central Azucarera del Danao made a payment of
P48,879.73 but left an unpaid balance of P48,059.77. The Philippine Sugar Institute, known as the PHILSUGIN for
short, acquired the Insular Sugar Refinery for a total consideration of P3,070,909.60 payable, in accordance with the
deed of sale Exhibit A, in 5 installments from the proceeds of the sugar tax to be collected under Republic Act 632.
The evidence further discloses that the operation of the Insular Sugar Refinery for the years 1954, 1955, 1956 and
1957 was disastrous in the sense that PHILSUGIN incurred tremendous losses as shown by an examination of the
statements of income and expenses marked Exhibits 5, 6, 7 and 8. Through the testimony of Mr. Cenon Flor Cruz,
former acting general manager of PHILSUGIN and at present technical consultant of said entity, presented by the
defendants as witness, it has been shown that the operation of the Insular Refinery has consumed 70% of the thinking
time and effort of the PHILSUGIN management. Contending that the purchase of the Insular Sugar Refinery with
money from the Philsugin Fund was not authorized by Rep. Act 632 and that the continued operation of the said
refinery was inimical to their interests, the appellants refused to continue with their contributions to the said fund. They
maintained that their obligation to contribute or pay to the said Fund subsists only to the limit and extent that they are
benefited by such contributions since Rep. Act 632 is not a revenue measure but an Act which establishes a "special
assessment." As such, the proceeds thereof may be devoted only to the specific purpose for which the assessment
was authorized, a special assessment being a levy upon property predicated on the doctrine that the property against
which it is levied derives some special benefit from the improvement. It is not a tax measure intended to raise revenues
for the Government.
ISSUE: Whether or not the “10 centavos per picul of sugar” authorized to be collected under Sec. 15 of RA 632 is a
special assessment or a tax measure to raise revenues.
HELD: Tax measure intended to raise revenue.
The Supreme Court held that the levy for the Philsugin Fund is 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 the general welfare of the entire country.
It is, therefore, an exercise of a sovereign power which no private citizen may lawfully resist. Moreover, even if it were
assumed that the acquisition of a refinery is not contemplated in Rep. Act 632 as within the objectives and powers of
the Philsugin, there is no denying the fact that not all the money in the Sugar Research and Stabilization Fund created
by the law from the levy on the appellant and the other sugar centrals and planters is involved in such purchase.
Indisputably, the Philsugin is using the rest of the said fund for purposes which cannot be questioned. Such being the
case, the obligation of appellant to pay the tax in question is clear.
88. NATIONAL POWER CORPORATION V. CITY OF CABANATUAN
G.R. No. 149110, April 9, 2003
FACTS: NPC is a government-owned and controlled corporation created under Commonwealth Act No. 120, as
amended.
For many years now, NPC sells electric power to the residents of Cabanatuan City, posting a gross income of
P107,814,187.96 in 1992. Pursuant to section 37 of Ordinance No. 165-92,8 the Cabanatuan City assessed NPC a
franchise tax amounting to P808,606.41, representing 75% of 1% of the latter’s gross receipts for the preceding year.
NPC refused to pay the tax assessment arguing that the respondent has no authority to impose tax on government
entities. Petitioner also contended that as a non-profit organization, it is exempted from the payment of all forms of
taxes, charges, duties or fees in accordance with sec. 13 of Rep. Act No. 6395, as amended.
The city of Cabanatuan filed a collection suit in the RTC, demanding NPC pay the assessed tax due, plus surcharge.
The city alleged that NPC’s exemption from local taxes has been repealed by section 193 of the LGC, which reads as
follows:
“Sec. 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise provided in this Code, tax exemptions or
incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government owned or
controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and
non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code.”
RTC upheld NPC’s tax exemption. On appeal the CA reversed the trial court’s Order on the ground that section 193,
in relation to sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to NPC.
ISSUE: W/N the city government of Cabanatuan has the authority to issue Ordinance No. 165-92 and impose an
annual tax on “businesses enjoying a franchise”
HELD: YES. Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure.
A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state
whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the
exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting
the general welfare and well-being of the people.
In recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation has
become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection
of local industries as well as public welfare and similar objectives. Taxation assumes even greater significance with
the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress;
local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Article X, section
5 of the 1987 Constitution.
Section 137 of the LGC clearly states that the LGUs can impose franchise tax “notwithstanding any exemption granted
by any law or other special law.”
Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that unless otherwise provided in
this Code, tax exemptions or incentives granted to or presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations except (1) local water districts, (2) cooperatives duly registered
under R.A. 6938, (3) non-stock and non-profit hospitals and educational institutions, are withdrawn upon the effectivity
of this code, the obvious import is to limit the exemptions to the three enumerated entities. It is a basic precept of
statutory construction that the express mention of one person, thing, act, or consequence excludes all others as
expressed in the familiar maxim expressio unius est exclusio alterius. In the absence of any provision of the Code to
the contrary, and we find no other provision in point, any existing tax exemption or incentive enjoyed by MERALCO
under existing law was clearly intended to be withdrawn.
Reading together sections 137 and 193 of the LGC, the SC concluded that under the LGC the local government unit
may now impose a local tax at a rate not exceeding 50% of 1% of the gross annual receipts for the preceding calendar
based on the incoming receipts realized within its territorial jurisdiction. The legislative purpose to withdraw tax
privileges enjoyed under existing law or charter is clearly manifested by the language used on (sic) Sections 137 and
193 categorically withdrawing such exemption subject only to the exceptions enumerated. Since it would be not only
tedious and impractical to attempt to enumerate all the existing statutes providing for special tax exemptions or
privileges, the LGC provided for an express, albeit general, withdrawal of such exemptions or privileges. No more
unequivocal language could have been used.
Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and support myriad
activities of the local government units for the delivery of basic services essential to the promotion of the general
welfare and the enhancement of peace, progress, and prosperity of the people. As this Court observed in the Mactan
case, “the original reasons for the withdrawal of tax exemption privileges granted to government-owned or controlled
corporations and all other units of government were that such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated enterprises.” With the added burden of devolution, it is even more
imperative for government entities to share in the requirements of development, fiscal or otherwise, by paying taxes or
other charges due from them.
89 Diaz vs. Secretary of Finance
Facts:
Petitioners filed this petition for declaratory relief assailing the validity of the impending imposition of value-added tax
(VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as regular users of
tollways in stopping the BIR action. Additionally, Diaz claims that he sponsored the approval of EVAT Law and The
1997 National Internal Revenue Code at the House of Representatives. Timbol, on the other hand, claims that she
served as Assistant Secretary of the Department of Trade and Industry and consultant of the Toll Regulatory Board
(TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration of President Gloria Macapagal-Arroyo to impose
VAT on toll fees. The imposition was deferred, however, in view of the consistent opposition of Diaz and other sectors
to such move. However, upon President Benigno C. Aquino III's assumption of office in 2010, the BIR revived the idea
and would impose the challenged tax on toll fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees within the meaning
of "sale of services" that are subject to VAT; that a toll fee is a "user's tax," not a sale of services; that to impose VAT
on toll fees would amount to a... tax on public service; and that, since VAT was never factored into the formula for
computing toll fees, its imposition would violate the non-impairment clause of the constitution. On August 13, 2010, the
Court issued a TRO enjoining the implementation of the VAT.
The Court required the government, represented by respondents Cesar V. Purisima, Secretary of the Department of
Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue, to comment on the petition within 10 days
from notice. Later, the Court issued another resolution treating the petition as one for prohibition.
The government avers that the NIRC imposes VAT on all kinds of services of franchise grantees, including tollway
operations, except where the law provides... otherwise; that the Court should seek the meaning and intent of the law
from the words used in the statute; and that the imposition of VAT on tollway operations has been the subject as early
as 2003 of several BIR rulings and circulars.
The government also argues that petitioners have no right to invoke the non-impairment of contracts clause since they
clearly have no personal interest in existing toll operating agreement between the government and tollway operators.
Finally, the government contends that the non-inclusion of VAT in the parametric formula for computing toll rates cannot
exempt tollway operators from VAT.
Issue:
Whether or not the imposition of VAT on tollway operators is not administratively feasible and cannot be implemented.
Ruling:
Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax system should be
capable of being effectively administered and enforced with the least inconvenience to the taxpayer. Non-observance
of the canon, however, will not render a tax imposition invalid "except to the extent that specific constitutional or
statutory limitations are impaired."
Thus, even if the imposition of VAT on tollway operations may seem burdensome to implement, it is not necessarily
invalid unless some aspect of it is shown to violate any law or the Constitution.
Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway operations. Any
declaration by the Court that the manner of its implementation is illegal or unconstitutional would be premature.
Although the transcript of the August 12, 2010 Senate hearing provides some clue as to how the BIR intends to go
about it,... the facts pertaining to the matter are not sufficiently established for the Court to pass judgment on. Besides,
any concern about how the VAT on tollway operations will be enforced... must first be addressed to the BIR on whom
the task of implementing tax laws primarily and exclusively rests. The Court cannot preempt the BIR's discretion on
the matter, absent any clear violation of law or the Constitution.
In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the VAT law's coverage
when she sought to impose VAT on tollway operations. Section 108(A) of the Code clearly states that services of all
other franchise grantees are subject to VAT, except as may be provided under Section 119 of the Code. Tollway
operators are not among the franchise grantees subject to franchise tax under the latter provision. Neither are their
services among the VAT-exempt transactions under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege, then it would have
been well for the law to clearly say so. Tax exemptions must be justified by clear statutory grant and based on language
in the law too plain to be mistaken.
But as the law is written, no such exemption obtains for tollway operators.
90. PANAY ELECTRIC CO., INC., PETITIONER, VS. THE COLLECTOR OF INTERNAL REVENUE AND THE
COURT OF TAX APPEALS, RESPONDENTS. G. R. No. L-10574, May 28, 1958
Facts:
Petitioner is a grantee of a legislative franchise to install, operate, and maintain an electric light, heat and power system
in certain municipalities of Iloilo, for a period of fifty years from the approval of its franchise on January 22, 1921. Under
the franchise, it was required to pay a franchise tax equal to 11/2 per cent of its gross earnings, during the first twenty
years, and 2 per cent during the remaining thirty years.
Upon the promulgation of Republic Act No. 39, amending Section 259 of the National Internal Revenue Code,
respondent CIR required petitioner to pay a franchise tax of 5 per cent instead of 2 per cent of its gross earnings.
Petitioner paid the franchise tax of 5 per cent in the total sum of P135,872.67, at the same time protesting the imposition
and collection of the 5 per cent tax. The protest, however, was denied by respondent.
On March 25, 1952, the Supreme Court promulgated its decision in the case of Philippine Railway vs. Collector of
Internal Revenue (91 Phil., 35), wherein it wast held that the rate of tax provided in Section 259 of the Revenue Code
as amended by Republic Act No. 39, is not applicable to holders of franchises which fix a specific rate of franchise tax.
Petitioner demanded the refund of excess franchise taxes paid. Respondent Collector wrote to petitioner, informing it
of his stand on the question of refund, to the effect that the first claim for refund filed by it was made only in its letter of
April 16, 1952, and, that refund may be effected only of the overpayment made two years prior to said demand, that is
to say, from April 16, 1950. Petitioner filed a petition for review with the defunct Board of Tax Appeals.
Respondent admitted that there had been overpayment, but contended that it could allow a refund of overpayment
made for a period of only two years prior to April 16, 1952, when petitioner filed a formal demand for refund.
Issue:
Whether a franchise liability tax is not an internal revenue tax
Held:
'A tax is a forced charge, imposition or contribution; it operates in invitum, and is in no way dependent upon the will or
contractual assent, express or implied, of the person taxed, (51 Am. Jur. pp. 38-39.)
'Franchise tax is "in consideration of the granting of the franchise," and it operates because a person taxed assents
expressly or impliedly. It is, in one word, a contractual assent. As correctly maintained by the respondent, Section 18
of the Tax Code enumerates what are National Internal Revenue Taxes, and among others franchise taxes are clearly
listed; Section 259, Tax on Corporate Franchises, deals with franchise taxes.' (B.T.A. No. 85, October 18, 1952.)
It is clear from a reading of Section 259 of the Revenue Code that the 'franchise tax' provided therein refers not only
to the tax imposed in said section but also to the 'taxes, charges, and percentages' prescribed in the special charters
under which holders of franchises operate. In fact, the collection of franchise taxes and the penalty, for delinquency
are governed by Section 259, in so far as the provisions thereof are not inconsistent with the special charters. And
Section 18 of the Revenue Code, as pointed out by the former Board of Tax Appeals, clearly classifies franchise taxes
as national internal revenue taxes. We might also add that Section 359 of the Revenue Code provides for the
disposition of franchise taxes as other national internal revenue taxes. We have, therefore, no doubt in our minds that
the franchise taxes prescribed in Act No, 2983, as amended by Act No. 3665, under which plaintiff operates, is a
national internal revenue tax, and the provisions of law governing refunds of national internal revenue taxes are
applicable to refunds of the franchise tax here in question.
Petitioner contends that its letters of Hay 7, 1948 and June 7, 1948 (Annexes A and B of the Petition for Review)
should be considered claims for refund. Whether they are demand for refund or not does not really matter because a
claim for refund not followed by a judicial action avails the claimant nothing. Besides, the refund of any tax already
paid or illegally collected is limited to a period of two years, counted from the date of the suit in court, not from the date
of the claim for refund. The claim for refund is only a preliminary step to court action.
The pertinent provisions of law applicable to the present case are sections 306 and 309 of the Revenue Code, which
we reproduce for purposes of reference:
"SEC. 306. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be maintained in any court
for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed
or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been
excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Collector
of Internal Revenue; but such suit or proceeding may be mamtained, whether or not such tax, penalty, or sum has
been paid under protest or duress. In any case, no such suit or proceeding shall be begun after the expiration of two
years from the date of payment of the tax or penalty."
"SEC. 309. Authority of Collector to make compromises and to refund taxes. The Collector of Internal Revenue may
compromise any civil or other case arising under this Code or other law or part of law administered by the Bureau of
Internal Revenue, may credit or refund taxes erroneously or illegally received, or penalties imposed without authority,
and may remit before payment any tax that appears to be unjustly assessed or excessive.
"He shall refund the value of internal-revenue stamps when the same are returned in good condition by the purchaser,
and may, in his discretion, redeem or exchange unused stamps that have been rendered unfit for use, and may refund
their value upon proof of destruction.
"The authority of the Collector of Internal Revenue to credit or refund taxes or penalties under this section can only be
exercised if the claim for credit or refund is made in writing and filed with him within two years after the payment of the
tax or penalty."
91. JOSE DE BORJA vs. VICENTE G. GELLA, ET AL.
G.R. No. L-18330 July 31, 1963
FACTS: Jose de Borja has been delinquent in the payment of his real estate taxes since 1958 for properties located
in the City of Manila and Pasay City and has offered to pay them with two negotiable, certificates of indebtedness in
the amounts of P793.40 and P717.69, respectively. Borja was a mere assignee of the aforesaid negotiable certificates,
the applicants for backpay rights covered by them being respectively Rafael Vizcaya and Pablo Batario Luna.
The offers to pay the estate taxes in question were rejected by the city treasurers of both Manila and Pasay cities on
the ground of their limited negotiability under Section 2, Republic Act No. 304, as amended by Republic Act 800, and
in the case of the city treasurer of Manila on the further ground that he was ordered not to accept them by the city
mayor, for which reason Borja was prompted to bring the question to the Treasurer of the Philippines who opined,
among others, that the negotiable certificates cannot be accepted as payment of real estate taxes inasmuch as the
law provides for their acceptance from their back pay holder only or the original applicant himself, but not his assignee.
In his letter to the Treasurer of the Philippines, Borja entertained hope that the certificates would be accepted for
payment in view of the fact that they are already long past due and redeemable, but his hope was frustrated. Borja
filed an action against the treasurers of both the City of Manila and Pasay City, as well as the Treasurer of the
Philippines, to impel them to execute an act which the law allegedly requires them to perform to accept the certificates
of indebtedness considering that they were already due and redeemable so as not to deprive him illegally of his
privilege to pay his obligation to the government thru such means. The lower court ruled in favour of Borja.
ISSUES:
1. Whether Borja may apply to the payment of his real estate taxes the certificates of indebtedness he holds while
respondents have the correlative legal duty to accept the certificates in payment of the taxes
2. Whether compensation can take place between Borja’s real estate tax liability and the credit represented by the
certificate of indebtedness
HELD:
1. No, the respondents are not duty bound to accept the negotiable certificates of indebtedness for the simple reason
that they were not obligations subsisting at the approval of RA 304 which took effect on June 18, 1948. Under RA 304,
payment through a certificate of indebtedness may be allowed if the tax is owed by the applicant himself. Furthermore,
the right to use the backpay certificate in settlement of taxes is given only to the applicant himself. Futhermore, the
right to use the backpay certificate in settlement of taxes is given only to the applicant and not to any holder of any
negotiable certificate to whom the law only gives the right to have it discounted by a Filipino citizen or corporation
under certain limitations. Borja is not himself the applicant of the certificate in question, he is merely as assignee
thereof.
2. No, the debtor insofar as the certificates of indebtedness are concerned is the Republic of the Philippines, whereas
the real estate taxes owed by Borja are due to the City of Manila and Pasay City, each one of which having a distinct
and separate personality from our Republic. This is contrary to Article 1279 (1) of the Civil Code which states that
“each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other.”
92. Vera v. Fernandez, 89 SCRA 199
Facts: The motion for allowance of claim and for payment of taxes dated May 28, 1969 was filed on June 3, 1969 for
the collection of the indebtedness to the government of the late Luis D. Tongoy for deficiency income taxes in the total
sum of P3,254.80. The administrator opposed the motion solely on the ground that the claim was barred under Section
5, Rule 86 of the Rules of Court. Jose Fernandez dismissed the motion for allowance of claim filed by the Regional
director of the BIR, being the judge of the Court of First Instance.
Issue: Whether the statute of non-claims Section 5, Rule 86 of the Rule of Court bars claim of the government for
unpaid taxes.
Ruling: No. Section 5, Rule 86 of the Rules of Court makes no mention of claims for monetary obligation of the decedent
created by law, such as taxes which is entirely of different character from the claims enumerated, such as “all claims
for money against the decedent arising from contract, express or implied, whether the same be due, or contingent, all
claim for funeral expenses and expenses for the last sickness of the decedent and judgment for money against the
decedent.” Under the familiar rule of statutory construction, the mention of one thing implies the exclusion of another
thing not mentioned.
The reason for the more liberal treatment of claims for taxes against a decedent's estate in the form of exception from
the application of the statute of non-claims, is not hard to find. Taxes are the lifeblood of the Government and their
prompt and certain availability are imperious need. (Commissioner of Internal Revenue vs. Pineda, G. R. No. L- 22734,
September 15, 1967, 21 SCRA 105). Upon taxation depends the Government ability to serve the people for whose
benefit taxes are collected. To safeguard such interest, neglect or omission of government officials entrusted with the
collection of taxes should not be allowed to bring harm or detriment to the people, in the same manner as private
persons may be made to suffer individually on account of his own negligence, the presumption being that they take
good care of their personal affairs. This should not hold true to government officials with respect to matters not of their
own personal concern. This is the philosophy behind the government's exception, as a general rule, from the operation
of the principle of estoppel.
93. G.R. No. L-34915 June 24, 1983
CITY GOVERNMENT OF QUEZON CITY and CITY COUNCIL OF QUEZON CITY, vs. HON. JUDGE VICENTE G.
ERICTA as Judge of the Court of First Instance of Rizal, Quezon City, Branch XVIII; HIMLAYANG PILIPINO,
INC., .
FACTS: Section 9 of Ordinance No. 6118, S-64 provides that at least 6% of the total area of the memorial park
cemetery shall be set aside for the charity burial of deceased persons who are paupers and have been residents of
Quezon City for at least 5 years prior to their death. As such, the Quezon City engineer required the respondent,
Himlayang Pilipino Inc, to stop any further selling and/or transaction of memorial park lots in Quezon City where the
owners thereof have failed to donate the required 6% space intended for paupers burial.
The RTC, therefore, rendered the decision declaring the Ordinance null and void.
Petitioners argued that the taking of the respondent’s property is a valid and reasonable exercise of police power and
that the land is taken for a public use as it is intended for the burial ground of paupers. Also, the Quezon City Council
is authorized under its charter, in the exercise of local police power, ” to make such further ordinances and resolutions
not repugnant to law as may be necessary to carry into effect and discharge the powers and duties conferred by this
Act and such as it shall deem necessary and proper to provide for the health and safety, promote the prosperity,
improve the morals, peace, good order, comfort and convenience of the city and the inhabitants thereof, and for the
protection of property therein.”
On the otherhand, respondent Himlayang Pilipino, Inc. contended that the taking or confiscation of property was
obvious because the questioned ordinance permanently restricts the use of the property such that it cannot be used
for any reasonable purpose and deprives the owner of all beneficial use of his property.
ISSUE: WON Section 9 of the ordinance in question a valid exercise of the police power?
HELD: No. Section 9 of the ordinance is not a valid exercise of the police power.
Police power is defined by Freund as ‘the power of promoting the public welfare by restraining and regulating the use
of liberty and property’. It is usually exerted in order to merely regulate the use and enjoyment of property of the owner.
If he is deprived of his property outright, it is not taken for public use but rather to destroy in order to promote the
general welfare. In police power, the owner does not recover from the government for injury sustained in consequence
thereof.
Police power is usually exercised in the form of mere regulation or restriction in the use of liberty or property for the
promotion of the general welfare. The power to regulate does not include the power to prohibit and the power to
confiscate. The ordinance confiscates and prohibits the operation of a memorial park cemetery. The confiscatory
clause and the penal provision in effect deter one from operating a memorial park cemetery.
This is an outright confiscation. It deprives a person of his private property without due process of law, nay, even
without compensation.
There is no reasonable relation between the setting aside of at least six (6) percent of the total area of an private
cemeteries for charity burial grounds of deceased paupers and the promotion of health, morals, good order, safety, or
the general welfare of the people. The ordinance is actually a taking without compensation of a certain area from a
private cemetery to benefit paupers who are charges of the municipal corporation. Instead of building or maintaining a
public cemetery for this purpose, the city passes the burden to private cemeteries.
The expropriation without compensation of a portion of private cemeteries is not covered by Section 12(t) of RA 537
which empowers the city council to prohibit the burial of the dead within the center of population of the city and to
provide for their burial in a proper place subject to the provisions of general law regulating burial grounds and
cemeteries.
94. Tomas Velasco
v
Hon. Antonio J. Villegas
G.R. No. L-24153 | February 14, 1983
Facts:
In their own behalf and in representation of the other owners of barbershops in the City of Manila, petitioners challenge
the constitutionality based on Ordinance No. 4964 of the City of Manila, which prohibited the business of massaging
customers of a barber shop. They contend that it amounts to a deprivation of property of their means of livelihood
without due process of law.
Issue:
Whether said ordinance was unconstitutional, and therefore an improper exercise of police power
Held:
No. The attack against the validity cannot succeed. As pointed out in the brief of respondents-appellees, it is a police
power measure. The objectives behind its enactment are: “(1) To be able to impose payment of the license fee for
engaging in the business of massage clinic under Ordinance No. 3659 as amended by Ordinance 4767, an entirely
different measure than the ordinance regulating the business of barbershops and, (2) in order to forestall possible
immorality which might grow out of the construction of separate rooms for massage of customers.”
The Court has been most liberal in sustaining ordinances based on the general welfare clause. As far back as U.S. v.
Salaveria, 4 a 1918 decision, this Court through Justice Malcolm made clear the significance and scope of such a
clause, which “delegates in statutory form the police power to a municipality. As above stated, this clause has been
given wide application by municipal authorities and has in its relation to the particular circumstances of the case been
liberally construed by the courts. Such, it is well to really is the progressive view of Philippine jurisprudence.”
95. G.R. No. L-75697
VALENTIN TIO doing business under the name and style of OMI ENTERPRISES, petitioner,
vs. VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO MANILA COMMISSION, CITY
MAYOR and CITY TREASURER OF MANILA, respondents.
FACTS: The petitioner on his own behalf and purportedly on behalf of other videogram operators adversely affected.
It assails the constitutionality of Presidential Decree No. 1987 entitled "An Act Creating the Videogram Regulatory
Board" because the government incurred losses estimated at P450 Million annually due to the proliferation and
unregulated circulation of videograms caused a sharp decline in theatrical attendance and a tremendous drop in the
collection of sales, contractor's specific, amusement and other taxes. The unregulated activities of videogram
establishments more than 1,200 movie houses and theaters and unemployment due to the shutdown of numerous
moviehouses and theaters. The rampant and unregulated showing of obscene videogram features constitutes a clear
and present danger to the moral and spiritual well-being of the youth.
ISSUE:
1. WON Section 10, which imposes a tax of 30% on the gross receipts payable to the local government is a RIDER
and the same is not germane to the subject matter thereof;
No. It is allied and germane to, and is reasonably necessary for the accomplishment of, the general object of the
DECREE, which is the regulation of the video industry through the Videogram Regulatory Board. The tax provision is
not inconsistent with, nor foreign to that general subject and title. The express purpose of the DECREE is to include
taxation of the video industry in order to regulate and rationalize the heretofore uncontrolled distribution of videograms.
2. The tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in violation of the due process
clause of the Constitution;
No. Tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities
taxed.
The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for regulating the video
industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, and the
proliferation of pornographic video tapes. It is not only a regulatory but also a revenue measure prompted by the
realization that earnings of videogram establishments of around P600 million per annum have not been subjected to
tax.
It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held
that "inequities which result from a singling out of one particular class for taxation or exemption infringe no constitutional
limitation". 12 Taxation has been made the implement of the state's police power.13
6. There is over regulation of the video industry as if it were a nuisance, which it is not.
No. The video industry is not being over-regulated and being eased out of existence as if it were a nuisance. Being a
relatively new industry, the need for its regulation was apparent. While the underlying objective of the DECREE is to
protect the moribund movie industry, there is no question that public welfare is at bottom of its enactment, considering
"the unfair competition posed by rampant film piracy; the erosion of the moral fiber of the viewing public brought about
by the availability of unclassified and unreviewed video tapes containing pornographic films and films with brutally
violent sequences; and losses in government revenues dropped.
96. Ortigas v. Feati Bank, 94 SCRA 533
Facts:
Ortigas & Co. is a limited partnership and Feati Bank and Trust Co., is a corporation. Ortigas & Co is engaged in real
estate business, developing and selling lots to the public, particularly the Highway Hills Subdivision along Epifanio de
los Santos Avenue, Mandaluyong, Rizal. On March 4, 1952, Ortigas sold Lot 5 and 6, Block 31 of the Highway Hills
Subdivision at Mandaluyong to Augusto Padilla y Angeles and Natividad Angeles. The latter transferred their rights in
favour of Emma Chavez, upon completion of payment a deed was executed with stipulations, one of which is that the
use of the lots are to be exclusive for residential purposes only. This was annotated in the Transfer Certificate of Titles
No. 101509 and 101511. Feati then acquired Lot 5 directly from Emma Chavez and Lot 6 from Republic Flour Mills.
On May 5, 1963, Feati started construction of a building on both lots to be devoted for banking purposes but could also
be for residential use. Ortigas sent a written demand to stop construction but Feati continued contending that the
building was being constructed according to the zoning regulations as stated in Municipal Resolution 27 declaring the
area along the West part of EDSA to be a commercial and industrial zone.
Issue:
whether or not the resolution of the Municipal Council of Mandaluyong declaring Lots Nos. 5 and 6, among others, as
part of the commercial and industrial zone of the municipality, prevailed over the building restrictions imposed by
Ortigas & co.
Ruling:
Resolution No. 27 prevails over the contract stipulations. Section 3 of RA 2264 of the Local Autonomy Act empowers
a Municipal Council to adopt zoning and subdivision ordinances or regulations for the Municipality. Section 12 or RA
2264 states that implied power of the municipality should be “liberally construed in it’s favour”, “to give more power to
the local government in promoting economic conditions, social welfare, and material progress in the community”. This
is found in the General Welfare Clause of the said act. Although non-impairment of contracts is constitutionally
guaranteed, it is not absolute since it has to be reconciled with the legitimate exercise of police power, e.g. the power
to promote health, morals, peace, education, good order or safety and general welfare of the people. Resolution No.
27 was obviously passed in exercise of police power to safeguard health, safety, peace and order and the general
welfare of the people in the locality as it would not be a conducive residential area considering the amount of traffic,
pollution, and noise which results in the surrounding industrial and commercial establishments.
97. Commissioner Of Internal Revenue v. Carlos Palanca, Jr.,
G.R. No. L-16626, 29 October 1966
FACTS: The late Don Carlos Palanca, Sr. donated in favor of his son, Carlos Palanca, Jr., shares of stock in La
Tondeña, Inc. amounting to P12,500 shares. Bureau of Internal Revenue considered the transfer of 12,500 shares of
stock of La Tondeña, Inc. to be a transfer in contemplation of death pursuant to Section 88 (b) of the National Internal
Revenue Code. Consequently, BIR assessed against Palanca, Jr. P191,591.62 as estate and inheritance taxes on the
transfer of said 12,500 shares of stock. On the tax liability of P191,591.62, Palanca, Jr. paid the amount of P60,581.80
as interest for delinquency.
Palanca, Jr. filed an amended income tax return for the calendar year 1955, claiming a deduction in the amount of
P60,581.80, representing interest on the estate and inheritance taxes on the 12,500 shares of stock, thereby reporting
a net taxable income for 1955 in the amount of P5,400.32 and an income tax due thereon in the sum of P428.00.
Palanca, Jr. requested a refund of P20,624.01 which is the difference between the amounts of P21,052.01 he paid as
income tax under his original return and of P428.00.
Without waiting for a decision on this claim for refund, Palanca, Jr. filed his petition for review before the Court of Tax
Appeals. The CTA ordered the refund to Palanca for alleged overpayment of income taxes for the calendar year 1955.
The Commissioner of Internal Revenue now seeks the reversal of the CTA’s ruling. The Commissioner urges that a
tax is not an indebtedness. The Commissioner submits that the deductibility of "interest on indebtedness" from a
person's income tax under Section 30 (b) (1) cannot extend to "interest on taxes."
ISSUE: Whether the amount paid for interest on the delinquent estate and inheritance tax is deductible from the gross
income.
RULING: Yes. While "taxes" and "debts" are distinguishable legal concepts, in certain cases as in the suit at bar, on
account of their nature, the distinction become inconsequential.
In our jurisdiction, the rule is settled that although taxes already due have not, strictly speaking, the same concept as
debts, they are, however, obligations that may be considered as such.
In Commissioner of Internal Revenue v. Prieto, we explicitly announced that while the distinction between "taxes" and
"debts" was recognized in this jurisdiction, the variance in their legal conception does not extend to the interests paid
on them, at least insofar as Section 30(b)(1) of the National Internal Revenue Code is concerned. Thus,
"Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that there should be
interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year. It
is here conceded that the interest paid by respondent was in consequence of the late payment of her donor's tax, and
the same was paid within the year it is sought to be deducted. The only question to be determined, as stated by the
parties, is whether or not such interest was paid upon an indebtedness within the contemplation of section 30(b)(1) of
the Tax Code, the pertinent part of which reads: 'Sec. 30. Deductions from gross income -- In computing net income
there shall be allowed as deductions - x x x x x 'Interest: '(1) In general. -- The amount of interest paid within the taxable
year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations the interest upon
which is exempt from taxation as income under this Title. "The term "indebtedness" as used in the Tax Code of the
United States containing similar provisions as in the above-quoted section has been defined as the unconditional and
legally enforceable obligation for the payment of money. Within the meaning of that definition, it is apparent that a tax
may be considered an indebtedness, xxx 'It follows that the interest paid by herein respondent for the late payment of
her donor's tax is deductible from her gross income under section 30(b) of the Tax Code above-quoted.'"
In both this and the said case, the taxpayer sought the allowance as deductible items from the gross income of the
amounts paid by them as interests on delinquent tax liabilities. Of course, what was involved in the cited case was the
donor's tax while the present suit pertains to interest paid on the estate and inheritance tax. This difference, however,
submits no appreciable consequence to the rationale of this Court's previous determination that interests on taxes
should be considered as interests on indebtedness within the meaning of Section 30(b)(1) of the Tax Code.
98. Progressive Development Corporation v. Quezon City
(G.R. No. L-36081, 24 April 1989)
FACTS: The City Council of QC passed an ordinance known as the Market Code of QC, which imposed a 5%
supervision fee on gross receipts on rentals or lease of privately-owned market spaces in QC. In case of failure of the
owners of the market spaces to pay the tax for three consecutive months, the City shall revoke the permit of the
privately-owned market to operate.
Progressive Development Corp, owner and operator of Farmer’s Market, filed a petition for prohibition against QC on
the ground that the tax imposed by the Market Code was in reality a tax on income, which the municipal corporation
was prohibited by law to impose.
ISSUE: Whether the supervision fee is an income tax or a license fee?
HELD: It is a license fee.
A LICENSE FEE is imposed in the exercise of the police power primarily for purposes of regulation, while TAX is
imposed under the taxing power primarily for purposes of raising revenues. If the generating of revenue is the primary
purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact
that incidentally, revenue is also obtained does not make the imposition a tax.
To be considered a license fee, the imposition must relate to an occupation or activity that so engages the public
interest in health, morals, safety, and development as to require regulation for the protection and promotion of such
public interest; the imposition must also bear a reasonable relation to the probable expenses of regulation, taking into
account not only the costs of direct regulation but also its incidental consequences.
In this case, the Farmers’ Market is a privately-owned market established for the rendition of service to the general
public. It warrants close supervision and control by the City for the protection of the health of the public by insuring the
maintenance of sanitary conditions, prevention of fraud upon the buying public, etc.
Since the purpose of the ordinance is primarily regulation and not revenue generation, the tax is a license fee. The use
of the gross amount of stall rentals as basis for determining the collectible amount of license tax does not, by itself,
convert the license tax into a prohibited tax on income. Such basis actually has a reasonable relationship to the
probable costs of regulation and supervision of Progressive’s kind of business, since ordinarily, the higher the amount
of rentals, the higher the volume of items sold.
The higher the volume of goods sold, the greater the extent and frequency of supervision and inspection may be
required in the interest of the buying public.
99. LTO vs. City of Butuan; Power of LGU
G. R. No. 131512 | January 20, 2000
Facts:
Relying on the fiscal autonomy granted to LGU's by the Constittuion and the provisons of the Local Government
Code, the Sangguniang Panglunsod of the City of Butuan enacted an ordinance "Regulating the Operation of
Tricycles-for-Hire, providing mechanism for the issuance of Franchise, Registration and Permit, and Imposing
Penalties for Violations thereof and for other Purposes." The ordinance provided for, among other things, the
payment of franchise fees for the grant of the franchise of tricycles-for-hire, fees for the registration of the vehicle,
and fees for the issuance of a permit for the driving thereof.
Petitioner LTO explains that one of the functions of the national government that, indeed, has been transferred to
local government units is the franchising authority over tricycles-for-hire of the Land Transportation Franchising and
Regulatory Board ("LTFRB") but not, it asseverates, the authority of LTO to register all motor vehicles and to issue to
qualified persons of licenses to drive such vehicles.
The RTC and CA ruled that the power to give registration and license for driving tricycles has been devolved to
LGU's.
Issue:
Whether the registration of tricycles was given to LGU's, hence the ordinance is a valid exercise of police power.
Ruling:
No, based on the-"Guidelines to Implement the Devolution of LTFRBs Franchising Authority over Tricycles-For-
Hire to Local Government units pursuant to the Local Government Code"- the newly delegated powers to LGU's
pertain to the franchising and regulatory powers exercised by the LTFRB and not to the functions of the LTO relative
to the registration of motor vehicles and issuance of licenses for the driving thereof. Corollarily, the exercised of a
police power must be through a valid delegation. In this case the police power of registering tricycles was not
delegated to the LGU’s, but remained in the LTO. Clearly unaffected by the Local Government Code are the powers
of LTO under R.A. No.4136 requiring the registration of all kinds of motor vehicles "used or operated on or upon any
public highway" in the country.
To construe the tax provisions of Section 133 (1) of the LGC indistinctively would result in the repeal to that extent
of LTO's regulatory power which evidently has not been intended. If it were otherwise, the law could have just said so
in Section 447 and 458 of Book III of the Local Government Code in the same manner that the specific devolution of
LTFRB's power on franchising of tricycles has been provided. Repeal by implication is not favored.
The power over tricycles granted under Section 458(a)(3)(VI) of the Local Government Code to LGUs is the power
to regulate their operation and to grant franchises for the operation thereof. The exclusionary clause contained in the
tax provisions of Section 133 (1) of the Local Government Code must not be held to have had the effect of
withdrawing the express power of LTO to cause the registration of all motor vehicles and the issuance of licenses for
the driving thereof. These functions of the LTO are essentially regulatory in nature, exercised pursuant to the police
power of the State, whose basic objectives are to achieve road safety by insuring the road worthiness of these motor
vehicles and the competence of drivers prescribed by R. A. 4136. Not insignificant is the rule that a statute must not
be construed in isolation but must be taken in harmony with the extant body of laws.
LGUs indubitably now have the power to regulate the operation of tricycles-for-hire and to grant franchises for the
operation thereof, and not to issue registration. Ergo, the ordinance being repugnant to a statute is void and ultra
vires.
100. COMPAÑIA GENERAL DE TABACOS DE FILIPINAS, plaintiff-appellee,
vs.
CITY OF MANILA, ET AL., defendants-appellants.
G.R. No. L-16619,June 29, 1963
Facts:
Compania General de Tabacos de Filipinas (Tabacalera) paid the City of Manila the fixed license fees
prescribed by Ordinance 3358 for the years 1954 to 1957. In 1954, City Ordinance 3634 and 3816 were passed; where
the term “general merchandise” found therein included all articles in Sections 123 to 148 of the Tax Code (thus, also
liquor under Sections 133 to 135). The Tabacalera paid its wholesaler’s and retailer’s taxes. In 1954, the City Treasurer
addressed a letter to an accounting firm, expressing the view that liquor dealers paying the annual wholesale and retail
fixed tax under Ordinance 3358 are not subject to the wholesale and retail dealers’ taxes prescribed by City Ordinances
3634, 3301, and 3816. The Tabacalera, upon learning of said stopped including quarterly sworn declarations required
by the latter ordinances, and in 1957, demanded refund of the alleged overpayment. The claim was disallowed. Hence
this present action.
Issue:
Whether Tabacalera was subjected to double taxation under Ordinance 3358 and Ordinances 3634, 3301 and 3816.
Held:
No. Generally, the term “tax” applies to all kinds of exactions which become public funds. Legally, however, a license
fee is a legal concept quite distinct from tax: the former is imposed in the exercise of police power for purposes of
regulation, while the latter is imposed under the taxing power for the purpose of raising revenues. Ordinance 3358
prescribes municipal license fees for the privilege to engage in the business of selling liquor or alcohol beverages;
considering that the sale of intoxicating liquor is (potentially) harmful to public health and morals, and must be subject
to supervision or regulation by the State and by cities and municipalities authorized to act in the premises. On the other
hand, Ordinances 3634, 3301 and 3816 imposed taxes on the sales of general merchandise, wholesale or retail, and
are revenue measures enacted by the Municipal Board of Manila. What the three ordinances mentioned heretofore
impose is a tax for revenue purposes based on the sales made of the same article or merchandise. It is already settled
in this connection that both a license fee and a tax may be imposed on the same business or occupation, or for selling
the same article, this not being in violation of the rule against double taxation.
101. Case: City Government of Baguio v. De Leon GR No. L-24756, October 31, 1968
Facts: The City of Baguio passed an ordinance imposing a license fee on any person, entity or corporation doing
business in the City. The ordinance sourced its authority from RA No. 329, thereby amending the city charter
empowering it to fix the license fee and regulate businesses, trades and occupations as may be established or
practiced in the City. De Leon was assessed for P50 annual fee it being shown that he was engaged in property
rental and deriving income therefrom. The latter assailed the validity of the ordinance arguing that it is ultra vires for
there is no statutory authority which expressly grants the City of Baguio to levy such tax, and that there it imposed
double taxation, and violates the requirement of uniformity.
Issue: Whether or not the power of the City of Baguio to levy taxes constitutes double taxation?
Ruling: No. RA 329 amended Section 2553 of the Revised Administrative Code that empowers the City Council of
Baguio to impose a license fee and to levy taxes for purposes of revenue. Thus, Ordinance cannot be considered
ultra vires for there is more than ample statutory authority for the enactment. An argument against double taxation
may not be invoked where one tax is imposed by the state and the other is imposed by the city, so that where, as
here, Congress has clearly expressed its intention, the statute must be sustained even though double taxation
results.
102. SERAFICA v. CITY TRASURER OF ORMOC
G.R. No. 24813, April 28, 1969
FACTS:
Ormoc City imposed an ordinance imposing a tax of 5 pesos for every 1,000 board feet of lumber sold in the city by
any person, partnership, firm, association, corporation, or entities. The City Treasurer levied on and collected from
Dr. Hermenegildo Serafica, as the owner of Serafica Sawmill, 1,837.84 pesos as tax on 367,568 board feet of lumber
sold during the third quarter of 1964. Serafica contends that the ordinance imposes double taxation because the exclusive domain of the administrative agency specifically empowered by law to supervise the profession, in this
business of lumberyard is already regulated under the Charter of Ormoc City and that the sale of lumber is a mere case the Professional Regulations Commission and the Board of Examiners in Optometry.
incident to the business of lumberyard. The regulatory power to issue licenses or permits extends only up to the regulation of a business and not in the
ISSUE: regulation of a profession. Therefore, the acts of the mayor are ultra vires and cannot be given effect.
Whether the Ordinance imposes double taxation
HELD:
No. Regulation and taxation are two different things, the first being an exercise of police power, whereas the latter is 104. PEPSI COLA BOTTLING COMPANY OF THE PHILIPPINES, INC V. MUNICIPALITY OF TANAUAN LEYTE.,
not, apart from the fact that double taxation is not prohibited in the Philippines. G.R NO. L-31156
103. Acebedo Optical Company v. Court of Appeals, G.R. No. 100152, 31 March 2000
Facts:
FACTS: Pepsi-Cola commenced a complaint with preliminary injunction to declare Section 2 of Republic Act No.
Petitioner applied with the Office of the City Mayor of Iligan for a business permit. After consideration of petitioner's 2264, otherwise known as the Local Autonomy Act, unconstitutional as an undue delegation of taxing authority as
well as to declare Ordinances Nos. 23 and 27 denominated as "municipal production tax" of the Municipality of
application and the opposition interposed thereto by local optometrists, respondent City Mayor issued Business
Tanauan, Leyte, null and void. Ordinance 23 levies and collects from soft drinks producers and manufacturers a tax
Permit No. 5342 subject to the following conditions: (1) Since it is a corporation, Acebedo cannot put up an optical
of one-sixteenth (1/16) of a centavo for every bottle of soft drink corked, and Ordinance 27 levies and collects on soft
clinic but only a commercial store; (2) It cannot examine and/or prescribe reading and similar optical glasses for
drinks produced or manufactured within the territorial jurisdiction of this municipality a tax of ONE CENTAVO (P0.01)
patients, because these are functions of optical clinics; (3) It cannot sell reading and similar eyeglasses without a on each gallon (128 fluid ounces, U.S.) of volume capacity. Aside from the undue delegation of authority, appellant
prescription having first been made by an independent optometrist or independent optical clinic. Acebedo can only contends that it allows double taxation, and that the subject ordinances are void for they impose percentage or
sell directly to the public, without need of a prescription, Ray-Ban and similar eyeglasses; (4) It cannot advertise specific tax.
optical lenses and eyeglasses, but can advertise Ray- Ban and similar glasses and frames; (5) It is allowed to grind
lenses but only upon the prescription of an independent optometrist. Issue:
On December 5, 1988, private respondent Samahan ng Optometrist Sa Pilipinas (SOPI lodged a complaint against Is R.A 2264 unconstitutional insofar as it imposes double taxation?
the petitioner alleging that Acebedo had violated the conditions set forth in its business permit and requesting the
cancellation and/or revocation of such permit. On July 19, 1989, the City Mayor sent petitioner a Notice of Resolution Held:
and Cancellation of Business Permit effective as of said date and giving petitioner three (3) months to wind up its No. R.A 2264 is not unconstitutional. Double taxation in general is not forbidden by our law, double
affairs. taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity
or by the same jurisdiction for the same purpose, but not in a case where one tax is imposed by the state and the
ISSUE:Whether or not the respondent city mayor acted beyond his authority in imposing the special conditions in the other by the city or municipality
permit.
105. Villanueva v City v Iloilo
GR No L-26521, December 28, 1968
HELD:
Yes, the power to issue licenses and permits necessarily includes the corollary power to revoke, withdraw or cancel
FACTS:
the same. And the power to revoke or cancel, likewise includes the power to restrict through the imposition of certain
On September 30, 1946, the Municipal Board of Iloilo City enacted Ordinance 86 imposing license tax fees upon
conditions. In the case of Austin-Hardware, Inc. vs. Court of Appeals,[7] it was held that the power to license carries
tenement houses. The validity of such ordinance was challenged by Eusebio and Remedios Villanueva, owners of
with it the authority to provide reasonable terms and conditions under which the licensed business shall be
four tenement houses containing 34 apartments. The Supreme Court held the ordinance to be ultra views. On
conducted. As the Solicitor General puts it:
January 15, 1960, however, the municipal board, believing that it acquired authority to enact an ordinance of the
"If the City Mayor is empowered to grant or refuse to grant a license, which is a broader power, it stands to reason
same nature pursuant to the Local Autonomy Act, enacted Ordinance 11, Eusebio and Remedios Villanueva
that he can also exercise a lesser power that is reasonably incidental to his express power, i. e. to restrict a license
assailed the ordinance anew.
through the imposition of certain conditions, especially so that there is no positive prohibition to the exercise of such
prerogative by the City Mayor, nor is there any particular official or body vested with such authority"
ISSUE:
However,distinction must be made between the grant of a license or permit to do business and the issuance of a
Does Ordinance 11 violate the rule of uniformity of taxation?
license to engage in the practice of a particular profession. The first is usually granted by the local authorities and the
second is issued by the Board or Commission tasked to regulate the particular profession. A business permit
RULING:
authorizes the person, natural or otherwise, to engage in business or some form of commercial activity. A
No. The Court has ruled the tenement houses constitute a distinct class of property and that taxes are uniform and
professional license, on the other hand, is the grant of authority to a natural person to engage in the practice or
equal when imposed upon all property of the same class or character within the taxing authority.
exercise of his or her profession.
The fact that the owners of the other classes of buildings in Iloilo are not imposed upon by the ordinance, or that
In the case at bar, what is sought by petitioner from respondent City Mayor is a permit to engage in the business of
tenement taxes are imposed in other cities do not violate the rule of equality and uniformity. The rule does not
running an optical shop. It does not purport to seek a license to engage in the practice of optometry as a corporate
require that taxes for the same purpose should be imposed in different territorial subdivisions at the same time. So
body or entity, although it does have in its employ, persons who are duly licensed to practice optometry by the Board
long as the burden of tax falls equally and impartially on all owners or operators of tenement houses similarly
of Examiners in Optometry.
classified or situated, equality and uniformity is accomplished. The presumption that tax statutes are intended to
A business permit is issued primarily to regulate the conduct of business and the City Mayor cannot, through the
operate uniformly and equally was not overthrown therein.
issuance of such permit, regulate the practice of a profession, like that of optometry. Such a function is within the
 exempted from payment thereof." Petitioner City of Manila approved only after a year, another tax ordinance, Tax
Ordinance No. 8011, amending Tax Ordinance No. 7988.
106. NURSERY CARE CORPORATION, ET AL, vs. ACEVEDO, G.R. No. 180651, July 30, 2014
Tax Ordinances No. 7988 and No. 8011 were later declared by the Court null and void in Coca-Cola Bottlers
Philippines, Inc. v. City of Manila (Coca-Cola case). However, before the Court could declare Tax Ordinance No.
7988 and Tax Ordinance No. 8011 null and void, petitioner City of Manila assessed respondent on the basis of
FACTS:
Section 21 of Tax Ordinance No. 7794, as amended by the aforementioned tax ordinances, for deficiency local...
business taxes, penalties, and interest. Respondent filed a protest with petitioner Toledo on the ground that the said
The City of Manila assessed and collected taxes from the individual petitioners pursuant to Section 15 (Tax on
assessment amounted to double taxation, as respondent was taxed... twice, i.e., under Sections 14 and 21 of Tax
Wholesalers,Distributors, or Dealers) and Section 17 (Tax on Retailers) of the Revenue Code of Manila. At the same
Ordinance No. 7794, as amended by Tax Ordinances No. 7988 and No. 8011.
time, the City of Manila imposed additional taxes upon the petitioners pursuant to Section 21 of the Revenue Code of
Manila, as amended, as a condition forthe renewal of their respective business licenses for the year 1999.Sextion 21
Issue: WHETHER OR NOT THE ENFORCEMENT OF [SECTION] 21 OF THE [TAX ORDINANCE NO. 7794, AS
of the Revenue Code of Manila stated: Section 21.Tax on Business Subject to the Excise, Value-Added or
AMENDED] CONSTITUTES DOUBLE TAXATION
Percentage Taxes under the NIRC - On any of the following businesses andarticles of commerce subject to the
excise, value added or percentage taxes under the National Internal Revenue Code,hereinafter referred to as NIRC,
Ruling: Yes. Emphasis must be given to the fact that prior to the passage of Tax Ordinance No. 7988 and Tax
as amended, a tax (50%) of (1%) per annum on the gross sales or receipts of the preceding calendar year is hereby
Ordinance No. 8011 by petitioner City of Manila, petitioners subjected and assessed respondent only for the local
imposed: A) On person who sells goods and services in the course of trade orbusinesses; x x x provided that all
business tax under Section 14 of Tax Ordinance No. 7794, but never... under Section 21 of the same. This was due
registered businesses in the City of Manila already paying the aforementioned tax shall beexempted from payment
to the clear and unambiguous proviso in Section 21 of Tax Ordinance No. 7794, which stated that "all registered
thereof.
business in the City of Manila that are already paying the aforementioned tax shall be exempted from payment...
To comply with the City of Manila’s assessment of taxes under Section 21, the petitioners paid under protest and
thereof." The "aforementioned tax" referred to in said proviso refers to local business tax. Stated differently, Section
the petitioners formally requested the Office of the City Treasurer for the taxcredit or refund of the local business
21 of Tax Ordinance No. 7794 exempts from the payment of the local business tax imposed by said section,
taxes paid under protest. However, then City Treasurer Anthony Acevedo (Acevedo) denied therequest. On April 8,
businesses that are already paying such tax... under other sections of the same tax ordinance. The said proviso,
1999, the petitioners, sought the reconsideration of the denial of their request. Still, Acevedo did notreconsider. In
however, was deleted from Section 21 of Tax Ordinance No. 7794 by Tax Ordinances No. 7988 and No. 8011.
the meanwhile, Liberty Toledo succeeded Acevedo as the City Treasurer of Manila.Petitioners then filed their
Following this deletion, petitioners began assessing respondent for the local business tax under Section 21 of Tax
respective petitions for certiorari in the Regional Trial Court (RTC) in Manila.
Ordinance No. 7794, as amended.
RTC held that it perceives no instance of the constitutionality proscribed double taxation in taxes imposed under
Section 15 and 17 wherein it is a tax on the business of wholesalers, distributors,dealers and retailers. On the other
The Court easily infers from the foregoing circumstances that petitioners themselves believed that prior to Tax
hand, the tax imposed upon herein petitioners under Section 21 is not a tax against the business ofthe petitioners
Ordinance No. 7988 and Tax Ordinance No. 8011, respondent was exempt from the local business tax under
(as wholesalers, distributors, dealers or retailers) but is rather a tax against consumers or end-users of the articles
Section 21 of Tax Ordinance No. 7794. Hence, petitioners had to... wait for the deletion of the exempting proviso in
soldby petitioners. CA affirmed the decision of the RTC.
Section 21 of Tax Ordinance No. 7794 by Tax Ordinance No. 7988 and Tax Ordinance No. 8011 before they
ISSUE:
assessed respondent for the local business tax under said section. Petitioners obstinately ignore the exempting
Whether or not the collection of taxes constitutes double taxation.
proviso in Section 21 of Tax Ordinance No. 7794, to their own detriment. Said exempting proviso was precisely
RULING:
included in said section so as to avoid double taxation.
The SC defined Double Taxation, wherein there is double taxation when the same taxpayer is taxed twice when he
should be taxed only once for the same purpose by the same taxing authority within the same jurisdiction during the
Double taxation means taxing the same property twice when it should be taxed only once; that is, "taxing the same
same taxing period, and the taxes are of the same kind or character. In addition, double taxation is abnoxious. In the
person twice by the same jurisdiction for the same thing." It is obnoxious when the taxpayer is taxed twice, when it
instant case, the court finds that there is double taxation because the taxes are being imposed (1) on the same
should be but once. Otherwise described as "direct duplicate taxation," the two taxes must be imposed on the same
subject matter – the privilege of doing business in the City of Manila ;(2) for the same purpose – to make persons
subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same
conducting business within the City ofManila contribute to city revenues ;(3) by thesame taxing authority – petitioner
taxing period; and the taxes must be of the same kind or... character.[18]
City of Manila; (4) within the same taxing jurisdiction – within the territorial jurisdiction of the City of Manila;(5) for
thesame taxing periods – per calendar year; and (6)of the same kind orcharacter – a local business tax imposed on
Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is subjected to the
gross sales or receipts of the business.
taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same
subject matter - the privilege of doing business in... the City of Manila; (2) for the same purpose - to make persons
107. Ferrer v. Bautista, 760 SCRA 652
conducting business within the City of Manila contribute to city revenues; (3) by the same taxing authority - petitioner
108. City of Manila v. Coca-Cola Bottlers Philippines, Inc., 595 SCRA 299
City of Manila; (4) within the same taxing jurisdiction - within the territorial jurisdiction... of the City of Manila; (5) for
Facts: Coca-Cola Bottlers Philippines, Inc. is a corporation engaged in the business of manufacturing and selling
the same taxing periods - per calendar year; and (6) of the same kind or character - a local business tax imposed on
beverages, and which maintains a sales office in the City of Manila. Prior to 25 February 2000, respondent had been
gross sales or receipts of the business.
paying the City of Manila local business tax only under Section 14 of Tax Ordinance No. 7794,being expressly
exempted from the business tax under Section 21 of the same tax ordinance.
109. DAVID G. NITAFAN, WENCESLAO M. POLO, and MAXIMO A. SAVELLANO, JR., petitioners,
vs.
The City of Manila subsequently approved Tax Ordinance No. 7988, amending certain sections of Tax Ordinance
COMMISSIONER OF INTERNAL REVENUE and THE FINANCIAL OFFICER, SUPREME COURT OF THE
No. 7794, particularly: (1) Section 14, by increasing the tax rates applicable to certain establishments operating...
within the territorial jurisdiction of the City of Manila; and (2) Section 21, by deleting the proviso found therein, which PHILIPPINES, respondents.
stated "that all registered businesses in the City of Manila that are already paying the aforementioned tax shall be G.R. No. L-78780, July 23 1987
FACTS:
Petitioners are qualified judges of the Regional Trial Court. They sought to prohibit the Commissioner of Internal
Revenue and the Financial Officer of the Supreme Court from making deductions of withholding taxes from their
salaries.
According to the petitioners, the tax withheld from their compensation as judicial officers is a violation of Section 10,
Article VIII of the 1987 Constitution which states that:
“The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of judges of lower
courts shall be fixed by law. During their continuance in office, their salary shall not be decreased”.
In other words, by deducting withholding taxes, the judges asserted that their salaries are being decreased, citing
Perfecto vs. Meer and Dencia vs. David as their legal basis.
In particular, since the 1987 Constitution does not contain a provision similar to Section 6, Article XV of the 1973
Constitution, petitioners claimed that the intent of the framers was to revert to the original concept of “non-diminution”
of salaries.
The Supreme Court En Banc had actually dealt with this matter administratively and directed its Fiscal Manageement
and Budget Office tocontinue with the deduction of the withholding taxes from the salaries of the Justices of the
Supreme Court as well as from the salaries of all other members of the judiciary.
While the question has been resolved, the Court decided to settle the legal issues through a judicial pronouncement.
ISSUE:
Whether the members of the Judiciary are exempt from income taxes.
RULING:
No. Members of the judiciary are subject to payment of income tax.
This payment of income tax does not fall within the constitutional protection against decrease of their salaries during
their continuance in office. Further, the deletion of the grant of exemption from payment of income tax to members of
the Judiciary was a way of ensuring the equality of the three branches of government.
Based on jurisprudence, it was concluded that the true intent of the framers was to make the salaries of members of
the Judiciary taxable, as is applicable to all income earners.
The course of deliberations, debates, and amendments on the draft proposal of Section 10, Article VIII further clarified
the issue:
Commissioner Cirilo Rigos’s proposal, that the term “diminished” be changed to “decreased” and that the
word “nor subjected to income tax” be deleted, was accepted.
Commissioner Joaquin G. Bernas announced that by putting a period after “decreased”, it is with the
understanding that the salaries of justices are subject to tax. He cited that this is based on the understanding that there
will be a provision in the Constitution similar to Section 6 of Article XV, the General Provisions of the 1973 Constitution,
which states that no salary of any public officer shall be exempt from payment of income tax.
The ruling that "the imposition of income tax upon the salary of judges is a dimunition thereof, and so violates the
Constitution", in Perfecto vs. Meer, as affirmed in Endencia vs. David must be declared discarded. The framers of the
fundamental law, as the alter ego of the people, have expressed in clear and unmistakable terms the meaning and
import of Section 10, Article VIII, of the 1987 Constitution that they have adopted.
Stated otherwise, we accord due respect to the intent of the people, through the discussions and deliberations of their
representatives, in the spirit that all citizens should bear their aliquot part of the cost of maintaining the government
and should share the burden of general income taxation equitably.
110. Mactan Cebu International Airport Authority v. Hon. Ferdinand J. Marcos
G.R. No. 120082, September 11, 1996
FACTS:
Mactan Cebu International Airport Authority was created by Republic Act No. 6958 to undertake an
economical, efficient and effective control of the management of the Mactan International Airport. MCIAA enjoyed the
tax exemption granted unto it by Sec. 14 of its Charter, but the treasurer of City of Cebu demanded payment of realty
taxes on several parcels of land owned by MCIAA on the ground that the tax exemption was withdrawn by the Local
Government Code.
MCIAA contends that it is a government instrumentality and that the taxing powers of the local government
cannot extend to its properties. The City of Cebu contends that MCIAA is not a government instrumentality, but a
GOCC.
ISSUE:
 Whether MCIAA is exempt from taxes.
RULING:
The power to tax is an incident of sovereignty and is unlimited in its range and the power to tax is lodged
with Congress, but it can be exercised by the Local Government Unit. There can be no question that under RA 6958
MCIAA is exempt from the payment of realty taxes imposed by the National Government or any of its agencies and
subdivisions. The Local Government Code was enacted and under Sec. 133 The Local Government is prescribed with
limitations on its taxing power and under paragraph o it states that “TAXES, FEES, OR CHARGES OF ANY KIND
ON THE NATIONAL GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES, AND LOCAL GOVERNMENT
UNITS” is included in the exemption. The exemptions were based on the ownership character and use of the property.
Ownership Exemptions. Exemptions from real property taxes on the basis of ownership are real properties owned
by: (i) the Republic, (ii) a province, (iii) a city, (iv) a municipality, (v) a barangay, and (vi) registered cooperatives;
Character Exemptions. Exempted from real property taxes on the basis of their character are: (i) charitable
institutions, (ii) houses and temples of prayer like churches, parsonages or convents appurtenant thereto, mosques,
and (iii) non-profit or religious cemeteries; and Usage exemptions. Exempted from real property taxes on the basis of
the actual, direct and exclusive use to which they are devoted are: (i) all lands buildings and improvements which are
actually, directed and exclusively used for religious, charitable or educational purpose; (ii) all machineries and
equipment actually, directly and exclusively used or by local water districts or by government-owned or controlled
corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; and
(iii) all machinery and equipment used for pollution control and environmental protection.
As a general rule, as laid down in Section 133 the taxing powers of local government units cannot extend to
the levy of inter alia, "taxes, fees, and charges of any kind of the National Government, its agencies and
instrumentalities, and local government units"; however, pursuant to Section 232, provinces, cities, municipalities in
the Metropolitan Manila Area may impose the real property tax except on, inter alia, "real property owned by the
Republic of the Philippines or any of its political subdivisions except when the beneficial used thereof has been granted,
for consideration or otherwise, to a taxable person”
The last paragraph of section 234 withdrawing the exemptions from real property taxes granted to natural or
juridical persons, including GOCC’s except as provided in that section withdrew the tax exemption of MCIAA and it
being a GOCC, it is therefore subject to real property taxes.
111. Meralco v. Vera, 67 SCRA 351
Facts; MERALCO is a holder of a municipal franchise to construct, maintain, and operate an electric light, heat and
power system in the City of Manila and its suburbs.
In 1962, MERALCO imported copper wires, transformers, and insulators for use in the operation of its business on
which, the Collector of Customs, as Deputy Commissioner of Internal Revenue, levied and collected a compensating
tax amounting to a total of P62,335.
Petitioner, on the other hand, bases its claim for exemption from the compensating tax on poles, wires, transformers
and insulators purchased by it from abroad on paragraph 9 of its franchise
Petitioner argues that the abovequoted provision in plain and unambiguous terms makes two references to the
exemption of the articles in question from all taxes except the franchise tax.
Issue; whether meralco is exempt from paying compensating tax.
Ruling; No.
TAXATION; EXEMPTION; STRICTLY CONSTRUED AGAINST TAXPAYER. — One who claims to be exempt from
the payment of a particular tax must do so under clear and unmistakable terms found in the statute. Tax exemptions
are strictly construed against the taxpayer, they being highly disfavored and may almost be said "to be odious to the
law." He who claims an exemption must be able to point to some positive provision of law creating the right; it cannot
be allowed to exist upon a mere vague implication or inference. The right of taxation will not be held to have been
surrendered unless the intention to surrender is manifested by words too plain to be mistaken, for the State cannot
step itself of the most essential power of taxation by doubtful words; it cannot by ambiguous language, be deprived
of this highest attribute of sovereignty. So, when exemption is claimed, it must be shown indubitably to exist, for
every presumption is against it, and a well-founded doubt is fatal to the claim.
COMPENSATING TAX; NOT A PROPERTY BUT AN EXCISE TAX. — A compensating tax is not a property tax but
is an excise tax. An excise tax is one that is imposed on the performance of an act, the engaging in an occupation, or
the enjoyment of a privilege. A tax levied upon property because of its use is an excise duty. Thus, where a tax is not
on the property as such, but is upon certain kinds of property, having reference to their origin and their intended use,
that is an excise tax.
112. Commissioner Of Internal Revenue v. A. D. Guerrero, G.R. No. L-20942, 22 September 1967
FACTS
Paul Gunn is an American national who was engaged in air transportation business under the name and style of
Philippine Aviation Development. His administrator, who was later on substituted by private respondent A.D Guerrero
as a special administrator, filed for a claim for refund of P2, 441.93 on the ground that Gunn’s estate “was entitled to
the same rights and privileges as Filipino citizens operating public utilities including privileges in the matter of taxation."
This tax privilege is a refund of 50% of the specific tax paid on aviation oil. Petitioner CIR, however, denied such claim,
ruling that such partial exemption from the gasoline tax was not included under the terms of the Ordinance and that in
accordance with the statute, to be entitled to its benefits, there must be a showing that the United States of which the
deceased was a citizen granted a similar exemption to Filipinos.
When elevated to the Court of Tax Appeals, said court ordered the CIR to refund to A.D Guerrero the sum of P2,441.93
representing 50% of the specific taxes paid on 61,048.19 liters of gasoline actually used in aviation during the period
from October 3, 1956 up to May 31, 1957, hence this petition.
ISSUE: Is an American owner of a corporation entitled to tax privileges such as tax refund and exemption in the same
way Filipino owners of corporations do?
RULING: No. For a tax exemption to exist, it must be so categorically declared in words that admit of no doubt. No
such language may be found in the Ordinance. It furnishes no support, whether express or implied, to the claim of
respondent Administrator for a refund.
Jurisprudence says that exemption from taxation is not favored and is never presumed, so that if granted it must be
strictly construed against the taxpayer. An exempting provision should be construed strictissimi juris against the
taxpayer and liberally in favor of the taxing authority.
Although the Ordinance appended to the Constitution allows American may operate public utilities, tax exemption is
not to be presumed and that if granted, it is to be most strictly construed.
113. COMMISSIONER OF INTERNAL REVENUE v. SOLIDBANK CORPORATION, G.R. No. 148191, November
25, 2003
FACTS: Solidbank filed its Quarterly Percentage Tax Returns reflecting gross receipts amounting to P1,474,693.44. It
alleged that the total included P350,807,875.15 representing gross receipts from passive income which was already
subjected to 20%final withholding tax (FWT).
The Court of Tax Appeals (CTA) held in Asian Ban Corp. v Commissioner, that the 20% FWT should not form part of
its taxable gross receipts for purposes of computing the tax.
Solidbank filed with the BIR a letter-request for the refund or issuance of a tax credit certificate in the aggregate amount
of ₱3,508,078.75, representing allegedly overpaid gross receipts tax for the year 1995. It also filed a petition for review
with the CTA where the it ordered the refund.
The CA ruling, however, stated that the 20% FWT did not form part of the taxable gross receipts because the FWT
was not actually received by the bank but was directly remitted to the government.
The Commissioner claims that although the FWT was not actually received by Solidbank, the fact that the amount
redounded to the bank’s benefit makes it part of the taxable gross receipts in computing the Gross Receipts Tax.
Solidbank says the CA ruling is correct.
ISSUE/S:
1) Is the 20% FWT a part of the taxable gross receipts?
2) Should accrued income form part of the GRT computation?
3) Is earmarking the same as withholding?
4) Is Solidbank entitled to tax refund or tax credit certification?
5) Is there double taxation in this case?
HELD:
[1] Yes, the amount of interest income withheld in payment of the 20% FWT forms part of gross receipts in computing
for the GRT on banks.
Under the Tax Code, the earnings of banks from passive income are subject to a twenty percent final withholding tax
(20% FWT). This tax is withheld at source and is thus not actually and physically received by the banks, because it is
paid directly to the government by the entities from which the banks derived the income. Apart from the 20% FWT,
banks are also subject to a five percent gross receipts tax (5% GRT) which is imposed by the Tax Code on their gross
receipts, including the passive income.
Since the 20% FWT is constructively received by the banks and forms part of their gross receipts or earnings, it follows
that it is subject to the 5% GRT. After all, the amount withheld is paid to the government on their behalf, in satisfaction
of their withholding taxes. That they do not actually receive the amount does not alter the fact that it is remitted for their
benefit in satisfaction of their tax obligations.
Stated otherwise, the fact is that if there were no withholding tax system in place in this country, this 20 percent portion
of the passive income of banks would actually be paid to the banks and then remitted by them to the government in
payment of their income tax. The institution of the withholding tax system does not alter the fact that the 20 percent
portion of their passive income constitutes part of their actual earnings, except that it is paid directly to the government
on their behalf in satisfaction of the 20 percent final income tax due on their passive incomes.
[2] Accrual should not be confused with the concept of constructive possession or receipt as earlier discussed.
Petitioner correctly points out that income that is merely accrued -- earned, but not yet received -- does not form part
of the taxable gross receipts; income that has been received, albeit constructively, does
[3] Earmarking is not the same as withholding. Amounts earmarked do not form part of gross receipts, because,
although delivered or received, these are by law or regulation reserved for some person other than the taxpayer. On
the contrary, amounts withheld form part of gross receipts, because these are in constructive possession and not
subject to any reservation, the withholding agent being merely a conduit in the collection process.
[4] No, Solidbank is not entitled to tax refund or tax credit certification. Exemptions are the exception in taxation. No
exemptions are normally allowed when a GRT is imposed. It is precisely designed to maintain simplicity in the tax
collection effort of the government and to assure its steady source of revenue even during an economic slump.
[5] No, there is no double taxation here. The subject matter of the FWT is the passive income generated in the form of
interest on deposits and yield on deposit substitutes, while the subject matter of the GRT is the privilege of engaging
in the business of banking. Also, although both taxes are national in scope because they are imposed by the same
taxing authority -- the national government under the Tax Code -- and operate within the same Philippine jurisdiction
for the same purpose of raising revenues, the taxing periods they affect are different. The FWT is deducted and
withheld as soon as the income is earned, and is paid after every calendar quarter in which it is earned. On the other
hand, the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in which it is earned.
114. Smart Communications, Inc., v. The City of Davao
G.R. No.15549 July 21, 2009
Facts:
Smart Communications, Inc. (Smart) filed a Motion for Reconsideration of the decision of the Court dated September
16, 2008, denying its appeal of the Decision and Order of the Regional Trial Court (RTC) of Davao City, dated July
19, 2002 and September 26, 2002, respectively.
On February 18, 2002, Smart filed a special civil action for declaratory relief under Rule 63 of the Rules of Court, for
the ascertainment of its rights and obligations under the Tax Code of the City of Davao particularly Section 1, Article
10 thereof, the pertinent portion of which reads:
“Notwithstanding any exemption granted by any law or other special law, there is hereby imposed a tax on
businesses enjoying a franchise, at a rate of seventy-five percent (75%) of one percent (1%) of the gross annual
receipts for the preceding calendar year based on the income or receipts realized within the territorial jurisdiction of
Davao City.”
Smart contends that its telecenter in Davao City is exempt from payment of franchise tax to the City. One of the
issues raised by Smart is that the imposition of franchise tax by the City of Davao would amount to a violation of the
constitutional provision against impairment of contracts. The franchise granted to it by R.A. No. 7294, according to
petitioner, is in the nature of a contract between the government and Smart.
On July 19, 2002, the RTC rendered a Decision denying the petition. Smart filed a motion for reconsideration, which
was denied by the trial court in an Order dated September 26, 2002. Smart filed an appeal before this Court, but the
same was denied in a decision dated September 16, 2008. Hence, this Motion for Reconsideration in which one of
the issues raised is that the imposition of a local franchise tax on Smart would violate the constitutional prohibition
against impairment of the obligation of contracts.
Issue:
Whether the imposition by the City of Davao of local franchise tax against Smart would violate the constitutional
prohibition against impairment of contracts? and
Whether Republic Act No. 7716, otherwise known as the "Expanded VAT Law removed or abolished the payment of
local franchise tax?
Ruling:
There is no violation of Article III, Section 10 of the 1987 Philippine Constitution against impairment of contracts. The
franchise of Smart does not expressly provide for exemption from local taxes. The uncertainty in the "in lieu of all
taxes" clause in R.A. No. 7294 on whether Smart is exempted from both local and national franchise tax must be
construed strictly against Smart which claims the exemption. Smart has the burden of proving that, aside from the
imposed 3% franchise tax, Congress intended it to be exempt from all kinds of franchise taxes – whether local or
national. Tax exemptions are never presumed and are strictly construed against the taxpayer and liberally in favor of
the taxing authority.
Besides, jurisprudence [Philippine Long Distance Telephone Company (PLDT) v. Province of Laguna, PLDT v. City
of Davao and PLDT v. City of Bacolod] suggest that aside from the national franchise tax, the franchisee is still liable
to pay the local franchise tax, unless it is expressly and unequivocally exempted from the payment thereof under its
legislative franchise. The "in lieu of all taxes" clause in a legislative franchise should categorically state that the
exemption applies to both local and national taxes; otherwise, the exemption claimed should be strictly construed
against the taxpayer and liberally in favor of the taxing authority.
Furthermore, Republic Act No. 7716, otherwise known as the "Expanded VAT Law," did not remove or abolish the
payment of local franchise tax. It merely replaced the national franchise tax that was previously paid by
telecommunications franchise holders and in its stead imposed a ten percent (10%) VAT in accordance with Section
108 of the Tax Code. VAT replaced the national franchise tax, but it did not prohibit nor abolish the imposition of local
franchise tax by cities or municipaties. The power to tax by local government units emanates from Section 5, Article
X of the Constitution which empowers them to create their own sources of revenues and to levy taxes, fees and
charges subject to such guidelines and limitations as the Congress may provide. The imposition of local franchise tax
is not inconsistent with the advent of the VAT, which renders functus officio the franchise tax paid to the national
government. VAT inures to the benefit of the national government, while a local franchise tax is a revenue of the
local government unit.
115. COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE’S MEDICAL CENTER INC.
G.R. No. 203514 February 13, 2017
FACTS:
St. Luke’s Medical Center, Inc. received a tax payment assessment from the BIR on December 14, 2007. Based on
the assessment, SLMC has a deficiency income tax under Section 27 (B) of the 1997 National Internal Revenue Code,
as amended for the taxable year 2005 in the amount of P78, 617,434.54 and for taxable year 2006 in the amount of
P57, 119,867.33.
In response to the received assessment, on January 14, 2008, SLMC filed with the CIR an administrative protest
assailing the assessments. The SLMC alleged that they are exempted from paying the income tax since SLMC is a
non-stock, non-profit, charitable and social welfare organization under Section 30 (E) and (G) of the 1997 NIRC as
amended.
However, on April 25, 2008, SLMC received CIR’s Final Decision on the Disputed Assessment dated April 9, 2008
increasing the deficiency income from P78, 617, 434.54 to P82,419,522.21 for taxable year 2005 and from
P57,119,867.33 to P60, 259,885.94 for taxable year 2006.
SLMC elevated the matter to Court of Tax Appeals finding the decision that SLMC is not liable for the deficiency income
tax under Section 27 (B) of the 1997 NIRC, as amended and exempt from paying the income under Section 30 (E) and
(G) of the same code.
Consequently, the CIR moved for reconsideration but the CTA Division denied which the CIR prompted to file a petition
for review before the CTA En Banc which eventually denied and affirmed the first decision of the CTA Division.
Moreover, the CIR filed an instant petition contending that the CTA erred in exempting SLMC from payment of income
tax, where the CIR petition is partly granted. SLMC ordered to pay the deficiency income tax in 1998 based on the
10% preferential income tax. The CIR argues that under the doctrine of Stare Decisis SLMC is subject to 10% income
tax under Section 27 (B) of the 1997 NIRC, and liable to pay the compromise penalty. SLMC argues that the income
derives from operating a hospital is not income from activities conducted for profit. And the case should be dismissed
since payment to BIR for the basic taxes due for taxable years 1998, 2000-2002 and 2004-2007 has been made.
ISSUE: Whether St. Luke’s is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which imposes
a preferential tax rate of 10% on the income of proprietary non-profit hospitals.
HELD: Yes.
The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or social welfare
purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict
interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G).
Section 30(E) and (G) of the NIRC requires that an institution be “operated exclusively” for charitable or social welfare
purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax
exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph
of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10%
rate pursuant to Section 27(B).
116. Commissioner of Internal Revenue v. Philippine-Aluminum Wheels, Inc.
G.R. No. 216161, 9 August 2017
FACTS: Philippine-Aluminum Wheels, Inc. (respondent) is a corporation organized and existing under Philippine laws
which engages in the manufacture, production, sale, and distribution of automotive parts and accessories. On 16
December 2003, the Bureau of Internal Revenue (BIR) issued a Preliminary Assessment Notice (PAN) against
respondent covering deficiency taxes for the taxable year 2001. The BIR, on 28 March 2004 issued a Final Assessment
Notice (FAN) against respondent in the amount of ₱32,100,613.42. On 23 June 2004, respondent requested for
reconsideration of the FAN issued by the BIR. On 8 November 2006, the BIR issued a Final Decision on Disputed
Assessment (FDDA) and demanded full payment of the deficiency tax assessment from respondent. On 12 April 2007,
the FDDA was served through registered mail.
On 19 July 2007, respondent filed with the BIR an application for the abatement of its tax liabilities. BIR denied
respondent’s application for tax abatement on the ground that the FDDA was already issued by the BIR and that the
FDDA had become final and executory due to the failure of the respondent to appeal the FDDA with the Court of Tax
Appeals (CTA). The BIR contended that the FDDA had been sent through registered mail on 12 April 2007 and that
the FDDA had become final, executory, and demandable because of the failure of the respondent to appeal the FDDA
with the CTA within thirty (30) days from receipt of the FDDA.
On 19 September 2007, respondent informed the BIR that it already paid its tax deficiency on withholding tax
amounting to P736,726.89 through the Electronic Filing and Payment System of the BIR and that it was also in the
process of availing of the Tax Amnesty Program under Republic Act No. 9480 (RA 9480). On 21 September
2007, respondent complied with the requirements of RA 9480 which include: the filing of a Notice of Availment, Tax
Amnesty Return and Payment Form, and remitting the tax payment. However, on 29 January 2008, the BIR denied
respondent’s request and ordered respondent to pay the deficiency tax assessment amounting to P29,108,767.63.
The BIR reiterated that the FDDA had become final and executory for the failure of the respondent to appeal the FDDA
with the CTA within the prescribed period of thirty (30) days. The BIR demanded the full payment of the tax assessment
and contended that the respondent’s availment of the tax amnesty under RA 9480 had no effect on the
assessment due to the finality of the FDDA prior to respondent’s tax amnesty availment.
Hence, on 1 August 2008, respondent filed a Petition for Review with the CTA assailing the decision of the BIR. The
CTA, thereafter, granted respondent’s Petition for Review and set aside the assessment in view of respondent's
availment of a tax amnesty under RA 9480.
ISSUE: Whether the Philippine-Aluminum Wheels, Inc. is entitled to the benefits of the Tax Amnesty Program under
RA 9480.
RULING: YES. The Court opined that a tax amnesty is 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. It partakes of
an absolute forgiveness or waiver by the government of its right to collect what is due it and to give tax evaders who
wish to relent a chance to start with a clean slate. A tax amnesty, much like a tax exemption, is never favored nor
presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer
and liberally in favor of the taxing authority.
On 19 September 2007, respondent availed of the Tax Amnesty Program under RA 9480, as implemented by DO 29-
07. Respondent submitted its Notice of Availment, Tax Amnesty Return, Statement of Assets, Liabilities and Net Worth,
and comparative financial statements for 2005 and 2006. Respondent paid the amnesty tax to the Development Bank
of the Philippines, evidenced by its Tax Payment Deposit Slip dated 21 September 2007. Respondent's completion
of the requirements of the Tax Amnesty Program under RA 9480 is sufficient to extinguish its tax liability under
the FDDA of the BIR.
Moreover, the CIR contended that respondent is disqualified to avail of the tax amnesty under Section 8(f) of RA 9480.
Sec. 8 provides that the tax amnesty shall not extend to persons or cases…(f) Tax cases subject of final and executory
judgement by the courts. The CIR believe that the respondent is disqualified because of the finality of the FDDA.
However, the Court disagreed. The Court ruled that Section 8(f) is clear: only persons with “tax cases subject of final
and executory judgment by the courts” are disqualified to avail of the Tax Amnesty Program under RA 9480. There
must be a judgment promulgated by a court and the judgment must have become final and executory.
Obviously, there is none in this case. The FDDA issued by the BIR is not a tax case "subject to a final and
executory judgment by the courts" as contemplated by Section 8(f) of RA 9480. The determination of the tax
liability of respondent has not reached finality and is still not subject to an executory judgment by the courts as it is the
issue pending before this Court.
117. ESSO STANDARD EASTERN, INC. vs. ACTING COMMISSIONER OF CUSTOMS
18 SCRA 488
GR No. L-21841
October 28, 1966
"Exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing
authority."
FACTS:
Petitioner, engaged in the industry of processing gasoline, oils etc., claims for the refund of special import taxes paid
pursuant to the provision of RA 1394 which imposed a special import tax "on all goods, articles or products imported
or brought into the Philippines." Exempt from this tax, by express mandate of Section 6 of the same law are
"machinery, equipment, accessories, and spare parts, for the use of industries, miners, mining enterprises, planters
and farmers". Petitioner argued that the importation it made of gas pumps used by their gasoline station operators
should fall under such exemptions, being directly used in its industry. The Collector of Customs of Manila rejected
the claim, and so as the Court on Tax Appeals. The CTA noted that the pumps imported were not used in the
processing of gasoline and other oil products but by the gasoline stations, owned by the petitioner, for pumping out,
from underground barrels, gasoline sold on retail to customers.
ISSUE:
Is the contention of the petitioner tenable? Does the subject imports fall into the exemptions?
RULING:
No.
The contention runs smack against the familiar rules that exemption from taxation is not favored, and that
exemptions in tax statutes are never presumed. Which are but statements in adherence to the ancient rule that
exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing
authority. Tested by this precept, we cannot indulge in expansive construction and write into the law an exemption
not therein set forth. Rather, we go by the reasonable assumption that where the State has granted in express terms
certain exemptions, those are the exemptions to be considered, and no more. Since the law states that, to be tax-
exempt, equipment and spare parts should be "for the use of industries", the coverage herein should not be enlarged
to include equipment and spare parts for use in dispensing gasoline at retail.
118. Pilmico-Mauri Foods Corp. v. CIR, 802 SCRA 618
118. PILMICO-MAURI FOODS CORP. V. CIR
802 SCRA 618
FACTS
PMFC is a corporation, organized and existing under the laws of the Philippines, with principal place of business at
Aboitiz Corporate Center, Banilad, Cebu City. The books of accounts of PMFC pertaining to 1996 were examined by
the for deficiency income, value-added and withholding tax liabilities.
The deficiency tax liabilities of PMFC were reduced from P9,761,750.02 to P3,020,259.30 after it disputed the
assessment of the CIR.
The CTA then reduced the amount to P2,804,920.36 on appeal.
From the total purchases of P5,893,694.64 which have been disallowed, it seems that a portion thereof amounting to
P1,280,268.19 (729,663.64 + 550,604.55) had no supporting sales invoices because of PMFC's failure to present said
invoices.
The sales invoices contain alterations particularly in the name of the purchaser, giving rise to serious doubts regarding
their authenticity and if they were really issued to PMFC.
PMFC raised the issue that Section 29 of the NIRC in force during that time had more lenient requirements as proof
for deductions, as compared to Section 138 which was more stringent.
ISSUES:
1) WON PMFC sufficiently gave proof for the deductions
RULING:
No. When a taxpayer claims a deduction, he must point to some specific provision of the statute in which that deduction
is authorized and must be able to prove that he is entitled to the deduction which the law allows.
The statutory test of deductibility where it is axiomatic that to be deductible as a business expense, three conditions
are imposed, namely: (1) the expense must be ordinary and necessary; (2) it must be paid or incurred within the taxable
year, and (3) it must be paid or incurred in carrying on a trade or business. In addition, not only must the taxpayer meet
the business test, he must substantially prove by evidence or records the deductions claimed under the law, otherwise,
the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary
does not justify its deduction.
Also, in interpreting tax regulations they should be taken as a whole and not as separate parts
119. CIR vs. Fireman’s Fund Insurance
[G.R. No. L-30644. March 9, 1987.]
Facts: Fireman’s Fund Insurance Company is a resident foreign insurance corporation organized under the
laws of the United States, authorized and duly licensed to do business in the Philippines. It is a member
of the American Foreign Insurance Association, through which its business is cleared. From January 1952
to December 1958, Fireman’s Fund entered into various insurance contracts involving casualty, fire and
marine risks, for which the corresponding insurance policies were issued. From January 1952 to 1956,
documentary stamps were bought and affixed to the monthly statements of policies issued; and from 1957
to 1958 documentary stamps were bought and affixed to the corresponding pages of the policy register,
instead of on the insurance policies issued. On 3 July 1959, the company discovered that its monthly
statements of business and policy register were lost. The loss was reported to the Building Administration
of Ayala Building and the National Bureau of Investigation on 6 July 1959. The Commissioner of Internal
Revenue was also informed of such loss by the company, through the latter’s auditors, Sycip, Gorres and
Velayo, in a letter dated 14 July 1959. After conducting an investigation of said loss, the company’s
examiner’s examiner ascertained that the company failed to affix the required documentary stamps to the
insurance policies issued by it and failed to preserve its accounting records within the time prescribed by
Section 337 of the Revenue Code by using loose leaf forms as registers of documentary stamps without
written authority from the Commissioner as required by Section 4 of Revenue Regulations V-1. As a
consequence of these findings, the Commissioner, in a letter dated 7 December 1962, assessed and
demanded from petitioner the payment of documentary stamp taxes for the years 1952 to 1958 in the total
amount of P79,806.87 and plus compromise penalties, a total of P81,406.87. The compromise penalties
consisted of the sum of P1,000.00 as penalty for the alleged failure to affix documentary stamps and the
further sum of P600.00 as penalty for an alleged violation of Revenue Regulations V-1 otherwise known as
the Bookkeeping Regulations. In a letter dated 14 January 1963, the company contested the assessment.
After the Commissioner denied the protest in a decision dated 17 March 1965, the company appealed to
the Court of Tax Appeals on 8 May 1965 (CTA Case 1629). After hearing the court rendered its decision
dated 24 May 1969 reversing the decision of the Commissioner of Internal Revenue. Hence, the petition
filed on 26 June 1969.
The Supreme Court resolved to dismiss the petition and to affirm the assailed decision of the Court of Tax
Appeals.
1. CTA Ruling: affixture of documentary stamps to paper other those authorized by law not
tantamount to failure to pay the same The affixture of documentary stamps to papers other than those
authorized by law is not tantamount to failure to pay the same. It is true that the mode of affixing the
stamps as prescribed by law was not followed, but the fact remains that the documentary stamps
corresponding to the various insurance policies were purchased and paid by the company. There is no
legal justification for the Commissioner to require the company to pay again the documentary stamp tax
which it had already paid. To sustain the Commissioner’s stand would require the company to pay the
same tax twice. If at all, the company should be proceeded against for failure to comply with the
requirement of affixing the documentary stamps to the taxable insurance policies and not for failure to pay
the tax. (See Sec. 239 and 332, Rev. Code).
2. CTA Ruling: Compromise penalties cannot be imposed if the company has not consented With
respect to the ‘compromise penalties’ in the total sum of P1,600.00, the penalties cannot be imposed in the
absence of a showing that the company consented thereto. A compromise implies agreement. If the offer is
rejected by the taxpayer, the Commissioner cannot enforce it except through a criminal action. (See Comm.
of Int. Rev. vs. Abad, L-19627, 27 June 1968.)
3. Section 210 of the National Internal Revenue Code; Stamp taxes upon documents, instruments,
and papers Section 210 of the National Internal Revenue Code provides “Upon documents, instruments, and
papers, and upon acceptances, assignments, sales, and transfers of the obligation, right, or property
incident thereto, there shall be levied, collected and paid, for and in respect of the transaction so had or
accomplished, the corresponding documentary stamp taxes prescribed in the following sections of this Title,
by the person making, signing, issuing, accepting, or transferring the same, and at the same time such act
is done or transaction had.” (Now. Sec. 222).
4. Section 232 of the National Internal Revenue Code; Stamp tax on life insurance policies Section
232 of the National Internal Revenue Code provides “On all policies of insurance or other instruments by
whatever name the same may be called, whereby any insurance shall be made or renewed upon any life
or lives, there shall be collected a documentary stamp tax of thirty-five centavos on each two hundred
pesos or fractional part thereof, of the amount issued by any such policy. (220) (As amended by PD
1457). Insurance policies issued by a Philippine company to persons in other countries are not subject to
documentary stamp tax. (Rev. Regs. 26). Medical certificate attached to an insurance policy is not a part
of the said policy. Insurance policy is subject to Section 232 of the Tax Code while medical certificate is
taxable under Section 237 of the same Code. Insurance policies are issued in the place where delivered to
the person insured.” (As amended.)
5. Section 221 of the National Internal Revenue Code; Stamp tax on policies of insurance upon
property Section 221 of the National Internal Revenue Code provides “On all policies of insurance or other
instruments by whatever name the same may be called, by which insurance shall be made or renewed
upon property of any description, including rents or profits, against peril by sea or on inland waters, or by
fire or lightning, there shall be collected a documentary stamp tax of six centavos on each four persons, or
fractional part thereof, of the amount of premium charged.” (Now Sec. 250.).
6. Section 237 of the National Internal Revenue Code; Payment of documentary stamp tax Section
237 of the National Internal Revenue Code provides “Documentary stamp taxes shall be paid by the
purchase and affixture of documentary stamps to the document or instrument taxed or to such other paper
as may be indicated by law or regulations as the proper recepient of the stamp, and by the subsequent
cancellation of same, such cancellation to be accomplished by writing, stamping, or perforating the date of
the cancellation across the face of each stamp in such manner that part of the writing, impression, or
perforation shall be on the stamp itself and part on the paper to which it is attached; Provided, That if the
cancellation is accomplished by writing or stamping the date of cancellation, a hole sufficiently large to be
visible to the naked eye shall be punched, cut or perforated on both the stamp and the document either
by the use of a hand punch, knife, perforating machine, scissors, or any other cutting instrument but if the
cancellation is accomplished by perforating the date of cancellation, no other hole need be made on the
stamp.” (Now Sec. 249.).
7. stamps Section 239 of the National Internal Revenue Code; Failure to affix or cancel documentary
Section 239 of the National Internal Revenue Code provides “Any person who fails to affix the correct
amount of documentary stamps to any taxable document, instrument, or paper, or to cancel in the manner
prescribed by section 237 any documentary stamp affixed to any document, instrument, or paper, shall be
subject to a fine of not less than twenty pesos or more than three hundred pesos. (Now Sec. 250.)
8. Documentary taxes, when deemed paid Documentary tax is deemed paid by: (a) the purchase of
documentary stamps; (b) affixture of documentary stamps to the document or instrument taxed or to such
other paper as may be indicated by law or regulations; and (c) cancellation of the stamps as required by
law.
9. Purpose of the law is to collect tax; Documentary stamps paid for and cancelled The over-riding
purpose of these provisions of law is the collection of taxes. The three steps involving documentary stamps
are but the means to that end. Thus, the purchase of the stamps is the form of payment made; the
affixture thereof on the document or instrument taxed is to insure that the corresponding tax has been paid
for such document while the cancellation of the stamps is to obviate the possibility that said stamps will be
reused for similar documents for similar purposes. In the present case, there appears to be no dispute on
the fact that the documentary stamps corresponding to the various policies were purchased and paid for by
the Company. Neither is there any argument that the same were cancelled as required by law. This
conclusion are also the findings of the Commissioner’s examiner (Amando B. Melgar), and confirmed by
the Memorandum of Acting Commissioner of Internal Revenue Jose B. Lingad, dated 7 November 1962 to
the Chief of Business Tax Division. The purchase of documentary stamps and their being affixed to the
monthly statements of business and policy registers were also admitted by counsel for the Government as
could clearly be gleaned from his Memorandum submitted to the Court of Tax Appeals. Simply said, the
purpose of imposing documentary stamp taxes is to raise revenue and the corresponding amount has
already been paid by the company and has actually become part of the revenue of the government.
10. Evidence to prove payment of documentary stamp tax The insurance policies with the
corresponding documentary stamps affixed are the best evidence to prove payment of said documentary
stamp tax. This rule however does not preclude the admissibility of other proofs which are uncontradicted
and of considerable weight, such as: copies of the applications for manager’s checks, copies of the
manager’s check vouchers of the bank showing the purchases of documentary stamps corresponding to the
various insurance policies issued, in the present case, during the years 1952-1958 duly and properly
identified by the witnesses for the company during the hearing and admitted by the Court of Tax Appeals.
11. Statutes levying taxes or duties, in case of doubt, construed strongly against the government It is
a general rule in the interpretation of statutes levying taxes or duties, that in case of doubt, such statutes
are to be construed most strongly against the government and in favor of the subjects or citizens, because
burdens are not to be imposed, nor presumed to be imposed beyond what statutes expressly and clearly
import (Manila Railroad Co. v. Collector of Customs, 52 Phil. 950 [1929]).
12. Affixture of signature not attended by bad faith; Justification for the acts of agents claimed for the
acts of the principal itself The affixture of the stamps on documents not authorized by law is not attended
by bad faith as the practice was adopted from the authority granted to Wise & Company, one of the
company’s general agents. Indeed, the Commissioner argued that such authority was not given to the
company specifically, but under the general principle of agency, where the acts of the agents bind the
principal, the conclusion is inescapable that the justification for the acts of the agents may also be claimed
for the acts of the principal itself.
13. Doctrine that no person shall unjustly enrich himself at the expense of another applies also to the
Government There is no justification for the government which has already realized the revenue which is
the object of the imposition of subject stamp tax, to require the payment of the same tax for the same
documents. Enshrined in our basic legal principles is the time honored doctrine that no person shall unjustly
enrich himself at the expense of another. It goes without saying that the government is not exempted from
the application of this doctrine (Ramie Textiles, Inc. v. Mathay Sr., 89 SCRA 587 [1979]).
120. EMILIO Y. HILADO, PETITIONER, VS.
THE COLLECTOR OF INTERNAL REVENUE AND THE COURT OF TAX APPEALS, RESPONDENTS.
G.R. No. L-9408, October 31, 1956
TOPIC: TAX LAWS AND IMPLEMENTING RULES AND REGULATIONS – Sec. 246
FACTS:
On March 31, 1952, Emilio Hilado filed his income tax return for 1951 where he claimed that the amount of P12,837.65
is a deductible item from his gross income pursuant to General Circular No. V-123 issued by the Collector of Internal
Revenue, which was issued pursuant to rules laid down by the Secretary of Finance. Hilado claims that this deduction
is a loss consisting in a portion of his war damage claim which had been duly approved by the Philippine War Damage
Commission under the Philippine Rehabilitation Act of 1946. However, such amount was never paid pursuant to a
notice served upon him by the Commission stating that said part of his claim will not be paid until the United States
Congress should make further appropriation. He claims that the amount of P12,837.65 represents a “business asset”
within the meaning of the Act, and that which he is entitled to deduct as a loss in his return for 1951. On 1952, the
Secretary of Finance issued General Circular No. V-139 which not only revoked and declared void his general Circular
No. V- 123 but laid down the rule that losses of property which occurred during the period of World War II from fires,
storms, shipwreck or other casualty, or from robbery, theft, or embezzlement are deductible in the year of actual loss
or destruction of said property. As a consequence, the amount of P12,837.65 was disallowed as a deduction from
Hilado’s gross income for 1951, and the Collector of Internal Revenue demanded the payment of deficiency income
tax for 1951.
ISSUE: Whether or not Hilado can claim compensation for destruction of his property during the war under the laws in
effect at the time.
HELD: NO.
It is true that under the authority of section 338 of the National Internal Revenue Code the Secretary of Finance, in the
exercise of his administrative powers, issued General Circular No. V-123 as an implementation or interpretative
regulation of section 30 of the NIRC, under which the amount of P12,837.65 was allowed to be deducted “in the year
the last installment was received with notice that no further payment would be made until the United States Congress
makes further appropriation therefor”. But such circular was found later to be wrong and was revoked. Thus, when
doubts arose as to the soundness or validity of the circular, the Secretary of Finance sought the advice of the Secretary
of Justice who said that war losses were not included as deductions for the year when they were sustained because
the taxpayers had prospects that losses would be compensated for by the United States Government. In line with this
opinion, the Secretary of Finance, through the Collector of Internal Revenue, issued General Circular No. V-139 which
not only revoked and declared void his previous Circular No. V — 123 but laid down the rule that losses of property
which occurred during the period of World War II from fires, storms, shipwreck or other casualty, or from robbery, theft,
or embezzlement are deductible for income tax purposes in the year of actual destruction of said property. Further, the
amount claimed does not represent a “business asset” that may be deducted as a loss in 1951, hence, the loss of the
corresponding asset or property could only be deducted in the year it was actually sustained. This is in line with section
30 (d) of the National Internal Revenue Code which prescribes that losses sustained are allowable as deduction only
within the corresponding taxable year.
121. Accenture v. CIR, G.R. No. L-190102
122. PHILEX MINING CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE
FACTS:
On August 5, 1992, the BIR sent a letter to Philex asking it to settle its excise tax liabilities amounting to
P123,821,982.52. Philex protested the demand for payment of the tax liabilities stating that it has pending claims for
VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus interest.
Therefore, these claims for tax credit/refund should be applied against the tax liabilities.
In reply, the BIR held that since these pending claims have not yet been established or determined with certainty, it
follows that no legal compensation can take place. Hence, the BIR reiterated its demand that Philex settle the amount
plus interest within 30 days from the receipt of the letter.
Philex raised the issue to the Court of Tax Appeals and in the course of the proceedings, the BIR issued a Tax Credit
Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of Philex of
P123,821,982.52; effectively lowered the latter’s tax obligation of P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining balance of P110,677,688.52
plus interest, elucidating its reason that “taxes cannot be subject to set-off on compensation since claim for taxes is
not a debt or contract.
Philex appealed the case before the Court of Appeals. Nonetheless, the Court of Appeals affirmed the Court of Tax
Appeals observation. Philex filed a motion for reconsideration which was again denied. However, a few days after the
denial of its motion for reconsideration, Philex was able to obtain its VAT input credit/refund not only for the taxable
year 1989 to 1991 but also for 1992 and 1994, computed amounting to 205,595,289.20.
In view of the grant of its VAT input credit/refund, Philex now contends that the same should, ipso jure, off-set its excise
tax liabilities since both had already become “due and demandable, as well as fully liquidated;” hence, legal
compensation can properly take place.
ISSUE:
Whether or not the petitioner is correct in its contention that tax liability and VAT input credit/refund can be subjected
to legal compensation.
HELD:
The Supreme Court has already made the pronouncement that taxes cannot be subject to compensation for the simple
reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction
between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the
Government in its sovereign capacity.
Philex’s claim is an outright disregard of the basic principle in tax law that taxes are the lifeblood of the government
and so should be collected without unnecessary hindrance. Evidently, to countenance Philex’s whimsical reason would
render ineffective our tax collection system.
Philex is not allowed to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund
or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a
tax is that it is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the consent of the
taxpayer.If any payer can defer the payment of taxes by raising the defense that it still has a pending claim for refund
or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when
they fall due simply because he has a claim against the government or that the collection of the tax is contingent on
the result of the lawsuit it filed against the government. Moreover, Philex's theory that would automatically apply its
VAT input credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government
of authority over the manner by which taxpayers credit and offset their tax liabilities.
"The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax
collector kill the 'hen that lays the golden egg.' And, in the order to maintain the general public's trust and confidence
in the Government this power must be used justly and not treacherously."
The petition is hereby dismissed.
123. CIR vs Burroughs Limited and the Court of Tax Appeals June 19, 1986
Facts:
Burroughs Limited is a foreign corporation authorized to engage in trade or business in the Philippines through a
branch office located at De la Rosa corner Esteban Streets, Legaspi Village, Makati, Metro Manila. Claiming that the
15% profit remittance tax should have been computed on the basis of the amount actually remitted (P6,499,999.30)
and not on the amount before profit remittance tax (P7,647,058.00), private respondent filed on December 24, 1980,
a written claim for the refund or tax credit of the amount of P172,058.90 representing alleged overpaid branch profit
remittance tax.
Issue:
Whether or not Burroughs is entitled to any tax credit.
Whether or not Memorandum Circular No. 8-82 should be given a retroactive effect?
Ruling:
Yes. Respondent concedes at least that in his ruling dated January 21, 1980 he held that under Section 24 (b) (2) of
the Tax Code the 15% branch profit remittance tax shall be imposed on the profit actually remitted abroad and not on
the total branch profit out of which the remittance is to be made. Based on such ruling petitioner should have paid only
the amount of P974,999.89 in remittance tax computed by taking the 15% of the profits of P6,499,999.89 in remittance
tax actually remitted to its head office in the United States, instead of Pl,147,058.70, on its net profits of P7,647,058.00.
Undoubtedly, petitioner has overpaid its branch profit remittance tax in the amount of P172,058.90.
Petitioner contends that respondent is no longer entitled to a refund because Memorandum Circular No. 8-82 dated
March 17, 1982 had revoked and/or repealed the BIR ruling of January 21, 1980. The said memorandum circular
states—
Considering that the 15% branch profit remittance tax is imposed and collected at source, necessarily the tax base
should be the amount actually applied for by the branch with the Central Bank of the Philippines as profit to be remitted
abroad.
No. What is applicable in the case at bar is still the Revenue Ruling of January 21, 1980 because private respondent
Burroughs Limited paid the branch profit remittance tax in question on March 14, 1979. Memorandum Circular No. 8-
82 dated March 17, 1982 cannot be given retroactive effect in the light of Section 327 of the National Internal Revenue
Code which provides-
Sec. 327. Non-retroactivity of rulings. Any revocation, modification, or reversal of any of the rules and regulations
promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the
Commissioner shag not be given retroactive application if the revocation, modification, or reversal will be prejudicial to
the taxpayer except in the following cases (a) where the taxpayer deliberately misstates or omits material facts from
his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently
gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based, or (c)
where the taxpayer acted in bad faith. (ABS-CBN Broadcasting Corp. v. CTA, 108 SCRA 151-152)
The prejudice that would result to private respondent Burroughs Limited by a retroactive application of Memorandum
Circular No. 8-82 is beyond question for it would be deprived of the substantial amount of P172,058.90. And, insofar
as the enumerated exceptions are concerned, admittedly, Burroughs Limited does not fall under any of them.
124. SECRETARY OF FINANCE CESAR B. PURISIMA AND COMMISSIONER OF INTERNAL REVENUE KIM S.
JACINTO-HENARES vs. REPRESENTATIVE CARMELO F. LAZATIN AND ECOZONE PLASTIC ENTERPRISES
CORPORATION
G.R. No. 210588 November 29, 2016
Facts: Secretary of Finance Cesar V. Purisima, pursuant to his authority to interpret tax laws and upon the
recommendation of petitioner Commissioner of Internal Revenue (CIR) Kim S. Jacinto-Henares, signed Revenue
Regulation (RR) 2-2012 on February 17, 2012 in response to reports of smuggling of petroleum and petroleum
products.
The RR requires the payment of value-added tax (VAT) and excise tax on the importation of all petroleum and
petroleum products coming directly from abroad and brought into the Philippines, including Freeport and economic
zones (FEZs).It then allows the refund of any VAT or excise tax paid if the taxpayer proves that the petroleum
previously brought in has been sold to a duly registered FEZ locator and used pursuant to the registered activity of
such locator. An FEZ locator must first pay the required taxes upon entry into the FEZ of a petroleum product, and
must thereafter prove the use of the petroleum product.
Carmelo F. Lazatin, in his capacity as Pampanga First District Rep, filed a petition for prohibition and injunction against
the petitioners to annul and set aside RR 2-2012. Lazatin posits that RA 9400 treats the Clark Special Economic Zone
and Clark Freeport Zone (Clark FEZ) as a separate customs territory and allows tax and duty-free importations of raw
materials, capital and equipment into the zone. Thus, the imposition of VAT and excise tax, even on the importation of
petroleum products into FEZs, directly contravenes the law.
The RTC declared RR 2-2012 unconstitutional. RR 2-2012 violates RA 9400 because it imposes taxes that, by law,
are not due in the first place. Since RA 9400 clearly grants tax and duty-free incentives to Clark FEZ locators, a
revocation of these incentives by an RR directly contravenes the express intent of the Legislature. In effect, the
petitioners encroached upon the prerogative to enact, amend, or repeal laws, which the Constitution exclusively
granted to Congress.
Issue: Whether RR 2-2012 is valid and constitutional
Ruling: RR 2-2012 is invalid and unconstitutional because: a) it illegally imposes taxes upon FEZ enterprises, which,
by law, enjoy tax-exempt status, and b) it effectively amends the law (i.e., RA 7227, as amended by RA 9400) and
thereby encroaches upon the legislative authority reserved exclusively by the Constitution for Congress.
The respondents argued that the power to enact, amend, or repeal laws belong exclusively to Congress. In passing
RR 2-2012, petitioners illegally amended the law - a power solely vested on the Legislature. The court agrees with the
respondents.
The power of the petitioners to interpret tax laws is not absolute. The rule is that regulations may not enlarge, alter,
restrict, or otherwise go beyond the provisions of the law they administer; administrators and implementors cannot
engraft additional requirements not contemplated by the legislature. It is worthy to note that RR 2-2012 does not even
refer to a specific Tax Code provision it wishes to implement. While it purportedly establishes mere administration
measures for the collection of VAT and excise tax on the importation of petroleum and petroleum products, not once
did it mention the pertinent chapters of the Tax Code on VAT and excise tax.
As RR 2-2012, an executive issuance, attempts to withdraw the tax incentives clearly accorded by the legislative to
FEZ enterprises, the *petitioners have arrogated upon themselves a power reserved exclusively to Congress, in
violation of the doctrine of separation of powers.
125. CIR vs.PHILIPPINE-ALUMINUM WHEELS, INC. G.R. No. 216161
Facts: Respondent is a corporation organized and existing under Philippine laws which engages in the
manufacture, production, sale, and distribution of automotive parts and accessories. BIR issued a Final Assessment
Notice (FAN) against respondent in the amount of ₱32,100,613.42 Respondent requested for reconsideration of the
FAN issued by the BIR. BIR issued a Final Decision on Disputed Assessment (FDDA) and demanded full payment of
the deficiency tax assessment from respondent. Respondent filed with the BIR an application for the abatement of its
tax liabilities. BIR denied respondent’s application for tax abatement on the ground that the FDDA was already issued
by the BIR and that the FDDA had become final and executory due to the failure of the respondent to appeal the FDDA
with the CTA.
However, PAW contended that they already paid their tax deficiency and that it was also in the process of
availing tax amnesty program under RA No. 9480 as implemented by Revenue Memorandum Circular No. 55-2007 to
settle its deficiency for the year 2001. On September 21, 2007, they complied with the requirementsnof RA 9480 which
include: the filing of a Notice of Availment, Tax Amnesty Return and Payment Form, and remitting the tax payment.
The BIR denied the request on the ground that FDDA had become final and executory for the failure of PAW to appeal
with the CTA within the period of thirty (30) days.
The CIR alleges that respondent is disqualified to avail of the Tax Amnesty Program under Revenue
Memorandum Circular No. 19-2008 (RMC No. 19-2008) dated 22 February 2008 issued by the BIR which includes
"delinquent accounts or accounts receivable considered as assets by the BIR or the Government, including self-
assessed tax" as disqualifications to avail of the Tax Amnesty Program under RA 9480.
Issue: Whether PAW is entitled to the benefits of Tax Amnesty Program under RA 9480.
Ruling: Yes. A tax amnesty is 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. It partakes of an absolute
forgiveness or waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent
a chance to start with a clean slate. A tax amnesty, much like a tax exemption, is never favored nor presumed in law.
The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in
favor of the taxing authority.
For the allegation of CIR. The CIR is wrong because the exception of delinquent accounts or accounts
receivable by the BIR under RMC No. 19- 2008 cannot amend RA 9480. As a rule, executive issuances including
implementing rules and regulations cannot amend a statute passed by Congress.
In National Tobacco Administration v. Commission on Audit, the SC held that in case there is a discrepancy
between the law and a regulation issued to implement the law, the law prevails because the rule or regulation cannot
go beyond the terms and provisions of the law, to wit: "[t]he Circular cannot extend the law or expand its coverage as
the power to amend or repeal a statute is vested with the legislature." To give effect to the exception under RMC No.
19-2008 of delinquent accounts or accounts receivable by the BIR, as interpreted by the BIR, would unlawfully create
a new exception for availing of the Tax Amnesty Program under RA 9480.
126. CIR v. Filinvest, G.R. No. 163653, 19 July 2011
127. Commissioner of Internal Revenue vs. Carlos Ledesma, Julieta Ledesma, Vicente Gustilo. Jr. and
Amparo Ledesma de Gustilo
G.R. No. L-17509 January 30, 1970
Facts:
On July 9, 1949, Carlos Ledesma, Julieta Ledesma and the spouses Amparo Ledesma and Vicente Gustilo,
Jr., purchased from their parents, the sugar plantation known as "Hacienda Fortuna," consisting of 36 parcels of land,
which sugar quota was included in the sale. By virtue of the purchase, respondents owned one-third each of the
undivided portion of the plantation. After the purchase of the plantation, herein respondents took over the sugar cane
farming on the plantation beginning with the crop year 1948-1949. For the crop year 1948- 1949 the San Carlos Milling
Co., Ltd. credited the respondents with their shares in the gross sugar production.
The respondents shared equally the expenses of production, on the basis of their respective one-third
undivided portions of the plantation. In their individual income tax returns for the year 1949 the respondents included
as part of their income their respective net profits derived from their individual sugar production from the "Hacienda
Fortuna," as herein-above stated.
On July 11, 1949, the respondents organized themselves into a general co-partnership under the firm name
"Hacienda Fortuna", for the "production of sugar cane for conversion into sugar, palay and corn and such other
products as may profitably be produced on said hacienda, which products shall be sold or otherwise disposed of for
the purpose of realizing profit for the partnership." The articles of general co-partnership were registered in the
commercial register of the office of the Register of Deeds in Bacolod City, Negros Occidental, on July 14, 1949.
Paragraph 14 of the articles of general partnership provides that the agreement shall have retroactive effect as of
January 1, 1949.
Issue:
 Whether or not Hacienda Fortuna should pay corporate income tax as an unregistered partnership on its net
income received during the period from January 1, 1949 to July 13, 1949, the period in the year 1949 prior to the date
of said registration.
Ruling:
Yes.
The Court of Tax Appeals, in its decision, has pointed out that as early as 1924 the Bureau of Internal
Revenue had applied the "status-at-the-end-of-the-taxable-year" rule in determining the income tax liability of a
partnership, such that a partnership is considered a registered partnership for the entire taxable year even if its articles
of co-partnership are registered only at the middle of the taxable year, or in the last month of the taxable year. We
agree with the Court of Tax Appeals that the ruling is a sound one, and it is in consonance with the purpose of the law
in requiring the registration of partnerships. The policy of the law is to encourage persons doing business under a
partnership agreement to have the partnership agreement, or the articles of partnership, registered in the mercantile
registry, so that the public may know who the real partners of the partnership are, the capital stock of the partnership,
the interest or contribution of each partner in the capital stock, the proportionate share of each partner in the profits,
and the earnings or salaries of the partner or partners who render service for the partnership.
128. COMMISSIONER OF INTERNAL REVENUE
vs.
THE ESTATE OF BENIGNO P. TODA, JR.
G.R. No. 147188, September 14, 2004
FACTS:
The CIR wants to assail the decision of the CTA holding the Estate of Toda not liable for the deficiency IT of
Cibeles Insurance Corporation (CIC) in the amount of 79 million pesos for 1989, and ordered the cancellation and
setting aside of the CIR's assessment.
The case at bar stemmed from a NOA sent to CIC arising from an alleged simulated sale of a 16-storey
commercial building known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City. It is
undisputed that CIC authorized Toda, Jr., President and owner of 99.991% of CIC, to sell the Cibeles Building and the
two parcels of land on which the building stands for an amount of not less than P90 million. Toda sold it to Altonaga
for 100 million pesos who then sold it on the same day to Royal Match Inc. (RMI) for 200 million. All these transactions
are evidenced by notarized deeds of sale.
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million. CIC paid
26 million pesos for its gains from the sale of said property.
3 years before Toda died, he had sold his entire shares of stocks in CIC to Choa for 12.5 million pesos.
The BIR issued the 79-million NOA and demand letter against CIC. CIC moved to reconsider because it has
a new set of stockholders which it called "new CIC." It also pointed out Toda's undertaking to keep CIC and its
stockholdings free from all tax liabilities during the period within which the realty was sold.
The issued a NOA against the Estate of Toda. The Estate filed a protest but the BIR rejected arguing that a
fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the
additional gain of P100 million, which resulted in the change in the income structure of the proceeds of the sale of the
two parcels of land and the building thereon to an individual capital gains, thus evading the higher corporate income
tax rate of 35%
ISSUES:
1. Whether the case is of tax evasion or tax avoidance?
2. Whether the period for assessment of deficiency income tax for the year 1989 prescribed? and
3. Whether respondent Estate be held liable for the deficiency IT of CIC for the year 1989, if any?
RULING:
1. YES, there is tax evasion in this case.
Tax evasion connotes the integration of three factors: (1) payment of tax less than legally due; (2) a state of mind being
evil, in bad faith, willful,or deliberate and not accidental; and (3) unlawful course of action.
The intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of tax liabilities
than for legitimate business purposes, constitutes one of tax evasion.
Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated. The incidence
of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a sale of
property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction
must be viewed as a whole, and each step from the commencement of negotiations to the consummation of the sale
is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as
a conduit through which to pass title.
To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when
it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to
Altonaga should be disregarded for income tax purposes.
2. NO, the period has not prescribed.
According to the Tax Code, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure
to file a return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission,
as the case may be.
In this case, the false return was filed on 15 April 1990, and the falsity thereof was claimed to have been discovered
only on 8 March 1991. The assessment for the 1989 deficiency income tax of CIC was issued on 9 January 1995.
Clearly, the issuance of the correct assessment for deficiency income tax was well within the prescriptive period.
3. YES, the Estate of Toda can be held liable for the deficiency IT of CIC.
Generally, a corporation has a juridical personality distinct and separate from the persons owning or composing it.
However, certain instances in which personal liability may arise:
[1] He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing
its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons;
[2] He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith
file with the corporate secretary his written objection thereto;
[3] He agrees to hold himself personally and solidarily liable with the corporation; or
[4] He is made, by specific provision of law, to personally answer for his corporate action.
Here, when the late Toda undertook and agreed to hold the BUYER and Cibeles free from any all income tax liabilities
of Cibeles for the fiscal years 1987, 1988, and 1989, he thereby voluntarily held himself personally liable therefor.
Respondent estate cannot, therefore, deny liability for CICs deficiency income tax for the year 1989 by invoking the
separate corporate personality of CIC, since its obligation arose from Todas contractual undertaking, as contained in
the Deed of Sale of Shares of Stock.
*Tax evasion and Tax avoidance:
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax
avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer
in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and
when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.
129. GR No. 153866 CIR vs. Seagate
FACTS: Respondent is a resident foreign corporation duly registered with the Securities and Exchange Commission
to do business in the Philippines and is registered with the Philippine Export Zone Authority (PEZA). The respondent
is Value Added Tax-registered entity and filed for the VAT returns. An administrative claim for refund of VAT input
taxes in the amount of P28,369,226.38 with supporting documents (inclusive of the P12,267,981.04 VAT input taxes
subject of this Petition for Review), was filed on 4 October 1999, but no final action has been received by the respondent
from the petitioner on the claim for VAT refund. CIR asserts that by virtue of the PEZA registration alone of respondent,
the latter is not subject to the VAT. Consequently, the capital goods and services respondent has purchased are not
considered used in the VAT business, and no VAT refund or credit is due.
ISSUE: Whether or not Seagate, a VAT-Registered PEZA Enterprise is entitled to tax refund or credit.
HELD: Yes, Seagate is entitled to refund or credit. As a PEZA-registered enterprise within a special economic zone,
respondent is entitled to the fiscal incentives and benefit provided for in either PD 66 or EO 226. It shall, moreover,
enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227 and 7844.
Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The end result,
however, is that it is not subject to the VAT. The non-taxability of transactions that are otherwise taxable is merely a
necessary incident to the tax exemption conferred by law upon it as an entity, not upon the transactions themselves.
The petitioner’s assertion that the capital goods and services respondent has purchased are not considered used in
the VAT business, and thus no VAT refund or credit is due is non sequitur. On this matter, the SC held that by the
VAT’s very nature as a tax on consumption, the capital goods and services respondent has purchased are subject to
the VAT, although at zero rate.
Seagate has complied with all the requisites for VAT refund or credit. First, respondent is a VAT-registered entity.
Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and have not
been offset against any output taxes.
To summarize, special laws expressly grant preferential tax treatment to business establishments registered and
operating within an ecozone, which by law is considered as a separate customs territory. As such, respondent is
exempt from all internal revenue taxes, including the VAT, and regulations pertaining thereto. Its sales transactions
intended for export may not be exempt, but like its purchase transactions, they are zero-rated. No prior application for
the effective zero rating of its transactions is necessary. Being VAT-registered and having satisfactorily complied with
all the requisites for claiming a tax refund of or credit for the input VAT paid on capital goods purchased, respondent
is entitled to such VAT refund or credit.
Having determined that respondent’s purchase transactions are subject to a zero VAT rate, the SC has determined
that tax refund or credit is in order.
130. CIR v. PLDT
G.R. No. 140230, December 15, 2005
FACTS: PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to install, operate and maintain a
telecommunications system throughout the Philippines.
For equipment, machineries and spare parts it imported for its business' on different dates from October 1, 1992 to
May 31, 1994, PLDT paid the BIR the amount of P164,510,953.00, broken down as follows: (a) compensating tax of
P126,713,037.00; advance sales tax of P12,460,219.00 and other internal revenue taxes of P25,337,697.00. For
similar importations made between March 1994 to May 31, 1994, PLDT paid P116,041,333.00 value-added tax (VAT).
PLDT addressed a letter to the BIR seeking a confirmatory ruling on its tax exemption privilege under Section 12 of
R.A. 7082. BIR issued on April 19, 1994 Ruling No. UN-140-94, which states that the 'in lieu of all taxes' provision
under Section 12 of RA 7082 clearly exempts PLDT from all taxes including the 10% value-added tax (VAT)
PLDT filed a claim for tax credit/refund of the VAT, compensating taxes, advance sales taxes and other taxes it had
been paying 'in connection with its importation of various equipment, machineries and spare parts needed for its
operations.' With its claim not having been acted upon by the BIR, PLDT filed with the CTA a petition for review,
seeking a refund of, or the issuance of a tax credit certificate in, the amount of P280,552,286.00.
CTA rendered a decision granting PLDT's petition. CTA held that PLDT is exempt from the payment of VAT,
compensating taxes, advance sales taxes and other BIR taxes on its importations, by virtue of the provision in its
franchise that the 3% franchise tax on its gross receipts shall be in lieu of all taxes on its franchise or earnings thereof.
ISSUE: Whether or not PLDT, given the tax component of its franchise, is exempt from paying VAT, compensating
taxes, advance sales taxes and internal revenue taxes on its importations.
RULING: Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden of taxation,
taxes may be classified into either direct tax or indirect tax.
In context, direct taxes are those that are exacted from the very person who, it is intended or desired, should pay them;
they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in. On the other
hand, indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the
expectation and intention that he can shift the burden to someone else. Stated elsewise, indirect taxes are taxes
wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on
to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays
for it. When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the
purchaser as part of the price of goods sold or services rendered.
To put the situation in graphic terms, by tacking the VAT due to the selling price, the seller remains the person primarily
and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final
purchaser is the burden of the tax. Stated differently, a seller who is directly and legally liable for payment of an indirect
tax, such as the VAT on goods or services, is not necessarily the person who ultimately bears the burden of the same
tax. It is the final purchaser or end-user of such goods or services who, although not directly and legally liable for the
payment thereof, ultimately bears the burden of the tax.
It bears to stress that the liability for the payment of the indirect taxes lies only with the seller of the goods or services,
not in the buyer thereof. Thus, one cannot invoke one's exemption privilege to avoid the passing on or the shifting of
the VAT to him by the manufacturers/suppliers of the goods he purchased. Hence, it is important to determine if the
tax exemption granted to a taxpayer specifically includes the indirect tax which is shifted to him as part of the purchase
price, otherwise it is presumed that the tax exemption embraces only those taxes for which the buyer is directly liable.
As may be noted, the clause 'in lieu of all taxes' in Section 12 of RA 7082 is immediately followed by the limiting or
qualifying clause 'on this franchise or earnings thereof, suggesting that the exemption is limited to taxes imposed
directly on PLDT since taxes' pertaining to PLDT's franchise or earnings are its direct liability. Accordingly, indirect
taxes, not being taxes on PLDT's franchise or earnings, are outside the purview of the 'in lieu provision.
131. Contex Corporation vs Commissioner of Internal Revenue
(G.R. No.151135, July 2, 2004)
Facts:
Petitioner Contex Corporation (CONTEX) is a domestic corporation engaged in the business of
manufacturing hospital textiles and garments and other hospital supplies for export. Petitioner’s place of business is
at the Subic Bay Freeport Zone (SBFZ). It is duly registered with the Subic Bay Metropolitan Authority (SBMA) as a
Subic Bay Freeport Enterprise, pursuant to the provisions of RA 7227. As an SBMA-registered firm, petitioner is
exempt from all local and national internal revenue taxes except for the 5% preferential tax provided in RA 7227.
Petitioner also registered with the BIR as a
The Court of Appeals reversed the CTA’s ruling, hence, this petition.
Issue: Whether COMASERCO engaged in the sale of services, and thus, liable to pay VAT?
Held: Yes.
Section 99 of the National Internal Revenue Code of 1986 provides that:
“Any person who, in the course of trade or business, sells, barters or exchanges goods, renders services,
or engages in similar transactions and any person, who, imports goods shall be subject to VAT imposed in Sections
100 to 102 of this Code”.
The Higher Court clarified the meaning of the term “in the course of trade or business” by citing Section 105
of RA 8424 which took effect on January 1, 1998. The phrase “in the course of trade or business” means the regular
conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a non-stock, non-profit organization (irrespective of the
disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity.
It is immaterial whether the primary purpose of a corporation indicates that it receives payments for services
rendered to its affiliates on a reimbursement-of-cost basis only, without realizing profit, for purposes of determining
liability for VAT on services rendered. As long as the entity provides services for a fee, remuneration or consideration, CHAPTER I: GENERAL PRINCIPLES & LIMITATIONS ON THE POWER OF TAXATION 3
then the service rendered is subject to VAT.
CHAPTER II: INHERENT AND CONSTITUTIONAL LIMITATIONS .............................. 9
Secondly, it is a rule that business taxes are the lifeblood of the nation, statutes that allow exemptions are
CHAPTER III: INCOME AND WITHHOLDING TAXES ...............................................15
construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any exemption from
the payment of a tax must be clearly stated in the language of the law, it cannot be merely implied therefrom. In the CHAPTER IV: KINDS OF TAXPAYERS .....................................................................17
case of the VAT, Section 109, RA 8424 clearly enumerates the transactions exempted from VAT. The services
rendered by COMASERCO do not fall within the exemptions. CHAPTER V: GROSS INCOME .................................................................................24

CHAPTER VI: EXCLUSIONS FROM GROSS INCOME .................................................45

CHAPTER VII: RETURN OF CAPITAL ......................................................................53

CHAPTER VIII: TAX BASES AND RATES .................................................................65

CHAPTER IX: ORDINARY ASSETS AND CAPITAL ASSETS .......................................67

CHAPTER X: TAX-FREE EXCHANGES .......................................................................70

REVIEWER ON TAXATION
CHAPTER XI: ACCOUNTING METHODS AND PERIODS ............................................72

CHAPTER XII: WITHHOLDING TAXES ....................................................................74

CHAPTER XIII: ESTATE TAX ..................................................................................75

CHAPTER XIV: DONOR’S TAX .................................................................................81

CHAPTER XV: INTRODUCTION TO VAT ..................................................................87

CHAPTER XVI: PERSONS LIABLE TO TAX ...............................................................88

CHAPTER XVII: OUTPUT TAX ON SALE OF GOODS OR PROPERTIES & SERVICES .. 89

CHAPTER XX: RATES OF VAT .................................................................................93

CHAPTER XXI: EXEMPT TRANSACTIONS ................................................................94

TABLE OF CONTENTS
CHAPTER XXIV: INTRODUCTION – TAX REMEDIES ................................................95

CHAPTER XXV: ADMINISTRATIVE REMEDIES OF GOVERNMENT ............................97

CHAPTER XXVI: JUDICIAL REMEDIES OF GOVERNMENT ......................................101

CHAPTER XXVII: CIVIL PENALTIES .....................................................................102

CHAPTER XXVIII: REMEDIES OF TAXPAYERS ......................................................104

CHAPTER XXIX: ASSESMENT AND PROTEST ........................................................105

CHAPTER XXX: PRESCRIPTION ............................................................................109

CHAPTER XXXI: TAX CREDIT OR REFUND ............................................................114

CHAPTER XXXII LOCAL BUSINESS TAXES ............................................................121

CHAPTER XXXIII: REAL PROPERTY TAX ..............................................................127 CHAPTER I: GENERAL

PRINCIPLES AND LIMITATIONS ON THE POWER OF
TAXATION
Q: Describe the power of taxation. May a legislative body enact laws to raise revenues in the absence of a
constitutional provision granting said body the power to tax? Explain.
A: The power of taxation is inherent in the State, being an attribute of sovereignty. As an incident of sovereignty, the
power to tax has been described as unlimited in its range, acknowledging in its very nature no limits, so that security
against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency
who are to pay it (Mactan Cebu Int’l Airport Authority v. Marcos)
Q: It is an attribute of sovereignty
A: The power of taxation is an essential and inherent attribute of sovereignity, belonging as a matter of right to every
independent government, without being expressly conferred by the people (Pepsi-Cola Bottling Co v Mun of
Tanauan, Leyte)
Q: Why is the power to tax considered inherent in a sovereign State?
A: It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty. Without this
power, no sovereign State can exist nor endure. The power to tax proceeds upon the theory that the existence of a
government is a necessity. The power to tax is an essential and inherent attribute of sovereignty, belonging as a
matter of right to every independent State. No sovereign State can continue to exist without the means to pay its
expenses, and for those means, it has the right to compel all citizens and property within its limits to contribute;
hence, the emergence of power to tax.
Q: May Congress under the 1987 Constitution, abolish the power to tax of local governments?
A: No, Congress cannot abolish what is expressly granted by the fundamental law. The only authority conferred to
Congress is to provide guidelines and limitations on the local government’s exercise of the power to tax (Sec. 5, Art.
X, 1987 Constitution)
Q: In our jurisdiction, which of the following statements may be erroneous?
Justify your answer.
Taxes are pecuniary in nature
Taxes are enforced charges and contributions
Taxes are imposed on persons and property within the territorial jurisdiction of a State
Taxes are levied by the executive branch of government
Taxes are assessed according to a reasonable rule of apportionment A: Taxes are levied by the
executive branch of government. This statement is erroneous because “levy” refers to the act of imposition by the
legislature which is done through the enactment of a tax law. Levy is an exercise of the power to tax, which is
exclusively legislative in nature and character. Clearly, taxes are not levied by the executive branch of government.
(NPC v Albay)
Q: Enumerate the 3 stages or aspect of taxation. Explain each.
A: The 3 stages or aspects of taxation are:
• Levy – this refers to the enactment of a law by Congress imposing a tax.
• Assessment and collection – this is the act of administration and implementation of the tax law by the
executive department through the administrative agencies
• Payment – this is the act of compliance by the taxpayer including such options, schemes or remedies as
may be legally available to him
Q: Discuss the meaning and the implications of the following statement: “Taxes are the lifeblood of government and
their prompt and certain availability is an imperious need”
A: The phrase “taxes are the lifeblood of government, etc.” expresses the underlying basis of taxation which is
governmental necessity, for indeed, without taxation, a government can neither exist nor endure. Taxation is the
indispensable and inevitable price for civilized society; without taxes, the government would be paralyzed. This
phrase has been used to justify the validity of the laws providing for summary remedies in the collection of taxes. In
Valley Trading Co. v CFI, when the Supreme Court ruled that the damages that may be caused to the taxpayer by
being made to pay the taxes cannot be said to be a irreparable as it would be against the government’s inability to
collect taxes.
Q: Justice Holmes once said: “The power to tax is not the power to destroy while this Court (the Supreme
Court) sits.” Describe the power to tax and its limitations A: The power to tax is an inherent power of the
sovereign, which is exercised through the legislature, to impose burdens upon subjects and objects within its
jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. The underlying
basis for its exercise is governmental necessity for without it no government can exist nor endure. Accordingly, it has
the broadest scope of all the powers of government because in the absence of limitations, it is considered as
unlimited, plenary, comprehensive and supreme. The two limitations on the power of taxation are the inherent and
constitutional limitations which are intended to prevent abuse on the exercise of the otherwise plenary and unlimited
power. It is the Court’s role to see to it that the exercise of the power does not transgress these limitations.
Q: For failure to comply with certain corporate requirements, the stockholders of ABC Corp. were notified by
the SEC that the corporation would be subject to involuntary dissolution. The stockholders did not do
anything to comply with the requirements, and the corporation was dissolved. Can the stockholders be held
personally liable for the unpaid taxes of the dissolved corporation? Explain briefly. A: No. As a general rule,
stockholders cannot be held personally liable for the unpaid taxes of a dissolved corporation. The rule prevailing
under our jurisdiction is that a corporation is vested by law with a personality that is separate and distinct from those
persons composing it (Sunio v NLRC). However, stockholders may be liable for the unpaid taxes of a dissolved
corporation, if it appears that the corporate assets have passed into their hands (Tan TIong Bio v CIR). Likewise ,
when the stockholders have unpaid subscriptions to the capital of the corporation, they can be made liable for unpaid
taxes of the corporation.
Q: Among the taxes imposed by the BIR are income tax, estate tax and donor’s tax, value added tax, excise tax,
other percentage taxes and documentary stamp tax. Classify these taxes into direct and indirect taxes, and
differentiate direct from indirect taxes.
A: Income tax, estate tax and donor’s tax are considered as direct taxes. On the other hand, VAT, excise tax, OPT
and DST are indirect taxes. A direct tax is demanded from the very person who, as intended should pay the tax
which he cannot shift to another, while an indirect tax is demanded in the first instance from one person with the
expectation that he can shift the burden to someone else, not as a tax but as part of the purchase price (Maceda v.
Macaraig).
Q: The police power, the power to tax and the power of eminent domain are inherent powers of government. May a
tax be validly imposed in the exercise of the police power and not of the power to tax? If your answer is in the
affirmative, give an example.
A: The police power may be exercised for the purpose of requiring licenses for which licenses fees may have to be
paid. The amount of the license fees for the regulation of useful occupations should only be sufficient to pay for the
cost of the license and the necessary expense of police surveillance and regulations. For non-useful occupations,
the license fee may be sufficiently high to discourage the particular activity sought to be regulated. It is clear from the
foregoing that police power may not be exercised by itself alone for the purpose of raising taxes. However, police
power may be exercised jointly with the power of taxation for the purpose of raising revenues (Lutz v. Araneta).
Q: “X” is the owner of a residential lot situated at Quirino Avenue, Pasay City. The lot has an area of 300 square
meters. On June 1, 1994, 100 sq meters of said lot owned by “X” was expropriated by the government to be used in
the widening of Quirino Avenue for P300,000.00, representing the estimated assessed value of said portion. From
1991 to 1995, “X”, who is a businessman, has not been paying his income tax. X is now being assessed for the
unpaid income taxes in the total amount of P150,000.00. X claims his income tax liability has already been
compensated by the amount of P300,000.00 which the government owes him for the expropriation of his property.
Decide.
A: The income tax liability cannot be compensated with the amount owed by the government as compensation for his
expropriated property. Taxes are distinct kind, essence and nature than ordinary obligations. Taxes and debts
cannot be subject of compensation because the government and X are not mutually creditors and debtors of each
other and a claim for taxes is not a debt, demand contract or judgment as it is allowable to be set off (Francis v. IAC).
Q: A municipality, BB, has an ordinance which requires that all stores, restaurants and other establishments selling
liquor should pay a fixed annual fee of
P20,000.00. Subsequently, the municipal board proposed an ordinance imposing a sales tax equivalent to 5% of the
amount paid for the purchase or consumption of liquor in stores, restaurants and other establishments. The
municipal mayor, CC, refused to sign the ordinance on the ground that it would constitute double taxations. Is the
refusal of the mayor justified? Reason briefly.
A: No. The refusal of the mayor is not justified. The impositions are of different nature and character. The fixed
annual fee is in the nature of a license fee imposed through the exercise of police power, while the 5% tax on
purchase or consumption is a local tax imposed through the exercise of taxing powers. Both a license fee and a tax
may be imposed on the same business or occupation, or for selling the same article and this is not in violation of the
rule against double taxation (Compania General de Tobacos de Filipinas v. City of Manila).
Q: (a) Is double taxation a valid defense against the legality of tax measure? (b) When an item of income is taxed in
the Philippines and the same income is taxed in another country, is there a case of double taxation? (c) What are the
unusual methods of avoiding the occurrence of double taxation?
A: (a) No, double taxation standing alone and not being forbidden by our fundamental law is not a valid defense
against legality of a tax measure (Pepsi-Cola Bottling Company of the Phil v. Mun of Tanauan, Leyte). However, if
double taxation amounts to a direct duplicate taxation, in that the same subject is taxed twice when it should be
taxed but once, in a fashion that both taxes are imposed for the same purpose by the same taxing authority, within
the same jurisdiction or taxing district, for the same taxable period and for the same kind or character of a tax, then it
becomes legally objectionable for being oppressive and inequitable.
(b) Yes, but it is only a case of indirect duplicate taxation which is not legally prohibited because the taxes are
imposed by different taxing authorities.
(c) The usual methods of avoiding the occurrence of double taxation are:
1. Allowing reciprocal exemption either by law or by treaty;
2. Allowance of tax credit for foreign taxes paid;
3. Allowance of deduction for foreign taxes paid; and
4. Reduction of the Philippine tax rate
Q: X, a lessor of a property, pays real estate tax on the premises, a real estate dealer’s tax based on rental receipts
and income tax on the rentals. He claims that this is double taxation. Decide
A: There is no double taxation. “Double taxation” means taxing for the same tax period the same thing or activity
twice, when it should be taxed but once, by the same taxing authority for the same purpose and with the same kind
or character of tax. The real estate tax is a tax on property; the real estate dealer’s tax is a tax on the privilege to
engage in business; while the income tax is a tax on the privilege to earn an income. These taxes are impose by
different taxing authorities and are essentially of different kind and character.
Q: Why are tax exemptions strictly construed against the taxpayer?
A: Tax exemptions are strictly construed against the taxpayer because such provisions are highly disfavored and
may almost be said to be odious to the law (Manila Electric Company
v. Vera). The exception 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 exemptions, they being contrary to the lifeblood theory
which is underlying basis for taxes. The natural rule is that everyone in the state must contribute to the support of
government. Exemptions are in derogation of sovereignty; hence, they must be strictly construed against the person
claiming it (Commissioner v. Guerrero).
Q: As an incentive for investors, a law was passed giving newly established companies in certain economic zone
exemption from all taxes, duties, fees, imposts and other charges for a period of three years. ABC Corp. was
organized and was granted such incentive. In the course of business, ABC Corp purchased mechanical equipment
from XYZ, Inc. (a) Normally, the sale is subject to a sales tax.
XYZ, Inc. claims, however, that since it sold the equipment to ABC Corp., which is tax exempt, XYZ should not be
liable to pay sales tax. Is this claim tenable? (b) Assume arguendo that XYZ had to and did pay the sales tax. ABC
Corp. later found, however, that XYZ merely shifted or passed on to ABC the amount of the sales tax by increasing
the purchase price. ABC Corp. now claims for a refund from the BIR in an amount corresponding to the tax passed
on to it, since it is tax exempt. Is the claim of ABC Corp meritorious?
A: (a) No. Exemption from taxes is personal in nature and covers only taxes for which the taxpayer grantee is directly
liable. The sales tax is a tax on the seller who is not exempt from taxes. Since XYX, Inc. is directly liable for the sales
tax and no tax exemption privilege is ever given to it, therefore its claim that the sale is exempt is not tenable. A tax
exemption is construed in strictissimi juris and it cannot be permitted to exist upon vague implications (Asiatic
Petroleum Co Ltd v Llanes).
(b) No. The claim of ABC Corp is not meritorious. Although the tax was shifted to ABC Corp. by the seller, what is
paid by it is not a tax but part of the cost it has assumed. The taxpayer who can file a claim for refund is the person
statutorily liable for the payment of the tax. Since ABC Corp. is not said taxpayer, it has no capacity to file a claim for
refund.
Q: Due to an uncertainty w/n a new tax law is applicable to printing companies, DEF Printers submitted a legal query
to the BIR on that issue. The BIR issued a ruling that printing companies are not covered by the new law. Relying on
this ruling, DEF Printers did not pay said tax.
Subsequently, however, the BIR reversed the ruling and issued a new one stating that the tax covers printing
companies. Could the BIR now assess DEF for back taxes corresponding to the years before the new ruling?
Reason briefly.
A: No. The reversal of a ruling shall not be given a retroactive application, if said reversal will be prejudicial to the
taxpayer. Therefore, BIR cannot assess DEF Printers for back taxes because it would be violative of the principle of
non-retroactivity of ruling and doing so would result in grave injustice to the taxpayer who relied on the first ruling in
good faith. Q: In view of the unfavorable balance of payment, condition and the increasing budget deficit, the
President of the Philippines, upon recommendation of the NEDA, issues during a recess of Congress, an EO
imposing an additional duty on all imports at the rate of 10% ad valorem. The EO also provides that the same shall
take effect immediately. Ricardo San Miguel, an importer, questions the legality of the EO on the grounds that only
Congress has the authority to fix the rates of import taxes and in any event, such an EO can take effect only 30 days
after promulgation and the President has no authority to shorten said period.
Are objections of Mr. San Miguel tenable?
A: No, the objections are not tenable as the EO cannot take effect immediately. Being an external law and having the
effect of law, the EO cannot become effective without publication, a requirement of due process (Tañada v Tuvera).
Q: Mr. Pascual’s income tax from leasing his property reaches the maximum rate of tax under the law. He donated ½
of his said property to non-stock, non-profit educational institution whose income and assets are actually, directly and
exclusively used for educational purposes, and therefore qualified for tax exemption under Article XIV, Section 4(3)
of the Constitution and Section 3(h) of the Tax Code. Having thus transferred a portion of his said asset, Mr. Pascual
succeeded in paying a lesser tax on the rental income derived from his property. Is there tax avoidance or tax
evasion? Explain.
A: There is tax avoidance. Mr. Pascual exploited a legally permissive alternative method to reduce his income tax for
transferring part of his rental income to a tax exempt entity through a donation of one half of the income producing
property. The donation is likewise exempt from the donor’s tax. The donation is the legal means employed to transfer
the incidence of income tax on the rental income.
Q: Distinguish tax evasion from tax avoidance.
A: Tax evasion is a scheme used outside of those lawful means to escape tax liability and, when availed of, it usually
subjects the taxpayer to further or additional civil or criminal liabilities. Tax avoidance, on the other hand, is a tax
saving device within the means sanctioned by law; hence, lega.
Q: When may a taxpayer suit be allowed?
A: A taxpayer’s suit may only be allowed when an act complained of, which may include a legislative enactment,
directly involves the illegal disbursement of public funds derived from taxation (Pascual v. Secretary of Public
Works). No money shall be paid out of the Treasury, except in pursuance of an appropriation made by law. (Sec 29,
Art VI, 1987 Constitution).
Q: May taxes be the subject of set-off or compensation? Explain.
A: No. Taxes cannot be the subject of set-off or compensation for the following reasons: (1) taxes are of distinct kind,
essence and nature, and these impositions cannot be classed in merely the same category as ordinary obligations;
(2) the applicable laws and principles governing each are peculiar, not necessarily common, to each; and (3) public
policy is better subserved if the integrity and independence of taxes are maintained (Republic v. Mambulao Lumber
Company).
Q: Can an assessment for a local tax be the subject of set-off or compensations against a final judgment for a sum of
money obtained by the taxpayer against the local government that made the assessment? Explain.
A: No. Taxes and debts are of different nature and character; hence, no set-off or compensation between these two
different classes of obligations is allowed. The taxes assessed are the obligation of the taxpayer arising from law,
while the money judgment against the government is an oblgation arising from contract, whether express or implied.
Inasmuch as taxes are not debts, it follows that the two obligations are not susceptible to set-off or legal
compensation. It is only when the local tax assessment and final judgment are both overdue, demandable, as well as
fully liquidated may set-off or compensation be allowed.
CHAPTER II: INHERENT AND CONSTITUTIONAL LIMITATIONS
Q: To provide means for rehabilitation and stabilization of the sugar industry so as to prepare it for the eventuality of
the loss of the quota allocated to the Philippines resulting from the lifting of US sanctions against an African country,
Congress passes a law increasing the existing tax on the manufacture of sugar on a graduated basis. All collections
made under the law are to accrue to a special fund to be spent only for the purpose enumerated therein, among
which are to place the sugar industry in a position to maintain itself and ultimately to insure its continued existence
despite the loss of that quota, and to afford laborers employed in the industry a living wage and to improve their
working conditions. X, a sugar planter, files a suit questioning the constitutionality of the law alleging that the tax is
not for public purpose as the same is being levied exclusively for the aid and support of the sugar industry. Decide
the case.
A: The suit filed by the sugar planter questioning the constitutionality of the sugar industry stabilization measure is
untenable. Taxation is no longer merely for raising revenue to support the existence of the government; the power
may also be exercised to carry out legitimate objects of the government. It is a legitimate object of government to
protect is local industry on which the national economy largely depends. Where the aim of the tax measure is to
achieve such a governmental objective, the tax imposition can be said to be for a public purpose (Gaston v Republic
Bank)
Q: The Municipality of Malolos passed an ordinance imposing a tax on any sale or transfer of real property located
within the municipality at arate of ¼ of 1% of the total consideration of such transaction. X sold a parcel of land in
Malolos which he inherited from his deceased parents and refused to pay the aforesaid tax. He instead filed
appropriate case asking that the ordinance be declared null and void since such a tax can only be collected by the
national government, as in fact he has paid BIR the required CGT. The Municipality countered that under the
Constitution, each local government is vested with the power to create its own sources of revenue and to levy taxes,
and it imposed the subject tax in the exercise of said constitutional authority. Resolve the controversy.
A: The ordinance passed by the Municipality of Malolos imposing a tax on the sale-ortransfer of real property is void.
The Local Tax Code only allows provinces and cities to impose a tax on the transfer of ownership of real property
(Secs 7 and 23, Local Tax Code). Municipalities are prohibited from imposing said tax that provinces are specifically
authorized to levy (Sec 22, Local Tax Code). While it is true that the Constitution has given broad powers of taxation
to LGU’s, this delegation, however, is subject to such limitations as may be provided by law (Sec 5, Art X, 1987
Constitution).
Q: Ace Tobacco Corp bought a parcel of land situated in Pateros and donated it to the Municipal Gov’t of Pateros for
the sole purpose of devoting the said land as a relocation site for the less fortunate constituents of said municipality.
In accordance therewith, the Municipal Government of Pateros issued to the occupants/beneficiaries Certificates of
Award giving them the respective areas where their houses are erected. Through Ordinance No. 2, Series of 1998,
the said municipal government ordained that the lots awarded to the awardees/donees be finally transferred and
donated to them. Determine the tax consequence of the foregoing dispositions with respect to the Municipal
Government of Pateros. A: The Municipality of Pateros is not subjected to any donor’s tax on the value of land it
subsequently donated, it being exempt from taxes as a political subdivisions of National Government.
Q: Mr. Cortez is a non-resident alien based in HK. During the calendar year 1999, he came to the Philippines several
times and stayed in the country for an aggregate period of more than 180 days. How will Mr. Cortez be taxed on his
income derived from sources within the Philippines?
A: Mr. Cortez, being a non-resident alien individual who has stayed for an aggregate period of more than 180 days
during the calendar year 1999, hsall for that taxable year be deemed to be a non-resident alien doing business in the
Philippines.
Considering the above, Mr. Cortez 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 (Sec. 25[A][1], NIRC).
Thus, he is allowed to avail of the itemized deductions including the personal and additional exemptions but subject
to the rule on reciprocity on the personal exemptions (Sec. 34[A] to [J] and [M] in relation to Sec. 25[A][1] and Sec.
35[D], NIRC).
Q: X, a multinational corporation doing business in the Philippines, donated 100 shares of stock of said corporation
to Mr. Y, its resident manager in the Philippines. What is the tax liability, if any, of X corporation?
A: Foreign corporations effecting a donation are subject to donor’s tax only if the property donated is located in the
Philippines. Accordingly, donation of a foreign corporation of its own shares of stocks in favor of resident employees
is not subject to donor’s tax. However, if 85% of the business of the foreign corporation is located in the Philippines
or the shares donated have acquired business situs in the Philippines, the donation may be taxed in the Philippines
subject to the rule of reciprocity.
Q: The President of the Philippines and the Prime Minister of Japan entered into an executive agreement in respect
of a loan facility to the Philippines from Japan, whereby it was stipulated that interest on loans granted by private
Japanese financial institutions to private financial institutions in the Philippines shall not be subject to Philippine
income taxes. Is this tax exemption valid? Explain.
A: Yes. The tax exemption is valid because an executive agreement has the force and effect of a treaty under the
provision of Revenue Code. Taxation is subject to international comity.
Q: An EO was issued pursuant to law, granting tax and duty incentives only to businesses and residents within the
“secured area” of the Subic Economic Special Zone, and denying said incentives to those who live within the Zone
but oustside such “secure area”. Is the constitutional right to equal protection of the law violated by the EO? Explain.
A: No. Equal protection of the law clause is subject to reasonable classification.
Classification, to be valid, must: (a) rest on substantial distinctions; (b) be germane to the purpose of the law; (c) not
be limited to existing conditions only; and (d) apply equally to all member of the same class.
There are substantial differences between big investors being in the “secured area” and the business operations
outside the “secured area”.
Q: Explain the requirement of uniformity as a limitation in the imposition and/or collection of taxes.
A: The tax is uniform when it operates with the same force and effect in every place where the subject of it is found. It
does not signify an intrinsic, but simply a geographical uniformity. Uniformity does not require the same treatment; it
simply requires reasonable basis for classification.
Q: The City of Makati, in order to solve the traffic problem in its business districts, decided to impose a tax, to be paid
by the driver, on all private cars entering the city during peak hours from 8am to 9am from Mondays to Fridays, but it
exempts those cars carrying more than two occupants, excluding the driver. Is the ordinance valid? Explain.
A: The ordinance is in violation of the rule of uniformity and equality, which requires that all subjects or objects of
taxation, similarly situated must be treated alike and must not be classified in an arbitrary manner. In the case at bar,
the ordinance exempts cars carrying more than two occupants from the said ordinance. Furthermore, the ordinance
imposes the tax only on private cars and exempts public vehicles from the imposition of the tax, although both
contribute to the traffic problem. There exists no substantial standard used in the classification used by the City of
Makati.
Another issue is the fact that the tax is imposed on the driver of the vehicle and not on the registered owner thereof.
The ordinance does not only violate the requirement of uniformity; the same is also unjust because it places the
burden on someone who had no control over the route of the vehicle. Hence, the ordinance is invalid for violating the
rules of uniformity and equality as well as for being unjust.
Q: X Corporation was the recipient in the 1990 of two tax exemptions both from Congress, one law exempting the
company’s bond issues from taxes and the other exempting the company from taxes in the operation of its public
utilities. The two laws extending the tax exemptions were revoked by Congress before their expiry dates. Were the
revocations constitutional?
A: Yes. The exempting statutes are both granted unilaterally by Congress in the exercise of taxing powers. Since
taxations is the rule and tax exemption is the exception, any tax exemption unilaterally granted can be withdrawn at
the pleasure of the taxing authority without violating the Constitution (Mactan Cebu Int’l Airport Authority v Marcos).
Q: A law was passed granting tax exemption to certain industries and investments for a period of fiver years. But the
three years later, the law was repealed. With the repeal, the exemptions were considered revoked by the BIR, which
assessed the investing companies for unpaid taxes effective on the date of th repeal of the law.
NPC and KTR companies questioned the assessments on the ground that, having made their investments in full
reliance with the period of exemption granted by the law, its repeal violated their constitutional right against the
impairment of the obligations and contracts. Is the contention of the companies tenable or not?
Reason.
A: The contention is not tenable. The exemption granted is in the nature of a unilateral tax exemption. Since the
exemptions is spontaneous on the part of the legislature and no service or duty or other remunerative conditions
have been imposed on the taxpayers receiving the exemption, it may be revoked at will by the legislature. What
constitutes an impairment of the obligation of contracts is the revocation of an exemption which is founded on a
valuable consideration because it takes the form and essence of a contract.
Q: ART VI Section 28(3) of the 1987 Constitution provides that charitable institutions, churches and parsonages or
convents appurtenant thereto, mosques, non-profit cemeteries and all lands, buildings, and improvements actually,
directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation. (a) To
what kind of tax does this exemption apply? (b) Is proof of actual use necessary for tax exemption purposes under
the Constitution? A: (a) This tax exemption applies only to property taxes. What is exempted is not the institution
itself but the lands, buildings and improvements actually, directly and exclusively used for religious, charitable and
educational purposes.
(b) Yes, because tax exemptions are strictly construed against the taxpayer. There must be evidence to show that
the taxpayer has complied with the requirements for exemption. Furthermore, RPT is based on use and not on
ownership; hence, the same rule must also be applied for RPT exemptions.
Q: The Roman Catholic Church owns a 2-hectare lot in a town in Tarlac province. The southern side and middle part
are occupied by the Church and a convent, the eastern side, by a school run by the Church itself, the southern side,
by some commercial establishments, while the rest of the property, in particular, the northwestern side, is idle or
unoccupied. May the Church claim tax exemption on the entire land? Decide with reasons.
A: No, The portions of land occupied and used by the Church, convent and school run by the church are exempt
from real property taxes, while the portion of the land occupied by commercial establishments and the portion, which
is idle, are subject to real property taxes. The usage of the property and not the ownership is the determining factor
whether or not the property is taxable.
Q: The Constitution exempts from taxation charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques and non-profit cemeteries and lands, buildings and improvements actually, directly and exclusively
used for religious, charitable and educational purposes.
Mercy Hospital is a 100-bed hospital organized for charity patients. May said hospital claim exemption from taxation
under the above-quoted constitutional provision? Explain.
A: Yes. Mercy Hospital can claim exemption from taxation under the provision of the Constitution, but only with
respect to real property taxes provided that such real properties are used actually, directly and exclusively for
charitable purposes.
Q: In 1991, Imelda gave her parents a Christmas gift of P100,000.00 and a donation of P80,000.00 to her parish
church. She also donated a parcel of land for the construction of a building to the PUP Alumni Association, a non-
stock, nonprofit organization. Portions of the building shall be leased to generate income for the association. Is the
donation to the parish church subject to tax?
A: The donation of P80,000.00 to the parish church, even assuming that it is exclusively for religious purposes, is no
tax-exempt because exemption granted under ART VI, Section 28(3) of the Constitution applies only to real estate
taxes.
Q: X sold a piece of land to the United Church of Christ of Quezon City, Inc. The land is to be devoted strictly for
religious purposes by the Church. When the Church tried to register the title of the land, the Registry of Deeds
refused claiming that the CGT was not paid. Is the transaction exempt from the CGT?
Reason.
A: No. Under section 21(e) in relation to Section 49(a)(4) of the NIRC, the seller is the one liable for the payment of
the CGT from the sale of real property by an individual taxpayer. Meanwhile, the Church in this instant case is the
buyer. Hence, Section 28(4) of the 1987 Constitution, which exempts church lands, buildings and improvements,
does not apply because the obligation to pay the CGT herein is imposed on X, the seller, and not on the Church.
Since payment of the CGT is a condition precedent for the registration of the transfer certificate of the title to real
property, the non-payment herein by the seller is a valid reason for the Registry of Deeds to deny the transfer of title
to the subject land.
Q: Under Article XIV, Section 4(3) of the 1987 Constitution, all revenues and assets of non-stock, non-profit
educational Institutions, used actually, directly and exclusively for educational purposes, are exempt from
taxes and duties. Are income derived from dormitories, canteens and bookstores as well as interest income
on bank deposits and yields from deposit substitutes automatically exempt from taxation? Explain.
A: no. The interest income on bank deposits and yields from deposit substitutes are not automatically exempt from
taxation. There must be a showing that the income are included in the school's annual information return and duly
audited financial statements, together with: (a) certifications from depository banks as to the amount of interest
income earned from passive investments not subject to the 20% FWT; and (b) certification of actual, direct and
exclusive utilization of said income for educational purposes; (c)!Board resolution on proposed project to be funded
out of the money deposited in banks or placed in money market placements, which must be used actually, directly
and exclusively for educational purposes.
The income derived from dormitories, canteens and bookstores are not also automatically exempt from taxation.
There is still the requirement for evidence to show actual, direct and exclusive use for educational purposes. It is to
be noted that the 1987 Constitution does not distinguish with respect to the sources or origin of the income. Th
distinction is with respect to the use which should be actual, direct and exclusive for educational purposes.
Consequently, the provisions of Section 30 of the NIRC, that a non-stock and non-profit educational institution is
exempt from taxation only in respect to income received By them as such could not affect the constitutional tax
exemption. Where the Constitution does not distinguish with respect to sources or origin, the Tax Code should not
make distinctions.
Q: The HR introduced HB No. 7000, which was envisioned to levy a tax on various transactions. After the bill
was approved by the House, the bill was sent to Senate as so required by the Constitution. In the upper
house, instead of a deliberation on the House Bill, the Senate introduced Senate Bill no. 8000 which was its
own version of the same tax. The Senate deliberated on this Senate Bill and approved the same. The House
bill and Senate billNewer then consolidated in the Bicameral
Committee. Eventually, the consolidated bill was approved and sent to the President who signed the same.
The private sectors affected by the new law questioned the validity of the enactment on the ground that the
constitutional provision requiring that all revenue bills should originate from the HR had been violated.
Resolve the issue.
A: There is no violation of the constitutional requirement that all revenue bills should originate from the HR. What is
prohibited is for the Senate to enact revenue measures on its own without a bill originating from the House. But once
the revenue bill was passed by the House and sent to the Senate, the latter's power to propose or concur with
amendments. This follows from the co-equality of the two chambers of Congress.
Q: XYZ Colleges is a non-stock, non-profit educational institution, run by the
Archdiocese of BP City. It collected and received the following: Tuition fees; Dormitory fees; Rentals from
canteen concessionaires; Interest from money market placements of the tuition fees; Donation of a lot and
building by school alumni.
1. Which of these above-cited income and donation would not be exempt from taxation? Explain
briefly.
2. Suppose that XYZ Colleges is a proprietary educational institution owned by the Archbishop's
family, rather than the Archdiocese, which of those above-cited income and donation would be exempt from
taxation?
A: (1) All of the income derived by the non-stock, non-profit educational institution will be exempt from taxation,
provided they are used actually, directly and exclusively for educational purposes are exempt from taxation. The
donation is likewise exempt from donor’s tax, if actually, directly and exclusively used for educational purposes,
provided that not more than 30% of the donation is used by the done for administration purposes. The donee, being
a non-stock, non-profit educational institution, is a qualified entity to receive an exempt donation, subject to
conditions prescribed by law. Accordingly, none of the cited income and donation collected and received by the non-
stock, non-profit educational institution would not be exempt from taxation.
(2) If XYZ Colleges is a proprietary educational institution, all of its income from schoolrelated and non-school-related
activities will be subject to the income tax, based on its aggregate net income derived from both activities.
Accordingly, all of the income enumerated in the problem will be taxable. The donation of lot and building will
likewise be subject to the donor’s tax because a donation to an educational institution is exempt only if the school is
incorporated as a non-stock entity paying no dividends. Since the donee is proprietary educational institution, the
donation is taxable.
Q: Anne Lapada, a student activist, wants to impugn the validity of a tax on text messages. On what grounds
may she do so?
A: She may claim that the law adversely affects her since she sends messages by text and that the tax money is
being extracted and spent in violation of the constitutionally guaranteed right to freedom of communication.
CHAPTER III: INCOME AND WITHHOLDING TAXES
Q: Distinguish “scheduler treatment” from “global treatment” as used in income taxation.
A: Under a schedular system, the various types/items of income (e.g. compensation; business/professional income)
are classified accordingly and are accorded different tax treatments, in accordance with schedules characterized by
graduated tax rates. Since these types of income are treated separately, the allowable deductions shall likewise vary
for each type of income.
Under the global system, all income received by the taxpayer are grouped together, without any distinction as to the
type or nature of the income, and after deducting therefrom expenses and other allowable deductions, are subjected
to tax at a graduated or fixed rate.
Q: (a) Discuss the meaning of the global and schedular systems of taxation. (b) To which system would you say
that the method of taxation under the NIRC belong?
A: (a) A global system of taxation in one where the taxpayer is required to lump all items of income earned during a
taxable period and pay tax under a single set of income tax rules on these different items of income. A schedular
system of taxation provides for a different tax treatment of different types of income so that a separate tax return is
required to be filed for each type of income and the tax is computed on a per return or per schedule basis. (b) The
current method of taxation under the Tax Code belongs to a system which is partly schedular and partly global.
Q: (1) What are the basic features of the present “income tax system?” A: Our present income tax
system can be said to have the following basic features:
(a) It has adopted a comprehensive tax situs by using the nationality, residence and source rules. This makes
citizens and resident aliens taxable on their income derived from all sources while non-resident aliens are
taxed only on their income derived from within the Philippines. Domestic corporations are also taxed on
universal income while foreign corporations are taxed only on income from within. [NOTE: If the question
is asked today, the answer should be: Resident citizens and domestic corporations are subject to tax on
their worldwide income, while the other types of taxpayers (whether individual or corporation) are taxed
only from sources within the Philippines beginning Jan 1, 1998 under RA 8424]
(b) The individual income tax system is mainly progressive in nature in that it provides graduated rates of
income tax. Corporations in general are taxed at a flat rate of
35% on net income [NOTE: tax rates 1998 = 34%; 1999 = 33%; 2000 = 32%; Nov 1 2005 = 35%; Jan 1
2009 = 30%]
(c) It has retained more schedular than global features with respect to individual taxpayers but has maintained
a more global treatment on corporations.
Q: Distinguish a direct tax from an indirect tax.
A: A direct tax is on in which the taxpayer who pays the tax is directly liable therefor; that is, the burden of paying the
tax falls directly on the persons paying the tax. The impact and incidence of taxation remain with the person upon
whom the tax was imposed. An indirect tax is one paid by a person who is not directly liable therefor, and who may
therefore shift or pass on the tax to another person or entity, which ultimately assumes the tax burden. In this case,
the impact of taxation is with the taxable seller of goods or service; while the incidence of taxation rests with the final
consumer.
Q: When is income taxable?
A: Income, gain or profit is subject to income tax, when the following requisites are present:
(a) The money or property received is income, gain or profit (and not return of capital)
(b) The income, gain or profit is receid (actually,or constructively), accrued, or realized during the taxable year; and
(c) The income, gain or profit is not exempt from income tax under the Constitution, treaty or statute
CHAPTER IV: KINDS OF TAXPAYERS
Q: Juan, a Filipino citizen, has emigrated to the US in 1997, where he is now a permanent resident. He owns certain
income earning property in the Philippines from which he continues to derive substantial income. He also receives
income form the employment in the United States on which the US income tax is paid. On which of the above income
is the taxable. If at all in the Philippines, and how, in general terms, would such income or income be taxed?
A: Juan will be taxed on both his income from the Philippines and on his income from the US because his being a
citizen makes him taxable on all income wherever derived. For the income he derives from his projects in the
Philippines, Juan shall be taxed on his net income under the Simplified Net Income Taxation Scheme whereby he
shall be considered as a selfemployed individual. His income as employee in the US, on the other hand, shall be
taxed in accordance with the schedular graduated rates of 1%, 2% and 3%, based on the adjusted gross income
derived by non-resident citizens from all sources without the Philippines during each taxable year. [Note: New law
beginning 1998 = income from sources within the Philippines of a non-resident citizen remains subject to Philippine
income tax, but his income from sources outside the Philippines is exempt)
Q: Federico, a Filipino citizen, migrated to the US some 6 years ago and got a permanent resident status or green
card. Should he pay his Philippine income tax on the gains he derived from the sale in the NYSE in PLDT, a
Philippine corporate whose shares are listed thereat?
A: Yes. The gains from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from
sources within the Philippines, regardless of where the said shares are sold. By this provision of law, the gain if any
from the sale of shares of stocks of a domestic corporation by any person shall be treated for income the Philippines.
Q: From what sources of income are the following persons/corporations taxable by the Philippine government?
1. Citizen of the Philippines and Residing therein
2. Nonresident citizen
3. Citizen who is working and deriving income from abroad as an overseas contract worker
4. An alien individual, whether a resident or not of the Philippines;
5. A domestic corporation.
A:
1. Taxable on all income within and without the Philippines 2. Taxable on
income derived from sources within the Philippines
3. Taxable only on income from sources within the Philippines.
4. Taxable on income derived from sources within the Philippines 5. Taxable on
all income derived from sources within and without.
Q: Four Catholic parishes hired the services of Frank Binatra, a foreign nonresident entertainer, to perform for four
nights at the Folk Arts Theatre, Binatra was paid P200,000.00 a night. The parishes earned P1,000,000.00which
they can be used for the support of the orphans in the city. Who are liable to pay taxes?
A: (a) The four Catholic parishes because the income received by them, not being income earned as such in the
performance of their religious functions and duties, is taxable income under the last paragraph of Section 26; in
relation to Section 26(e) of the Tax Code. In promoting and operating the Binatra Show, they engaged in an on
activity conducted for profit.
(b) The income of Frank Binatra, a non-resident alien under our law, is taxable at the rate of 30% (now 25%) FWT
based on the gross income from the show. Mr. Binatra is not engaged in any trade or business in the Philippines.
Q: Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in
international shipping. He and his wife, who manages their business, filed a joint income tax return for 1997 on
March 15, 1998. After an audit of the return, the BIR issued on April 20, 2001 a deficiency income tax assessment
for the sum of P250,000.00, inclusive of interest and penalty. For failure of Mr. and Mrs. Sebastian to pay the tax
within the period stated in the notice of assessment, the BIR issued on August 19, 2001 warrants of distraint and levy
to enforce collection of the tax.
(a) What is the rule of income taxation with respect to Mr. Sebastian’s income in 1997 as a seaman on board the
Norwegian vessel engaged in international shipping? Explain your answer.
(b) If you are the lawyer of Mr. and Mrs. Sebastian, what possible defense or defenses will you raise in behalf of your
clients against the action of the BIR in enforcing collection of the tax by the summary remedies of warrants of
distraint and lavy? Explain your answer.
A: (a) The 1997 income of Mr. Sebastian as a seaman is considered as income of a nonresident citizen derived from
without the Philippines. The total gross income, in US dollars (or if in other foreign currency, its dollar equivalent)
from without the Philippines shall be declared by him for income tax purposes using a separate income tax return
which will not include his income from business derived within the Philippines (to be covered by another return). He
is entitle of $4,500 and foreign national income taxes paid to arrive at his adjusted income during the year. His
adjusted income will be subject to the graduated tax rates of 1% to 3% (Note: The above provision was amended
already by RA 8424 [Tax Code of 1997] effective January 1, 1998. Income from foreign sources of nonresident
citizens is exempt from income tax)
(b) I will raise the defense of prescription. The right of the BIR to assess prescribes after three years counted from
the last day prescribed by law for the filing of income tax return, when the said return is filed on time. The last
day for filing the 1997 income tax return is April 15, 1998. Since the assessment was issued only on April 20,
2001, the BIR’s right to assess has already prescribed
Q: Alain Descartes, a French citizen permanently residing in the Philippines, received several items of income during
the taxable year, such as consultancy fees received for designing a computer program and installing the same in the
Shanghai facility of a Chinese firm; interests from his deposits in a local bank of foreign currency earned abroad
converted to Philippine pesos; dividends received from an American corporation which derived 60% of its annual
gross receipts from Philippine sources for the past 7 years; and gains derived from the sale of his condominium unit
located in Taguig City to another resident alian. Which item of income is not subject to Phlippine income tax?
A: The consultancy fees are not subject to Philippine income tax. Being an alien, it is subject to income tax only on
income from sources within the Philippines. Since the consultancy fees are received by him for designing a computer
program and installing the same in China, the same shall be treated as income from sources outside the Philippines.
Q: Newtex International (Phils), Inc. is an American firm dully authorized to engage in business in the Philippines as
a branch office. In its activity of acting as a buying agent for foreign, buyers of shirts and dresses abroad and
performing liaison work between its home office and the Filipino garment manufacturers and exporters, Newtex does
not generate any income. To finance its office expenses here, its head office abroad regularly remits to it the needed
amount. To oversee its operations and manage its office here, which had been in operation for two years, the head
office assigned three foreign personnel. Are the three foreign personnel subject to Philippine income tax?
A: The three foreign personnel are subject to tax on the income that they receive for services rendered in the
Philippines. Non-resident aliens are subject to tax on income from sources within the Philippines. Income is deemed
derived from sources within the country when it is earned for services rendered in the Philippines.
Q: Mr. Cortez is a nonresident alien based in HK. During the calendar year 1999, he came to the Philippines several
times and stayed in the country for an aggregated period of more than 180 days. How will Mr. Cortez be taxed on his
income derived from sources within the Philippines and from abroad?
A: Mr. Cortez being a nonresident alien individual who has stayed for an aggregate period of more than 180 days
during the calendar year 1999, shall for that taxable year be deemed to be a nonresident alien doing business in the
Philippines.
Considering the above, Mr. Cortez shall be subject to an income tax in the same manner as a resident citizen on
taxable income received from all sources within the Philippines. Thus, he is allowed to avail of the itemized
deductions including the personal and additional exemptions, but subject to the rule on reciprocity on the personal
exemptions.
Q: Jonny transferred a valuable 10-door commercial apartment to a designated trustee, Miriam, naming in the trust
instrument Santino, Johnny’s 10-year old son, as the sole beneficiary. The trustee is instructed to distribute the
yearly rentals amounting to P720,000. The trustee consults you if she has to pay the annual income tax on the
rentals received from the commercial apartment. (a) What advice will you give the trustee? (b) Will your advice be
the same, if the trustee is directed to accumulate the rental income and distribute the same only when the beneficiary
reaches the age of majority. Why or why not?
A: (a) It depends. Where the trust document transferring the property is revocable, the rental income shall be
included in computing the taxable income of the grantor. On the other hand, if the trust document is irrevocable and
the donor’s tax on the value of the transferred property was duly paid by the grantor at the time of the creation of the
trust, the rental income shall be reported by the trustee in the income tax return to be filed by her. Income tax shall
apply to the income of the property held in trust, including income which is to be distributed currently by the fiduciary
to the beneficiary. However, the taxable income of the trust shall be computed by allowing as deduction the amount
of the income of the trust for the taxable year, which is to be distributed currently by the fiduciary to the beneficiary,
but the amount so allowed as a deduction shall be included in computing the taxable income of the beneficiary,
whether distributed to them or not. (b) No, my advice will be different if the trustee is directed to accumulate the
rental income and distribute the same only when the beneficiary reaches the age of majority. Income tax shall also
apply to income accumulated or held for future distribution under the terms of the trust document. However, the
trustee is allowed as an additional deduction in computing he taxable year, which is property paid or credited during
such year to any beneficiary, but the amount so allowed as deduction shall be included in computing the taxable
income of the beneficiary.
Q: Mr. Santos died intestate in 1989 leaving his spouse and five children as the only heirs. The estate consisted of a
family home and a four-door apartment which was being rented to tenants. Within the year, an extrajudicial
settlement of the estate was executed from the heirs, each of them receiving his/her due share. The surviving
spouse assumed administration of the property. Each year, the net income from the rental property was distributed to
all, proportionately, on which they paid respectively, the corresponding income tax. In 1994, the income tax returns of
the heirs were examined and deficiency income tax assessments were issued against each of them for the year
1989 to 19993, inclusive, as having entered into an unregistered partnership. Were the assessments justified? A:
Yes, the assessments were justified because for income tax purposes, the co-ownership of inherited property is
automatically converted into an unregistered partnership form the moment the said properties are used as a common
fund with intent to produce profits for the heirs in proportion to their shares in the inheritance.
From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and
the income thereof, for each of them to manage and dispose of as exclusively their own, without the intervention of
the other heirs, and accordingly, he becomes liable individually for all taxes in connection therewith. If after such
partition, he allows his shares to be held in common with his co-heirs under a single management to be used with
the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or
instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed.
Q: Noel Langit and his brother, Jovy, bought a parcel of land which they registered in their names as pro indiviso
owners (Parcel A). Subsequently, they formed a partnership, duly registered with SEC, which bought another parcel
of land (Parcel B). Both parcels of land were sold, realizing a net profit of P1,000,000.00 for parcel A and
P500,000.00 for parcel B.
1. The BIR claims that the sale of parcel A should be taxed as a sale by an unregistered partnership. Is the BIR
correct?
2. The BIR also claims that the sale of parcel B should be taxed as a sale by a corporation. Is the BIR correct?
A: (1) The BIR is not correct , since there is not showing that the acquisition of the property by Noel and Jovy Langit
as pro indivisio owners, and prior to the formation of the partnership, was used, intended for use, or bears any
relations whatsoever to the pursuit or conduct of the partnership business. The sale of parcel A shall therefore not be
treated as a sale by an unregistered partnership, but an ordinary sale of a capital asset, and hence will be subject to
the 5% (now 6%) CGT and documentary stamp tax on transfers of real property, said taxes to be borne equally by
the co-owners. (2) The BIR is correct, since a “corporation” as deemed under the Tax Code includes partnerships, no
matter how created or organized, except general professional partnerships. The business partnership, in the instant
case, shall therefore be taxed in the same manner as a corporation on the sale of parcel B. The sale shall thus be
subject to the creditable withholding tax on the sale of parcel B, and the partnership shall report the gain realized
from the sale when it files its income tax return.
Q: Roberto Ruiz and Conrado Cruz bought 3 parcels of land from Rodrigo Sabado on 4 May 1976. Then on 8 July
1977, they bought 2 parcel of land from Miguel
Sanchez. In 1988, they sold the first three parcels of land to Central Realty, Inc. In 1989, they sold the two parcels to
Jose Guerrero. Ruiz and Cruz realized a net profit of P100,000.00 for the sale in 1988 and P150,000.00 for the sale
in 1989.
The corresponding CGT were individually paid by Ruiz and Cruz.
On 20 September 1990, however, Ruiz and Cruz received a letter from the Commissioner of Internal Revenue
assessing them deficiency corporate income taxes for the years 1988 and 1989 because, according to the
Commisioner, during said years they, as co-owners in the real estate transactions, formed an unregistered
partnership or joint venture taxable as a corporation and that the unregistered partnership was subject to corporate
income tax, as distinguished from profits derived from the partnership by them, which is subject to individual income
tax.
Are Robert Ruiz and Conrado Cruz liable for deficiency corporate income tax? A: Roberto Ruiz and Conrado Cruz
are not liable for corporate income tax. Evidently abandoning the Gatchalian ruling,, the Supreme Court in a recent
ruling in Pascual v. Court of Tax Appeals (G.R. No. 78133, October 18, 1988) held that isolated transactions by two
or more persons do not warrant their being considered as an unregistered partnership. They will instead be
considered as mere co-owners, no corporate income tax is due on mere coownerships. It was, therefore, correct for
Ruiz and Cruz to merely pay their individual tax income tax liabilities on the gain from sale of real estate transactions.
Q: Five years ago, Marquez, Peneyra, Jayme, Posadas, and Manguit, all lawyers, formed a partnership which they
named Marquez and Peneyra Law Offices. The Commissioner of Internal Revenue thereafter issued Revenue
Regulations[s] No. 2-93 implementing R.A.7496, known as the Simplified Net Income Taxation Scheme (SNITS).
Revenue Regualtion[s] No. 2-93 provides in part: “Sec. 6. General Professional Partnership. - The general
professional partnership and the partners are covered by R.A. 7496. Thus, in determining profit of the partnership,
only the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses paid or
incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or paid
by the partnership but are not considered as direct costs are not deductible from his gross income.”
(1)Marquez and Peneyra Law Offices Law Offices filed a taxpayer’s suit alleging that Revenue Regulations No. 2-93
violates the principle of uniformity in taxation because general professional partnerships are now subject to
payment of income tax and that there is a difference in the tax treatment between individuals engaged in the
practice of their respective professions and partners in general professional partnership. Is this contention
correct? Explain.
(2)Is Revenue Regulations No. 2-93 now considered as having adopted a gross income method instead of
retaining the net income taxation scheme? Explain. A: (1) The contention is not correct. General professional
partnerships remain to be a nontaxable entity. The partners comprising the same are taxable and they are obligated
to report as income their share in the income of the general professional partnership during the taxable year, whether
distributed or not. The Simplified Net Income Tax System (SNITS) treats professionals as one class of taxpayers so
that they shall be treated alike, irrespective of whether they practice their profession alone or in association with
other professionals under a general professional partnership. What are taxed differently are individuals and
corporations. All individuals similarly situated are taxed alike under the regulations. Therefore, the principle of
uniformity in taxation is not violated. On the contrary, all the requirements of a valid regulation have been complied
with. (2) No. Revenue Regulation No. 2-93, implementing RA No. 7496, has indeed significantly reduced the items of
deduction by limiting it to direct costs and expenses, or 40% of gross receipts maximum deduction in cases where
the direct costs are difficult to determine. The allowance of the limited deductions, however, is still in consonance
with the net income taxation scheme rather than the gross income method. While it is true that not all the expenses
of earning the income might be allowed, this can well be justified by the fact that deductions are not matters of right
but are matters of legislative grace.
Q: Another Banking Corporation, which was organized in 2000 and existing under the laws of the Philippines and
owned by the Sy Family of Makati City, set up in 2010 a branch office in Shanghai City, China, to take advantage of
the presence of many Filipino workers in that area and its booming economy. During the year, the bank management
decided not to include the P20 million net income of the Shanghai Branch in the annual Philippine income tax return
filed with the BIR, which showed a net taxable income of P30 million, because the Shanghai Branch is treated as a
foreign corporation and is taxed only on income from sources within the Philippines, and since the loan and other
business transactions were done in
Shanghai, these incomes are not taxable in the Philippines
(a) Is the bank correct in excluding the net income of its Shanghai Branch in the computation of its annual corporate
income tax for 2010? Explain your answer
(b) Should the Shanghai Branch of another Bank remit profit to its Head Office in the Philippines in 2011, is the
branch liable to the 15% branch profit emittance tax imposed under Section 28A(A)(5) of the 1997 Tax Code?
Explain your answer.
A: (a) No. A domestic corporation is taxable on all income derived from sources within and without the Philippines
(Sec. 23, NIRC). The income of the foreign branch and that of the Head Office will be summed up for income tax
purposes, following the “single entity” concept and will all be included in the gross income of the domestic
corporation in the annual Philippine income tax return.
(b) No. The branch profit remittance tax is imposed only on remittance by branches of foreign corporation in the
Philippines to their Head Office abroad. It is the outbound branch profits that is subject to the tax, not the inbound
profits.
Q: XYZ Law Offices, a law partnership in the Philippines and a VAT-registerd taxpayer, received a query by email
from Gainsburg Corporation, a corporation organized under the laws of Delaware, USA, but the email came from
California, where Gainsburg has an office. Gainsburg has no office in the Philippines and does no business in the
Philippines.
XYZ Law Offices rendered its opinion on the query and billed Gainsburg $1,000 from the opinion. Gainsburg remitted
its payment through Citibank, which converted the remitted $1,000 to pesos. What are the implications of the
payment to XYZ Law offices in terms of VAT and income taxes?
A: The payment of XYZ Law Offices by Gainsburg Corporation is subject to income tax and VAT in the Philippines.
For income tax purposes, the compensation for services is part of the gross income of the law partnership. From its
total gross income within and without, it has to compute its nect income in the same manner as a corporation. The
net income of the partnership, whether distributed or not, will be declare by the partners based on their agreement as
part of their gross income who are to pay the income tax thereon in their individual capacity (Sec. 26, NIRC).
For VAT purposes, the transaction is a zero-rated sale of services where the output tax is zero percent and XYZ is
entitled to claim as refund or tax credit certificate the input taxes attributable to the zero rated sale, if the same is not
utilized by the partnership. The services were rendered to a nonresident person, engaged in business outside the
Philippines, which services are paid for in foreign currency inwardly remitted through the banking system, thereby
making the sale of services subject to tax at zero-rated.
Q: HK Co. is a Hong Kong company, which has a duly licensed Philippine branch engaged in trading activities in the
Philippines. HK Co. also invested directly in 40% of the shares of stack of A Co., a Philippine corporation. These
shares are booked in the Head Office of HK Co. and are not reflected as assets of the Philippine branch. In 1998, A
Co. declared dividends to its stockholders. Before remitting the dividends to HK Co., A Co. seeks your advice as to
whether it will subject the remittance to withholding tax. No need to discuss withholding tax rates, if applicable. Focus
your discussion on what is the issue.
A: I will advise A Co. to withhold and remit the withholding tax on the dividends. While the general rule is that a
foreign corporation is the same juridical entity as its branch office in the Philippines, when, however, the corporation
transacts business in the Philippines directly and independently of its branch, the taxpayer would be the foreign
corporation itself and subject to the dividend tax similarly imposed on nonresident foreign corporation. The dividends
earned by a resident foreign corporation, which is exempt from tax.
Q: Foster Corporation (FC) is a Singapore-based foreign corporation engaged in construction and installation
projects. In 2010, Global Oil Corporation (GOC), a domestic corporation engaged in the refinery of petroleum
products, awarded an anti-pollution project to Foster Corporation, whereby FC shall design, supply machinery, and
equipment, and install an anti-pollution device for GOC’s refinery in the Philippines, provided that the installation part
of the project may be subcontracted to a local construction company. Pursuant to the contract, the design and supply
contracts were done in Singapore by FC, while the installation works were subcontracted by FC with Philippine
Construction Corporation (PCC), a domestic corporation. The project with a total cost of P100M was completed in
2011 at the following cost components; (design – P20M, machinery and equipment
– P50M and installation – P30M). Assume that the project was 40% complete in 2010 and 100% complete in 2011,
based on the certificates issued by the architects and engineers working on the poject. GOC paid FC as follows:
P60M in 2010 and P40M in 2011, and FC paid PCC in foreign currency through a Philippine bank as follows: P10M
in 2010 and P20M in 2011.
(a) Is FC liable to Philippine income tax, and if so, how much revenue shall be reported by it in 2010 and in 2011?
Explain your answer.
(b) Is PCC, which adopted the percentage of completion method of reporting income and expenses, liable to value
added tax in 2010 and in 2011? Explain your answer.
A: (a) No. FC is not liable to Philippine income tax. The revenues from the design and supply contracts, having been
all done by FC (a foreign corporation), hence, not taxable to a foreign corporation in the Philippines. With respect to
the installation works which was subcontracted by FC to PCC, a domestic corporation, it is PCC (not FC) that does
the work in the Philippines and should report the income thereon.
(b) Yes. PCC is liable to VAT as seller of services done in the Philippines for a fee. However, the sale of services to
FC is subject to VAT at zero percent. Services rendered by a VATregistered local contractor to a nonresident foreign
corporation who is outside the Philippines, paid for in foreign currency inwardly remitted through the Philippine
banking system are zero-rated sales of services
Q: Aplets Corporation is registered under the laws of the British Virgin Islands. It has extensive operations
in Southeast Asia. In the Philippines, its products are imported and sold at a mark-up by its exclusive
distributor, Kim’s Trading, Inc. The BIR compiled a record of all the imports of Kim from Aplets and imposed
a tax on Aplets’ net income derived from its exports to Kim. Is the BIR correct? A: No. Aplets Corporation is a
non-resident foreign corporation not engaged in trade or business in the Philippines and its sources of income from
outside the Philippines. As a foreign corporation, it is subject to Philippine income tax only on income from sources
within the Philippines. Gains, profits and income from the sale of personal property outside the Philippines shall be
treated as income from sources outside the Philippines.
CHAPTER V: GROSS INCOME
Q: 1. What is gross income for purposes of income tax?
2. How does income differ from capital? Explain.
A: 1. Gross income means all income from whatever source derived, including (but not limited to) compensation for
services, including fees, commissions, and similar items; gross income from business; gains derived from dealings in
property; interest; royalties; dividends; annuities; prized and winnings; pensions; and partner’s distributive share of
the gross income of general professional partnership
2. Income differs from capital in that income is any wealth which flows into the taxpayer other than a return of capital,
while capital constitutes the investment which is the source of income. Therefore, capital is fund, while income is the
flow. Capital is wealth, while income is the fruit. Income is liable to income tax, while capital ore return of capital is
exempt from tax.
Q: Mr. Francisco borrowed P10,000.00 from his friend, Mr. Gutierrez, payable in one year without interest. When the
loan became due, Mr. Francisco told Mr. Gutierrez that he was unable to pay because of business reverses. Mr.
Gutierrez took pitty on Mr. Francisco and condoned the loan. Mr. Francisco was solvent at the time he borrowed the
P10,000.00 and at the time the loan was condoned. Did Mr. Francisco derived any income from the cancellation or
condonation of his indebtedness? Explain.
No. Mr Francisco did not derive any income from the cancellation or condonation of his indebtedness. Since it is
obvious that the creditor merely desired to benefit the debtor in view of the absence of consideration for the
cancellation, the amount of the debt is considered as a gift from the creditor to the debtor and need not be included
in the latter’s gross income. The gift may, however, be subject to donor’s tax at 30%, since Mr. Francisco and Mr.
Gutierrez are not members of the same family.
Q: Bates advertising Company is a nonresident corporation duly organized and existing under the laws of Singapore.
It is not doing business and has no office in the Philippines. Pilipinas Garment, Inc., a domestic corporation, retained
the services of Bates to do all the advertising of its products abroad. For said services, Bates’ fees are paid through
outward remittances. Are the fees received by Bates subject to any withholding tax?
A: The fees paid to Bates Advertising Company, a non-resident foreign corporation, are not subject to withholding
tax, since they are not subject to Philippine income tax. They are exempt because they do not constitute income from
Philippine sources, the same being compensation for labor or personal services performed outside the Philippines.
Q: A Co., is an off-line international carrier without any flight operation in the Philippines. It has, however, a liaison
office in the Philippines which is duly licensed, with the SEC, established for the purpose of providing passenger and
flight information, reservation and ticketing services. Are the revenues of A Co. from tickets reserved by its Philippine
office subject to tax?
A: The revenues in the Philippines of A Co. as an off-line airline from ticket reservation services are taxable income
from whatever source under Section 28(a) of the Tax Code. This case in analogous to Commissioner v. BOAC,
where the SC ruled that income received in the Philippines from the sale of tickets by an off-line airline is taxable as
income from whatever source.
Q: An international airline with no landing rights in the Philippines sold tickets in the Philippine s for air transportation.
Is income derived from such sales of tickets considered taxable income of the said international air carrier from
Philippine sources under the Tax Code? Explain.
A: No. While the tickets are sold here by the international airline, this is for carriage of persons, excess baggage,
cargo and mail not originating from the Philippines, because the airline has no landing rights in the Philippines. The
income from the sale of tickets is actually the gross revenue derived from the carriage of persons, excess baggage,
cargo and mail and these revenues are considered as income from Philippine sources only if the flight originates
from the Philippines in a continuous and uninterrupted flight, irrespective of the place of payment of the ticket or
passage document. Accordingly, the income mentioned is not derived from Philippine sources.
Q: Pacific, Inc. is engaged in overseas shipping. It time chartered one of its ships to a Japanese company on a five-
year term. The charter was consummated through the efforts of Kamino Moto, a Tokyo based broker. The
negotiation took place in Tokyo. The agreement calls the Pacific, Inc. to pay Kamino Moto $50,000.00. Your opinion
is sought whether Pacific, Inc. should withhold the tax before sending the compensation of Kamino Moto.
A: The compensation of Kamino Moto is not subject to withholding tax. Compensation for labor or personal services
performed outside the Philippines are considered as income from sources without the Philippines. Kamino Moto’s
effort in consummating the Charter is a form of labor or services. Considering further that Kamino Moto is a Tokyo-
based broker, presumably a non-resident foreign corporation, it is taxable only on income within the Philippines.
Q: ABC, a domestic corporation, entered into a software license agreement with XYZ, a non-resident foreign
corporation based in the US. Under the agreement which the parties forged in the US, XYZ granted ABC the right to
use a computer system program and to avail of technical know-how relative to such program. In consideration for
such rights, ABC agreed to pay 5% of the revenues it receives from customers who will use and apply the program in
the Philippines. Discuss the tax implications of the transactions.
The royalty received by XYZ from ABC will be subject to Philippine income tax because the source of the royalty
income is from the Philippines. Rentals and royalties from property located in the Philippines or from any interest in
such property shall be treated as income from sources within the Philippines. Considering that XYZ is a nonresident
foreign corporation, such royalty income is subject tot the 30% final withholding income tax under Section 29 (B) of
the Tax Code, such tax to be withheld by ABC and paid in the same manner as provided in Section 58 of the Tax
Code. XYZ does not have to file a Philippine income tax return on the royalty income. For VAT purposes, ABC must
withhold and assume the payment of the 12% VAT on the royalty income, which input tax can be credited against
ABC’s output tax for the taxable period.
Q: A is a resident Filipino citizen. He purchased a parcel of land in Makati city in 1970 at a consideration of P1M. In
2011, the land, which remained undeveloped and idle, had a fair market value of P20M. Mr. B, another Filipino
citizen, is very much interested in the property and he offered to buy the same for P20M. (a) Is A liable for income tax
in 2011 based on the offer to buy by MR B? (b) Should A agree to sell the land in 2012 for P20M, subject to the
condition as stated in the Deed of Sale that the buyer shall assume the capital gains tax thereon, how much is the
income tax due on the transaction and when must the tax return be filed and tax be paid by the taxpayer?
A: (a) A is not liable for income tax in 2011 because no income is realized by him during that year. Tax liability for
income tax attaches only if there is a gain realized resulting from a closed and complete transaction. (b) He shall be
liable to pay the 6% capital gains tax based on the gross selling price of the property of P20M plus the capital gains
tax assumed by the buyer (following the doctrine of constructive receipt of income). He should file the return within
30 days from the date of sale and pay the tax as he files the return.
Q: What is meant by taxable income?
A: Taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions and/or
personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other special
laws.
Q: ABC Computer Corp. purchased some years ago Membership Certificate No. 7 from the Calabar Golf Club, Inc.
for P300,000.00. In September 4, 1985, it transferred the same to Mr. John Johnson, its American computer
consultant, to enable him to avail of the facilities of the Club during his stay here. The consultancy agreement
expired two year later in the meantime, the value of the Club share appreciated and what was purchased by the
corporation at P300,000.00, commanded a market value of P800,000.00 in 1987. Before he returned home a few
days after his tenure ended, Mr. Johnson transferred the subject share to Mr. Robert James, the new consultant of
the firm and the newly designated playing representative, under a Deed of Declaration of Trust and Assignment of
Shares, wherein the former acknowledged the absolute ownership of ABC Computer Corp. over the share, that the
assignment was without any consideration and that the share was placed in his name because the Club required it to
be done. (a) Is the assignment/transfer of the shares from Johnson to James subject to income tax? (b) Is the said
assignment a gift and, therefore, subject to gift tax?
A: (a) The assignment or transfer of shares from Johnson to James is not subject to income tax. There had been no
real change of ownership that took place. There having been no actual sale or exchange, no income tax incidence
can be said to have occurred. In addition, there was really no income realized or received considering that in the
Deed of declaration of Trust and Assignment of Shares, the absolute ownership of ABC Computer Corp was
explicitly recognized. (b) The assignment can neither be held to be a gift. To be considered a gift within the context of
the NIRC, there must be a transfer of ownership or a quantifiable interest. More importantly, the transfer of the
membership certificate was merely a designation of the consultant to be the “playing representative” of ABC
Computer Corporation in the Calabar Golf Club.
Q: X, a multinational corporation doing business in the Philippines donated 100 shares of stock of said corporation to
Mr. Y, its resident manager in the Philippines.
(1)What is the tax liability, if any, of X corporation?
(2)Assuming the shares of stocks were given to Mr. Yin consideration of his services to the corporation
which are the tax implication? Explain. A: (1) Foreign corporations effecting a donation are subject to donor’s tax
only if the property donated is located in the Philippines. Accordingly, donation of a foreign corporation of its own
shares of stocks in favor of a resident employee is not subject to donor’s tax. However, if 85% of the business of the
foreign corporation is located in the Philippines of the shares donated have acquired business situs in the Philippines
the donation may be taxed in the Philippines subject to the rule of reciprocity.
(2) If the shares of stocks were given to Mr. Y in consideration of his services to the corporation, the same shall
constitute taxable compensation income to the recipient because it is a compensation for services rendered under an
employee-employer relationship, hence, subject to income tax.
Q: X is employed as a driver of a corporate lawyer and he receives a monthly salary of P 5,000.00 with free board
and lodging with an equivalent value of P 1,500.00.
1. What will be the basis of X’s income tax? Why?
2. Will your answer in question (1) be the same if X’s employer is an obstetrician? Why?
Q: A Co., a Philippine corporation, has an executive (P) who is a Filipino citizen, A Co. has a subsidiary in Hong
Kong (HK Co.] and will assign P for an indefinite period to work full time for HK Co. P will bring his family to reside in
HK and will lease out his residence in the Philippines. The salary of P will be shouldered 50% by A Co. while the
other 50% plus housing, cost of living and educational allowances of P’s dependents will be shouldered by HK Co. A
Co. will credit the 50% of P’s salary to P’s Philippine bank account. P will sign the contract of employment in the
Philippines. P will also be receiving rental income for the lease of his Philippine residence. Are these salaries,
allowances and rentals subject to the Philippine income tax?
A: The salaries and allowances received by P are not subject to Philippine income tax. P qualifies as a non-resident
citizen because he leaves the Philippines for employment requiring him to be physically present abroad most of the
time during the taxable year (Sec. 22[E], NIRC). A non-resident citizen is taxable only on income derived from
Philippine sources (Sec. 23, NIRC). The salaries and allowances received from being employed abroad are incomes
from without because these are compensation for services rendered outside of the Philippines (Sec. 42, NIRC).
However, P is taxable on rental income for the lease of his Philippine residence because this is an income derived
from within, the leased property being located in the Philippines (Sec. 42, NIRC).
Q: Citing Section 10, Article VIII of the 1987 Constitution, which provides that salaries of judges shall be
fixed by law and that during their continuance in office their salary shall not be decreased, a judge of MM
Regional Trial Court questioned the deduction of withholding taxes from his salary since it results into a net
deduction of his pay. Is the contention of the judge correct? Reason briefly. A: No. The contention is incorrect.
The salaries of judges are not tax-exempt and their taxability is not contrary to the provisions of Section 10, Article
VIII of the Constitution on the non-diminution of the salaries of the judiciary during their continuance in office. The
clear intent of the Constitutional Commission that framed the Constitution is to subject their salaries to tax as in the
case of all taxpayers. Hence, the deduction of withholding taxes, being a manner of collecting the income tax on their
salary, is not a diminution contemplated by the fundamental law (Nitafan, et al. v. Commissioner, 152 SCRA 284
[1987]).
Q: A “Fringe benefit” is defined as being any good, service or other benefit furnished or granted in cash or in kind by
an employer to an individual employee. Would it be the employer or the employee who is legally required to pay an
income tax on it? Explain.
A: It is the employer who is legally required to pay an income tax on the fringe benefit paid to supervisory or
managerial employee. The fringe benefit paid to supervisory or managerial employee. The fringe benefit tax is
imposed as a final withholding income tax on the fringe benefits of the employee, but the legal obligation to remit the
tax is placed on the employer, such that if the tax is not paid, the legal recourse of the BIR is to go after the
employer. Any amount or value received by the employee as a fringe benefit is considered tax-paid, or net of the
income tax due thereon. The person who is legally required to pay is that person who, in case of non-payment, can
be legally demanded to pay the tax. However, fringe benefit paid to a rank-and-file employee is taxable to said
employee, which the employer is required to deduct the corresponding withholding tax, unless it is considered as de
minimis benefit exempt from income tax.

A: 1. The basis of X’s income tax would depend on whether his employer is an employee or a practicing corporate
lawyer. If his employer is an employee, the basis of X’s income tax is P 6,500.00 equivalent the total of the basic
salary and the value of the board and lodging. This is so because the employer has no place of business where the
free board and lodging may be given. On the other hand, if the corporate lawyer is a practicing lawyer
(selfemployed), X should be taxed only on P 5,000.00, provided that the free board and lodging is given in the
business premises of the lawyer and for his convenience, and that the free lodging was given to X as a condition for
his employment.

2. If the employer is an obstetrician who is self-employed, the basis of his income will only be P 5,000.00, if it is
proven that the free board and lodging is given within premises of said employer for his convenience and that the
free lodging is required to be accepted by X as condition for employment. Otherwise, X would be taxed on P
6,500.00.
Q:1. Mr. Adrian is an executive of a big business corporation. Aside from his salary, his employer provides him with
the following benefits: free use of a residential house to an exclusive subdivision, free use of a limousine and
membership in a country club where he can entertain customers of the corporation. Which of these benefits, if any,
must Mr. Adrian report as income?
Explain.
2. Capt. Canuto is a member of the Armed Forces of the Philippines. Aside from his pay as captain, the government
gives him free uniforms, free living quarters in whatever military camp he is assigned, and free meals inside the
camp. Are these benefits income to Capt. Canuto? Explain.
3. Mr. Infante was hit by a wayward bus while on his way to work. He survived but had to pay P400,000.00 for his
hospitalization. He was unable to work for six months which meant that he did not receive his usual salary of
P10,000.00 a month or a total of P60,000.00. he sued the bus company and was able to obtain a final judgment
awarding him P 400,000.00 as reimbursement for his hospitalization, P60,000.00 for the salaries he failed to receive
while hospitalized, P200,000.00 as moral damages for his pain and suffering, and P100,000.00 as exemplary
damages. He was able to collect in full from the judgment. How much income did he realize when he collected on the
judgment? Explain.
A: 1. Mr. Adrian must report the imputed rental value of the house and limousine as
income. If the rental value exceeds the personal needs of Mr. Adrian because he is expected to provide
accommodation in said house for company guests or the car is used partly for business purpose, then Mr. Adrian is
entitled only to a ratable rental value of the house and limousine as exclusion from gross income and only a
reasonable amount should be reported as income. This is because the free housing and use of the limousine are
given partly for the convenience and benefit of the employer (Henderson v. Collector, 1 SCRA 548).
2. No, the free uniforms, free living quarters and the free meals inside the camp area are not income to Capt.
Canuto because these are facilities or privileges furnished by the employer for the employer’ convenience which are
necessary incidents to proper performance of the military personnel’s duties.
3. None. The P200,000.00 moral and exemplary damages are compensation for injuries sustained by Mr.
Infante. The P400,000.00 reimbursement for hospitalization expenses and the P60,000.00 for salaries he failed to
receive are amounts of any damages received whether by suit or agreement on account of such injuries. Section
28(b)(5) of the Tax Code specifically excludes these amounts from the gross income of the injured individual (Sec.
28[b], NIRC and Sec. 63, Rev. Regs. No. 2).
Q: The University of Bigaa, a non-stock, non-profit entity, operates a canteen for its students and a bookstore inside
the campus. It also operates two dormitories for its students, one of which is in the campus. Is the University liable to
pay income taxes for the operation of the:
1. Canteen?
2. Bookstore?
3. Two dormitories?
A: 1. For the operation of the canteen inside the campus, the income thereon being incidental to the operations of
the university as a school, is exempt (Art. XIV[4][3], Constitution; DECS Regulations No. 137-87, December 16.
2. For the same reasons, the University of Bigaa is not liable to pay income taxes for the operation of the
bookstore, since this is an ancillary activity the conduct of which is carried out within the school premises.
3. The University of Bigaa shall not be liable to pay income taxes for the operation of the dormitory located in
the campus, for same reasons as the foregoing.
However, the latter shall be liable for income taxes on income from operations of the dormitory located outside the
school premises.
Q: Spouses Pablo Gonzales and Teresita Gonzales, both resident citizens, acquired during their marriage a
residential house and lot located in Makati City, which is being leased to a tenant for a monthly rental of P100,000.
Mr. Pablo Gonzales is the President of PG Corporation and he receives P50,000 salary per month. The spouses
have only one minor child. In late June 2010, he was immediately brought to the hospital because of a heart attack
and he was pronounced dead on June 30, 2010. With no liabilities, the estate of the late Pablo Gonzales was settled
extra-judicially in early 2011.
1. Is Mr. Gonzales required to file income tax return for 2010? If so, how much income must he declare for the
year? How much personal and additional exemption is he entitled to?
2. Is Mrs. Gonzales required to file income tax return for 2010? If so, how much income must be declare for the
year and how much personal exemption is she entitled to?
3. Is the Estate of the late Pablo Gonzales required to file income tax return for 2010? If so, how much income
must it declare for the year and how much personal exemption is it entitled to?
A: 1. Yes, Mr. Pablo Gonzales is required to file income tax return and pay income tax on the following incomes for
2010: P300,000 – rental income (P100,000 / 2 x 6 months), and P300,000 (P50,000 x 6 months) – salary, from
January to June 30. Only 50% of the rental is to be reported by him because the leased property is a property of the
conjugal partnership of gains belonging to the spouses. He will be entitled to personal exemption of P50,000 and
additional personal exemption of P25,000 for one minor child. If the taxpayer dies during the taxable year, his estate
may still claim the personal and additional exemptions for himself and his dependent as if he died at the close of
such year (Sec. 35, NIRC).
2. Yes, Mrs. Teresita Gonzales is required to file her income tax return and pay income tax on P600,000
(P50,000 x 12 months), rental income for the year (January to December 2010). If any income of the spouses cannot
be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same
shall be divided equally between them for the purpose of determining their respective taxable income (Sec. 24 [A],
NIRC). Since the deceased husband already claimed the additional personal exemption for the minor child, Mrs.
Gonzales could no longer claim the additional personal exemption (Sec. 35[B], NIRC).
3. Yes, the Estate of the late Pablo Gonzales (through his Administrator or Executor) is also required to file
its income tax return and pay tax, if applicable. Income tax imposed by Title II upon individuals shall apply to the
income of estates, including income received by estates of deceased persons during the period of administration or
settlement of the estate (Sec. 60, NIRC), and the estate of a decedent (which shall have its own TIN) shall be
entitled to personal exemption of P20,000 (Sec. 61, NIRC). It is believed, however, that since the personal
exemption of individuals has been increased to P50,000 under R.A. 9504 (social legislation) in 2008, the same
amount of P50,000 shall also be extended to estates and trusts. The rental income to be reported by the estate shall
be P300,000 (P100,000 / 2 x 6 months (from July 1 to December 31, 2010).
Q: Mr. Domingo owns a vacant parcel of land. He leases the land to Mr. Enriques for ten years at a rental of
P12,000.00 per year. The condition is that Mr. Enriquez will erect a building on the land which will become the
property of Mr. Domingo at the end of the lease without compensation or reimbursement whatsoever for the value of
the building. Mr. Enriquez erects the building. Upon completion, the building had a fair market value of P1 million. At
the end of the lease, the building is worth only P900,000.00 due to depreciation. Will Mr. Domingo have income
when the lease expires and becomes the owner of the building with a fair market value of P900,000.00? How much
income must he report on the building? Explain.
A: When building is erected by a lessee in the leased premises in pursuance of an agreement with the lessor that the
building becomes the property of the lessor at the end of the lease, the lessor has the option to report income as
follows:
a. The lessor may report as income the market value of the building at the time when such building is
completed; or
b. The lessor may spread over the life of the lease the estimated depreciated value of such building a
the termination of the lease and report as income for each year of the lease an aliquot part thereof
(Sec. 49, Rev. Regs. No. 2).
Q: John McDonald, a U.S. citizen residing in Makati City, bought shares of stocks of a domestic corporation whose
shares are listed and traded in the Philippine Stock Exchange, at the price of Php2 million. Yesterday, he sold the
shares of stocks through his favorite Makati stockbroker at a gain of Php200,000. Is John McDonald directly sold the
shares to his best friend, who is another U.S. citizen residing in Makati, at a gain of Php 200,000. Is he liable to
Philippine income tax? If so, what is the tax base and rate?
A: 1. No, John McDonald is exempt from Philippine income from his sale of shares of stocks of a domestic
corporation that are listed and traded in the Philippine Stock Exchange by express provision of law (Sec. 24[c],
NIRC, as amended by B.P. 221, May 25, 1982). He is, however subject to the stock transaction tax equivalent to
one-half of one percent (1/2 of 1%) of the gross selling price or gross value in money of the shares of stock sold or
exchanged (Sec. 127[A], NIRC).
2. Yes, John McDonald will be subject to Philippine income tax on the Php 200,000 gain arising from his direct sale
of the listed shares of stocks of a domestic corporation to his friend residing in Makati. An alien individual, whether or
not a resident of the Philippines, is taxable on income derived from sources within the Philippines (Sec. 23[D], NIRC).
Gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources
within Philippines, regardless of where the said shares are sold (Sec. 42[E], NIRC). A final tax at the rates prescribed
below is hereby imposed upon the net capital gains realized during the taxable year from the sale of shares of stock
in a domestic corporation, except shares sold or disposed of through the stock exchange:
Not over P100,000 5%
On any amount in excess of P100,000 10%
(Sec. 24[c], NIRC)
Q: In 2000, Mr. Belen bought a residential house and lot for P1,000,000. He used the property as his and his family’s
principal residence. It is now year 2013 and he is thinking of selling the property to buy a new one. He seeks your
advice on how much income tax he would pay if he sells the property. The total zonal value of the property is
P5,000,000 and the fair market value per tax declaration is P2,500,000. He intends to sell it for P6,000,000. What
material considerations will you take into account in computing the income tax? Please explain the legal relevance of
each of these considerations.
A: Since the planned sale involves a real property classified as a capital asset, the material considerations to take
into account to compute the income tax are:
1. The current fair market value of the property to be sold. The current fair market value is the higher
between the zonal value and the fair market value per tax declaration;
2. The gross selling price of the property;
3. Determination of the tax base, which is the higher amount between the gross selling price and the
current fair market value of the property.
The income tax is computed at 6% of the tax base, which is in the nature of a final capital gains tax (Sec. 24[D][1],
NIRC).
However, since the property to be sold is a principal residence and the purpose is to buy a new one, I will advise Mr.
Belen that the sale can be exempt from the 6% capital gains tax if he is willing to comply with the following
conditions:
a. He must utilize the entire proceeds of sale in acquiring a new principal residence within 18 months
from date of disposition;
b. He should notify the Commissioner of his intention to avail of the exemption within 30 days from date
of sale;
c. He should open an escrow account with a bank and deposit the 6% capital gains tax due on the sale.
If he compliers with the utilization requirement, he will be entitled to get back his deposit of the tax
payment; otherwise, the deposit will be applied against the capital gains tax due (Sec. 24[D][2],
NIRC).
Q: Melissa inherited from the father a 300-sq.m. lot. At the time of her father’s death on March 14, 1995, the property
was valued at P720,000. On February 28, 1996, to defray the of the medical expenses of her sick son, she sold the
lot for P600,000 on cash basis. The prevailing market value of the property at the time of sale was P3,000 per sq. m.
1. Is Melissa liable to pay capital gains tax on the transaction? If so, how much and why? If not, why not?
2. Is Melissa liable to pay VAT on the sale of the property? If so, how much and why? If not, why not?
A: 1. Melissa is liable to pay the 6% capital gains tax based on the gross selling price (P600,000) or fair market value
at the time of sale (P900,000 = P3,000 x 300 sq. m.), whichever is higher. The capital gains tax is P54,000
(P900,000 x 6%). Although Melissa actually incurred a loss in the sale of the real property, this loss is disregarded for
income tax purposes because Section 24(D) of the Tax Code presumes that the seller realized a gain from the sale
of such real property classified as a capital asset and it imposes the tax on the higher amount between the gross
selling price and the fair market value, The real property is a capital asset, since it is not used in the trade or
business of Melissa (Sec.
39[A], NIRC).
2. No. Melissa is exempt from VAT on the sale of the real property classified as a capital asset. To be subject to
VAT, the real property must be classified as an ordinary asset, the seller must be engaged in the real estate
business, and the amount of gross sales must have exceeded P1.5 million. In this case all the above requisites are
not present.
Q:Josel agreed to sell his condominium unit to Jess for P2.5 million. At the time of the sale, the property had
a zonal value of P2.0 million. Upon the advice of a tax consultant, the parties agreed to execute two deeds of
sale, one indicating the zonal value P2.0 million as the selling price and the other, showing the true selling
price of P2.5 million. The tax consultant filed the capital gains tax return, using the deed of sale showing the
zonal value of P2.0 million as the selling price. Discuss the tax implications and consequences of the action
taken by the parties. A: The capital gains tax due on the sale shall be based on the actual selling price of P2.5
million, which is higher than the zonal value of the property (Sec. 24[D][1], NIRC). The documentary stamp tax on the
conveyance of real property shall likewise be based on the higher value (Sec. 196, NIRC). Accordingly, a deficiency
capital gains tax and documentary stamp tax are due from Josel plus the 50% surcharge imposable on a fraudulent
return. Both Josel and his tax consultant are criminally liable for tax evasion. Here, it is clear that the three (3)
requisite factors to constitute tax evasion are present, viz.; (1) the end to be achieved, which is the payment of less
than that known by them to be legally due; (2) an accompanying state of mind, which is evil, in bad faith, willful or
deliberate and not merely accidental and (3) a course of action, which is unlawful (CIR v. Estate of Benigno P. Toda,
Jr., 438 SCRA 290 [240]).
Q: Juan Panalo won a damage suit for P500,000.00 against Juana Talo. Panalo got a writ of execution and made a
levy on the lot of Talo. The lot was sold at public auction where Panalo was the highest bidder for P500,000.00
Panalo refused to pay any capital gains tax on his purchase of said lot. Your opinion.
A: The capital gains tax from sales of real property is payable by the seller (Section 21[e] in relation to Section
49[a][4] of the NIRC). Hence, Panalo cannot refuse to pay the capital gains tax on his purchase of said lot, because
he is treated as the statutory seller.
Q: Pedro Manalo, a Filipino citizen residing in Makati City, owns a vacation house and lot in San Francisco,
California, U.S.A., which he acquired in 2000 for P15,000,000. On January 10, 2006, he sold said real property to
Juan Mayaman, another Filipino citizen residing in Quezon City, for P20,000,000. On February 9, 2006, Manalo filed
the capital gains tax return and paid P1,200,000 representing 6% capital gains tax. Since Manalo did not derive any
ordinary income, no income tax return was filed by him for 2006. After the tax audit conducted in 2007, the BIR
officer assessed Manalo for deficiency income tax computed as follows: P5,000,000 (P2,000,000 less P15,000,000)
x 35% = P1,750,000, without the capital gains tax paid being allowed as tax credit. Manalo consulted a real estate
broker who said that the P1,200,000 capital gains tax should be credited from the P1,750,000 deficiency income tax.
1. Is the BIR officer’s tax assessment correct? Explain.
2. If you were hired by Manalo as his tax consultant, what advice would you give him to protect his interest? Explain.
A: 1. A resident citizen like Pedro Manalo is taxable on all income derived from sources within and without the
Philippines (Sec. 23[A], NIRC). Gains, profits and income from the sale of real property located without the
Philippines are considered as incomes from sources without the Philippines (Sec. 42[C][5], NIRC).
The vacation house and lot in California, USA is a capital asset, since it is not used in the taxpayer’s trade or
business (Sec. 39[A][1], NIRC). However, it is not subject to the 6% capital gains tax under Section 24(D)(1) of the
Tax Code, since the real property is not located in the Philippines. Said preferential rate of income tax applies only
when the seller is a resident citizen and the real property is classified as a capital asset located in the Philippines.
Accordingly, the gain of P5 million (P20 million less P15 million) shall be included in the taxable income of Pedro
Manalo for 2006 subject to the graduated income tax rates of 5% to 32% (Sec. 24[A][1], NIRC). It is, therefore,
erroneous for the BIR to apply the corporate income tax rate of 35% on the taxable income of Pedro Manalo, a
resident citizen.
2. The amount of P1,200,000 (6% times P15 million), representing capital gains tax erroneously paid by Pedro
Manalo, may be credited against the ordinary income tax due on the taxable income for 2006, since capital gains tax
is another form of income tax under Title II of the Tax Code. If the BIR official insists on not allowing such tax credit
of capital gains tax erroneously paid against ordinary income tax due for the year, I would advise my client to file a
written claim for tax credit or refund for the capital gains tax erroneously paid with the BIR within two (2) years from
the date of payment (Secs. 204[c] and 229, NIRC).
Q: Last July 12, 2000, Mr. & Mrs. Peter Camacho sold their principal residence situated in Tandang Sora, Quezon
City for Ten million pesos (P10,000,000.00) with the intention of using the proceeds to acquire or construct a new
principal residence in Aurora Hills, Baguio City. What conditions must be met in order that the capital gains
presumed to have been realized from such sale may not be subject to capital gains tax? A: The conditions are:
1. The proceeds are fully utilized in acquiring or constructing a new principal residence within eighteen
(18) calendar months from the sale or disposition of the principal residence;
2. The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the
new principal residence built or acquired;
3. The Commissioner of Internal Revenue must have been informed by Mr. & Mrs. Peter Camacho
within thirty (30) days from the date of sale or disposition on July 12, 2000, through a prescribed
statement / return of their intention to avail of the tax exemption;
4. That the said exemption can only be availed of once every ten (10) years; and
5. If there is no full utilization of the proceeds of sale or disposition, the unused portion of the gain
presumed to have been realized from the sale or disposition shall be subject to capital gains tax (Sec.
24[D][2],NIRC).
Q: Mr. Pedro Aguirre, a resident citizen, is working for a large real estate development company in the country and in
2010, he was promoted to VicePresident of the company. With more responsibilities comes higher pay. In 2011, he
decided to buy a new car worth P2 million and he traded-in his old car with a market value of P800,000, and paid the
difference of P1.2 million to the car company. The old car, which was bought three (3) years ago by the father of Mr.
Pedro Aguirre at a price of P700,000, was donated by him and registered in the name of his son. The corresponding
donor’s tax thereon was duly paid by the father.
1. How much is the cost basis of the old car to Mr. Aguirre?
2. What is the nature of the old car – capital asset or ordinary asset?
3. Is Mr. Aguirre liable to pay income tax on the gain from the sale of his old car? A: 1. P700,000. The basis of
the property in the hands of the done-son is the carry-over basis, the same basis as if it would be in the hands of the
donor-father (Sec. 40[B][3], NIRC).
2. The old car is a capital asset. It is a property held by the taxpayer (whether or not connected with his trade
or business), but is not stock in trade or other property of a kind which would properly be included in the inventory of
the taxpayer, if on hand at the close of the year, or property held primarily for sale to customers in the ordinary
course of his trade or business, or property used in the trade or business of a character subject to depreciation, or
real property used in trade or business of the taxpayer (Sec. 39[A],NIRC).
3. Yes, he is liable to income tax on his capital gain of P100,000 (P800,000 less P700,000), but only 50% of
the taxable gain shall be recognized and subject to income tax, considering that the holding period of the old car is
more than one year (Sec. 39, NIRC).
Q: In 2007, Mr. & Mrs. Renato Garcia, an overseas Filipino contract worker in Hong
Kong, opened peso and dollar deposits at the Philippine branch of the Hong Kong Bank in Manila. During the year,
the bank paid interest income of Php10,000 on the peso deposit and US$1,000 on the dollar deposit. The bank
withheld final income tax equivalent to 20% of the entire interest income and remitted the same to BIR.
1. Are the interest incomes on the bank deposits of Mr. & Mrs. Renato Garcia subject to income tax? Explain.
2. Is the ban correct in withholding the 20% final tax on the entire interest income? Explain.
A: 1. The interest income on the foreign currency deposit of Renato Garcia, a non-resident citizen, with the FCDU of
HK Bank in Makati is exempt from Philippine income tax by express provision of law (Sec. 24[B] in relation to Sec.
28[A][7][b], NIRC). His interest income on peso deposit with HK Bank in Makati will be subject to the 20% final
withholding tax (Sec. 24[B][1], NIRC in relation to Secs. 23[B] and 57[A], NIRC).
The interest income on the foreign currency deposit of Mrs. Garcia, a resident citizen, with the FCDU of HK Bank in
Makati is subject to the 7.5% final withholding tax (Sec. 24[B][1], NIRC), while her interest income on the peso
deposit with the bank will be subject to the 20% final withholding tax.
2. No, as discussed above, the 20% final withholding tax applies only on the interest income on peso deposits. Since
20% FWT is higher that the 7.5% FWT on interest income on foreign currency deposit of Mrs. Garcia, she can file a
written claim for refund or tax credit for the excess tax paid, and Renato Garcia can also file a written claim for refund
or tax credit for the 20% FWT erroneously deducted and remitted to the BIR on his interest income on foreign
currency deposit which is exempt from income tax.
Q: On 3 January 1998, X, a Filipino citizen residing in the Philippines, purchased one hundred (100) shares in the
capital stock of Y Corporation, a domestic company. On 3 January 2000, Y Corporation declared, out of the profits of
the company earned after 1 January 1998, a hundred percent (100%) stock dividends on all stockholders of record
as of 31 December 1999 as a result of which X holding in Y Corporation became two hundred (200) shares. Are the
stock dividends received by X subject to income tax? Explain.
A: No. Stock dividends are not realized income. Accordingly, the different provisions of the Tax Code, imposing a tax
on dividend income covers cash and property dividends only, making stock dividends in the equivalent of cash or
property dividend, as when the distribution results to a change in ownership interest of the shareholders, the stock
dividends will be subject to income tax (Sec. 24[B][2]; Sec. 2[A] and [B]; Sec. 28[B][5][b], NIRC).
Q: In 2009, Caruso, a resident Filipino citizen, received dividend income from a
U.S.-based corporation which owns a chain of Filipino restaurants in the West Coast, USA. The dividend remitted to
Caruso is subject to U.S. withholding tax with respect to a non-resident alien like Caruso.
1. What will be your advice to Caruso in order to lessen the impact of possible double taxation on the same income?
2. Would you answer in 1 be the same, if Caruso became a U.S. immigrant in 2008 and had become a non-resident
Filipino citizen? Explain the difference in treatment for Philippine income tax purposes.
A:1. In order to lessen the impact of double taxation on the same income, I would advise Caruso to credit the U.S.
income tax on the dividend paid to the U.S. Federal Government against the Philippine income tax to be paid to the
Philippine Government. This privilege is, however, subject to limitation as to amount and proof of tax payment made
to the U.S. government must be attached to the Philippine income tax return.
2. If Caruso became an immigrant in 2008 and thus became a non-resident Filipino citizen, such dividend income
received from a U.S. corporation will be treated as a foreign-source income, exempt from the Philippine income tax.
A non-resident Filipino citizen is taxed only on income from sources within the Philippines (Sec. 23[B],NIRC), and
dividends received from a foreign corporation whose gross income for the three-year period was derived from
sources outside the Philippines (Sec. 42[B], NIRC).
Q: What do you think is the reason why cash dividends, when received by a resident citizen or alien from a domestic
corporation, are taxed only at the final tax of 10% and not at the progressive tax rate schedule under Section 24(A)
of the Tax Code? Explain your answer.
A: The reason for imposing final withholding tax (rather than the progressive tax schedule) on cash dividends
received by a resident citizen or alien from a domestic corporation is to ensure the collection of income tax on said
income. If we subject the dividend to the progressive tax rate, which can only be done through the filing on income
tax returns, there is no assurance that the taxpayer will declare the income, especially when there are other items of
gross income earned during the year. It would be extremely difficult for the BIR to monitor compliance considering
the huge number of stockholders. By shifting the responsibility to remit the tax to the corporation, it is very easy to
check compliance because there are fewer withholding agents compared to the number of income recipients.
Likewise, the imposition of a final withholding tax will make the tax available to the government at an earlier time.
Finally, the final withholding tax will be a sure revenue to the government unlike when the dividend is treated as a
returnable income where the recipient thereof who is in a tax loss position is given the change too offset such loss
against dividend income thereby depriving the government of the tax on said dividend income.
Q: What are disguised dividends in income taxation? Give an example.
A: Disguised dividends are those income payment made by a domestic corporation, which is a subsidiary of a non-
resident foreign corporation, to the latter ostensibly for services rendered by the latter to the former, but which
payments are disproportionately larger than the actual value of the services rendered. In such case, the amount over
and above the true value of the service rendered shall be treated as a dividend, and shall be subjected to the
corresponding tax of 35% on Philippine sourced gross income, or such other preferential rate as may be provided
under a corresponding Tax Treaty.
Example: Royalty payments under a corresponding licensing agreement.
Q: The MKB-Phils is a BOI-registered domestic corporation licensed by the MKB of the United Kingdom to distribute,
support and use in the Philippines its computer software systems, including basic and related materials for banks.
The MKB-Phils provides consultancy and technical services, incidental thereto by entering into licensing agreements
with banks. Under such agreements, the MKB-Phils will not acquire any proprietary rights in the licensed systems.
The MKB-Phils pays royalty to the MKB-UK, net of 15% withholding tax prescribed by the RP-UK Tax Treaty. Is the
income of the MKB-Phils under the licensing agreement with banks considered royalty subject to 20% final
withholding tax? Why? If not, what kind of tax will its income be subject to? Explain.
A: Yes. The income of MKB-Phils under the licensing agreement with banks shall be considered as royalty subject to
20% final withholding tax. The term royalty is broad enough to include technical advice, assistance or services
rendered in connection with technical management or administration of any scientific, industrial or commercial
undertaking, venture, project or scheme (Sec. 42[4][f], NIRC). Accordingly, the consultancy and technical services
rendered by MKB-Phils which are incidental to the distribution, support and use of the computer systems of MKB-UK
are taxable as royalty.
Q: X is employed as security guard o Excel Supermarket, Inc. X lives in a room within the compound of Excel but he
is not charged any rent. The rental value of the room is P300.00 a month. X wants your opinion on whether BIR can
tax the value of the free use of his room.
A: The rental value of the room is not taxable. Section 2.2 of the Revenue Audit Memorandum Order No. 1-87
provides that if the lodging is furnished in the business premises of the employer and the employee is required to
accept such lodging as a condition of his employment, then the value of said lodging will be not taxable. It is merely
for the convenience, comfort and pleasure of the employer.
Q: Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold
Cup Boxing Council, a sports association duly accredited by the Philippine Boxing Association. Onyoc received the
amount of P500,000 as his prize which was donated by Ayala Land Corporation. The BIR tried to collect income tax
on the amount received by Onyoc and donor’s tax from Ayala Land Corporation, which taxes, Onyoc and Ayala Land
Corporation refuse to pay. Decide.
A: The prize will not constitute a taxable income to Onyoc; hence, the BIR is not correct in imposing the income tax
R.A. No. 7549 explicitly provides that “All prized and awards granted to athletes in local and international sports
tournaments and competitions held in the Philippines or abroad and sanctioned by their respective national sports
associations shall be exempt from income tax.”
Neither is the BIR correct in collecting the donor’s tax from Ayala Land Corporation. The law is clear when it
categorically stated that the donor of said prizes and awards shall be exempt from the payment of the donor’s tax.
Q: Evelyn is a graduate student of U.P. In January 1991, she won the Palanca Award for an outstanding short story
she wrote. The award was P25,000.00 in cash. In February, 1991, she was also named Most Valuable Player of the
Varsity volleyball team and she was given a trophy plus P10,000.00. Finally, in March 1991, she received a
Fellowship Award from the University of California to pursue a master’s degree in American literature. The fellowship
is for $10,000.00 plus free board and lodging for two (2) semesters. Should Evelyn include these awards and
fellowship in her gross income? Reason.
A: Gross income include prizes and winnings (Sec. 27, NIRC), except those stated in Section 28B(8), (E) of the
NIRC, to wit:
“(E) Prizes and awards made primarily in recognition of religious charitable, scientific, educational, artistic, literary, or
civil achievement but only if:
i. The recipient was selected without any action on his part to enter the contest or proceeding; and
ii. The recipient is not required to render substantial future services as a condition to receiving the prize
or award.”
The first award granted to Evelyn was a Palanca award. This kind of award requires submission of literary works.
Hence, this is included in the gross income because it fails to meet the legal requisites provided for in the afore-
quoted provisions of law specifically item
(i).
The second award granted to Evelyn was the Most Valuable Player Award. In this kind of award, Evelyn did not file
any application to enter into any contest. The award was given to her in recognition for her outstanding performance
in the field of sports. However, the recognition in the field of sports is not among those stated in the afore-quoted
provision of law. Thus, the award granted to her does not fall under the afore-quoted provision of law. The last award
granted to her was the Fellowship Award. This requires also submission of application to quality for such award.
Hence, it fails to meet the necessary requisites of the afore-quoted provision of law specifically item (1).
Q: Is the prize of one million pesos awarded by the Reader’s Digest subject to withholding tax? Who is responsible
for withholding the tax? What are the liabilities for failure to withhold such tax?
A: It depends. If the prize is considered as winning derived from sources within the
Philippines, it is subject to withholding of final tax (Sec. 24[B] in relation to Sec. 57[A], NIRC). If derived from sources
without the Philippines, it is not subject to withholding of final tax because the Philippine tax law and regulations
could not reach out to foreign jurisdictions.
The tax shall be withhold by the Reader’s Digest or local agent who has control over the payment of the prize.
Any person required to withhold or who willfully fails to withhold, shall, in addition to the other penalties provided
under the Code, be liable upon conviction to a penalty equal to the total amount of tax not withheld (Sec. 251, NIRC).
In case of failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the
payer / withholding agent (1st par., Sec. 2.S7[A], Rev. Regs. No. 2-98).
Any person required under the Tax Code or by rules and regulations to withhold taxes at the time or times required
by law or rules and regulations shall, in addition to other penalties provided by law, upon conviction be punished by a
fine of not less than Ten thousand pesos (Php10,000.00) and suffer imprisonment of not less than one (1) year but
not more than ten (10) years (1st par., Sec. 255, NIRC).
Q: Jose Miranda, a young artist and designer, received a prize of P100,000.00 for winning in the on-the-spot peace
poster contest sponsored by a local Lions Club.
Shall the reward be included in the gross income of the recipient for tax purpose?
Explain.
A: No. It is not includable in the gross income of the recipient because the same is subject to a final tax of 20%, the
amount thereof being in excess of P10,000.00 (Sec. 24[B][1], NIRC). The prize constitute a taxable income because
it was made primarily in recognition of artistic achievement which he won due to an action on his part to enter the
contest (Sec. 32[B][7][c], NIRC). Since it is an on-the-spot contest, it is evident that he must have joined the contest
in order to earn the prize or award.
Q: Mr. Lajojo is a big-time swindler. In one year he was able to earn P1 million from his swindling activities. When the
Commissioner of Internal Revenue discovered his income from swindling, the Commissioner assessed him a
deficiency income tax for such income.
The lawyer of Mr. Lajojo protested the assessment on the following grounds:
1) The income tax applies only to legal income, not to illegal income;
2) Mr. Lajojo’s receipts from his swindling did not constitute income because he was under obligation to
return amount he had swindled, hence, his receipt from swindling was similar to a loan, which is not
income, because for every peso borrowed he has a corresponding liability to pay one peso; and
3) If he has to pay the deficiency income tax assessment, there will be hardly anything left to return to the
victims of the swindling.
How will you rule on each of the three grounds for the protest? Explain.
A:1. The contention that the income tax applies to legal income and not to illegal income is not correct. Section 28(a)
of the Tax Code includes within the purview of gross income all income from whatever source derived. Hence, the
illegality of the income will not preclude the imposition of the income tax thereon.
2. The contention that the receipts from his swindling did not constitute income because of his obligation to
return the amount swindled is likewise not correct, When a taxpayer acquires earnings, lawfully or unlawfully, without
the consensual recognition, express or implied, of an obligation to repay and without restriction as to their
disposition, he has received taxable income, even though it may still be claimed that he is not entitled to retain the
money, and even thought he may still be adjudged to restore its equivalent (James v. U.S., 366 US 213, 1961). To
treat the embezzled funds not as taxable income would perpetuate injustice by relieving embezzlers of the duty of
paying income taxes on the money they enrich themselves with through embezzlement, while honest people pay
their taxes on every conceivable type of income.
3. The deficiency income tax assessment is a direct tax imposed on the owner which is an excise on the
privilege to earn an income. It will not necessarily be paid out of the same income that was subjected to the tax. Mr.
Lajojo’s liability to pay the tax is based on his having realized a taxable income from his swindling activities and will
not affect his obligation to make restitution. Payment of the tax is a civil obligation imposed by law while restitution is
a civil liability arising from a crime.
Q: Mr. Osorio, a bank executive, while playing golf with Mr. Perez, a manufacturing firm executive , mentioned to the
latter that this (Osorio) bank had just opened a business relationship with a big foreign Importer of goods which
Perez’ company manufactures. Perez requested Osorio to introduce him to this foreign Importer and put in a good
word for him (Perez), which Osorio did. As a result, Perez was able to make a profitable business deal with the
foreign importer.
In gratitude, Perez, in behalf of his manufacturing firm, send Osorio an expensive car as a gift. Osorio called Perez
and told him that there was really no obligation on the part of Perez or his company to give such an expensive gift.
But Perez insisted that Osorio keep the car. The company of Perez deducted the cost of the car as a business
expense.
The Commissioner of Internal Revenue included the fair market value of the car as income of Osorio who protested
that the car was a gift and therefore excluded from income.
Who is correct, the Commissioner or Osorio? Explain.
A: The Commissioner is correct. The car, having been given to Mr. Osorio in consideration of having introduced Mr.
Perez to a foreign imported which resulted to a profitable business deal, is considered to be a compensation for
services rendered. The transfer is not a gift because it is not made out of a detached or disinterested generosity but
for a benefit accruing to Mr. Perez. The fact that the company of Mr. Perez takes a business deduction for the
payment indicates that it was considered as a pay rather than a gift. Hence, the fair market value of the car is
includible in the gross income pursuant to Section 28(a)(1) of the Tax Code (See 1974 Federal Tax Handbook, p.
145). A payment though voluntary, if it is in return for services rendered, or proceeds from the constraining force of
any moral or legal duty a benefit characterized as a “gift” by the payor (Commissioner v. Duberstein, 363 U.S. 278).
Q: An insolvent company had an outstanding obligation of P100,000.00 form a creditor. Since it could not pay the
debt, the creditor agreed to accept payment through dacion en pago a property which had a market value
P30,000.00. In the dacion en pago document, the balance of the debt was condoned.
1. What is the tax effect on the discharge of the unpaid balance of the obligation
on the debtor corporation?
2. Insofar as the creditor is concerned, how is he affected tax-wise as a consequence of the transaction?
A:1. The condonation of the unpaid balance of the obligation has the effect of a donation made on the part of the
creditor. It is obvious that the creditor merely desires to benefit the debtor and without any consideration therefore
cancels the debt, the amount of the debt cancelled is a gift from the creditor to the debtor and need not be included
in the latter’s gross income (Sec. 50, Rev. Regs. No. 2).
2. For the difference of P70,000.00, the creditor shall be subject to donor’s tax at the applicable rates provided for
under the National Internal Revenue Code.
Q: Mr. Francisco borrowed P10,000.00 from his friend, Mr. Gutierrez, payable in one year without interest. When the
loan became due, Mr. Francisco told Mr. Gutierrez that he (Mr. Francisco) was unable to pay because of business
reverses. Mr. Gutierrez took pity on Mr. Francisco and condoned the loan. Mr. Francisco was solvent at the time he
borrowed the P10,000.00 and at the time the loan was condoned.
Did Mr. Francisco derive any income from the cancellation or condonation of his indebtedness? Explain.
A: No. Mr. Francisco did not derive any income from the cancellation or condonation of his indebtedness. Since it is
obvious that the creditor merely desired to benefit the debtor in view of the absence of consideration for the
cancellation, the amount of the debt is considered as a gift from the creditor to the debtor and need not be included
in the latter’s gross income.
Q: During the year, a domestic corporation derived the following items of revenue: (a) gross receipts from a trading
business; (b) interests from money placements in the banks; (c) dividends from its stock investments in domestic
corporations; (d) gains from stock transactions through the Philippine Stock Exchange; (e) proceeds under an
insurance policy in the loss of goods.
In preparing the corporate income tax return, what should be the tax treatment on each of the above items?
A:The gross receipts from trading business is includible as an item of income in the corporate income tax return and
subject to corporate income tax rate based on net income. The other items of revenue will not be included in the
corporate income tax return. The interest from money market placements is subject to a final withholding tax of 20%
dividends from domestic corporations are exempt from income tax; and gains from stock transactions with the
Philippine Stock Exchange are subject to transaction tax which is in lieu of the income tax. The proceeds under an
insurance policy on the loss of goods in of an item of income is but merely a return of capital; hence, not taxable.
Q: XYZ Foundation is a non-stock, non-profit association duly organized for religious, charitable and social welfare
purposes. Last January 3, 2000, it sold a portion of its lot used for religious purposes and utilized the entire proceeds
for the construction of a building to house its free Day and Night Care Center for children of single parents. In order
to subsidize the expenses of the Day and Night Care Center and to support its religious, charitable and social
welfare projects, the Foundation leased the 300 square meter area of the second and third floors of the building for
use as a boarding house. The Foundation also operates a canteen and a gift shop within the premises, all the
income from which is used actually, directly, and exclusively for the purposes for which the Foundation was
organized. 1. Considering the constitutional provision granting tax exemption to non-stock corporations, such as
those formed exclusively for religious, charitable or social welfare purposes, explain the meaning of the last
paragraph of said Section 30 of the 1997 Tax Code, which states that "Income of whatever kind and character of the
foregoing organizations 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 tax imposed under this Code.”
2. Is the income derived by XYZ Foundation form the sale of a portion of its lot, rentals from its boarding house and
the operation of its canteen and gift shop subject to tax? Explain.
A: 1. The exemption contemplated in the Constitution covers real estate tax on real properties actually, directly and
exclusively used for religious, charitable or social welfare purposes. It does not cover exemption from the imposition
of income tax, which is within the context of Section 30 of the Tax Code. As a rule, non-stock, non-profit corporations
organized for religious, charitable or social welfare purposes are exempt from income tax on their income received
by them as such. However, if these religious charitable or social welfare corporations derive income from their
properties or any of their activities conducted for profit, the income tax shall be imposed on said items of income,
irrespective of their disposition (Sec. 30, NIRC; Commissioner v. YMCA, G.R. No. 124043, October 14, 1998; CIR v.
St. Luke’s Medical Center, G.R. No. 195909, September 26, 2012).
2. Yes, The income derived from the sale of lot and rentals from its boarding house are considered as income from
properties which are subject to tax. Likewise, the income from its activities conducted for profit, which are subject to
tax. The income tax attaches irrespective of the disposition of these incomes.
Q: Explain briefly whether the following items are taxable or non-taxable: (a) income from jueteng; (b) gain arising
from expropriation of property; (c) taxes paid and subsequently refunded; (d) recovery of bad debts previously
charged off; and (e) gain on the sale of a car used for personal purposes.
A: a. It is taxable, The law imposes a tax on ‘income from any source whatever,’ which means that is includes
income whether legal or illegal (Sec. 32[A], NIRC).
b. Taxable. There is a material gain, not excluded by law, realized out of a closed and completed transaction. Gains
from dealings in property are part of gross income (Sec.
32[A][3], NIRC).
c. It depends. Taxes paid which are allowed as a deduction from gross income are taxable when subsequently
refunded but only to the extent of the income tax benefit of said deduction (Sec. 34[C][1], NIRC). If follows that
taxes paid which are not allowed as deduction from gross income, i.e., income tax, donor’s tax and estate tax,
are not taxable when refunded.
d. Recovery of bad debts previously charged off is taxable to the extent of income tax benefit of said deduction
(Sec. 34[E][1], NIRC).
e. Gain on the sale of a car used for personal purposes is taxable. This is a gain derived
from dealing in property which is part of the taxpayer’s gross income (Sec. 32[A][3], NIRC). There is a materials gain,
not excluded by law, realized out of a closed and completed transaction.
Q: State with reasons the tax treatment of the following in the preparation of annual income tax returns:
1. Proceeds of life insurance received by a child as irrevocable beneficiary;
2. 13th month pay and de minimis benefits;
3. Dividends received by a domestic corporation from (i) another domestic corporation; and (ii) a foreign
corporations;
4. Interest on deposits with (i) BPI Family Bank; and (ii) a local offshore banking unit of a foreign bank;
5. Income realized from sale of (i) capital assets, and (ii) ordinary assets. A: 1. The proceeds of life insurance
received by a child as irrevocable beneficiary are not to be reported in the annual income tax return, because they
are excluded from gross income. This kind of receipt does not fall within the definition of income – “any wealth which
flows into the taxpayer other than a mere return of capital.” Since insurance is compensatory in nature, the receipt is
merely considered as a return of capital (Sec. 32 [B][1], NIRC); Fisher v. Trinidad, 43 Phil. 73 [1992]).
2. 13th month pay is excluded from gross income for income tax purposes to the extent of P30,000. Any excess will
be included in the gross income as part of gross compensation income (Sec. 32[B][7][e], NIRC).
3.i. De minimis benefits are non-taxable fringe benefits. They are not to be reported in the income tax return because
they are tax exempt. They are also exempt from the imposition of the fringe benefits tax (Sec. 33[C], NIRC).
3.ii. Dividends received by a domestic corporation from another domestic corporation are not subject to income tax;
hence, should not be declared in the income tax return (Se.
27[D][4], NIRC).
4.i. Dividends received by a domestic corporation from a foreign corporation are subject to income tax and shall form
part of the gross income. There is no law exempting this type of dividend from income tax (Sec. 32[7], NIRC).
4.ii. Interest on deposit with BPI Family Bank is a passive income subject to a final withholding tax rate of 20% the
interest on deposit with a local offshore banking unit of a foreign bank is a passive income subject to a final
withholding tax rate of 7.5% (Sec. 24[B][1],NIRC). Both interest incomes are not to be declared as part of gross
income in the income tax return.
5.i. Generally, income realized from the sale of capital assets are not to be reported in the income tax return, as they
are already subject to final taxes (capital gains tax on real property located in the Philippines and shares of stocks of
a domestic corporation). What are to be reported in the annual income tax return are the capital gains derived from
the disposition of capital assets other than real property located in the Philippines or shares of stocks in domestic
corporations which are not subject to final taxes.
5.ii. Income realized from the sale of ordinary assets is taxable and the said income shall be declared in the annual
income tax return. The income constitutes either income derived from the conduct of trade or business or a gain
derived from dealings in property (Sec. 32[A][2] and [3], NIRC).
CHAPTER VI: EXCLUSIONS FROM GROSS INCOME
Q: On 30 June 2000, X took out a life insurance policy on his own life in the amount of P2,000,000.00 He designated
his wife, Y, as irrevocable beneficiary to P1,000,000.00 and his son, Z, to the balance of P1,000,000.00, but in a
latter designation, reserving his right to substitute him for another. On 1 September 2003, X died and his wife and
son went to the insurer to collect the proceeds of X’s life insurance policy. Are the proceeds of the insurance subject
to income tax on the part of Y and Z for their respective shares? Explain.
A: No. The law explicitly provides that proceeds of life insurance policies paid to the heirs or beneficiaries upon the
death of the insured are excluded from gross income and is exempt from taxation. The proceeds of life insurance
received upon death of the insured constitutes a compensation for the loss of life; hence, a return of capital, which is
beyond the scope of income taxation (Sec. 32[B][1], NIRC). [NOTE: The reservation as to his right to designate or
substitute the beneficiary for another is not important for income tax purposes, although it is material for estate tax
purposes.]
Q: X, while driving home from his office, was seriously injured when his automobile was bumped from behind by a
bus driven by a reckless driver. As a result, he had to pay P200,000.00 to his doctor and P100,000.00 to the hospital
where he was confined for treatment. He filed a suit against the bus driver and the bus company and was awarded
and paid actual damages of P300,000.00 (for his doctor and hospitalization bills), P100,000.00 by way of moral
damages, and P50,000.00 for what he had to pay his attorney for bringing his case to court.
Which, if any, of the following awards are taxable income to x and which are not?
Explain.
A: Nothing is taxable. Under the Tax Code, any amount received as compensation for personal injuries or sickness,
plus the amounts for any damages received whether by suit or agreement, on account of such injuries or sickness
shall be excluded from gross income. Since the entire amount of P450,000.00 received represents award of
damages on account of the injuries sustained, all shall be excluded from his gross income. Obviously, these
damages are considered by law as mere return of capital (Sec. 32[B][4], NIRC).
Q: JR was a passenger on an airline that crashed. He survived the accident but sustained serious physical injuries
which required hospitalization for 3 months. Following negotiations with the airline and its insurer, an agreement was
reached under terms of which JR was paid the following amounts: P500,000.00 for his hospitalization; P250,000.00
as moral damages; P300,000.00 for loss of income during the period of his treatment and recuperation. In addition,
JR received from his employer the amount of P200,000.00, presenting the cash equivalent of his earned vacation
and sick leaves. Which, if any, of the amounts he received are subject to income tax? Explain.
A: The amount of P200,000.00 that JR received from his employer is subject to income tax, except the money
equivalent of ten (10) days unutilized vacation leave credits which is not taxable. Amounts of vacation allowances or
sick leave credits which are paid to an employee constitutes compensation (Sec. 2.78[A][7], Rev. Regs. No. 2-98, as
amended by Rev. Regs No. 10-2000).
The amounts that JR received from the airlines are excluded from gross income and not subject to income tax
because they are compensation for personal injuries suffered from an accident as well as damages received as a
result of an agreement on account of such injuries (Sec. 32[B][4], NIRC).
Q: Company A decides to close its operations due to continuing losses and to terminate the services of its
employees. Under the Labor Code, employees who are separated from service for such cause are entitled to
minimum of one-half month pay for every year of service. Company A paid the equivalent of one month pay for every
year of service and the cash equivalent of unused vacation and sick leaves as separation benefits. Are such benefits
taxable and subject to withholding tax under the Tax Code? Decide with reasons.
A: The separation benefits paid by Company A to its employees are excluded from gross income, being in the nature
of benefits given to employees whose services were terminated due to causes beyond their control (Sec. 32[B][6][b],
NIRC). The entire benefits, thus, are not taxable and not subject to withholding tax under the Tax Code.
Q: A group of philanthropists organized a non-stock, non-profit hospital for charitable purposes to provide medical
services to the poor. The hospital also accepted paying patients although none of its income accrued to any private
individual; all income were plowed back for the hospital’s use and not more than 30% of its funds were used for
administrative purposes. Is the hospital subject to tax on its income? If it is, at what rate?
A: Yes, a non-stock, non-profit hospital organized for charitable purpose, although generally exempt from income
tax, becomes taxable on income derived from activities conducted for profit. Services rendered to paying patients are
considered activities conducted for profit which are subject to income tax, regardless of the disposition of the said
income. The rate is 10% of net income, considering that the income earned appears to be derived solely from
hospital-related activities (CIR v. St. Luke’s Medical Center, ibid).
Private educational institution that engages in profitable undertaking is subject to tax. – A private educational
institution which deviates from its purely educational purposes and activities shall be treated like any private
domestic corporation engaged in business for profit with respect to income derived there from. The protective mantle
of income tax benefit or exemption cannot be extended to a private educational institution which chooses to descend
from its high pedestal of tax preference or immunity to the level of an ordinary private corporation engaged in
profitable undertaking or business (Xavier School, Inc. v. Commissioner, CTA Case 1682, October 8, 1969).
Q: 1. X, an employee of ABC Corporation died. ABC Corporation gave X’s widow an amount equivalent to X’s salary
for one year.
2. Is the amount considered taxable income to the widow? Why?
3. Is said amount subject to tax? Explain.
A: 1. No. the amount received by the widow from the decedent’s employer may either be a gift or a separation
benefit on account of death. Both are exclusions from gross income pursuant to provisions of Section 28(b) of the
Tax Code.
2. A, an employee of the Court of Appeals, retired upon reaching the compulsory age of 65 years. Upon
compulsory retirement, A received the money value of his accumulated leave credits in the amount of P 500,000.00.
3. No. The commutation of leave credits, more commonly known as terminal leave pay, i.e., the cash
equivalent of accumulated vacation and sick leave credits given to an officer or employee who retires, or separated
from the service through no fault of his own, is exempt from income tax (BIR Ruling No. 238-91, November 8, 1991;
Commissioner v. Castañeda, G.R. No. 96016, October 17, 1991).
Q: Maribel Santos, a retired public school teacher, relies on her pension from the GSIS and the interest income from
a time deposit of P 500,000.00 with ABC bank.
Is Miss Santos liable to pay any tax on her income?
A: Maribel Santos is exempt from tax on the pension from the GSIS (Sec. 28[b][7][F], NIRC). However, as regards
her time deposit, the interest she receives thereon is subject to 20% final withholding tax (Sec. 21[a][c], NIRC).
Q: X owns a half-hectare property in Bacoor, Cavite which in 1980 was expropriated by the national government,
through the Department of Public Works and Highways. After 10 years, X was paid P 2,000,000.00 as just
compensation plus 6% annual interest by the DPWH but minus the withholding tax. Is the action of DPWH proper?
Reason.
A: No, the action of DPWH is not proper. In the case of Province of Tayabas v. Perez (66 Phil. 467), just
compensation was defined as “the just and complete equivalent of the loss which the owner of a thing expropriated
has to suffer by reason of the expropriation.” Further, in BIR Ruling No. 61-91, “just compensation” was defined as
that which is paid by the Government equivalent to the value of the property at the time of its taking. It is the fair and
full equivalent for the indemnity.
Based on the foregoing it is clear therefore that the amount received after 10 years as just compensation is not in
any way a profit, gain or income on the part of X, in the same vein, the 6% annual interest paid by DPWH is not
income. The same partakes of the nature of a penalty or indemnity due and accruing to X for having been deprived
of the use and benefit by not being paid of the fair market value of the property since its taking 10 years ago. Hence,
the DPWH should not have withheld taxes.
Q: The employees of Travelers, Inc. staged a strike. X, a non-union member joined the strike and volunteered to
picket the company premises from 8:00 A.M. to 12: P.M. Monday to Friday. Six months into the strike. X ran out of
money and asked financial aid from the union since he has no other source of income and needed financial
assistance in order to live. The union gave him P 1,000.00 a month to take care of his food requirements plus P
500.00 to take care of his monthly rent. When X filed his return, he excluded these benefits from his gross income.
The exclusion was denied by the BIR. Decide.
A: The P 1,500.00 is not compensation income because compensation income arises out of employer-employee
relationship as payment for services without compensation. The P 1,500.00 is a gift from the labor union. According
to Section 28(b)(3) of the NIRC, gifts are to be excluded from gross income. Thus, the BIR’s denial is not valid.
Q: Born of a poor family on 14 February 1944, Mario worked his way through college. After working for more than 2
years in X Manufacturing Corporation, Mario decided to retire and avail of the benefits under the very reasonable
retirement plan maintained by his employer. He planned to invest whatever retirement benefits he would receive in a
business that will provide his employer with the needed raw materials. On the day of his retirement on 30 April 1985,
he received P 400,000.00 as retirement benefit. In addition, his endowment insurance policy, for which he was
paying an annual premium of P 1,520.00 since 1965, also matured. He was then paid the face value of his insurance
policy in the amount of P 50,000.00.
1. Is Mario’s P 400,000.00 retirement benefit subject to income tax?
2. Is his P 50,000.00 insurance proceeds exempt from income taxation?
A: 1. Mario’s P 400,000.00 retirement benefit is subject to income tax. To be exempt, the retirement pay must have
been extended to an employee who is at least 50 years of age and who would have worked for at least ten (10)
years with the employer. The amount cannot be considered as a separation pay that would have exempted benefits
from income tax since it was Mario who had decided to retire instead of being required to do so (Sec. 28, NIRC).
2. The P 50,000.00 insurance proceeds is not totally exempt from income tax. The excluded amount is only that
portion which corresponds to the premiums that he had paid since 1965. At the rate of P 1,520.00 per year multiplied
by twenty (20) years which was the period of the policy, he must have paid a total of P 30,400.00. Accordingly, he
will be subject to report as taxable income the amount of P 19,6000.00 (Sec. 28, NIRC).
Q: Delstar Emmanuel Perez, a government employee, retires from the service upon reaching the compulsory
retirement age of 65. Would the amount he is entitled to receive by way of commutation of his accumulated leave
credits, of his terminal leave pay, be subject to income tax?
A: The amount that Emmanuel Perez is to receive should not be subjected to income tax, and such was the ruling by
the Supreme Court in the Re: Zialcita Administrative Case (Adm. Matter No. 90-6015-SC, October 18, 1990). The
ruling apparently repudiated, or at least is inconsistent with, its earlier decision in Commissioner v. Victoriano, G.R.
No. 83176, August 10, 1989.
Q: Pedro Reyes, an official of Corporation X, asked for an “earlier retirement” because he was emigrating to
Australia. He was paid P 2,000,000.00 as separation pay in recognition of is valuable services to the corporation.
Juan Cruz, another official of the same company, was separated for occupying a redundant position. He was given P
1,000,000.00 as separation pay.
Jose Bautista was separated due to his falling eyesight. He was given P 5,000.00 as separation pay. All the three (3)
were not qualified to retire under the BIRapproved pension plan of the corporation.
1. Is the separation pay given to Reyes subject to income tax?
2. How about the separation pay received by Cruz?
3. How about the separation pay received by Bautista?
A: 1. The separation pay given to Reyes is subject to income tax as compensation income because it arises from a
service rendered pursuant to an employer-employee relationship. It is not considered an exclusion from gross
income because the rule in taxation is tax construed in strictissimi juris or the rule on strict interpretation of tax
exemptions.
2. The separation pay received by Cruz is not subject to income tax because his separation from the
company was involuntary (Sec. 28[b][7], NIRC).
3. The separation pay received by Bautista is likewise not subject to his separation is due to disability, hence
involuntary.
Under the law, separation pay received through involuntary causes is exempt from taxation.
Q: A Co., a Philippine corporation, has two divisions – manufacturing and construction. Due to the economic
situation, it had to close its construction division and lay-off the employees in that division. A Co. has a retirement
plan approved by the BIR, which requires a minimum of 50 years of age and 10 years of service in the same
employer at the time of retirement. There are 2 groups of employees to be laid off:
(a) Employees who are at least 50 years of age and has at least 10 years of service at the time of
termination of employment; and
(b) Employees who do not meet either the age or length of service.
A Co. plans to give the following:
For category (A) employees – the benefits under the BIR approved plan plus an ex gratia payment of one
month of every year of service.
For category (B) employees – one month for every year of service. For both categories, the cash
equivalent of unused vacation and sick leave credits.
A Co. seeks your advice as to whether or not it will subject any of these payments to withholding tax. Explain your
advice.
A: For category ‘A’ employees, all the benefits received on account of their separation are not subject to income tax;
hence, no withholding tax shall be imposed. The benefits received under the BIR-approved plan upon meeting the
service requirement and age requirement are explicitly excluded from gross income. The ex gratia payment also
qualifies as an exclusion from gross income, being in the nature of benefit received on account of separation due to
causes beyond he employees’ control (Sec 32[B], NIRC). The cash equivalent of unused vacation and sick leave
credits qualifies as part of separation benefits excluded from gross income (CIR v. Court of Appeals, G.R. No. 96016,
October 17, 1991). For category ‘B’ employees, all the benefits received by them will also be exempt from income
tax; hence, not subject to withholding tax. These are benefits received on account of separation due to causes
beyond the employees’ control, which are specifically excluded from gross income (Sec. 32[B], NIRC).
Q: Mr. Jacobo worked for a manufacturing firm. Due to business reverse the firm offered voluntary redundancy
program in order to reduce overhead expenses. Under the program an employee who offered to resign would be
given separation pay equivalent to his three month’s basic salary for every year of service. Mr. Jacobo accepted the
offer and received P 400,000.00 as separation pay under the program.
After all the employees who accepted the offer were paid, the firm found its overhead still excessive. Hence it
adopted another redundancy program. Various unprofitable departments were closed. As a result, Mr. Kintanar was
separated from the service. He also received P 400,000.00 as separation pay. Did Mr. Jacobo derive income when
he received his separation pay? Explain.
A: Yes, Mr. Jacobo derived a taxable income when he received his separation pay because his separation from
employment was voluntary on his part in view of his offer to resign. What is excluded from gross income is any
amount received by an official or employees as a consequence of separation of such official or employee from the
service of the employer for any cause beyond the control of the said official or employee (Sec. 28, NIRC). Q: Mr.
Quiroz worked as chief accountant of a hospital for forty-five years. When he retired at 65 he received retirement pay
equivalent to two months’ salary for every year of service as provided in the hospital BIR approved retirement plan.
The Board of Directors of the hospital felt that the hospital should give Quiroz more than what was provided for in the
hospital’s retirement plan. In view of his loyalty and Invaluable services for forty-five years; hence, it resolved to pay
him a gratuity of P1 Million over and above his retirement pay.
The Commissioner of Internal Revenue taxed the P1 Million as part of the gross compensation income of Quiroz who
protested that it was excluded from income because (a) it was a retirement pay, and (b) it was a gift.
1. Is Mr. Quiroz correct in claiming that the additional P1 Million was retirement pay and therefore excluded from
income? Explain.
2. Is Mr. Quiroz correct in claiming that the additional P1 Million was gift and therefore excluded from income?
Explain.
A:1. No. The additional P1 Million is not a retirement pay but a part of the gross compensation income of Mr. Quiroz.
This is not a retirement benefit received in accordance with a reasonable private benefit plan maintained by the
employer as it was not paid out of the retirement plan. Accordingly, the amount received in excess of the retirement
benefits that he is entitled to receive under the BIR-approved retirement plan would not quality as an exclusion from
gross income.
2. No. The amount received was in consideration of his loyalty and invaluable services to the company which is
clearly a compensation income received on account of employment.
Under the employer’s motivation test, ‘emphasis should be placed on the value of Mr. Quiroz services to the
company as the compelling reason for giving him the gravity; hence it should constitute a taxable income. The
payment would only qualify as a gift if there is nothing but good will, esteem and kindness’ which motivated the
employer to give the gratuity (Stanton v. U.S., 186 F. Supp. 393). Such is not the case in the herein problem.
Q: XYZ Foundation is a non-stock, non-profit association duly organized for religious, charitable and social welfare
purposes. Last January 3, 2000, it sold a portion of its lot used for religious purposes and utilized the entire proceeds
for the construction of a building to house its free Day and Night Care Center for children of single parents. In order
to subsidize the expenses of the Day and Night Care Center and to support its religious, charitable and social
welfare projects, the Foundation leased the 300 square meter area of the second and third floors of the building for
use as a boarding house. The Foundation also operates a canteen and a gift shop within the premises, all the
income from which is used actually, directly, and exclusively for the purposes for which the Foundation was
organized. 1. Considering the constitutional provision granting tax exemption to non-stock corporations, such as
those formed exclusively for religious, charitable or social welfare purposes, explain the meaning of the last
paragraph of said Section 30 of the 1997 Tax Code, which states that "Income of whatever kind and character of the
foregoing organizations 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 tax imposed under this Code.”
2. Is the income derived by XYZ Foundation form the sale of a portion of its lot, rentals from its boarding house and
the operation of its canteen and gift shop subject to tax? Explain.
A: 1. The exemption contemplated in the Constitution covers real estate tax on real properties actually, directly and
exclusively used for religious, charitable or social welfare purposes. It does not cover exemption from the imposition
of income tax, which is within the context of Section 30 of the Tax Code. As a rule, non-stock, non-profit corporations
organized for religious, charitable or social welfare purposes are exempt from income tax on their income received
by them as such. However, if these religious charitable or social welfare corporations derive income from their
properties or any of their activities conducted for profit, the income tax shall be imposed on said items of income,
irrespective of their disposition (Sec. 30, NIRC; CIR v. CA and YMCA, 298 SCRA 83).
2. Yes, The income derived from the sale of lot and rentals from its boarding house are considered as income from
properties which are subject to tax. Likewise, the income from its activities conducted for profit, which are subject to
tax. The income tax attaches irrespective of the disposition of these incomes. (Sec. 30, NIRC; CA and CIR v. YMCA,
ibid.).
Q: X sold a piece of land to the United Church of Christ of Quezon City, Inc. The land is to be devoted strictly for
religious purposes by the Church. When the Church tried to register the title of the land, the Register of Deeds
refused, claiming that the capital gains tax was not paid. Is the transaction exempt from the capital gains tax?
Reason.
A: 1. No. Under Section 21(e) in relation to Section 49(a)(4) of the National Internal Revenue Code, the seller is the
one liable for the payment of the capital gains tax from the sale of real property by an individual taxpayer. Meanwhile,
the Church in this instant case is the buyer. Hence, Section 28(4) of the 1987 Constitution, which exempts church
lands, buildings and improvements, does not apply because the obligation to pay the capital gains tax herein is
imposed on X, the seller, and not on the Church. Since payment of the capital gains tax is a condition precedent for
the registration of the transfer certificate of title to real property, the non-payment herein by the seller is a valid
reason for the Registry of Deeds to deny the transfer of title to the subject land.
2. No. The tax exemption granted to churches in the Constitution refers to property tax and not to capital gains tax
which is an income tax. Besides, the capital gains tax is the liability of the seller X and not the purchaser.
Q: Under Article XIV, Section 4(3) of the 1987 Philippine Constitution, all revenue s and assets of non-stock, non-
profit education institutions, used actually, directly and exclusively for educational purposes, are exempt from taxes
and duties. Are income derived from dormitories, canteens and bookstores as well as interest income on bank
deposits and yields from deposit substitutes automatically exempt from taxation? Explain.
A: No. The interest income on bank deposits and yields from deposit substitutes are not automatically exempt from
taxation. There must be a showing that the incomes are included in the school’s annual information return and duly
audited financial statements together with:
1. Certifications from depository banks as to the amount of interest income earned from passive
investments not subject to the 20% final withholding tax;
2. Certification of actual, direct and exclusive utilization of said income for education purposes;
3. Board resolution on proposed project to be funded out of the money deposited in banks or placed in
money market placements (Finance Department Order No. 149-95, November 24, 1995), which must
be used actually, directly and exclusively for educational purposes.
The income derived from dormitories, canteens and bookstores are not also automatically exempt from taxation.
There is still the requirement for evidence to show actual, direct and exclusive use for educational purposes. It is to
be noted that the 1987 Philippine Constitution does not distinguish with respect to the source or origin of the income.
The distinction is with respect to the use which should be actual, direct and exclusive for educational purposes.
Consequently, the provisions of Section 30 of the NIRC of 1997, that a non-stock and nonprofit educational
institution is exempt from taxation only “in respect to income received by them as such” could not affect the
constitutional tax exemption. Where the Constitution does not distinguish with respect to source or origin, the Tax
Code should not make distinctions.
CHAPTER VII: RETURN OF CAPITAL
Q: In 1990, X started constructing a commercial building with spaces for lease to the public. X required Y, a
prospective lessee to sign a pre-lease agreement, which principally provided: (a) that the lessee shall extend to the
lessor a non-interest bearing loan of P100,000.00 payable within twelve (12) months; and (b) that in consideration of
the loan, the lessee shall be given preference in the lease and his rentals shall not be increased while the loan
remains unpaid. Upon completion of the building, Y extended the loan of P100,000.00 to X and he was given a
space in its ground floor. May the BIR consider the P100,000.00 as taxable income of X?
Reason.
A: Section 28 of the NIRC defines “gross income” as all income from whatever sources derived including but not
limited to the following items:
a) Compensation for services, including fees, commissions, and similar items;
b) Gross income derived from business;
 c) Gains derived from dealings in property;
d) Interest;
e) Rents;
f) Royalties;
g) Dividends;
h) Annuities;
i) Prizes and winnings;
j) Pensions; and
k) Partner’s distributive share of the gross income of general professional partnership.
Further, under Section 36 of Revenue Regulations No. 2, “taxable income” in a broad sense means all wealth which
flows into the taxpayer other than as a mere return of capital. It includes the forms of the income specifically
described as gains and profits, including gains derived from the sale or other disposition of assets. Gross income,
means income (in the broad sense) less income which is by statutory provision or otherwise exempt from the tax
imposed by law.
Applying the above provision of law to the case at bar, the amount P100,000.00, being a loan or an indebtedness, is
an outlay, not a taxable income or gain.
Q: Distinguish “Exclusion from Gross Income” from “Deductions From Gross Income.” Give an example of each.
A: Exclusive from gross income refer to a flow of wealth to the taxpayer which are not treated as part of gross
income, for purposes of computing the taxpayer’s taxable income, due to the following reasons: (1) It is exempted by
the fundamental law; (2) It is exempted by statute; (3) it does not come within the definition of income (Sec. 61, Rev.
Regs. No. 2). Deductions from gross income, on the other hand, are the amounts, which the law allows to be
deducted from gross income in order to arrive at net income.
Exclusions pertain to the computation of gross income, while deduction pertain to the computation of net income.
Exclusions are something received or earned by the taxpayer, which do not form part of gross income while
deductions are something spent or paid in earning gross income. Example of an exclusion from gross income is
proceeds of life insurance received by the beneficiary upon the death of the insured which is not an income or 13 th
month pay of an employee not exceeding P30,000.00, which is an income not recognized for tax purposes. Example
of a deduction is business rental.
Q: Atty. Gambino is a partner in a general professional partnership. The partnership computes its gross revenues,
claims deductions allowed under the Tax Code, and distributes the net income to the partners, including Atty.
Gambino, in accordance with its articles of partnership. In filing his own income tax return, Atty. Gambino claimed
deductions that the partnership did not claim, such as purchase of law books, entertainment expenses, car insurance
and car depreciation. The BIR disallowed the deductions. Was the BIR correct?
A: No, the BIR is wrong in disallowing the deduction claimed by Atty. Gambino. It appears that the general
professional partnership claimed itemized deductions from its gross revenues in arriving at its distributable net
income. The share of a partner in the net income of the partnership must be reported by him as part of his gross
income from practice of profession and he is allowed to claim further deductions which are reasonable, ordinary and
necessary in the practice of profession and were not claimed by the partnership in computing its net income (Sec.
26, NIRC; Rev. Regs. No. 16-2008, February, 2010). [NOTE: The examinee may want to qualify his answer further
by citing the rules on (a) purchases of law books, which can be a capital expenditure; (b) entertainment of law books,
which can be a capital ceiling for sellers of services; (c) car insurance and depreciation, which are deductible only to
the extent that it was used for business or practice of law].
Q: Masarap Food Corporation (MFC) incurred substantial advertising expenses in order to protect its brand franchise
for one of its line products. In its income tax return, MFC included he advertising expense as deduction from gross
income, claiming it as an ordinary business expense. Is MFC correct?
A: In 1995, respondent paid P9.4 million for advertising a product. This was disallowed by the BIR as ordinary and
necessary expense and considered the same as capital expenditure, since the amount was staggering, which was
incurred to create or maintain some form of goodwill for the taxpayer’s trade or business or for the industry or
profession of which the taxpayer is a member. The court held that “goodwill” generally denotes the benefit arising
from connection and reputation, and efforts to establish reputation are akin to acquisition of capital assets. Therefore,
expenses related thereto are not (ordinary and necessary) business expenses but are capital expenditures (that are
not deductible pursuant to the provisions of Section 36 of the Tax Code) (Commissioner v. General Foods Phils.,
G.R. No. 143672, April 24, 2003).
Q: In December 1993, the Sangguniang Bayan authored a Christmas bonus of P3,000.00, a cash gift of P5,000.00,
and transportation and representation allowance of P6,000.00 for each of the municipal employees.
1) Is the Christmas bonus subject to any tax? 2) How about
the cash gift?
3) How about the transportation and representation allowances?
A: 1.The Christmas bonus given by the Sangguniang Bayan to the municipal employees is taxable as additional
compensation (Sec. 21 [a], NIRC).
2. The cash gift per employee of P5,000.00 being substantial may be considered taxable also. It is n the nature of
additional compensation income as it is highly doubtful if municipal governments are authorized to make gifts in
substantial sums such as this. It is not furthermore gift of “small value” which employers might give to their
employees on special occasions like Christmas – items which could be exempt under BIR Revenue Audit
Memorandum Order No. 1-87. [NOTE: It is considered as de minimis benefits under Rev.
Regs. No. 3-98, as amended; hence exempt from income tax and fringe benefits tax.] 3. The transportation and
representation allowances are actually reimbursements for expenses incurred by the employee for the
employer. Said allowances spent by the employee for the employer are designed to enhance the quality of the
service that the employer is supposed to perform for its clientele like the people of the municipality.
Q: Gold and Silver Corporation gave extra 14th month bonus to all its officials and employees in the total amount of
P75 million. When it filed its corporate income tax return the following year, the corporation declared a net operating
loss. When the income tax return of the corporation was reviewed by the BIR the following year, it disallowed as item
of deduction the P75 million bonus the corporation gave its officials and employees on the ground of
unreasonableness. The corporation claimed that the bonus is an ordinary and necessary expense that should be
allowed.
A: I will rule against the deductibility of the bonus. The extra bonus is both not normal to the business and
unreasonable. Admittedly, there is no fixed test for determining the reasonableness of a bonus as an additional
compensation. This depends upon many factors, such as the payment must be made in good faith; the character of
the taxpayer’s business; the volume and amount of its net earnings; the locality; the type and extent of the services
rendered; the salary policy of the corporation; the size of the particular business; the employees’ qualification and
contributions to the business venture; and general economic conditions (C.M. Hoskins & Co., Inc. v. CIR, 30 SCRA
434 [1969]). Giving an extra bonus at a time that the company suffers operating loss is not a payment in good faith
and is not normal to the business; hence unreasonable and not qualify as ordinary and necessary expense.
Q: X just hurdled the bar examinations and immediately engaged in the practice of law. In preparing his income tax
return he listed the following as deductible items: (a) fees paid to the Supreme Court to be able to take the bar
examinations; (b) fees paid to a law school to enroll in its pre-bar review classes; (c) malpractice insurance; and (d)
amount spent to entertain a judge who decided his first case.
Which deductions are allowable? Reason.
A: Section 29 of the National Internal Revenue Code on deductions, among other things, provide:
“(a) Expenses
1) Business Expenses (a) In General – All the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business. Including a reasonable allowance for salaries or
other compensation for personal services actually rendered; traveling expenses while away from
home in the pursuit of a trade, profession or business: rentals or other payments required to be
made as a condition to the continued use or possession, for the purpose of the trade, profession or
business of property to which the taxpayer has not taken nor is not taking title or in which he has no
equity.”
Further, Section 69 of Revenue Regulations No. 2, as amended, otherwise known as “Income Tax Regulations,”
reads:
“Sec. 69. Professional Expenses - A professional may claim as deductions the cost of supplies used by him or in the
practice of his profession, expenses paid in the operation and repair of transportation equipment used in making
professional calls, dues not professional societies and subscriptions to professional journals; the rent paid for office
rooms, the expenses of the fuel, light, water, telephone, etc. used on such offices, and me hire of office assistants.
Amounts currently expended for books, furniture and professional instruments and equipment, the useful life of which
is short, may be deducted. But amounts expended for books, furniture and professional instruments and equipment
of a permanent character are not allowable deductions.”
From the foregoing provisions of law that ordinary and necessary expenses incurred during a taxable year pertaining
directly to the practice of a profession may be allowed as deductions, it may be inferred from a keen reading of
Section 69 of Revenue Regulations No. 2 that aside from personal exemptions, only direct costs or overhead
expenses incurred in the actual practice of a profession may be claimed; i.e., supplies, fuel, light, electricity, salaries,
etc. Applying the above considerations in the case at bar, it appears that among the expenses, the same being an
ordinary and necessary expense in the pursuit of a profession as defined by Section 29 of the NIRC and further
qualified by Revenue
Regulations No. 2. The tuition fees for the pre-bar classes and the bar examination fees paid to the Supreme Court
by X do not qualify as deductible expenses under Revenue
Regulations No. 2. As for the amount spent by X to entertain the Judge who decided his first case, the same may not
be claimed as an expense. A business expenses to be deductible must be sustained by adequate proof and that the
same must not be against the law or public policy (Consolidated Mines v. Court of Tax Appeals and Commissioner,
58 SCRA 618).
Q: X is the Advertising Manager of Mang Douglas Ham, Inc. X had dinner with Y, owner of a chain of burger
restaurants, to convince the latter to carry Mang Douglas’ hamburger. After Y agreed, both X and Y went their
separate ways. X celebrated by going to as single’s bar. He picked up a partner and consumed a bottle of beer. He
drove home at 3:00 a.m. On his way, he sideswiped a pedestrian who died as a result of the accident. X settled the
case extra-judicially by paying the heirs of the pedestrian P50,000.00. The money, however, came from Mang
Douglas Hamburger, Inc. Discuss whether the P50,000.00 can be claimed by Mang Douglas Hamburger, Inc. as an
ordinary and necessary expense.
A: No. As the expenditure had not been incurred in carrying on his trade or business, the same cannot be considered
an ordinary and necessary expense for which deduction may be claimed. Such expense is a personal expense
which is not deductible form the gross income pursuant to Section 36 of the 1997 Tax Code.
Q: MC Garcia, a contractor who won the bid for the construction of a public highway, claims as expenses, facilitation
fees which according to him are standard operating procedure in transactions with the government. Are these
expenses allowable as deduction from gross income?
A: No. The alleged facilitation fees which he claims as standard operating procedure in transactions with the
government comes in the form of bribes or “kickback” which are not allowed as deductions from gross income (Sec.
34 [A][l][c], NIRC).
Q: In order to facilitate the processing of its application for a license from a government office, Corporation A found it
necessary to pay the amount of Php100,000 deductible from the gross income of Corporation A? On the other hand,
is the Php100,000 taxable income of the approving official? Explain your answers.
A: Since the amount of Php100,000 constitutes a bribe, it is not allowed as a deduction from gross income of
Corporation “A” (Sec. 34[A][1][c], NIRC). However, to the recipient government official, the same constitutes a
taxable income. All income from legal or illegal sources is taxable absent any clear provision of law exempting the
same. This is the reason why gross income had been defined to include income derived from whatever source (Sec.
32[A], NIRC). Illegally acquired income constitutes realized income under the claim of right doctrine (Rutkin v. U.S.,
343 U.S. 130). Q: (1993)
Q: X is the proprietor of Vanguard, which is a security and detective agency. X was able to get the contract to
provide the security services of a government agency calling for the deployment of 100 security guards on a 24-hour
basis. The director, X gives him at the end of the month P100,000.00 per guard hired. May X deduct from his income
the money he paid to the director? Reasons.
A: The money to please the director is not deductible. This is a form of bribery. Deductions shall not be allowed if the
expense is contrary to law, public policy or for immoral purposes (Zamora v. Commissioner, 8 SCRA 163; Roxas v.
CTA and Commissioner, 23 SCRA 276).
Q: Are contributions to a candidate in an election subject to donor’s tax? On the part of the contributor, is it allowable
as a deduction from gross income?
A: 1. No, provided the recipient candidate had complied with the requirement for filing of returns of contributions with
the Commission on Elections as required under the Omnibus Election Code.
2. The contributor is not allowed to deduct the contributions because the said expenses is not directly attributable to,
the development, management, operation and/or conduct of a trade, business or profession (Sec. 34[A][l][a], NIRC).
Furthermore, if the candidate is an incumbent government official or employee, it may even be considered as a bribe
or a kickback (Sec. 34[A][l][c], NIRC).Q: Sometime in December 1980, a taxpayer donated to his son 3,000 shares
of stock of San Miguel Corporation. For failure to file a donor’s return on the donation within the statutory period, the
taxpayer was assessed the sum of P102,000.00, as donor’s tax plus 25% surcharge or P25,500.00 and 20% interest
or P20,400,00 which he paid on June 24, 1985.
On April 10, 1986, he filed his income tax return for 1985 claiming among others, a deduction for interest amounting
to P9,500.00 and reported a taxable income of P96,000.00.
On November 10, 1986, the taxpayer filed an amended income tax return for the same calendar year 1985, claiming
therein an additional deduction in the amount of P20,400.00 representing interest paid on the donor’s gift tax.
A claim for refund of alleged overpaid income tax for 1985 was filed with the Commissioner which was subsequently
denied.
Upon appeal with the Court of Tax Appeals, the Commissioner took issue with the Court of Tax Appeals’
determination that the amount paid by the taxpayer for interest on his delinquent taxes is deductible from the gross
income for the same year pursuant to Section 29 (b)(1) of the National Internal Revenue Code.
The Commissioner of Internal Revenue pointed out that a tax is not indebtedness. He argued that there is a
fundamental distinction between a “tax” and a “debt”. According to the Commissioner, the deductibility of interest on
indebtedness from a person’s income tax cannot extend to interest on taxes.
What is your opinion on the argument of the Commissioner that a tax is not indebtedness so that
deducibility on the interest on taxes should not be allowed? A: The Commissioner’s argument is misplaced
because the interest on the donor’s tax is not one that can be considered as having been incurred in connection with
the taxpayer’s trade, business or exercise of profession. Tax obligations constitute indebtedness for purposes of
deduction from gross income of the amount of interest paid on indebtedness (CIR v. Palanca, 18 SCRA 496).
Although interest payment for delinquent taxes is not deductible as tax, the taxpayer is not precluded from claiming
said interest as deduction as such (Collector v. Magalona, L-15802, September 30, 1960).
Q: Explain if the following items are deductible from gross income for income tax purposes. Disregard who is the
person claiming the expense.
1) Interest on loans used to acquire capital equipment or machinery; 2) Depreciation of good will.
A:1. This is a deductible item from gross income. The law gives the taxpayer the option to claim as a deduction or
treat as capital expenditure interest incurred to acquire property used in trade, business or exercise of a profession
(Sec. 34[B][3], NIRC).
2. Depreciation for goodwill is not allowed as deduction from gross income. While intangibles may be allowed to be
depreciated or amortized, it is only allowed to those intangibles whose use in the business or trade is definitely
limited in duration (Basilan Estates v. CIR, 21 SCRA 17). Such is not the case with goodwill.
Q: A Co., a Philippine corporation, issued preferred shares of stock with the following features:
1. Non-giving;
2. Preferred and cumulative dividends at the rate of 10% per annum, whether or not in any period the
amount is covered by earnings or projects;
3. In the event of dissolution of the issuer, holders of preferred stock shall be paid in full ratably as the
assets of the issuer may permit before any distribution shall be made to common stockholders; and
4. The issuer has the option to redeem the preferred stock.
A Co. declared dividends on the preferred stock and claimed the dividends as interest deductible from its
gross income for income tax purposes. The BIR disallowed the deduction. A Co. maintains that the preferred
shares with their features are really debt and therefore the dividends are really interest. Decide. A: The
dividends are not deductible from gross income. Preferred shares shall be considered capital, regardless of the
conditions under which such shares are issued and, therefore, dividends paid thereon are not considered “interest”
which are allowed to be deducted from the gross income of the corporation (RMC No. 17071, July 12, 1971).
Q: “A” is a travelling salesman working full time for Nu Skin Products. He received a monthly salary plus 3%
commission on his sales in a Southern province where he is based. He regularly uses his own car to
maximize his visits even to far-flung areas. One fine day, a group of militants seized his car. He was notified
the following day by the police that the marines and the militants had a bloody encounter and his car was
completely destroyed after a grenade hit it. “A” wants to file a claim for casually loss. Explain the legal basis
of your tax advice. A: I would advise “A” not to file a claim for casualty loss deduction from gross income, because
he derives purely compensation income, which includes the 3% commission on his sales, from his employer. An
individual who receives compensation income under an employer- employee relationship is not entitle to any kind of
deduction (whether itemized or the standard deduction) from gross income (Sec. 34, NIRC). Indeed, he is allowed to
deduct from his gross compensation income only the personal and additional exemptions authorized in Section 35 of
the Tax Code. Besides, to be deductible from gross income, casualty loss must relate to a property connected with
the trade, business or profession of the taxpayer (Sec. 34[D][2], NIRC).
Q: Give the requisites for deductibility of a loss.
A: The requisites for deductibility of a loss are: (a) loss belongs to the taxpayer; (b) actually sustained and charged
off during the taxable year; (c) evidenced by a closed and completed transaction; (d) not compensated by insurance
or other forms of indemnity; (e) not claimed as a deduction for estate tax purposes in case of individuals taxpayers;
and (f) if it is a casualty loss it is evidenced by a declaration of loss filed within 45 days with the BIR.
Q: X is a traveling salesman in Jolo, Sulu. In the course of this travel, a band of MNLF seized his car by force and
used it to kidnap a foreign missionary. The next day, X learned that the military and the MNLF band had a chance
encounter. Using heavy weapons, the military fired at the MNLF band that tried to escape with the use of X’s car. All
the members of the band died and X’s car was a total wreck. Can X deduct the value of his car from his income as
casualty loss? Reason.
A: Section 29(1)(c) of the National Internal Revenue Code provides that in cases of individual taxpayers, losses to
be deductible must:
a) Actually be sustained and charged off within the taxable year;
b) Have been incurred in trade, profession or business or in any transaction entered into for profit,
though not connected with trade, profession, or business;
c) Be evidenced by a closed and completed transaction.
Moreover, Section 1 of Revenue Regulations No. 12-77 defined “casualty loss” as a complete or partial destruction of
property resulting from an identifiable event of sudden, unexpected, or unusual nature. It denotes accidents, some
sudden invasion by hostile agency, and excludes progressive deterioration.
Based on the above-mentioned laws the circumstances of the case at bar, the value of the wrecked car is deducible
as casualty loss provided the regulations governing substantiation requirements for losses are complied with.
Q: Explain if the following items are deductible from gross income for income tax purposes. Disregard who is the
person claiming the deduction.
1) Reserves for bad debts; 2)
Worthless securities.
A: 1. Reserves for bad debts are not allowed as deduction from gross income. Bad debts must be charged off during
the taxable year to be allowed as deduction from gross income.
The mere setting up of reserves will not give rise to any deduction (Sec. 34[E],NIRC).
2. Worthless securities, which are ordinary assets, are not allowed as deduction from gross income because the loss
is not realized. However, if these worthless securities are capital assets, the owner is considered to have incurred a
capital assets, the owner is considered to have incurred a capital loss as of the last day of the taxable year and,
therefore, deductible to the extent of capital gains (Sec. 34[D][4], NIRC). This deduction, however, is not allowed to a
bank or trust company (Sec. 34[E][2], NIRC).
Q: PQR Corporation claimed as a deduction in its tax return the amount of P1,000,000.00 as bad debts. The
corporation was assessed by the Commissioner of Internal Revenue for deficiency taxes on the ground that the
debts cannot be considered as “worthless,” hence, they do not quality as bad debts. The company asks for your
advice on “What factors will hold in determining whether or not the debts are bad debts?” Answer and explain briefly.
A: In order that debts shall be considered as bad debts because they have become worthless, the taxpayer should
establish that during the year for which it became evident in the exercise of sound, objective business judgment that
there remained no practical, but only vaguely theoretical , prospect that the debt would ever be paid (Collector of
Internal Revenue v. Goodrich International Rubber Co., 21 SCRA 1336 [1967]). “Worthless” is not determined by an
inflexible formula or slide rule calculation, but upon the exercise of sound business judgment. The factors to be
considered include, but are not limited to, the following: (a) the debtor has no property nor visible income; (b) the
debtor has been adjudged bankrupt or insolvent; (c) collateral with small amounts of debts and further action on the
accounts would entail expenses exceeding the amounts sought to be collected.
Q: 1. What is meant by the “tax benefit rule”?
2. Give an illustration of the application of the tax benefit rule.
A: 1. Tax benefit rule states that the taxpayer is obliged to declare as taxable income subsequent recovery of bad
debts in the year they were collected to the extent of the tax benefit enjoyed by the taxpayer when the bad debts
were written-off and claimed as deduction from gross income. It also applies to taxes previously deducted from gross
income but which were subsequently refunded or credited. The taxpayer is also required to report as taxable income
the subsequent tax refund or tax credit granted to the extent of the tax benefit of the taxpayer enjoyed when such
taxes were previously claimed as deduction from income.
2. X Company has a business connected receivable amounting to P100,000.00 from Y who was declared bankrupt
by a competent court. Despite earnest efforts to collect the same, Y was not able to pay, prompting X Company to
write-off the entire liability. During the year of write-off, the entire amount was claimed as a deduction for income tax
purposes reducing the taxable net income of X Company to only P1,000,000.00. Three 93) years later, Y voluntarily
paid his obligation previously written-off to X Company. In the year of recovery, the entire amount constitutes part of
gross income of X Company because it was able to get full tax benefit three (3) years earlier.
Q: 1. What is the proper allowance for depreciation of any property used in trade or business?
2. What is the annual depreciation of a depreciable fixed asset with a cost of P100,000.00 and an estimated useful
life of 20 years and salvage value of P10,000.00 after its useful life?
A: 1. The proper allowance of depreciation of any property used in trade or business refers to the reasonable
allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) said property. The
reasonable allowance shall include, but not limited to, an allowance computed under any of the following methods:
(a) straight-line method; (b) declining-balance method; (c) sum-of-years-digit method; and (d)any other method which
may be prescribed by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue
(Sec. 34[F], NIRC).
2. The annual depreciation of the depreciable fixed asset may be computed on the straightline method which will
allow the taxpayer to deduct an annual depreciation of P4,500, arrived at by dividing the depreciable value of
P100,000 by the estimated useful life (20 years).
Q: The Filipinas Hospital for Crippled Children is a charitable organization. X visited the hospital, on his birthday, as
was his custom. He gave P1,000,000.00 to the hospital and P5,000.00 to a crippled girl whom he particularly pitied.
A crippled son of X is in the hospital as one of its patients. X wants to exclude both the P100,000.00 and the
P5,000.00 from his gross income. Discuss.
A: Under Section 29 (h)(1) of the National Internal Revenue Code charitable contributions to be deductible must be:
a. Actually paid or made to domestic corporations or associations organized and operated exclusively
for religious, charitable, scientific, youth and sports development, cultural or educational purposes or
for rehabilitation of veterans or
to social welfare institutions no part of which inures to the benefits of any private individuals;
b. Made within the taxable year;
c. Not more than 6% (for individuals) or 3% (for corporations) of the taxpayer’s taxable income to be
computed without including the contribution.
Applying the above-provisions of law to the case at bar, it is clear therefore that only the P100,000.00 contribution of
X to Filipinas Hospital for Crippled Children qualified as a deductible contribution.
Section 29(h)(1) of the NIRC expressly provides that the same must be actually paid to a charitable organization to
be deductible. Note that the law accorded no privilege to similar contributions extended to private individuals. Hence,
the P5,000.00 contribution to the crippled girl cannot be claimed as a deduction.
Q: X’s favorite charity organization is the Philippine National Red Cross (PNRC). To raise money, PNRC sponsored
a concert featuring the Austria Boys Choir. X advanced P100,000.00 to the PNRC for which he was issued a
promissory note. Before its maturity, X cancelled and returned the note to PNRC. An advertising man, X also
undertook the promotions of the Austria Boys Choir. Part of the promotions campaign was to ask prominent
personalities to publicly donate blood to the PNRC a day before the concert. X himself donated 100cc. of blood. X
intends to claim as deductions the value of the note, the cash value of the promotions campaign and the cash value
of the blood he donated. Give your legal advice.
A: The value of the note can be claimed as deduction as charitable contribution. While the amount was originally a
loan, it can be considered to have become a gift or contribution when X cancelled and returned the note to PNRC, a
charitable organization. On the other, the cash value of the promotions campaign cannot be claimed as a d
deduction. Advertising expenses can only be deducted from the revenues where the expense were incurred. In the
case at hand, PNRC is the revenue-producing entity not X. X did not derive any revenue. Thus, the cash value of
his promotions campaign cannot be claimed as deduction.
Finally, the cash value of the blood donated by X cannot be claimed as deduction. Blood has no monetary value in
this case as it is not disbursed in the form of expense.
Q: Taxpayers, whose only income consist of salaries and wages from their employers, have long been complaining
that they are not allowed to deduct any item from their gross income for purposes of computing their net taxable
income. With the passage of the Comprehensive Tax Reform Act of 1997, is this complaint still valid? Explain your
answer.
A: No more. Gross compensation income earners are now allowed at least an item of deduction in the form of
premium payments on health and / or hospitalization insurance in an amount not exceeding P2,400.00 per annum
(Sec. 34[M], NIRC). This deduction is allowed if the aggregate family income do not exceed P 250,000.00 and by the
spouse, in case of married individual, who claims additional personal exemption for dependents.
Q: Ernesto, a Filipino citizen and a practicing lawyer, filed his income tax return for
2007, claiming optional standard deductions. Realizing that he has enough documents to substantiate his
profession-connected expenses, he now plans to file an amended income tax return for 2007, in order to claim
itemized deductions, since no audit has been commenced by the BIR on the return he previously filed.
Will Ernesto to allowed to amend his return? Why or why not?
A: Ernesto will not be allowed to file an amended return for 2007, not because of Section 6(A) of the 1997 Tax Code
which allows the filing of amended tax return provided that no audit notice has been served upon him by the BIR in
the meantime, but because of Section 34 (L) of the Tax Code, which provides that “Such election (of the itemized or
standard deduction) when made in the return shall be irrevocable for the taxable year for which the return is made.”
Q: Distinguish allowable deductions from personal exemptions. Give an example of an allowable deduction and
another example for personal exemption.
A: The distinction between allowable deductions and personal exemptions are as follows:
1. As to amount – Allowable deductions generally refer to actual expenses incurred in the pursuit of
trade, business or practice of profession while personal exemptions are arbitrary amounts allowed by
law.
2. As to nature – Allowable deductions constitute business expenses while personal exemptions pertain
to personal expenses.
3. As to purpose – Deductions are allowed to enable the taxpayer to recoup his cost of doing business
while personal exemptions are allowed to cover personal, family and living expenses.
4. As to claimants – Allowable deductions can be claimed by all taxpayers, corporate or otherwise, while
personal exemptions can be claimed only by individual taxpayers.
Q: Mar and Joy got married in 1990. A week before their marriage, Joy received, by way of donation, a condominium Q: ABC, a domestic corporation, sold in 1989 two (2) condominium units of Legaspi Towers in Roxas Boulevard for
unit worth P750,000.00 from her parents. After marriage, some renovations were made at a cost of P150,000.00. P8,158,142.00. The corporation declared in its income tax return for taxable year 1989 its gains derived from the
The spouses were both employed in 1991 by the same company. On 30 December 1992, their first child was born, sale of two (2) condominium units as follows:
and a second child was born on 07 November 1993. In 1994, they sold the condominium unit and bought a new
unit. Under the foregoing facts, what were the events in the life of the spouses that had income tax incidence?
A: The events in the life of Spouses Mar and Joy, which have income tax incidences, are the following:

a. Their marriage in 1990 qualifies them to claim personal exemption for married individuals; UNIT A UNIT B

b. Their employment in 1991 by the same company will make them liable to the income imposed on
gross compensation income;
c. Birth of the first child in December 1992 would give rise to an additional exemption of P5,000.00 (now (316.5 sq.ft.) (322 sq.ft.)
P25,000.00) for the taxable year 1992;
d. Birth of their second child in November 1993 would likewise entitle them to claim additional
exemption of P5,000.00 (now P25,000.00) raising their additional personal exemptions to P10,000.00
for taxable year 1993; Proceeds from sale P3,933,679 P4,224,463
e. Sale of their condominium unit in 1994 shall make the spouses liable to the 5% (now 6%) capital
gains tax on the gain presumed to have been realized from the sale.

Q: RAM got married to LISA last January 2003. On November 30, 2003, LISA gave birth to twins. Unfortunately, Less:
however, LISA died in the course of her delivery.
Due to complications, one of the twins also died on December 15, 2003.
In preparing his income tax return for the year 2003, what should RAM indicate in the return as his civil status; (a)
single; (b) married; (c) head of the family; (d) widower, (e) none of the above? Why Reason. 1,501,295 1,529,755
A: RAM should indicate “(b) married” as his civil status in preparing his income tax return for the year 2003. The (a) Acquisition costs (Deed of Sale 9/9/83)
death of his wife during the year will not change his status because should the spouse die during the taxable year,
the taxpayer may still claim the same exemptions (that of being married) as if the spouse died at the close of such
year (Sec. 35[c], NIRC). (b) Payments of Realty Tax 49,248 55,413

Q: OXY is the president and chief executive officer of ADD Computers, Inc. When
OXY was asked to join the government service as director of a bureau under the Department of Trade and Industry,
he took a leave of absence from ADD. Believing that its business outlook, goodwill and opportunities improved with Total of (a)(b) 1,550,543 1,585,168
OXY in the government, ADD proposed to obtain a policy of insurance on this life. On ethical grounds, OXY objected
to the insurance purchase but ADD purchased the policy anyway. Its annual premium amounted to P100,000.00. Is
said premium deductible by ADD Computers? Reason.
A: No. The premium is not deductible because it is not an ordinary business expense. The term “ordinary” is used in
the income tax law in its common significance and it has the connotation of being normal, usual or customary Gains 2,383,136 2,639,295
(Deputy v. Du Pont, 308 US 488 [1940]). Paying premium for the insurance of a person not connected to the
company is not normal, usual or customary.

Another reason for its non-deductibility is the fact that it can be considered as an illegal compensation made to a
government employee. This is so because if the insured, his estate or heirs were made as the beneficiary (because
of the requirement of insurable interest), the payment of premium will constitute bribes which are not allowed as
deduction from gross income (Sec. 34[A][1][c], NIRC).
On the other hand, if the company was made the beneficiary, whether directly or indirectly, the premium is not
allowed as a deduction from gross income (Sec. 36[A][4], NIRC).
CHAPTER VIII: TAX BASES AND RATES
Without going into computations, answer the following question:
Since ABC derived gains from the sale of the condominium units, should it pay the 5% capital gains tax, 35%
corporate income tax or none of the above because the corporation is not a real estate dealer? Discuss.
A: ABC Corporation must pay the 35% corporate income tax. The National Internal Revenue Code does not provide
for the payment by corporations of 5% (now 6%) capital gains tax on the sale of real property, whether considered
capital assets or not. Such income is included in the computation of net income (gross taxable income less
deductions) and is subject to the tax rate of 35%. [NOTE: Existing law imposes the final tax of 6% on the gain
presumed to have been realized on the sale of lands and/or buildings of corporations treated as capital assets. The
applicable corporate income tax rate beginning January 1, 2000 under R.A. 8424 is 32% and starting November 1,
2005 under R.A. 9337 is 35%, but starting January 1, 2009, the rate is 30%].
Q: What is the “immediacy test”? Explain briefly.
A: To determine the reasonable needs of the business in order to justify an accumulation of earnings (and not
impose the 10% tax on improperly accumulated earnings of corporations), the “immediacy test” under American
jurisprudence has been adopted in the Philippines. Thus, the term “reasonable needs of the business” is construed
to mean the immediate needs of the business to accumulate earnings and profits (instead of declaring dividends to
shareholders), including reasonably anticipated needs.
CHAPTER IX: ORDINARY ASSETS AND CAPITAL ASSETS
Q: Oriental, Inc. holds a proprietary share of Capital Gold Club, Inc. It assigned without any consideration this share
to X, one of its foreign consultants, to enable him to use its facilities for the duration of his stay in the Philippines. X
signed a Declaration of Trust where he acknowledged that the share is owned by Oriental, Inc. and where he
promised to transfer the same to whoever will succeed him as consultant. When X’s contract with Oriental, Inc.
expired, he left the Philippines and assigned for free the share to Y, his successor in office. What tax, if any, can be
imposed by the BIR on the transaction?
A: The BIR cannot impose any tax because there was no real transfer of the ownership of the subject Capitol Golf
Club, Inc. (“Capitol”) proprietary share from X to Y. Oriental, Inc. is the true owner of the Capitol proprietary share. It
remained the true owner from the time of the Capitol share’s use by X, to the transfer of the Capitol share’s use to Y.
Oriental remained the legal owner thereof all throughout, while X and Y are only the beneficial owners.
Q: X-land Condominium Corporation was organized by the owners of units in Xland Building Corporation in
accordance with the Master Deed with Declaration of Restrictions. The X-land Building Corporation, the developer of
the building, conveyed the common areas in favor of the X-land Condominium Corporation. Is the conveyance
subject to tax?
A: The conveyance is not subject to any tax. The same is without consideration, and not in connection with a sale
made to X-land Condominium Corporation, and the purpose of the conveyance to the latter is for the management of
the common areas for the common benefit of the unit owners.
The same is not subject to income tax since no income was realized as a result of the conveyance, which was made
pursuant to the Condominium Act (R.A. 4264), and the purpose of which was merely to vest title to the common
areas in favor of the X-land Condominium Corporation.
There being no monetary consideration, neither is the conveyance subject to the creditable withholding tax imposed
under Resume Regulation No. 1-90, as amended.
The second conveyance was actually no conveyance at all because when the units were sold to the various buyers,
the common areas were already part and parcel of the sale of said units pursuant to the Condominium Act. However,
the Deed of Conveyance is subject to documentary stamp tax.
Q: In 1990, Mr. Naval bought a lot for P1,000,000.00 in a subdivision with the intention of building his residence on it.
In 1994, he abandoned his plan to build his residence on it because the surrounding area became a depressed area
and land values in the subdivision went down; instead, he sold it for P800,000.00. At the time of the sale, the zonal
value was P500,000.00.
Is the land a capital asset or an ordinary asset? Explain.
Is there any income tax due on sale? Explain.
A: (1) The land is a capital asset because it is neither for sale in the ordinary course of business nor a property used
in the trade or business of the taxpayer (Se. 33, NIRC). Yes, Mr. Naval is liable to the 5 % (now 6%) capital gains tax
imposed under Section 21(e) of the Tax Code based on the gross selling price of P800,000.00, which is an amount
higher than the zonal value.
Q: In January, 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for P100,000. This property
has a current fair market value of P10 million in view of the construction of a concrete road traversing the property.
Juan Gonzales agrees to exchange his agricultural lot in Laguna for a one-half hectare residential property located in
Batangas, with a fair market value of P10 million, owned by Alpha Corporation, a domestic corporation engaged in
the buy and sale of real property. Alpha Corporation acquired the property in 2007 for P9 million. What is the nature
of the real properties exchanged for tax purposes--capital asset or ordinary asset? Explain.
Is Juan Gonzales subject to income tax on the exchange of property? If so, what is the tax base and rate? Explain.
Is Alpha Corporation subject to income tax on the exchange of property? If so, what is the tax base and rate?
Explain.
A: a. The term “capital assets” means property held by the taxpayer (whether or not connected with his trade or
business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be
included in the inventory of the taxpayer, if on hand at the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or
business, of a character which is subject to the allowance for depreciation, or real property used in trade or business,
of a character which is subject to the allowance for depreciation, or real property used in trade or business of the
taxpayer (Sec. 39[A][1], NIRC). Based on the foregoing definition, the agricultural land of Juan Gonzales is a capital
asset, while the residential property of Alpha Corporation is an ordinary asset.
Yes, Juan Gonzales is subject to the capital gains tax equal to 6% of the gross selling price or fair market value at
the time of the exchange, whichever is higher, on the agricultural land in Laguna he exchanged to Alpha Corporation.
In this case, the law presumes that Juan Gonzales makes a profit from sale or transfer of property (Sec. 24[D][1],
NIRC).
Yes, Alpha Corporation is liable to pay corporate income tax on the net taxable income
(gross sales less cost of sales and deductions) realized by it from the sale or exchange of its Batangas property for
the agricultural land in Laguna owned by Juan Gonzales. The net profit of P1 million (P10 million selling price less P9
million cost) will be added to the other ordinary incomes and from such gross income, business expenses and other
allowable deductions will be deducted to arrive at net taxable income for the year to which we will apply the regular
corporate income tax rate of 35%.
Q:1. What is the difference between capital gains and ordinary gains?
What does the term “ordinary income” include?
A: 1. Capital gains are gains realized from the sale or exchange of capital assets, while ordinary gains refer to gains
realized from the sale or disposition of ordinary assets.
The term ordinary income includes any gain from the sale or exchange of property which is not a capital asset.
These are the gains derived from the sale or exchange of property such as stock in trade of the taxpayer or other
property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the
taxable year, or property held by the taxpayer primarily for sale to customers in the course of his trade or business,
or property used in trade or business of a character which is subject to the allowance for depreciation, or real
property used in trade or business of the taxpayer (Sec. 22[Z] in relation to Sec. 39[A][1], NIRC).
Q: An individual, who owns a ten (10)-door apartment with a monthly rental of P10,000.00 each residential unit, sold
this property to another individual taxpayer.
Is the seller liable to pay the capital gains tax?
A: No. The seller is not liable to pay the capital gains tax because the property sold is an ordinary asset, i.e., real
property used in trade or business. It is apparent that the taxpayer is engaged in the real estate business, regularly
renting out the 10-door apartment.

Q: A corporation, engaged in real estate development, executed deeds of sale on various subdivided lots. One
buyer, after going around the subdivision, bought a corner lot with a good view of the surrounding terrain. He paid
P1.2 million, and the title to the property was issued. A year later, the value of the lot appreciated to a market value
of P1.6 million, and the buyer decided to build his house thereon.
Upon inspection, however, he discovered that a huge tower antenna had been erected on the lot frontage
totally blocking his view. When he complained, the realty company exchanged his lot with another corner lot with an
equal area but affording a better view. Is the buyer liable for capital gains tax on the exchange of the lots?
A: Yes, the buyer is subject to capital gains tax on the exchange of lots on the basis of prevailing fair market value of
the property transferred at the time of the exchange of the fair market value of the property received, whichever is
higher (Sec. 21[e], NIRC). Real property transaction subject to capital gains tax are not limited to sales but also
exchanges of property unless exempted by a specific provision of law.
Q: A, a doctor by profession, sold in the year 2000 a parcel of land which he bought as a form of investment in 1990
for Php1 million. The land was sold to B, his colleague, at a time when the real estate prices had gone down and so
the land was sold only for Php800,000 which was then the fair market value of the land. He used the proceeds to
finance his trip to the United States. He claims that he should not be made to pay the 6% final tax because he did not
have any actual gain on the sale. Is his contention correct? Why?
A: No. The 6% capital gains tax on sale of real property held as capital asset is imposed on the income presumed to
have been realized from the sale which is the fair market value or selling price thereof, whichever is higher (Sec.
24[D], NIRC). Actual gain is not required for the imposition of the tax, but it is the gain by fiction of law which is
taxable
Q: What is the rationale for the rule prohibiting the deduction of capital losses from ordinary gains? Explain.
A: Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales
or exchanges (Sec. 39[c], NIRC). Thus, capital losses are not deductible from ordinary gains. The rationale for this
rule is that a capital asset refers to property held which is not considered as an ordinary asset. Generally, capital
assets are properties of the taxpayer that are not used in his trade or business, as distinguished from ordinary assets
which are used in the trade or business of the taxpayer. To allow the deduction of non-business (capital) losses from
business (ordinary) income or gain could mean the reduction or even elimination of taxable income of the taxpayer
through personal, non-business related expenses, resulting in substantial losses of revenue to the government.
CHAPTER X: TAX-FREE EXCHANGES
Q: HK Co. is a Hong Kong corporation not doing business in the Philippines. It holds 40% of the shares of A Co., a
Philippine company, while the 60% is owned by P Co., a Filipino-owned Philippine corporation. HK Co. also owns
100% of the shares of B Co., an Indonesian company which has a duly licensed Philippine branch. Due to worldwide
restructuring of the HK Co. group, HK Co. decided to sell all its shares in A and B Companies. The negotiations for
the buy-out and the signing of the Agreement of Sale were all done in the Philippines. The agreement provides that
the purchase price shall be subject to withholding tax. Explain your advice.
A: P Co. should not subject the payments of the purchase price to withholding tax. While the seller is a non-resident
foreign corporation which is not normally required to file returns in the Philippines and therefore, ordinarily all its
income earned from Philippine sources is taxed via the withholding tax system, this is not the procedure availing with
respect to sales of shares of stock. The capital gains tax on the sale of shares of stock of a domestic corporation is
always required to be paid through capital gains tax return filed. The sale of the shares of stock of the Indonesian
Corporation is not subject to income tax under our jurisdiction because the income derived therefrom is considered
as a foreign-source income.
Q: Cebu Development Inc. (CDI) has an authorized capital stock of P5,000,000.00 divided into 50,000 shares with a
par value of One Hundred Pesos (P100.00) per share. Of the authorized capital stock, Legaspi is a stockholder of
CDI where he has subscription amounting to 13,000 shares. To fully pay his unpaid subscription in the amount of
P950,000.00, Mr. Legaspi transferred to the corporation a parcel of land that he owns by virtue of a Deed of
Assignment.
Upon investigation, the BIR discovered that Mr. Legaspi acquired said property for only P500,000.00.
1) Is Mr. Legaspi liable for any taxable gain?
2) Is the CDI liable for any taxable gain?
A: 1) The transfer by Mr. Legaspi to the corporation of the parcel of land in payment of his unpaid subscription did
not increase his stockholdings in the corporation. It cannot be said that he acquired control of the corporation by
virtue of the transfer of the land. His percentage of the stockholding in the capital stock of the corporation remains
the same after the transfer as before. Therefore, Mr. Legaspi derived taxable gain for his economic gain which was
realized by virtue of the exchange of the land for the liability for the subscription.
CDI itself is not liable for any taxable gain since subscription payments are not considered as taxable income being
merely investments in the corporation. However, a taxable incidence may occur as and when the corporation sells
the parcel of land for a price over and above the value of the shares of stock or in this case over and above
P950,000.00. Until such time, however, there is no realizable income on the part of the corporation.
Q: 1) In a qualified tax-free exchange of property for shares under Section
34(c)(2) of the Tax Code, what is the tax basis for computing the capital gains on: (a) the sale of the assets received
by the corporation; and (b) the sale of the shares received by the stockholders in exchange of the assets?
In a qualified merger under Section 34(c)(2) of the Tax Code, what is the tax basis for computing the capital gains
on: (a) thesale of the assets received by the surviving corporation from the absorbed corporation; and (b) the sale of
the shares of stock received by the stockholders from the surviving corporation?
A: 1) In a qualified tax-free exchange of property for shares of stock under Section 34(c)(2) of the Tax Code, the tax
basis for computing the gain on the:
sale of the assets received by the corporation shall be the original/historical cost (i.e., purchase price plus expenses
of acquisition) of the property/assets given in exchange of the shares of stock.
sale of the shares of stock received by the stockholders in exchange of the assets shall be the original/historical
cost of the property given in exchange of the shares of stock. In a qualified merger under Section 34(c)(2) of the
Tax Code, the tax basis for computing the capital gains on:
the sale of the assets received by the surviving corporation from the absorbed corporation shall be the
original/historical cost of the assets when still in the hands of the absorbed corporation.
the sale of the shares of stock received by the stockholders from the surviving corporation shall be the
acquisition/historical cost of assets transferred to the surviving corporation.
Q: Three brothers inherited in 1992 a parcel of land valued for real estate tax purposes at P3.0 million which they
held in co-ownership. In 1995, they transferred the property to a newly organized corporation as their equity which
was placed at the zonal value of P6.0 million. In exchange for the property, the three brothers thus each received
shares of stock of the corporation with a total par value of P2.0 million or, altogether, a total of P6.0 million. No
business was done by the Corporation, and the property remained idle. In the early part of 1997, one of the brothers,
who was in dire need of the funds, sold his shares to the two brothers for P2.0. Is the transaction subject to any
internal revenue tax (other than the documentary stamp tax)?
A: Yes. The exchange in 1995 is a tax-free exchange so that the subsequent sale of one of the brothers of his
shares to the other two (2) brothers in 1997 will be subject to income tax. This is so because the tax-free exchange
merely deferred the recognition of income on the exchange transaction. The gain subject to income tax in the sale is
measured by the difference between the selling price of the shares transferor at the time of exchange which is the
fair market value of his share in the real property at the time of inheritance (Sec. 34[b][2], NIRC). The net gain from
the sale of shares of stock is subject to the schedular capital gains tax of 10% for the first P100,000.00 and 20% for
the excess thereof (Sec. 21[d], NIRC). [NOTE: The current capital gains tax rates are 5% on the first P100,000.00
net capital gain and 10% on the amount over P100,000.00].
Q: Last July 12, 2000, Mr. and Mrs. Peter Camacho sold their principal residence situated in Tandang Sora, Quezon
City, for ten million pesos (P10,000,000.00) with the intention of using the proceeds to acquire or construct a new
principal residence in Aurora Hills, Baguio City.
What conditions must be met in order that the capital gains presumed to have been realized from such
sale may not be subject to capital gains tax?
A: When the real property sold or disposed by a natural person (e.g., citizen or resident alien) is a capital asset and
his principal residence, the capital gains presumed to have been realized from the sale or disposition thereof shall be
exempt from the 6% capital gains tax, provided that:
The proceeds of sale is fully utilized in acquiring or constructing a new principal residence within 18 calendar months
from the date of sale or disposition;
The Commissioner is duly notified by the taxpayer within 30 days from the date of sale or disposition through a
prescribed return of his intention to avail of the tax exemption; and The tax exemption is availed only once every 10
years. The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new
principal residence built or acquired.
CHAPTER XI: ACCOUNTING METHODS AND PERIODS
Q: What is the "all events test"? Explain briefly.
A: Accrual of income and expense is permitted when the "all events test" has been met. This test requires (1) fixing a
right to the income or the liability to pay, and (2) availability of reasonably accurate determination of such income or
liability. It does not, however, demand that the amount of income or liability be known absolutely; it only requires that
a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy, which
implies something less than an exact or completely accurate amount.
Q: Mr. Javier is a non-resident senior citizen. He receives a monthly pension from the GSIS, which he deposits with
the PNB-Makati Branch. Is he exempt from income tax and therefore not required to file an income tax return?
A: Mr. Javier is exempt from income tax on his monthly GSIS pension (Sec. 32[B][6][f], NIRC), but not on the interest
income that might accrue on the pensions deposited with PNB which are subject to final withholding tax.
Consequently, since Mr. Javier's sole taxable income would have been subjected to a final withholding tax,
he is not required anymore to file an income tax return (Sec. 51[A][2][c], NIRC).
Q: In the year 2000, X worked part time as a waitress in a restaurant in Mega Mall for 8am to 4pm and then as a
cashier in a 24-hour convenience store in her neighborhood. The total income of X for the year from the two
employees does not exceed her total personal and additional exemption for the year 2000. Was she required to file
an income tax return last April? Explain your answer.
A: Yes. An individual deriving compensation concurrently from two or more employers at any time during the taxable
year shall file an income tax return (Sec. 51[A][2][b], NIRC).
Q: Robert Patterson is an American who first arrived in the Philippines in 1944 as a member of the US Armed Forces
that liberated the Philippines. After the war he returned to the United States but came back to the Philippines in 1958
and stayed here up to the present. He is presently employed in the United States Naval Base, Olongapo City. For
the year 1985, he earned US$10,856.00. Sometime in 1986, the District Revenue Office of the Bureau of Internal
Revenue served him a notice, informing him that he did not file his income tax return for the year 1985 and directing
him to file said return in 10 days. He refused to file any return claiming that he is not a resident alien and is therefore
not required to file any income tax return. Is Patterson's claim correct?
A: Patterson's claim is not correct. While Patterson is exempt from income tax, an exemption from income tax does
not, however, necessarily mean an exemption likewise from the filing of an income tax return (Garrison v Court of
Appeals, 187 SCRA 525).
Q: a) How often does a domestic corporation file income tax return for income earned during a single taxable
year? Explain the process. b) What is the reason for such procedure?
A: a) A domestic corporation is required to file income tax returns four (4) times for income earned during a single
taxable year. Quarterly returns are required to be filed for the first three quarters where the corporation shall declare
its quarterly summary of gross income and deductions on a cumulative basis (Sec. 75, NIRC). Then, a final
adjustment return is required to be filed covering the total taxable income for the entire year, calendar or fiscal (Sec.
76, NIRC).
b) The reason for this procedure is to ensure the timeliness of collection tomeet the budgetary needs of the
government. Likewise, it is designed to ease the burden on the taxpayer by providing it with an installment payment
scheme, rather than requiring the payment of the tax on a lump-sum basis after the end of the year.
CHAPTER XII: WITHHOLDING TAXES
Q: What is meant by income subject to "final tax"? Give at least two examples of income of resident individuals that
is subject to the final tax.
A: Income subject to the final tax refers to an income wherein the tax due is fully collected through the withholding
tax system. Under this procedure, the payor of the income withholds the tax and remits it to the government as a final
settlement of the income tax due on said income. The recepient is no longer required to include the item of income
subjected to "final tax" as part of his gross income in his income tax returns. Examples of income subject to final tax
are divided income, interest from bank deposits, royalties, etc.
Q: Is a non-resident alien who is not engaged in trade or business or in the exercise of profession in the Philippines
but who derived rental income from the Philippines required to file an income tax return on April of the year following
his receipt of said income? If not, why not?
A: No. The income tax on all income derived from Philippine sources by a non-resident alien who is not engaged in
trade or business in the Philippines is withheld by the lessee as a Final Withholding Tax (Sec. 57[A], NIRC). The
government cannot require persons outside of its territorial jurisdiction to file a return; for this reason, the income tax
on income derived from within must be collected through the withholding tax system and thus relieve the recipient of
the income the duty to file income tax returns (Sec. 51, NIRC).
Q: To start a business of his own, Mr. Mario de Guzman oped for an early retirement from a private company after
ten (10) years of service. Pursuant to the company's qualified and approved private retirement plan, he was paid his
retirement benefit which was subjected to the withholding tax.
Is the employer correct in withholding the tax? Explain.
Under what conditions are retirement benefits received by officials and employees of private firms excluded from
gross income and exempt from taxation?
A: (a) It depends. An employee retiring under a company's qualified and private retirement plan can only be exempt
from income tax on his retirement benefits if the following requisites are met: (1) that the retiring employee must have
been in service of the same employer for at least 10 years; (2) that he is not less than 50 years of age at the time of
retirement; and (3) the benefit is availed of only once. In the instant case, there is no mention whether the employee
has likewise complied with requisites number (2) and (3). The conditions to be met in order that retirement benefits
received by officials and employees of private firms are excluded from gross income and exempt from taxation are as
follows:
Under R.A. 4917 (those received under a reasonable private benefit plan):
the retiring official or employee must have been in service of the same employer for at least
10 years; that he is not less than 50 years of age at the time of retirement; and that
the benefit is availed of only once.
Under R.A. 7641 (those received from employers without any retirement plan): Those received under existing
collective bargaining agreement and other agreements are exempt; and
In the absence of retirement plan or agreement providing for retirement benefits, the benfits are excluded from gross
income and exempt from income tax if: (i) retiring employee must have served at least five (5) years; and (ii) that he
is not less than 60 years of age but not more than 65.
CHAPTER XIII: ESTATE TAX
Q: (1) What is the principle of mobilia sequuntur personam?
(2) Are donations inter vivos and donations mortis causa subject to estate taxes? A: (1) Principle of mobilia
sequuntur personam refers to the principle that taxation of intangible personal property generally follows the
residence or domicile of the owner thereof.
Donations inter vivos are subject to donor's gift tax (Sec. 91[a], Tax Code) while donations mortis causa are subject
to estate tax (Sec. 77, Tax Code). However, donations inter vivos constituted lifetime like transfers in contemplation
of death or revocable transfers (Sec. 78[b] and [c], Tax Code) may be taxed for estate tax purposes, the theory being
that the transferor's control thereon extends up to the time of his death.
Q: John Cerna, Filipino citizen, married to Maria Cerna, died in a vehicular accident in NLEX on July 10, 2007. The
spouses owned, among others a 100-hectare agricultural land in Sta. Rosa, Laguna with current fair market value of
P20 million, which was subject matter of a Joint Venture Agreement about to be implemented with Star Land
Corporation (SLC), a well-known real estate development company. He bought the said real property for P2 million
fifty [50] years ago. On January 5, 2208, the administrator of the estate and SLC jointly announced their big plans to
start conversion and development of the agricultural lands in Sta. Rosa, Laguna into first-class residential and
commercial centers. As a result, the prices of real properties in the locality have doubled. The administrator of the
Estate of Jose Cernan filed the estate tax return on January 9, 2008, by including in the gross estate the real
property at P2 million. After 9 months, the BIR issued deficiency estate tax assessment, by valuing the real property
at P40 million. (a) Is the BIR correct in valuing the real property at P40 million? (b) If you disagree, what is the correct
value to be used for estate tax purposes?
A: a. No, BIR is wrong in valuing the real property at P40 million. The P40 million represents the value of the real
property in 2008, after the announcement by the joint venture partners that development plans would be pursued in
the area. The value of the gross estate of the decedent shall be determined by including the value at the time of
death in 2007 of all property, real or personal, tangible or intangible, wherever situated (Sec. 85, NIRC). Since the
fair market value of the real property at the time of death of Mr. Jose Cerna in 2007 was P20 million, this market
value should be the one used for purposes of determining the gross estate. Whatever is the value of the property
after his death--whether it increases or decreases-- is of no moment for estate tax purposes.
Q: Ralph Donald, an American Citizen, was a top executive of a U.S. company in the Philippines until he retired in
1999. He came to like the Philippines so much that following his retirement, he decided to spend the rest of his life in
the country. He applied for and was granted a permanent resident status the following year. In the spring of 2004,
while vacationing in Orlando, Florida, USA, he suffered a heart attack and died. At the time of his death, he left the
following properties: (a) bank deposits with Citibank Makati and Citibank Orlando, Florida; (b) a rest house in
Orlando, Florida; (c) a condominium unit in Makati; (d) shares of stock in the Philippine subsidiary of the U.S.
company where he worked; (e) shares of stock in San Miguel Corp. and PLDT; (f) shares of stock in Disney World in
Florida; (g) U.S. treasury bonds; and (h) proceeds from a life insurance policy issued by a U.S. corporation.
Which of the following assets shall be included in the taxable gross estate in the Philippines? Explain.
A: Being a resident of the Philippines at the time of his death, the gross estate of Ralph Donald shall include all his
property, real or personal, tangible or intangible, wherever situated at the time of his death (Sec. 85, NIRC). Thus,
the following shall be included in his taxable gross estate in the Philippines:
a. bank deposits with Citibank Makati and Citibank Orlando, Florida
b. a rest house in Orlando, Florida
c. a condominium unit in Makati
d. shares of stock in the Philippine subsidiary of the U.S. company
e. shares in San Miguel Corp. and PLDT
f. shares of stock in Disney World in Florida
g. U.S. treasury bonds
The proceeds from a life insurance policy issued by a U.S. corporation is included as part of the gross
estate of Ralph Donald, if the designation of the beneficiary is revocable or irrespective of the nature of the
designation, if the designated beneficiary is either the estate of the deceased, his executor or administrator. If the
designated beneficiary is other than the estate, executor or administrator and the designation is irrevocable, the
proceeds shall not form part of his gross estate (Sec. 85[E], NIRC).
Q: Jose Ortiz owns 100 hectares of agricultural land planted to coconut trees. He died on May 30, 1994. Prior to his
death, the government, by operation of law, acquired under the Comprehensive Agrarian Reform Law all his
agricultural lands except five (5) hectares. Upon the death of Ortiz, his widow asked you how she will consider the
100 hectares of agricultural land in the preparation of the estate tax return. What advice will you give her?
A: The 100 hectares of land, which Jose Ortiz owned but which prior to his death on May 30, 1994 were by the
government under CARP, are no longer part of his taxable gross estate, with the exception of the remaining five (5)
hectares which under Section 78(a) of the Tax
Code still forms part of "decedent's interest."
Q: Cliff Robertson, an american citizen, was a permanent resident of the Philippines. He died in Miami, Florida. He
left 10,000 shares of Meralco, a condominium unit at the Twin Towers Building at Pasig, Metro Manila and a house
and lot in Los Angeles, California.
What assets shall be included in the Estate Tax Return to be filed with the BIR?
A: All of Mr. Robertson's assets, consisting of 10,000 shares in the Meralco, a condominium unit in Pasig, and his
house and lot in Los Angeles, California, are taxable. The properties of a resident alien decedent like Mr. Robertson
are taxable wherever situated (Secs. 77, 78 and 98, NIRC).
Q: Mr. Agustin, 75 years old and suffering from an incurable disease, decided to sell for valuable and sufficient
consideration, a house and lot to his son. He died one year later. In the settlement of Mr. Agustin's estate, the BIR Q: A died, survived by his wife and three children. The estate tax was properly paid and the estate settled and
argued that the house and lot were transferred in contemplation of death and should therefore form part of the gross divided and distributed among the four heirs.
estate for estate tax purposes. Is the BIR correct? A: No. The house and lot were not transferred in contemplation of
Later the BIR found out that the estate failed to report the income received by the estate during administration. The
death; therefore, these properties should not form part of the decedent's gross estate. To qualify as a transfer in BIR issued a deficiency income tax assessment plus interest, surcharges and penalties. Since the 3 children are
contemplation of death, the transfer must be either without consideration or for insufficient consideration. Since the
residing abroad, the BIR sought to collect the full tax deficiency only against the widow. Is the BIR correct?
house and lot were sold for valuable and sufficient consideration, there is no transfer in contemplation of death for A:Yes. The BIR is correct. In a case where the estate has been distributed to the heirs, the collection remedies
estate tax purposes (Sec. 85[B], NIRC). Q: A, aged 90 years and suffering from incurable cancer, on August 1, 2001
available to the BIR in collecting tax liabilities of an estate may either (1) sue all the heirs and collect from each of
wrote a will and, on the same day, made several inter vivos gifts to his children. Ten days later, he died. In your
opinion, are the inter vivos gifts considered transfers in contemplation of death for purposes of determining them the amount of tax proportionate to the, inheritance received or (2) by virtue of the lien created under Section
properties to be included in his gross estate? Explain your answer. 219, sue only one heir and subject the property he received from the estate to the payment of the estate tax. The
A: Yes. When the donor makes his will within a short time of, or simultaneously with, the making of gifts, the gifts are BIR, therefore, is correct in pursuing the second remedy although this will give rise to the right of the heir who pays to
considered as having made in contemplation of death (Roces v. Posadas, 58 Phils. 108). Obviously, the intention of seek reimbursement from the other heirs (Collector v. Pineda, 21 SCRA 105). In no case, however, can the BIR
the donor in making the inter vivos gifts is to avoid the imposition of the estate tax and since the donees are likewise enforce the tax liability in excess of the share of the widow in the inheritance.
his forced heirs who are called upon to inherit, it will create a presumption juris tantum that said donations were
made mortis causa; hence, the properties donated shall be included as part of A's estate.
Q: While driving his car to Baguio City last month, Pedro Asuncion, together with his wife, Assunta, and only son,
Q: In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000. The fair market value of the painting at Jaime, met an accident that caused the instantaneous death of Jaime. The following day, Assunta also died in a
the time of purchase was P1 million. yuri paid all the corresponding taxes on the transaction. In 2001, Xavier died. In hospital. The spouses and their son had the following assets and liabilities at the time of death:
his last will and testament, Xavier bequeathed the painting, already worth P1.5 million, to his only son, Zandro. The
will also granted Zandro the power to appoint his wife, Wilma, as successor to the painting in the event of Zandro's Assunta
death. Sandro died in 2007, and Wilma succeeded to the property. (a) Should the painting be included in the gross
estate of Xavier in 2001 and thus, be subject to estate tax? (b) Should the painting be included in the gross estate of Exclusive Conjugal Jaime
Zandro in 2007 and thus, be subject to estate tax? (c) May a vanishing deduction be allowed in either or both of the
estates?
Cash P10,000,000 P1,200,000
A: a. The value of the gross estate of the decedent shall be determined by including the value at the time of his death
of all property, real or personal, tangible or intangible, wherever situated (Sec. 85, NIRC). Accordingly, the fair
market value of the painting in 2001, which was owned by Xavier at the time of his death, should be included in the Cars 2,000,000 500,000
gross estate of Xavier and be subject to estate tax.
Land 5,000,000 2,000,000
The value of the painting in 2007, which was bequeathed by Xavier to Zandro by will in 2001 with power to appoint
his wife, Wilma, as successor to the painting, should not be included in the gross estate of Zandro. Only property
passing under a general power of appointment is included in the gross estate of the decedent. In this case, the Residential house 4,000,000
painting has to be transferred by Zandro to his wife, Wilma, based on the will of his father, Xavier, and since the
power of appointment granted by Xavier to Zandro is specific (i.e. only to his wife), such property should not be
Mortgage payable 2,500,000
included in his gross estate in 2007.

No, vanishing deduction is not available to both Estates of Xavier and Zandro because in the case of Xavier, he
acquired the painting by purchase, and in the case of Zandro, the painting shall not be included in his gross estate;
hence, there would be no double taxation of the same property, for estate tax purposes. Moreover, the two (2)
deaths must occur within a period of five (5) years. In this case, the death of Zandro occurred in 2007, and more than
five (5) years have, therefore, elapsed from the date of death of Xavier in 2001.
Q: In June 2000, X took out a life insurance policy of his own life in the amount of
P2,000,000.00. He designated his son, Z, as his beneficiary with respect to
P1,000,000.00, reserving his right to substitute him for another. X died in September 2003. are the proceeds of life
insurance to form part of the gross estate of X? Explain.
A: Only the proceed of P1,000,000,00 given to the son, Z, shall form part of the gross estate of X. Under the Tax
Code, proceeds of life insurance shall form part of the gross estate of the decedent to the extent of the amount
receivable by the beneficiary designated in the policy of insurance except when it is expressly stipulated that the
designation of the beneficiary is irrevocable. As stated in the problem, only the designation of Y is irrevocable, and
the decedent reserved the right to substitute Z as beneficiary for snother person. Accordingly, the proceeds received
by Y shall be excluded, while the proceeds received by Z shall be included in the gross estate of X (Sec.
85[E],NIRC).
Funeral expenses 300,000
a. Is the Estate of Jaime Asuncion liable to estate tax? Explain.
b. Is vanishing deduction applicable to the Estate of Assunta Asuncion? Explain.
A: a. The Estate of Jaime Asuncion is not liable to estate tax. At the time of death, his gross estate amounted to
P1,200,000. Since his estate is entitled to standard deduction of P1 million and funeral expenses equivalent to 5% of
his gross estate not exceeding P200,000, plus the fact that the first P200,000 of his net estate is exempt from estate
tax, there would be no estate tax due on his net estate.
No, there would be no vanishing deduction allowed to the Estate of Assunta Asuncion, since she did not inherit or
receive any property from her deceased son, Jaime, that was previously subjected to estate tax or donor's tax. While
her estate could be entitled to receive one-half of P1.2 million (or P600,000) cash deposit from her deceased son,
this is exempt from estate tax, as explained above. To be entitled to the vanishing deduction, it is important that the
property (cash of P600,000 in the instant case) must have been taxed in the estate of a prior decedent.
Q: What is vanishing deductions in estate taxation?
A: Vanishing deductions or property previously taxed in estate taxation refers to the diminishing
deductibility/exemption, at the rate of 20% over a period of five (5) years until it is lost after the fifth year, of any
property (situated in the Philippines) forming part of the gross estate, acquired by the decedent from a prior decedent
who died within a period of five (5) years from the decedent's death.
Q: Vanishing deduction is availed of by taxpayers to:
a. correct his accounting records to reflect the actual deductions made;
b. reduce his gross income;
c. reduce his output value-added tax liability;
d. reduce his gross estate.
Choose the correct answer. Explain.
A: I choose (d), reduce his gross estate. Vanishing deduction or property previously taxed is one of the items of
deductions allowed in computing the net estate of a decedent (Sec. 86[A][2] and 86[B][2], NIRC).
Q: Mr. Castro inherited from his father, who died in June 10, 1994, several pieces of real property in Metro Manila.
The estate tax return was filed and the estate tax due in the amount of P250,000.00 was paid on December 6, 1994.
The Tax Fraud Division of the BIR investigated the case on the basis of confidential information given by Mr. Santos
on January 6, 1998 that the return filed by Mr. Castro was fraudulent and that he failed to declare all properties left
by his father with intent to evade payment of the correct tax. As a result, a deficiency estate tax assessment for
P1,250,000.00, inclusive of 50% surcharge for fraud, interest and penalty, was issued against him on January 10,
2001. Mr. Castro protested the assessment, on the ground of prescription. A. Decide Mr. Castro's protest.
B. What legal requirement must Mr. Santos comply with so that he can claim his reward? Explain.
A: A. The protest should be resolved against Mr. Castro. What was filed is a fraudulent return making the prescriptive
period for assessment 10 years from discovery of the fraud (Sec. 222, NIRC). Accordingly, the assessment was
issued within the prescriptive period to make an assessment based on a fraudulent return.
B. The legal requirements that must be satisfied by Mr. Santos to entitle him to reward are as follows:
He should voluntarily file confidential information under oath with the Law Division of the
Bureau of Internal Revenue alleging therein the specific violations constituting fraud; The information must not
yet be in the possession of the Bureau of Internal Revenue, or refer to a case already pending or previously
investigated by the Bureau of internal Revenue;
Mr. Santos should not be a government employee or a relative of a government employee within the sixth degree of
consanguinity; and
The information must result to collections of revenues and/or fines and penalties (Sec. 282, NIRC).
Q: a) Discuss the rule on situs of taxation with respect to the imposition of the estate tax on property left behind by a
non-resident decedent.
Mr. Felix de la Cruz, a bachelor resident citizen, suffered from a heart attack while on a business trip to the USA. He
died intestate on June 15, 2000 in New York City, leaving behind real properties situated in New York; his family
home in Valle Verde, Pasig City; an office condominium in Makati City; shares of stocks in san
Miguel Corporation; cash in bank; and personal belongings. The decedent is
heavily insured with Insular Life. He had no known debts at the time of his death. As the sole heir and appointed
Administrator, how would you determine the gross estate of the decedent? What deductions may be claimed by the
estate and when and where shall the return be filed and estate tax paid?
A: a) The value of the gross estate of a non-resident decedent who is a Filipino citizen at the time of his death shall
be determined by including the value at the time of his death of all property, real or personal, tangible or intangible,
wherever situated to the extent of the interest therein of the decedent at the time of his death (Sec. 85[A], NIRC).
These properties shall have a situs of taxation in the Philippines; hence, subject to Philippine estate taxes.
On the other hand, in the case of a non-resident decedent who at the time of his death was not a citizen of
the Philippines, only that part of the entire gross estate which is situated in the Philippines to the extent of the interest
therein of the decedent at the time of his death shall be included in his taxable estate, provided that with respect to
intangible personal property, we apply the rule of reciprocity.
The gross estate shall be determined by including the value at the time of his death all of the properties mentioned,
to the extent of interest he had at the time of his death because he is a Filipino citizen (Sec. 85[A], NIRC).
With respect to the life insurance proceeds, the amount includible in the gross estate for Philippine tax
purposes would be to the extent of the amount receivable by the estate of the deceased, his executor, or
administrator, under policies taken out by decedent upon his own life, irrespective of whether or not the insured
retained the power of revocation or to the extent of the amount receivable by any beneficiary designated in the policy
of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable (Sec. 85[E],
NIRC).
The deductions that may be claimed by the estate are:
The actual funeral expenses or in an amount of equal to five percent (5%) of the gross estate, whichever is lower ,
but in no case to exceed two hundred thousand pesos
(P200,000.00) (Sec. 86[A][1][a],NIRC);
The judicial expenses in the testate or intestate proceedings (Sec. 86[A][1], NIRC); The value of the decedent's
family home located in Valle Verde, Pasig City in an amount not exceeding one million pesos (P1,000,000.00) and
upon presentation of a certification of the barangay captain of the locality that the same has been the decedent's
family home (Sec.
86[A][4], NIRC);
The standard deduction of P1,000,000.00 (Sec. 86[A][5], NIRC);
Medical expenses incurred within one year from death in an amount not exceeding P500,000.00 (Sec. 86[A][6],
NIRC).
The estate tax return shall be filed within six (6) months from the decedent's death (Sec. 90[B], NIRC),
provided that the Commissioner of Internal Revenue shall have authority to grant in meritorious cases, a reasonable
extension not exceeding thirty (30) days for filing the return (Sec. 90[C], NIRC).
Except in cases where the Commissioner of Internal Revenue otherwise permits, the estate tax return shall
be filed with an authorized agent bank, or Revenue District Officer, Collection Officer, or duly authorized Treasurer of
Pasig City, the City in which the decedent, Mr. de la Cruz, was domiciled at the time of his death (Sec. 90[D], NIRC).
CHAPTER XIV: DONOR’S TAX
Q: Celia donated P110,000 to her friend Victoria, who was getting married. Celia gave no other gift during the
calendar year. What is the donor's tax implication on Celia's donation?
A: Celia shall pay a 30% donor's tax on the P100,000 cash donation, since Victoria, the donee, is a stranger to her. A
"stranger" is a person who is not a brother, sister (whether by whole or half-blood), spouse, ancestor and lineal
descendant; or a relative by consanguinity in the collateral line within the fourth civil degree of relationship (Sec.
99[B], NIRC). Celia is not entitled to deduct the amount of P10,000 as dowry or gift on account of marriage because
that privilege is given only to parents of the donee who is getting married (Sec. 101[A], NIRC).

Q: X, a multinational corporation doing business in the Philippines, donated 100 shares of stock of said corporation
to Mr. Y, its resident manager in the Philippines.
What is the tax liability, if any, of X corporation?
Assuming the shares of stocks were given to Mr. Y in consideration of his services to the corporation, what are the
tax implications? Explain.
A: (1) Foreign corporations effecting a donation are subject to donor’s tax only if the property donated is located in
the Philippines. Accordingly, donation of a foreign corporation of its own shares of stocks in favor of resident
employees is not subject to donor’s tax (BIR Ruling No. 018-87, January 26, 1987). However, if 85% of the business
of the foreign corporation is located in the Philippines or the shares donated have acquired business situs in the
Philippines, the donation may be taxed in the Philippines subject to the rule of reciprocity.
If the shares of stocks were given to Mr. Y in consideration of his services to the corporation, the same shall
constitute taxable compensation income to the recipient because it is a compensation for services rendered an
employer-employee relationship; hence, subject to income tax.
The par value or stated value of the shares issues also constitutes deductible expense to the corporation, provided it
is subjected to withholding tax on wages.
Q: Mr. Bill Morgan, a Canadian citizen and a resident of Scarborough, Ontario sends a gift check of $20,000.00 to
his future Filipino daughter-in-law who is to be married to his only son in the Philippines.
Is the donation by Mr. Morgan subject to tax? Explain.
What is the tax consequence, if any, to the donee (Filipino daughter-in-law of Mr.
Morgan)?
Can you name one kind of gift that is exempt from donor’s tax which is extendible to both residents and non-
residents or non-citizens of the Philippines? Include qualifications, if any.
A: 1) Yes. While the gift has been made on account of marriage, to qualify for exemption to the extent of the first
P10,000.00 of the value thereof, such gift should have been given to a legitimate, recognized natural or adopted
child of the donor.
The gift, with respect to the donee, is excluded from the gross income and is exempt from income taxation. There is
no donee’s gift tax.
Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not
conducted for profit, or to any political subdivision of the said
Government, are exempt from gift tax with respect to both residents and non-residents.
Q: In the settlement of the estate of Mr. Barbera who died Intestate, his wife renounced her inheritance and her
share of the conjugal property in favor of their children. The BIR determined that there was a taxable gift and thus
assessed Mrs.
Barbera as a dono. Was the BIR correct?
A: The BIR is correct that there was a taxable gift but only insofar as the renunciation of the share of the wife in the
conjugal property is concerned. This is a transfer of property without consideration, which takes effect during the
lifetime of the transfer/wife, and it thus qualifies as a taxable gift (Rev. Regs. No. 2-2003).
Q: Spouses Jose San Pedro and Clara San Pedro, both Filipino citizens, are the owners of a residential house and
lot in Quezon City. After the recent wedding of their son, Mario, to Maria, the spouses donated said real property to
them. At the time of the donation, the real property has a fair market value of P2 million. Are Mario and Maria
subject to income tax for the value of the real property donated to them? Explain.
Are Jose and Clara subject to donor’s tax? If so, how much is the taxable gift of each spouse and what rate shall be
applied to the gift? Explain.
A: a) Mario and Maria, donees, are exempt from income tax on the value of the real property received by them
through donation of their parents. The value of the property acquired by gift, bequest, devise, or descent, shall not be
included in the gross income of the donees. However, income from such property shall be included in their gross
incomes during the year (Sec. 23[B][3], NIRC).
Spouses Jose and Clara are subject to donor’s tax on the fair market value (P2 million) of real property donated to
their son, Mario, and on the donation made to Mario’s wife, Maria. There are four (4) taxable donations of P500,000
made by the spouses. Donor Jose made P500,000 donation to his son, Mario, and another donation of P500,000 to
his daughter-inlaw, Maria. Donor Clara also made P500,000 donation to her son, Mario, and another donation of
P500,000 to her daughter-in-law, Maria. Since the donations to their son, Mario, were made by the Spouses Jose
and Clara on account of his marriage, Jose and Clara can each deduct P10,000 from his or her gross gift. Their net
gifts of P490,000 (P500,000 less P10,000) will be subject to the graduated donor’s tax rates ranging from 2% to 15%
(Sec. 99[A], NIRC). With respect to their donations to their daughter-in-law, Maria, their gross gifts of P500,000 shall
be subject to the 30% donor’s tax rate, considering that the donee is a stranger in relation to the donors. A “stranger”
is a person who is not a: (i) brother, sister (whether by whole or half-blood), spouse, ancestor and lineal ascendant;
or (ii) relative by consanguinity to the collateral line within the fourth degree of relationship (Sec. 99[B], NIRC).
Q: Ace Tobacco Corporation bought a parcel of land situated at Pateros and donated it to the Municipal Government
of Pateros for the sole purpose of devoting
the said land as a relocation site for the less fortunate constituents of aid municipality. In accordance therewith, the
Municipal Government of Pateros issued to the occupants/beneficiaries Certificates of Award giving to them the
respective areas where their houses are erected. Through Ordinance No. 2, Series of 1998, the said municipal
government ordained that the lots awarded to the awardees be finally transferred and donated to them. Determine
the tax consequence of the foregoing dispositions with respect to Ace Tobacco Corporation, the Municipal
Government of Pateros, and the occupants/beneficiaries.
A: The donation by Ace Tobacco Corporation is exempt from the donor’s tax because it qualifies as a gift to or for the
use of any political subdivision of the National Government (Sec. 101[2], NIRC). The conveyance is likewise exempt
from documentary stamp tax because it is a transfer without consideration. Since the donation is to be used as a
relocation site for the less fortunate constituents of the municipality, it may be considered as an undertaking for
human settlements; hence, the value of the land may be deductible in full from the gross income of Ace Tobacco
Corporation if it is in accordance with National Priority Plan determined by the National Economic Development
Authority (Sec. 34[H][2][a], NIRC). If the utilization is not in accordance with a National Priority Plan determined by
the National Economic Development Authority, then Ace Tobacco Corporation may deduct the value of the land
donated only to the extent of five percent (5%) of its taxable income derived from trade or business as computed
without the benefit of the donation (Sec. 34[H][2][a] in relation to Sec.34[H][1], NIRC).
The Municipality of Pateros is not subject to any donor’s tax on the value of land it subsequently donated, it being
exempt from taxes as a political subdivision of the National Government.
The occupants/beneficiaries are subject to real property taxes because they now own the land.
Q: A, an individual, sold to B, his brother-in-law, his lot with a market value of P1,000,000.00 for P600,000.00. A’s
cost in the lot is P100,000.00. b is financially capable of buying the lot. A also owns X Co., which has a fast growing
business. A sold some of shares of stock in X Co. to his key executives in X Co. These executives are not related to
A. The selling price is P3,000,000.00 which is the book value of the shares sold but with a market value of
P5,000,000.00. A’s cost in the shares sold is P1,000,000.00. The purpose of A in selling the shares is to enable his
key executives to acquire proprietary interest in the business and have a personal stake in the business.
Explain if the above transactions are subject to donor’s tax.
A: The first transaction where a lot was sold by A to his brother-in-law for a price below its fair market value will not
be subject to donor’s tax if the lot qualifies as a capital asset. The transfer for less than adequate and full
consideration which gives rise to a deemed gift, does not apply to a sale of property subject to capital gains tax (Sec.
100, NIRC). However, if the lot sold is an ordinary asset, the excess of the fair market value over the consideration
received shall be considered as a gift subject to the donor’s tax.
The sale of shares of stock below the fair market value thereof is subject to the donor’s tax pursuant to the
provisions of Section 100 of the Tax Code. The excess of the fair market value over the selling price is a deemed gift.
Q: Levox corporation wanted to donate P5 million as prize money for the world professional billiard championship to
be held in the Philippines. Since the Billiard Sports Federation of the Philippines does not recognize the event, it was
held under the auspices of the International Professional Billiards Association, Inc. Is Levox subject to donor’s tax on
its donation?
A: Yes, since the national sports association for billiards does not sanction the event, and the donation is not
included among the exempt donations under the law.
Q: On December 6, 2001, LVN Corporation donated a piece of vacant lot situated in Mandaluyong City to an
accredited and duly registered non-stock, non-profit educational institution to be used by the latter in building a
sports complex for students.
May the donor claim in full as deduction from its gross income for the taxable year in 2001 the amount of the donated
lot equivalent to its fair market value/zonal value at the time of the donation? Explain your answer.
In order that donations to non-stock, non-profit educational institution may be exempt from the donor’s gift tax, what
conditions must be met by the donee?
A: a. No. Donations and/or contributions made to qualified donee institutions consisting of property other than money
shall be based on the acquisition cost of the property. The donor is not entitled to claim as full deduction the fair
market value/zonal value of the lot donated (Sec.34[H], NIRC).
In order that donations to non-stock, non-profit educational institution may be exempt from the donor’s gift tax, it is
required that not more than 30% of the said gifts shall be used by the donee-institution for administration purposes
(Sec. 101[A][3], NIRC).
Q: In 1991, imeda gave her parents a Christmas gift of P100,000.00 and a donation of P80,000.00 to her parish
church. She also donated a parcel of land for the construction of a building to the PUP Alumni Association, a non-
stock, nonprofit organization. Portions of the building shall be leased to generate income for the association.
(1) Is the Christmas gift of P100,000.00 to Imelda’s parents subject to tax?
(2) How about the donation to the parish church?
(3) How about the donation to the PUP Alumni Association?
A: (1) The Christmas gift of P100,000.00 (now P200,000.00) given by Imelda to her parents is taxable up to
P50,000.00 (now P100,000.00) because under the law (Sec. 92[a] now Sec.
99[A], NIRC), net gifts not exceeding P50,000 are exempt.
The donation of P80,000.00 to the parish church even assuming that it is exclusively for religious purposes is not tax-
exempt because the exemption granted under Article VI, Section 28(3) of the Constitution applies only to real estate
taxes (Lladoc v. Commissioner, 14 SCRA 292).
The donation to the PUP Alumni Association does not also qualify for exemption both under the Constitution and the
afore-cited law because it is not an educational or research organization, corporation, institution, foundation or trust.
Q: Are contributions to a candidate in an election subject to donor’s ta? On the part of the contributor, is
it allowable as a deduction from gross income? A: No, provided the recipient candidate had complied with the
requirement for filing of returns of contributions with the Commission on Elections as required under the Omnibus
Election Code.
The contributor is not allowed to deduct the contributions because the said expense is not directly
attributable to, the development, management, operation and/or conduct of a trade, business or profession (Sec.
3[A][1][a], NIRC). Furthermore, if the candidate is an incumbent government official or employee, it may even be
considered as bribe or a kickback (Sec. 34[A][1][c], NIRC).
Q: Miguel, a citizen and resident of Mexico, donated US$1,000 worth of stocks in Barack Motors Corporation, a
Mexican company, to his legitimate son, Miguelito, who is residing in the Philippines and about to be married to a
Filipino girlfriend. Mexico does not impose any transfer tax of whatever nature on all gratuitous transfers of property.
(a) Is Miguel entitled to claim a dowry exclusion? Why or why not? (b) Is Miguel entitled to the rule of reciprocity in
order to be exempt from the Philippine donor’s tax? Why or why not?
A: a. Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by parents
to each of their legitimate, recognized natural or adopted children to the extent of the first Ten thousand pesos
(P10,000) is exempt from donor’s tax (Sec. 101[A], NIRC). To be entitled to the dowry exemption under the donor’s
tax law, the donor must be a resident of the Philippines. SInce Miguel is a non-resident alien, he does not qualify to
claim such exemption.
Miguel is not entitled to the rule of reciprocity in order to be exempt from the Philippine donor’s tax. In the first place,
the donation by Miguel, a non-resident Mexican citizen, of the shares of stock of Barack Motors Corporation, a
Mexican company, which has not acquired business situs in the Philippines, to his son, Miguelito, is exempt from
donor’s tax under Section 104 of the 1997 TAx Code, which provides that “...where the donor was a non-resident
alien at the time of his donation, his real and personal property so transferred but which are situated outside the
Philippines shall not be included as part of his ‘gross gift.’” In other words, there is nothing to be subject to donor’s
tax, and there is no reciprocity rule necessary to claim exemption.
Q: Kenneth Yusoph owns a commercial lot which he bought many years ago for P1 million. It is now worth P20
million although the zonal value is only P15 million. He donates one-half pro indiviso interest in the land to his son
Dino on 31 December 1994, and the other one-half pro indiviso interest to the same son on 2 January 1995.
How much is the value of the gifts in 1994 and 1995 for purposes of computing the gift tax? Explain.
The Revenue District Officer questions the splitting of the donations into 1994 and 1995. He says that since there
were only two (2) days separating the two (2) donations they should be treated as one, having been made within one
year. Is he correct? Explain.
Dino subsequently sold the land to a buyer for P20 million. How much did Dino gain on the sale? Explain.
Suppose, instead of receiving the lot by way of donation, Dino received it by inheritance. What would be his
gain on the sale of the lot for P20 million? Explain. A: (1) The value of the gifts for purposes of computing the gift
tax shall be P7.5 million in 1994 and P7.5 million in 1995. In valuing a real property for gift tax purposes the property
should be appraised at the higher of two values as of the time of donation which are (a) the fair market value as
determined by the Commissioner (which is the zonal value fixed pursuant to Sec.16[e] of the Tax Code), or (b) the
fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. The fact that the
property is worth P20 million as of the time of donation is immaterial, unless it can be shown that this value is one of
the two values mentioned as provided under Section 81 of the Tax Code. The Revenue District Officer is not correct
because the computation of the gift tax is cumulative but only insofar as gifts made within the same calendar year.
Therefore, there is no legal justification for treating two (2) gifts effected in two (2) separate calendar years as one
gift.
Dino gained an income of P19 million from the sale. Dino acquires a carry-over basis which is the basis of the
property in the hands of the donor or P1 million. The gain from the sale or other disposition of property shall be the
excess of the amount realized therefrom over the basis or adjusted basis for determining gain (Sec. 34[a], NIRC).
Since the property was acquired by gift, the basis for determining gain shall be the same as if it would be in the
hands of the donor or the last preceding owner by whom the property was not acquired by gift. Hence, the gain is
computed by deducting the basis of P1 million from the amount realized which is P20 million.
If the commercial lot was received by inheritance the gain from the sale for P20 million is P5 million because the
basis is the fair market value as of the date of acquisition. The steppedup basis of P1.5 million which is the value for
estate tax purposes is the basis for determining the gain (Sec. 34[b][2], NIRC).
Q: Your bachelor client, a Filipino residing in Quezon City, wants give his sister a gift of P200,000. He seeks your
advice, for purposes of reducing if not eliminating the donor’s tax on the gift, on whether it is better for him to give all
of the P200,000 on Christmas 2001 or to give P100,000 on Christmas 2001 and the other P100,000 on January 1,
2002. Please explain your advice.
A: I would advice him to split the donation. Giving the P200,000 as a one-time donation would mean that it will be
subject to a higher tax bracket under the graduated tax structure, thereby necessitating the payment of donor’s tax.
On the other hand, splitting the donation into two equal amounts of P100,000 given on two (2) different years will
totally relieve the donor from the donor’s tax because the first P100,000 donation in the graduated brackets is
exempt (Sec. 99, NIRC). While the donor’s tax is computed on the cumulative donations, the aggregation of all
donations made by a donor is allowed only over one calendar year.
Q: a) When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net gifts. For
purposes of this tax, who is a stranger? What conditions must concur in order that all grants, donations and
contributions to non-stock, non-profit private educational institutions may be exempt from the donor’s tax under
Section 101(a) of the Tax Code?
A: a) A “stranger” is a person who is not a:
Brother or sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or
Relative by consanguinity in the collateral line within the fourth degree of relationship (Sec.
98[B], NIRC)
The following are the conditions:
Not more than 30% of said gifts shall be used by such donee for administration purposes; The educational institution
is incorporated as a non-stock, non-profit, paying no dividends, governed by trustees who receive no compensation,
and devoting all its income. whether students’ fees or gifts, donations, subsidies or other forms of philanthropy, to the
accomplishment and promotion of the purposes enumerated in its Articles of Incorporation (Sec. 101[A][3], NIRC).
CHAPTER XV: INTRODUCTION TO VAT
Q: Characteristics of Value Added Tax
A: 1. It is a tax on the value added by the taxpayer.
It is collected through the “tax credit method” or “invoice method.” It is a transparent
form of sales tax.
It is a broad-based tax on consumption of goods, properties or services in the Philippines as it applies to all stages of
manufacture, production, and distribution of goods and services.
It is an indirect tax.
The Philippines adopted the “separate indication of tax method.” There is no
cascading in the value added tax system.
CHAPTER XVI: PERSONS LIABLE TO TAX
Q: Greenhills Condominium Corporation is an existing non-stock, non-profit association of unit owners in Greenhills
Tower, San juan City since 2001. To be able to reduce the association dues being collected from the unit owners,
the Board of directors of the corporation agreed to lease part of the ground floor of the condominium building to DEF
Savings Bank for P120,000 a month starting January, 2007.
Is the non-stock, non-profit association liable to value added tax in 2007? If your answer is in the negative, is it liable
to another kind of business tax?
Will the association be liable to value added tax in 2008, if it increases the rental to P150,000 a month beginning
January, 2008? Explain.
A: a. No, Greenhills Condominium Corporation will not be subject to value added tax, since its gross rental income
for the year 2007 will be P1,440,000 (P120,000 times 12). The sale or lease of goods or properties or the
performance of properties other than the transactions mentioned in the preceding paragraphs, where the gross
annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos (P1,500,000),
shall be exempt from value added tax (Sec. 109[V], NIRC). However, it would be subject to the 3% percentage tax
on its gross rental income under Section 116 of the Tax Code. Yes. If Greenhills Condominium Corporation
increases the monthly rental income to P150,000, it will be subject to the 12% value added tax beginning November
1, 2008, unless it registers as a VAT person effective January 1, 2008. The reason for this is that the gross annual
rental income of the association for 2008 would be P1,800,00 (P150,000 times 12) (Sec. 109[V], NIRC). Moreover,
the association will be deemed to be engaged in the leasing, despite its being a non-stock, non-profit organization.
The phrase “in the course of trade or business” means the regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental thereto, by any person, regardless of whether or not the person
engaged therein is a non-stock,non-profit private organization (irrespective of the disposition of its net income and
whether or not it sells exclusively to members or their guests), or government entity (Sec. 105, NIRC).
Q: Newtex International (Phils.), Inc. is an American firm duly authorized to engage in business in the Philippines as
a branch office. In its activity as a buying agent for foreign buyers of shirts and dresses abroad and performing
liaison work between its home office and the Filipino garment manufacturers and exporters, Newtex does not
generate any income. To finance its office its office expenses here, its head office abroad regularly remits to it the
needed amount. To see its operation and manage its office here, which had been in operation for two years, the
head office assigned three foreign personnel. Is Newtex subject to VAT? A: Newtex is not subject to VAT. The VAT
is imposed on sellers and not on buyers. The branch office did not derive any income or compensation so as to
possibly permit the imposition of a value added tax on compensation for services rendered. In addition, since the
transactions are direct export sales, the VAT does not apply. Export sales are among those that are either zero-rated
or exempt from value added tax (Secs. 99-100,NIRC CHAPTER XVII: OUTPUT TAX ON SALE OF GOODS OR
PROPERTIES AND SERVICES
Q: Deemed sale
A: The following transactions are considered as deemed sales:
Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for
use in the course of business;
Distribution or transfer to shareholders or investors as share in the profits of the VATregistered persons or to
creditors in payment of debt;
Consignment of goods, if actual sale is not made within sixty days following the date such goods were consigned;
and
Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement
or cessation.
Q: An alien employee of the Asian Development Bank (ADB) who is retiring soon has offered to sell his car to you,
which he imported tax-free for his personal use. The privilege of exemption from tax is granted to qualified personal
use under the ADB Charter, which is recognized by the tax authorities. If you decide to purchase the car, is the sale
subject to tax? Explain.
A: Yes. The sale is subject to tax. Section 107(B) of the Tax Code provides that “[I]n the case of tax-free importation
of goods into the Philippines by persons, entities or agencies exempt from tax, where such goods are subsequently
sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers, transferees, or
recipients shall be considered the importer thereof, who shall be liable for any internal revenue tax on such
importation.”
Q:State whether the following transactions are (a) VAT exempt; (b) subject to VAT at 10% (now 12%); or (c) subject
to VAT at 0%:
Sale of fresh vegetables by Aling Ining at the Pamilihang Bayan ng Trece Martirez;
Services rendered by Jake’s Construction Company, a contractor to the World
Health Organization in the renovation of its offices in Manila;
Sale of tractors and other agricultural implements by Bungkal Incorporated to local farmers;
Sale of RTW by Cely’s Boutique, a Filipino dress designer, in her dress shop and other outlets;
Fees for lodging paid by students to Bahay-Bahayan dormitory (monthly fee P1,500).
A: 1. VAT exempt. Sale of agricultural products such as fresh vegetables in their original state, of a kind generally
used as, or producing foods for human consumption, is exempt from VAT (Sec. 109[c], NIRC).
VAT at 10%. Since Jake’s Construction Company has rendered services to the World Health Organization, which is
an entity exempted from taxation under international agreements to which the Philippines is a signatory, the supply
of services is subject to zero percent (0%) rate (Sec. 108[B][3], NIRC).
VAT at 10%. Tractors and other agricultural implements fall under the definition of goods which include all tangible
objects which are capable of pecuniary estimation (Sec.
106[A][1], NIRC), the sales of which are subject to VAT at 10%.
This is subject to VAT at 10%. This transaction also falls under the definition of goods, the sales of which are subject
to VAT at 10%.
VAT exempt. The monthly fee paid by each student falls under the lease of residential units with a monthly rental per
unit not exceeding P8,000 (now P10,000), which is exempt from VAT, regardless of the amount of aggregate rentals
received by the lessor during the year (Sec. 109[x], NIRC). The term “unit” shall mean per person in the case of
dormitories, boarding houses, and bed spaces (Sec. 4.103-1, Rev. Regs. No. 7-95).
Q: Your client, United Market Cooperative, is requesting the Commissioner of Internal Revenue to exempt it from the
payment of VAT on its purchases of prime commodities from food suppliers/manufacturers on the ground that it is
exempt from all taxes, including VAT, under R.A. No. 6938, the Cooperative Code of the Philippines.
Do you think our client can obtain the necessary exemption from the BIR? If your answer is in the affirmative, explain
the basis for the grant. If your answer is in the negative, state the basis for the rejection of the request.
A: 1. An exemption is not necessary. The value added tax is not imposed on the purchaser but on the seller, except
in importation of goods.
No. The exemption to which the taxpayers are entitled to refers to those that are levied on the exempt taxpayer or
directly imposed on the exempted goods. The value added tax is imposed on the sellers of goods and services, not
on the purchasers.
Q:Royal Mining is a VAT-registered domestic mining entity. One of its products is silver being gold to the Bangko
Sentral ng Pilipinas. It filed a claim with the BIR for tax refund on the ground that under Section 106 of the Tax Code,
sales of precious metals to the Bangko Sentral are considered export sales subject to zerorated VAT. Is Royal
Mining’s claim meritorious? Explain.
A:No, Royal Mining’s claim is not meritorious because it is the sale of gold (and not silver) to the BSP that is
considered as export sale subject to zero-rated VAT.
Q:Emiliano Paupahan is engaged in the business of leasing out several residential apartment units he owns. The
monthly rental for each unit ranges from P8,000 to P10,000. His gross rental income for one year is P1,650,000. He
consults you on whether it is necessary for him to register as a VAT taxpayer. What legal advice will you give him,
and why?
A:Since the rental income per unit per month of his apartment units (which ranges from P8,000 to P10,000) does not
exceed the threshold provided for in the VAT law in the amount of P10,000, his rental income is exempt from VAT
under Section 109(Q) of the 1997 Tax Code. In view, thereof, it does not matter whether or not he has exceeded the
general threshold for the preceding twelve months of P1,500,00 prescribed in Section 109(V) of the Tax Code. Thus,
my advice is for him not to register as a VAT person. He will be exempt from VAT under Section 109(Q) and for the
3% percentage tax under Section 116 of the Tax Code.
Q:Mr. Abraham Eugenio, a pawnshop operator, after having been requested by the
Revenue District Officer to pay value added tax pursuant to a Revenue Memorandum Order (RMO) of the
Commissioner of Internal Revenue, filed with the Regional Trial Court an action questioning the validity of the RMO.
If you were the judge, will you dismiss the case?
A:Yes. An RMO is in reality a ruling or an opinion issued by the Commissioner in implementing the provisions of the
Tax Code dealing with the taxability of pawnshops. The power to review rulings issued by the Commissioner is
lodged with the CTA and not with the RTC. A ruling falls within the purview of “other matters arising under the Tax
Code,” appealable only to the CTA (CIR v. Leal, 392 SCRA 9 [2002]).
Q: In 2010, pursuant to a Letter of Authority (LA) issued by the Regional Director, Mr. Abcede was assessed
deficiency income taxes by the BIR for the year 2009. He paid the deficiency. In 2011, Mr. Abcede received another
LA for the same year 2009, this time from the National Investigation Division, on the ground that Mr. Abcede;s 2009
return was fraudulent. Mr. Abcede contested the LA on the ground that he can only be investigated once in a taxable
year. Decide.
A: The contention of Mr. Abcede is not tenable. While the general rule is to the effect that for income tax purposes, a
taxpayer must be subject to examination and inspection by the internal revenue officers only once in a taxable year,
this will not apply if there is a fraud, irregularity, or mistakes as determined by the Commissioner. In the instant case,
what triggered the second examination is the findings by the BIR that Mr. Abcede’s 2009 return was fraudulent.
Accordingly, Mr. Abcede the examination is legally justified. (Sec. 235, NIRC)
Q: “A” Co., a Philippine corporation, is a big manufacturer of consumer good and has several suppliers of raw
materials. The BIR suspects that some of the suppliers are not properly reporting their income on the sales to “A” Co.
The CIR therefore: (a) Issued an access letter to “A” Co. to furnish the BIR information on sales and payment to its
suppliers. (b) Issued an access letter to a bank (“X” Bank) to furnish the BIR on deposits of some suppliers of “A” Co.
on the alleged ground that the suppliers are committing tax evasion. “A” Co., “X” Bank and the suppliers have not
been issued by the BIR letter of authority to examine. “A” Co. and “X” Bank believe that the BIR is on a “fishing
expedition” and come to you for counsel. What is your advice?
A: I will advice “A” Co. and “X” Bank that the BIR is justified only in getting information from the former but not from
the latter. The BIR is authorized to obtain information from the other persons than those whose internal revenue tax
liability is subject to audit or investigation. However, this power shall not be constructed as granting the
Commissioner the authority to inquire into bank deposits (Sec. 5, NIRC)
Q: Can the Commissioner of Internal Revenue inquire into the bank deposits of a taxpayer? If so does this power of
the Commissioner conflict with R.A. 1405, Secrecy of Bank Deposits Law?
A: The Commissioner of Internal Revenue is authorized to inquire into the bank deposit of:
(1) A decedent to determine his gross estate. (2) Any taxpayer who has filed an application for compromise of his tax
liability by means of financial incapacity to pay his tax liability (Sec. 6[F], NIRC).
The limited power of the Commissioner does not conflict with R.A. No. 1405 because of the provisions of the Tax
Code granting this power is an exception to Secrecy of Bank Deposits Law as embodied in a later legislation.
Furthermore, in case a taxpayer applies for an application to compromise the payment of his tax liabilities on his
claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be
considered unless and until he waives in writings his privilege under R.A. 1405, and such waiver shall constitute the
authority of the Commissioner to inquire into the bank deposits of the taxpayer.
Q:X dies in year 2000 leaving a bank deposit of P 2,000,000.00 under joint account with his associates in a law firm.
Learning of X’s death from the newspapers, the Commissioner wrote to every bank in the country asking them to
disclose to him the amount of deposits that might be outstanding in his name or jointly with others at the date of his
death. May the bank holding the deposit refuse to comply on the ground of the Secrecy of Bank Deposit Law?
Explain.
A: No. The commissioner has the authority to inquire into bank deposit accounts of a decedent to determine his
gross estate notwithstanding the provisions of the Bank Secrecy Law. Hence, the banks holding the deposits in
question may not refuse to disclose the amount of deposits on the ground of secretary of bank deposits (Sec. 6 [F],
NRC). The fact that the deposit is a joint account will not preclude the Commissioner from inquiring thereon because
the law mandates that if a bank has knowledge of the death of a person, who maintained a bank deposit account
alone or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the
Commissioner has certified that the taxes imposed thereon have been paid (Sec. 97, NIRC0. Hence, to be able to
gibe the required certification, the inclusion of the deposit is imperative.
Q: A taxpayer is suspected not to have declared his correct gross income in his return filed for 1997. The examiner
requested the Commissioner to authorize him to inquire into the bank deposits of the taxpayer so that he could
proceed with the net worth method of investigation to establish fraud.
May the examiner be allowed to look into the taxpayer’s bank deposits? In what cases may the Commissioner or his
duly authorized representative be allowed to inquire or look into the bank deposits of a taxpayer?
A: No, as this would be violative of R.A. 1405, the Bank Deposits Secrecy Law.
The Commissioner or his duty authorized representative may be allowed to inquire or look into the bank deposits of a
taxpayer in the following cases:
For the purpose of determining the gross estate of a decedent;
Where the taxpayer has filed an application for compromise of his tax liability by reason of
financial incapacity to pay such tax liability (Sec. 6[F], NIRC);
Where the taxpayer has signed a waiver authorizing the Commissioner or his duly authorized representatives to
inquire into the bank deposits.
CHAPTER XX: RATES OF VAT
Q:Royal Mining is a VAT-registered domestic mining entity. One of its products is silver being gold to the Bangko
Sentral ng Pilipinas. It filed a claim with the BIR for tax refund on the ground that under Section 106 of the Tax Code,
sales of precious metals to the Bangko Sentral are considered export sales subject to zerorated VAT. Is Royal
Mining’s claim meritorious? Explain.
A:No, Royal Mining’s claim is not meritorious because it is the sale of gold (and not silver) to the BSP that is
considered as export sale subject to zero-rated VAT.
CHAPTER XXI: EXEMPT TRANSACTIONS
Q:Emiliano Paupahan is engaged in the business of leasing out several residential apartment units he owns. The
monthly rental for each unit ranges from P8,000 to P10,000. His gross rental income for one year is P1,650,000. He
consults you on whether it is necessary for him to register as a VAT taxpayer. What legal advice will you give him,
and why?
A:Since the rental income per unit per month of his apartment units (which ranges from P8,000 to P10,000) does not
exceed the threshold provided for in the VAT law in the amount of P10,000, his rental income is exempt from VAT
under Section 109(Q) of the 1997 Tax Code. In view, thereof, it does not matter whether or not he has exceeded the
general threshold for the preceding twelve months of P1,500,00 prescribed in Section 109(V) of the Tax Code. Thus,
my advice is for him not to register as a VAT person. He will be exempt from VAT under Section 109(Q) and for the
3% percentage tax under Section 116 of the Tax Code.
Q:Mr. Abraham Eugenio, a pawnshop operator, after having been requested by the
Revenue District Officer to pay value added tax pursuant to a Revenue Memorandum Order (RMO) of the
Commissioner of Internal Revenue, filed with the Regional Trial Court an action questioning the validity of the RMO.
If you were the judge, will you dismiss the case?
A:Yes. An RMO is in reality a ruling or an opinion issued by the Commissioner in implementing the provisions of the
Tax Code dealing with the taxability of pawnshops. The power to review rulings issued by the Commissioner is
lodged with the CTA and not with the RTC. A ruling falls within the purview of “other matters arising under the Tax
Code,” appealable only to the CTA (CIR v. Leal, 392 SCRA 9 [2002]).
CHAPTER XXIV: INTRODUCTION – TAX REMEDIES
Q: In 2010, pursuant to a Letter of Authority (LA) issued by the Regional Director, Mr. Abcede was assessed
deficiency income taxes by the BIR for the year 2009. He paid the deficiency. In 2011, Mr. Abcede received another
LA for the same year 2009, this time from the National Investigation Division, on the ground that Mr. Abcede;s 2009
return was fraudulent. Mr. Abcede contested the LA on the ground that he can only be investigated once in a taxable
year. Decide.
A: The contention of Mr. Abcede is not tenable. While the general rule is to the effect that for income tax purposes, a
taxpayer must be subject to examination and inspection by the internal revenue officers only once in a taxable year,
this will not apply if there is a fraud, irregularity, or mistakes as determined by the Commissioner. In the instant case,
what triggered the second examination is the findings by the BIR that Mr. Abcede’s 2009 return was fraudulent.
Accordingly, Mr. Abcede the examination is legally justified. (Sec. 235, NIRC)
Q: “A” Co., a Philippine corporation, is a big manufacturer of consumer good and has several suppliers of raw
materials. The BIR suspects that some of the suppliers are not properly reporting their income on the sales to “A” Co.
The CIR therefore: (a) Issued an access letter to “A” Co. to furnish the BIR information on sales and payment to its
suppliers. (b) Issued an access letter to a bank (“X” Bank) to furnish the BIR on deposits of some suppliers of “A” Co.
on the alleged ground that the suppliers are committing tax evasion. “A” Co., “X” Bank and the suppliers have not
been issued by the BIR letter of authority to examine. “A” Co. and “X” Bank believe that the BIR is on a “fishing
expedition” and come to you for counsel. What is your advice?
A: I will advice “A” Co. and “X” Bank that the BIR is justified only in getting information from the former but not from
the latter. The BIR is authorized to obtain information from the other persons than those whose internal revenue tax
liability is subject to audit or investigation. However, this power shall not be constructed as granting the
Commissioner the authority to inquire into bank deposits (Sec. 5, NIRC)
Q: Can the Commissioner of Internal Revenue inquire into the bank deposits of a taxpayer? If so does this power of
the Commissioner conflict with R.A. 1405, Secrecy of Bank Deposits Law?
A: The Commissioner of Internal Revenue is authorized to inquire into the bank deposit of:
(1) A decedent to determine his gross estate. (2) Any taxpayer who has filed an application for compromise of his tax
liability by means of financial incapacity to pay his tax liability (Sec. 6[F], NIRC).
The limited power of the Commissioner does not conflict with R.A. No. 1405 because of the provisions of the Tax
Code granting this power is an exception to Secrecy of Bank Deposits Law as embodied in a later legislation.
Furthermore, in case a taxpayer applies for an application to compromise the payment of his tax liabilities on his
claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be
considered unless and until he waives in writings his privilege under R.A. 1405, and such waiver shall constitute the
authority of the Commissioner to inquire into the bank deposits of the taxpayer.
Q:X dies in year 2000 leaving a bank deposit of P 2,000,000.00 under joint account with his associates in a law firm.
Learning of X’s death from the newspapers, the Commissioner wrote to every bank in the country asking them to
disclose to him the amount of deposits that might be outstanding in his name or jointly with others at the date of his
death. May the bank holding the deposit refuse to comply on the ground of the Secrecy of Bank Deposit Law?
Explain.
A:No. The commissioner has the authority to inquire into bank deposit accounts of a decedent to determine his gross
estate notwithstanding the provisions of the Bank Secrecy Law. Hence, the banks holding the deposits in question
may not refuse to disclose the amount of deposits on the ground of secretary of bank deposits (Sec. 6 [F], NRC). The
fact that the deposit is a joint account will not preclude the Commissioner from inquiring thereon because the law
mandates that if a bank has knowledge of the death of a person, who maintained a bank deposit account alone or
jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has
certified that the taxes imposed thereon have been paid (Sec. 97, NIRC0. Hence, to be able to gibe the required
certification, the inclusion of the deposit is imperative.
Q:A taxpayer is suspected not to have declared his correct gross income in his return filed for 1997. The examiner
requested the Commissioner to authorize him to inquire into the bank deposits of the taxpayer so that he could
proceed with the net worth method of investigation to establish fraud.
May the examiner be allowed to look into the taxpayer’s bank deposits? In what cases may the
Commissioner or his duly authorized representative be allowed to inquire or look into the bank deposits of a
taxpayer?
A:No, as this would be violative of R.A. 1405, the Bank Deposits Secrecy Law.
The Commissioner or his duty authorized representative may be allowed to inquire or look into the bank
deposits of a taxpayer in the following cases:
a) For the purpose of determining the gross estate of a decedent;
b) Where the taxpayer has filed an application for compromise of his tax liability by reason of
financial incapacity to pay such tax liability (Sec. 6[F], NIRC);
c) Where the taxpayer has signed a waiver authorizing the Commissioner or his duly authorized
representatives to inquire into the bank deposits.
CHAPTER XXV: ADMINISTRATIVE REMEDIES OF GOVERNMENT
Q: For failure of Oceanic Company, Inc.(OCEANIC) to pay deficiency taxes of Php20 Million, the Commissioner
of Internal Revenue issued warrants of distraint on OCEANIC's personal properties and levy on its real
properties. Meanwhile, the Department of Labor through the Labor Arbiter rendered a decision ordering
OCEANIC to pay unpaid wages and other benefits to its employees. Four barges belonging to OCEANIC were
levied upon by the sheriff and later sold at public auction.
The Commissioner of Internal Revenue filed a motion with the Labor Arbiter to annul the sale and enjoin the
sheriff from disposing the proceeds thereof. The employees of OCEANIC opposed the motion contending that
Article 110 of the Labor Code gives first preference to claims for unpaid wages. Resolve the motion. Explain.
A: The motion filed by the Commissioner should be granted because the claim of the government for unpaid taxes is
generally preferred over the claims of laborers for unpaid wages. The provision of Article 110 of the Labor Code, which
gives laborers' claims for preference, applies only in case of bankruptcy or liquidation of the employer's business. In
the instant case, OCEANIC is not under bankruptcy or liquidation at the time the warrants of distraint and levy were
issued; hence, the lien of the employees is unwarranted (CIR v.NLRC,G.R. No.74965,November 9,1994).
Q: Is the BIR authorized to collect estate tax deficiencies by the summary remedy of levy upon and sale of real
properties of the decedent without first securing the authority of the court sitting in probate court over the
supposed will of the decedent?
A: Yes. The BIR is authorized to collect estate tax deficiency through the summary remedy of levying upon and sale
of real properties of a decedent, without the cognition and authority of the court sitting in probate over the supposed
will of the deceased, because the collection of estate tax is executive in character. As such, the estate tax is exempted
from the application of the statute of non-claims, and this is justified by the necessity of government funding,
immortalized in the maxim that taxes are the lifeblood of the government (Marcos II v.CA and CIR,273 SCRA 47).
Q: Is the BIR authorized to issue a warrant of garnishment against the bank account of a taxpayer despite the
pendency of his protest against the assessment with the BIR or appeal with the Court of Tax Appeals?
A: The BIR is authorized is issue a warrant of garnishment against the bank account of a taxpayer despite the pendency
of protest (Yabes v.Flojo,15 SCRA 278).Nowhere in the Code is the Commissioner required to rule first on the protest
before he can institute collection proceedings on the tax assessed. The legislative policy is to give the Commissioner
much latitude in the speedy and prompt collection of taxes because it is in taxation that the Government depends to
obtain the means to carry on its operations (Republic v.Lim Tian Teng Sons,16 SCRA 584).
Q: State and discuss briefly whether the following cases may be compromised or may not be compromised:
a. Delinquent accounts;
b. Cases under administrative protest, after issuance of the final assessment notice to the taxpayer, which are
still pending; c. Criminal tax fraud cases;
d. Criminal violations already filed court;
e. Cases where final reports of reinvestigation or reconsideration have been issued resulting in the reduction
of the original assessment agreed to by the taxpayer when he signed the required agreement form.
A: a. Delinquent accounts may be compromised, if either of the two conditions is present:(1) the assessment is of
doubtful validity, or (2) the financial position of the taxpayer demonstrates a clear inability to pay the tax
(Sec.204[A],NIRC;Sec.2,Rev.Regs.No.30-2002);
b. These may not be compromised, provided that it is premised upon doubtful validity of the assessment or
financial incapacity to pay;
c. These may not be compromised, so that the taxpayer may not profit from his fraud, thereby discouraging
its commission;
d. These may not be compromised in order that the taxpayer will not profit from his criminal acts;
e. Cases where final reports of reinvestigation or reconsideration have been issued resulting in the reduction
of the original assessment agreed to by the taxpayer when he signed the required agreement form, cannot be
compromised. By giving his conformity to the revised assessment, the taxpayer admits the validity of the
assessment and his capacity to pay the same (Sec.2,Rev.Regs.No.30-2002).
Q: After the tax assessment had become final and unappealable, the Commissioner of Internal Revenue
initiated the filing of a civil action to collect the tax due from NX. After several years, a decision was tendered
by the court ordering NX to pay the tax due plus penalties and surcharges. The judgment became final and
executory, but attempts to execute the judgment award were futile.
Subsequently, NX offered the Commissioner a compromise settlement of 50% of the judgment award,
representing that this amount is all he could really afford. Does the Commissioner have the power to accept the
compromise offer? Is it legal and ethical? Explain briefly.
A: Yes. The Commissioner has the power to accept the offer of compromise, if the financial position of the taxpayer
clearly demonstrates a clear inability to pay the tax (Sec.204, NIRC).
As represented by NX in his offer, only 50% of the judgment award is all he could really afford. This is an offer
for compromise based on financial incapacity which the Commissioner shall not accept, unless accompanied by a
waiver of the secrecy of bank deposits (Sec.6[F],NIRC).The waiver will enable the Commissioner to ascertain the
financial position of the taxpayer, although the inquiry need not be limited only to the bank deposits of the taxpayer but
also as to his financial position as reflected in his financial statements or other records upon which his property holdings
can be ascertained.
If indeed the financial position of NX as determined by the Commissioner demonstrates a clear inability to pay
the tax, the acceptance of the offer is legal and ethical because the ground upon which the compromise was anchored
is within the context of the law and the rate of compromise is well within and far exceeds the minimum prescribed by
law, which is only 10% of the basic tax assessed.
A: Yes. The commissioner has the power to accept the offer of compromise, if the financial position of the taxpayer
clearly demonstrates a clear inability to pay the tax (Sec. 204, NIRC).
As represented by NX in his offer, only 50% of the judgment award is all he could really afford. This is an offer for
compromise based on financial incapacity which the Commissioner shall not accept, unless accompanied by a waiver
of the secrecy of bank deposits (Sec. 6[F], NIRC). The waiver will enable the Commissioner to ascertain the financial
position of the taxpayer, although the inquiry need not be limited only to bank deposits of the taxpayer but also as to
his financial position as reflected in his financial statements or other records upon which his property holdings can be
ascertained.
If indeed he financial position of NX as determined by the Commissioner demonstrates a clear inability to pay the tax,
the acceptance of the offer is legal and ethical because the ground upon which the compromise was anchored is within
the context of the law and the rate of compromise is well within and far exceeds the minimum prescribed by law, which
is only 10% of the basic tax assessed.
Q: Under what conditions may the Commissioner of Internal Revenue be authorized to:
a. Compromise the payment of any internal revenue tax?
A:The Commissioner of Internal Revenue maybe authorized to compromise the payment of any internal revenue tax
where:
1) A reasonable doubt as to the validity of the claim against the taxpayer exists;or 2) The financial position
of the taxpayer demonstrates a clear inability to pay the assessed tax.
3) Abate or cancel a tax liability?
A: The Commissioner of Internal Revenue may abate or cancel a tax liability when:
1) The tax or any portion thereof appears to be unjustly or excessively assessed;or 2) The administration
and collection costs involved do not justify the collection of the amount due (Sec.204[B], NIRC).
Q: An Information was filed in court for willful non-payment of income tax, the assessment of which has
become final. The accused, through counsel, presented a motion that be allowed to compromise his tax
liability subject of the information. The prosecutor indicated his conformity to the motion. Is this procedure
correct?
A: No. Criminal violations, if already filed in court, may not be compromised (Sec.204[B], NIRC). Furthermore, the
payment of the tax due after apprehension shall not constitute a valid defense in any prosecution for violation of any
provisions of the Tax Code (Sec.247[a], NIRC). Finally, there is no showing that the prosecutor in the problem is a
legal officer of the Bureau of Internal Revenue to whom the conduct of criminal actions is lodged by the Tax Code.
Q: May the Commissioner of the Internal Revenue compromise the payment of withholding tax (tax deducted
and withheld at source) where the financial position of the taxpayer demonstrates a clear inability to pay the
assessed tax? A: No. A taxpayer who is constituted as withholding agent who has deducted and withheld at source
the tax on the income payment made by him holds the taxes as trust funds for the government (Sec.58[D],NIRC) and
is obligated to remit them to the BIR. The subsequent inability of the withholding agent to pay/remit the tax withheld is
not a ground for compromise; because the withholding tax is not a tax upon the withholding agent but it is only a
procedure for the collection of a tax.
Q: Minolta Philippines, Inc. (Minolta) is an EPZA-registered enterprise enjoying preferential tax treatment
under a special law. After investigation of its withholding tax returns for the taxable year 1997,the BIR issued
a deficiency withholding tax assessment in the amount of Php150,000.00.On May 15,1999,because of financial
difficulty, the deficiency tax remained unpaid, as a result of which the assessment became final and executory.
The BIR also found that, in violation of the provisions of the NIRC, Minolta did not file its final corporate income
tax return for the taxable year 1998, because it allegedly incurred net loss from its operations. On May 17, 2002
the BIR filed with the RTC an action for collection of the deficiency withholding tax for 1997.
A. Will the BIR's action for collection prosper? As counsel of Minolta, what action will you take? Explain.
B. May criminal violations of the Tax Code be compromised?
If Minolta makes voluntary offer to compromise the criminal violations for non-filing and non-payment
of taxes for the year 1998, may the Commissioner accept the offer? Explain.
A:
A. Yes. BIR’s action for collection will prosper because the assessment is already final and executor. It can
already be enforced through judicial action.
As counsel of Minolta, I will introduce evidence that the income payment was reported by the payee and the
income tax was paid thereon in 1997 so that my client may be allowed to pay only the civil penalties for non-
withholding pursuant to Revenue memorandum Order No. 38-83.
 B. All criminal violations of the Tax code may be compromised except those already filed in court or those
involving fraud (Sec. 204, NIRC).
Accordingly, if Minolta makes a voluntary offer to compromise the criminal violations for non-filing and non-
payment of taxes for the year 1998, the Commissioner may accept the offer which is allowed by law.
However, if it can be established that a tax has not been paid as a consequence of non-filing of the return,
the civil liability for taxes may be dealt with independently of the criminal violations. The compromise
settlement of the criminal violations will not relieve the taxpayer from its civil liability. But the civil liability for
taxes may also be compromised if the financial position of the taxpayer demonstrates a clear inability to pay
the tax.
Q: A domestic corporation failed to withhold and remit the tax on income received from Philippine sources by
a non-resident foreign corporation. In addition to the civil penalties provided for under the Tax Code, a
compromise penalty was imposed for violation of the withholding tax provisions. May the Commissioner of
Internal Revenue legally enforce the collection of compromise penalty?
A: No. There is no showing that the compromise penalty was imposed by the Commissioner of Internal Revenue with
the agreement and conformity of the taxpayer (Wonder Mechanical Engineering Corporation v.Court of Tax Appeals,
et al.,64 SCRA 555).
CHAPTER XXVI: JUDICIAL REMEDIES OF GOVERNMENT
Q: When is an internal revenue tax considered delinquent?
A: An internal revenue tax is considered delinquent when it is unpaid after the lapse of the last day prescribed by law
for its payment. Likewise, it could also be considered as delinquent where an assessment for deficiency tax has
become final and the taxpayer has not paid it within the period given in the notice of assessment.
Q: Antonio Cruz was appointed by the Regional Trial Court as administrator in the testate proceedings for the
settlement of the estate of his deceased father. On 12 February 1987 the Commissioner of Internal Revenue
issued a deficiency estate tax assessment for the estate. The notice of deficiency assessment was received
by the latter's office two (2) days later, the Administrator requested for a reconsideration of the assessment
on the ground that the same is contrary to law and is not supported by sufficient evidence. He also requested
for a period of fifteen (15) days within which to submit the estate's position paper.
On 4 August 1988,not having received the promised position paper, the Commissioner filed with the
Court a motion for allowance of claim and for an order of payment of estate taxes, praying therein that the
administrator be required to pay the BIR the aforementioned deficiency tax. The administrator opposed the
motion alleging that by reason of the pendency of his request for reconsideration the deficiency assessment
has not become final and executory and, therefore, the absence of a decision on the disputed assessment is
a bar against collection of taxes. He further argued that it is the Court of Tax Appeals, and not the Regional
Trial Court, which has exclusive jurisdiction over the claim.
Resolve the motion and issues raised.
A: Evidently, the request for reconsideration referred to did not express or specify the grounds therefor. A request for
reconsideration in the tenor stated in the problem is insufficient, not being substantiated,to stop the running of the 30-
day period within which the assessment may be disputed (Dayrit v. Cruz,G.R. No.39919,September 26,1988).The
failure of the taxpayer to submit the promised position paper within the said 30-day period had the effect of rendering
the assessment final and executory.In addition,the pendency of a decision on a disputed assessment does not bar the
collection of the taxes,and no injunction may be issued by any court (except by the Court of Tax Appeals as an incident
to a timely petition for review).In the absence of a petition for review with the Court of Tax Appeals which may be
brought by a taxpayer within 30 days from the receipts of the final decision of the Commissioner, the Court of Tax
Appeals has no jurisdiction to take cognizance thereof (See Sec.11,R.A. 1125).Premises considered, the action taken
by the Commissioner with the Regional Trial Court was appropriate and in accordance with law. The taxpayer's
failure to dispute the assessment effectively by complying with the conditions laid down by the BIR, such as specifying
under oath the grounds of his protest, paying one-half of the amount assessed and putting up a bond for the balance,
provided a legal basis for the government to collect the taxpayer's liability by ordinary civil action (Republic v. Ledesma,
G.R. No.L-18759,February 28,1967).
CHAPTER XXVII: CIVIL PENALTIES
Q: Danilo, who is engaged in the trading business, entrusted to his accountant the preparation of his income
tax return and the payment of the tax due. The accountant filed a falsified tax return by under-declaring the
sales and overstating the expense deductions of Danilo. Is Danilo liable for the deficiency tax and the penalties
thereon? What is the liability, if any, of the accountant? Discuss.
A: Yes, Danilo is liable for the deficiency tax as well as for the deficiency interest. However, he is not liable for the fraud
penalty because the accountant acted beyond the limits of his authority. A tax return which does not correctly reflect
taxable income may only be false but not necessarily fraudulent, where it appears that the return was not prepared by
the taxpayer himself but by his accountant. Accordingly, the 50% surcharge for fraud could not be imposed (Azanr v.
CTA, 58 SCRA 719 [1974]).
Q: Businessman Stephen Yang filed an income tax return for 1993 showing business net income of 350,000.00
Pesos on which he paid an income tax of 61,000.00 Pesos. After filing the return, he realised that he forgot to
include an item of business income in 1993 for 50,000.00 Pesos. Being an honest taxpayer, he included this
income in his return for 1994 and paid the corresponding income tax thereon.
In the examination of his 1993 rerun, the BIR examiner found that Stephen Yang failed to report this item of
50,000.00 Pesos and assessed him a deficiency income tax on this item, plus 50% fraud surcharge.
1. Is the examiner correct?
2. If you were the lawyer of Stephen yang, what would you have advised your client before he included in
his 1994 return the amount of 50,000.00 Pesos as 1993 income to avoid the fraud surcharge?
3. Considering that Stephen yang had already been assessed a deficiency income tax for 1993 for his failure
to report the 50,000.00 Pesos income, what would you advise him to do to avoid the penalties for tax
delinquency?
4. What would you advise Stephen to do with regard to the income tax he paid for the 50,000.00 Pesos in
his 1994 return? In case your remedy falls, what is your other recourse?
A:
1. The examiner is correct in assessing a deficiency income tax for table year 1993 but not in imposing the 50%
fraud surcharge. The amount of all items of gross income must be included in gross income during the year in
which received or realised (Sec. 38, NIRC). The 50% fraud surcharge attaches only if a false or fraudulent
return is wilfully made by Mr. Yang (Sec. 248, NIRC). The fact that Mr. Yang included the income in his 1994
return belies any claim of wilfulness but is rather indicative of an honest mistake which was sought to be
rectified by a subsequent act, that is the filing of the 1994 return.
2. Mr. Yang should have amended his 1993 income tax return to allow for the inclusion of the 50,000.00 income
during the taxable period it was realised.
3. Mr. Yang should file a protest questioning the 50% surcharge and ask for abatement thereof
4. Mr. Yang should file a written claim for refund with the Commissioner of Internal revenue of the taxes paid on
the 50,000.00 income included in 1994 within two years from payment pursuant to Section 204(3) of the Tax
Code. Should this remedy fail in administrative level, a judicial claim for refund can be instituted before the
expiration of the two-year period.
Q:
1. What is a deficiency interest” for the purposes of the income tax? illustrate
2. What is a “delinquency interest” for purposes of the income tax? illustrate
A: 1. Deficiency interest for purposes of the income tax is the interest due on any amount of tax due or instalment
thereof which is not paid on or before the date prescribed for its payment computed at the rate of 20% per annum or
the Manila reference rate, which is higher, from the date prescribed for its payment until it is fully paid. If for example
after the audit of the books of XYZ Corp. for taxable year 1993 there was found to be due a deficiency income tax of
125,000.00 Pesos inclusive of the 25% surcharge imposed under Section 248 of the Tax Code, the interest will be
computed on the 125,000.00 from April 15, 1994 up to its date of payment.
2. Delinquency interest is the interest of 20% or the Manila reference rate, whichever is higher, required to be paid
in case of failure to pay:
a. the amount of the tax due on any return required to be filed; or
b. the amount of tax due for which return is required; or
c. the deficiency tax or any surcharge or interest thereon, on the due date appearing in the notice and demand of
the Commissioner of Internal Revenue.
If in the above illustration the assessment notice was real eased on December 31, 1994 and the amount of deficiency
tax, incisive of surcharge and deficiency interest, was computed up to January 30, 1995 which is the due date for
payment per assessment notice, failure to pay on this latter date will render the tax delinquent and will require the
payment of delinquency interest.
The imposition of 1% monthly [now 20% annual] interest is but a just compensation to the state for the delay in paying
the tax for the concomitant use by the taxpayer of funds that rightfully should be in the government’s hands (U.S. v.
Goldstein, 189 F[2d] 752). The fact that the interest charged is made proportionate to the period of delay constitutes
the best evidence that such interest is not penal but compensatory (Aguinaldo Industries Corporation v. Commissioner
and CTA, L-29790, February 25,1982).
CHAPTER XXVIII: REMEDIES OF TAXPAYERS
Q: Compare the taxpayers remedies under the national Internal Revenue Code and the Tariff and Customs Code.
A: The taxpayers remedies under the National Internal Revenue Code may be categorised into remedies before
payment and remedies after payment. The remedy before payment consists of administrative remedy which is the
filing of protest within 30 days from receipt of assessment , and judicial remedy which is the appeal of the adverse
decision of the Commissioner on the protest with the Court of Tax Appeals, thereafter to the Court of appeals and
finally with the Supreme Court.
The remedy after payment is availed of by paying the assessed tax within 30 days from receipt of assessment and
the filing of a claim for refund or tax credit of these taxes on the ground that they are erroneously paid within two years
from date of payment.if there is a denial of the claim, appeals of the CTA shall be made within 30 days from receipt of
denial but within two years from date of payment. if the Commissioner fails to act on the claim for refund or tax credit
and the two years period is about to expire, the taxpayer should consider the continuous inaction of the Commissioner
as a denial and elevate the case to the CTA before the expiration of the two year period.
Under the Tariff and Customs Code, taxpayer’s remedies arise only after payment of duties. The administrative
remedies consist of filing a claim for refund which may take the form of abatement or drawback. The taxpayer can also
file a protest within 15 days from payment if he disagrees with the ruling or decision of the Collector of Customs
regarding the legality or correctness of the assessment of customs duties.if the decision of the Collector is adverse to
the taxpayer, he can notify the Collector within 15 days from receipt of said decision of his desire to have his case
reviewed by the Commissioner Government, is automatically elevated of the Commissioner, the same shall be
automatically elevated to and finally reviewed by the secretary of Finance.
Resort to judicial relief can be had by the taxpayer by appealing the decision of the
Commissioner or of the Secretary of Finance (for cases subject to automatic review) within 30 days from the
promulgation of the adverse decision to the CTA.
Q: On March 10, 2010, Continental, Inc. received a preliminary assessment notice (PAN) dated March 1, 2010
issue by the Commissioner of Internal Revenue (CIR) for deficiency income tax for 2008.It failed to protest the
PAN. The CIR thereupon issued final assessment notice (FAN) with letter of demand on April 30, 2010. The
FAN was received by the corporation on May 10, 2010, following which or on May 25 2010,it filed its protest
against it. The CIR denied the protest on the ground that the assessment had already become final and
executory, the corporation having failed to protest the PAN. Is the CIR correct? Explain.
A: No. Failure to file a Reply of PAN makes the taxpayer in default and authorises the revenue official to issue the
FAN. However, no liability for additional or deficiency tax arises from such failure. Indeed, Revenue Regulation No.
12-99 makes the filing of such Reply to PAN merely directory, i.e the taxpayer may or may not reply to the PAN is for
the CIR to issue a FAN, since the corporation timely filed the protest against the FAN, it cannot be said that the final
assessment notice had already become final and executory.
CHAPTER XXIX: ASSESMENT AND PROTEST
Q: Describe separately the procedures on the legal remedies under the Tax Code available to an aggrieved
taxpayer both at the administrative and judicial levels. A: The legal remedies of an aggrieved taxpayer under the
tax Code, both at the administrative and judicial levels, may be classified into those for assessment, collection and
refund.
a. After receipt of the Pre- Assessment Notice (PAN), he must within 15 days from receipt explain why no
additional taxes should be assessed against him.
b. if the Commission of Internal revenue issues an assessment notice, the taxpayer must administratively protest
or dispute the assessment by filing a motion for reconsideration or reinvestigation within 30 days from receipt
of the notice of assessment (4th par, Sec. 228, NIRC).
Q: After examining the book and records of EDS Corporation, the 2004 final assessment notice, showing basic
tax of 1,000,000 Pesos, deficiency interest of 400,000 Pesos, and due for payment of April 20, 2007, but without
the demand letter, was mailed and released by the BIR on April 15, 2007. The registered letter containing the
tax assessment, was received by the EDS Corporation on April 25, 2007.
a. What is an assessment notice? What are the requisites of a valid assessment? Explain.
b. As tax lawyer of EDS Corporation, what legal defense(s) would you raise against the assessment? Explain.
A: a. The assessment notice, without the demand letter, is void. Section 228 of the Tax Code expressly provides that
“the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the
assessment shall be void.” Since the assessment notice merely contains the basic tax, interest and due date for
payment, it does not comply with the requirements of the law that it must state the factual and legal bases; hence, it is
void.
b. The demand letter is important not only because in such letter does the BIR makes a demand for the payment of
the deficiency tax but more importantly, because of the findings of the facts and computations of the deficiency taxes
by the revenue officers as we'll as the legal basis for such assessment are adequately explained therein.
Q: What are the requisites before a taxpayer’s request for reinvestigation may be granted by the BIR? Discuss
briefly.
A: A request for reinvestigation refers to a plea for re-evaluation of an assessment on the basis of newly discovered
evidence or additional evidence the taxpayer intends to present in the re-investigation.
Q: The BIR issued in 2010 a final assessment notice and demand letter against X Corporation covering
deficiency income tax deficiency for the year 2008 in the amount of PHP10 Million. X Corporation earlier
requested the advice of a lawyer on whether or not it should file a request for reconsideration or a request for
reinvestigation. The lawyer said it does not matter whether the protest filed against the assessment is a
request for reconsideration or a request for reinvestigation, because it has the same consequences or
implications. (a) What are the differences between a request for reconsideration and a request for
reinvestigation? (b) Do you agree with the advice of the lawyer?
A: a. Request for reconsideration is a plea for evaluation of the assessment on the basis of existing records without
the need of presentation of additional evidence (Rev. Regs. No. 1299). It does not suspend the period to collect the
deficiency tax (Sec. 223, NIRC). The 180day period within which the BIR shall act on the protest starts from the filing
of the request for reconsideration (Sec. 228, NIRC). On the other hand, a request for reinvestigation is a plea for re-
evaluation of the assessment on the basis of additional or newly discovered evidence which are to be introduced for
examination for the first time. It suspends the running of the prescriptive period to collect. The 180-year period within
which the BIR shall act on the protest starts only from the date of submission of the additional or newly discovered
evidence (Sec. 228, NIRC; RCBC v. CIR, cited in Royal Bank of Scotland [Phil.] v. CIR, CTA EB Case No. 446, October
23, 2009)
b. No, in view of the aforesaid differences between the request for reconsideration and the request for
reinvestigation.
Q: A final assessment notice was issued by the BIR on June 13, 2000, and received by the taxpayer on June
15, 2000. The taxpayer protested on July 31, 2000. The protest was initially given due course, but was
eventually denied by the CIR in a decision dated June 15, 2005. The taxpayer then filed a petition for review
with the CTA, but the CTA dismissed the same. (a) is the CTA correct in dismissing the petition for review (b)
Assume that the CTA’s decision dismissing the petition for review has become final. May the CIR legally
enforce collection of the delinquent tax?
A: a. Yes. The CTA is correct in dismissing the petition for review because the assessment had already become final
and executory by the time the protest was filed on July 31, 2000. The fact that the petition for review was filed by the
taxpayer before the CTA within 30 days from the date of receipt of the CIR’s final decision in the disputed assessment,
this is not, however, relevant in this case because the taxpayer filed its protest against the assessment after the 30-
day period mandated by law.
b. Since the assessment had already become final and executory for failure of the taxpayer to file a timely protest
against the assessment, particularly where the decision of the CTA also becomes final executory, the CIR can legally
enforce the collection of the delinquent tax by administrative remedies through the issuance of warrants of
distraints/garnishments and levy and/or by judicial remedies through the filing of civil actions or criminal actions within
the time prescribed by law.
Q: In the examination conducted by the revenue officials against the corporation taxpayer in 2010, the BIR
issued a final assessment notice and demand letter which states: “It is requested that the above deficiency
tax be paid immediately upon receipt hereof, inclusive of penalties incident to delinquency. This is our final
decision based on investigation. If you disagree, you may appeal this decision within 30 days from receipt
hereof, otherwise said deficiency tax assessment shall become final, executory and demandable.” The
assessment was immediately appealed by the taxpayer to the court of Tax appeals, without filing its protest
against the assessment and without a denial thereof by the BIR. If you were the judge, would you deny the
petition for review filed by the taxpayer and consider the case as prematurely filed?
A: No, the petition for review should not be denied. The case is an exception to the rule on exhaustion of administrative
remedies. The BIR is estopped from claiming that the filing of the petition for review is premature because the taxpayer
failed to exhaust all administrative remedies. The statement of the BIR in its final assessment notice and demand letter
led the taxpayer to conclude that only a final judgment ruling in his favor would be accepted by the BIR. The taxpayer
cannot be blamed for not filing a protest against the assessment since the language used and the tenor of the demand
letter indicate that it is the final decision of the BIR on the matter. The CIR should indicate, in a clear and unequivocal
language, whether his action on a disputed assessment constitutes his final determination thereon in order for the
taxpayer concerned to determine when his or her right to appeal to the tax court accrues. Although there was no direct
reference for the taxpayer to bring the matter directly to the CTA, it cannot be denied that the word “appeal” under
prevailing tax laws refers to the filing of a petition for review with the CTA (Allied Bank Corporation v. CIR, G.R. No.
175097, February 5, 2010).
Q: On June 1, 2003, Global Bank received a final notice of assessment from the
BIR for deficiency documentary stamp tax in the amount of 55 million. On June 20,
2003, Global Bank filed a request for reconsideration with the Commissioner of Internal Revenue. The
Commissioner denied the request for reconsideration only on May 30, 2006, at the same time serving on Global
Bank a warrant of distraint to collect the deficiency tax. If you were the counsel, what will be your advice to
the bank? Explain.
A: The denial of the request for reconsideration is a final decision of the Commissioner of
Internal Revenue. I would advise Global Bank to appeal the Commissioner’s denial to the Court of Tax Appeals (CTA)
within 30 days from receipt, if the remedy of appeal is still available, I will further advise the bank to file a motion for
injunction with the CTA to enjoin the Commissioner from enforcing the assessment pending resolution of the appeal.
While n appeal to the CTA will not suspend the payment, levy, distraint and/or sale of any property of the taxpayer for
the satisfaction of its tax liability, the CTA is authorized to give injunctive relief if the enforcement would jeopardize the
interest of the taxpayer, as in this case where the assessment has not become final.
Q: A taxpayer received a tax deficiency assessment of 51.2 million from the BIR demanding payment within
180 days; otherwise, it would collect through summary remedies. The taxpayer requested for a
reconsideration stating the grounds therefor. Instead of resolving the request for reconsideration, the BIR
sent a Final Notice Before Seizure to the taxpayer.
May this action of the Commissioner of Internal Revenue be deemed a denial of the request for
reconsideration of the taxpayer to entitle him to appeal to the CTA? Decide with reasons.
A: Yes. The action of the CIR is deemed a denial of the request for reconsideration of the taxpayer, thus entitling him
to appeal to the CTA. The Notice was the only response received by the taxpayer and its content and tenor supports
the theory that it was the BIR final act regarding the request for reconsideration. The very title of the Notice indicated
that it was a “Final Notice Before Seizure” which means that the taxpayer’s properties will be subjected to seizure to
enforce the deficiency assessment. Thus, in one decided case, the Supreme Court ruled that the Final Notice Before
Seizure is a final decision of the Commissioner on the disputed assessment (CIR v Isabela Cultural Corp., 361 SCRA
71 [2001]).
Q: RR disputed a deficiency tax assessment and upon receipt of an adverse decision by the Commissioner of
Internal revenue, filed an appeal with the Court of Tax Appeals. While the appeal is pending, the BIR served a
warrant of levy on the real properties of RR to enforce the collection of the disputed tax. Granting arguendo
that the BIR can legally levy on the properties, what could RR do to stop the process? Explain briefly.
A: RR should file a motion for injunction with the CTA to stop the administrative collection process. An appeal to the
CTA shall not suspend the enforcement of the tax liability, unless a motion to that effect shall have been presented in
court and granted by it on the basis that such collection will jeopardize the interest of the taxpayer or the Government
(Pirovano v. CIR, 14 SCRA 832 [1965]).
The CTA is empowered to suspend the collection of internal revenue taxes and customs duties in cases pending
appeal only when: (1) in the opinion of the court the collection by the BIR will jeopardize the interest of the government
and/or the taxpayer; and (2) the taxpayer is willing to deposit the amount being collected or to file a surety bond for not
more than double the amount of the tax to be fixed by the court (Sec. 11, R.A. 1125).
Q: On March 15, 2000, the BIR issued a deficiency income tax assessment for the taxable year 1997 against
the Valera Group of Companies (Valera) in the amount of P10 million. Counsel for Valera protested the
assessment and requested a reinvestigation of the case. During the investigation, it was shown that Valera
had been transferring its properties to other persons. As no additional evidence to dispute the assessment
had been presented, the BIR issued on June 16, 2000 warrants of distraint and levy on the properties and
ordered the filing of an action in the RTC for the collection of the tax, Counsel for Valera filed an injunctive
suit in the RTC to compel the BIR to hold the collection of the tax in abeyance until the decision on the protest
was rendered.
A. Can the BIR file the civil action for collection, pending decision on the administrative protest? Explain.
B. As counsel for Valera, what action would you take in order to protect the interest of your client? Explain your
answer.
A:
 A. Yes, because there is no prohibition for this procedure considering that the filing of the civil action for
collection during the pendency of an administrative protest constitutes the final decision of the Commissioner
on the protest (CIR v. Union Shipping Corp., 85 SCRA 548 [1990]).
B. I will wait for the filing of the civil action for collection and consider the same as an appealable decision. I will
not file an injunctive suit because it is not an available remedy. I would then appeal the case to the Court of
Appeals and move for the dismissal of the collection case with the RTC. Once the appeal to the CTA is filed
on time the CTA has exclusive jurisdiction over the case. Hence, the collection case in the RTC should be
dismissed (Yabes v. Flojo, 115 SCRA 278 [1982]).
Q: CFB Corporation, a domestic corporation engaged in food processing and other allied activities, received
a letter from the BIR assessing it delinquency income taxes. CFB filed a letter of protest. One month after, a
warrant of distraint and levy was served on CFB Corporation.
If you were the lawyer engaged by CFB Corporation to contest the assessment made by the BIR, what
steps will you take for your client?
A: I shall immediately file a motion for reconsideration of the issuance of the warrant of distraint and levy and seek
from the BIR Commissioner a denial of the protest “in clear and unequivocal language.” This is so because the issuance
of a warrant of distraint and levy is not considered as a denial by the BIR of the protest filed by CFB Corporation (CIR
v Union Shipping Corp., 185 SCRA 547).
Within 30 days from receipt of such denial “in clear and unequivocal language,” I shall then file a petition
for review with the CTA.
Q: Spanflex Intl, Inc. received a notice of assessment from the BIR. It seasonably filed a protest with all the
necessary supporting documents, but the BIR failed to act on the protest. Thirty days from the lapse of 180
days from filing the protest, Spanflex still has not elevated the matter to the CTA. What remedy, if any, can
Spanflex take?
A: Spanflex may wait for the final decision on the disputed assessment of the BIR and appeal it to the CTA within 30
days from receipt of such decision.
CHAPTER XXX: PRESCRIPTION
Q: Mia, a compensation income earner, filed her income tax return for the year 2007 on March 30, 2008. On
May 20, 2011, Mia received an assessment notice and letter of demand covering the year 2007, but the
postmark on the envelope shows April 10, 2011. Her return is not a false or fraudulent return. Can she raise
the defense of prescription?
A: No. the 3-year prescriptive period started to run only on April 15, 2008 (and not on March 30, 2008). Internal revenue
taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return (Sec. 203,
NIRC). Accordingly, the period to assess the deficiency tax for 2007 has not yet expired on April 10, 2011.
Q: DEF Corporation is a wholly owned subsidiary of DEF, Inc., California, USA. Every December 15 of the year,
DEF Corporation paid annual royalties to DEF, Inc. for the use of the latter’s software, for which the former, as
withholding agent of the government, withheld and remitted to the BIR the 15% final tax based on the gross
royalty payments. The withholding tax return is filed and the tax remitted to the BIR on January 10 of the
following year. On April 10, 2007, DEF Corporation filed a written claim for tax credit with the BIR, arising from
erroneously paid income taxes covering the years 2004 and 2005. The following day, DEF Corporation filed a
petition for review with the CTA involving the tax credit claim for 2004 and 2005.
a. As a BIR lawyer handling the case, would you raise the defense of prescription in your Answer to the claim
for tax credit? Explain.
b. Can the BIR lawyer raise the defense that DEF Corporation is not the proper party to file such claim for tax
credit? Explain.
A:
a. No credit or refund of taxes shall be allowed, unless the taxpayer files in writing with the Commissioner
a claim for credit or refund within two (2) years after the payment of the tax. (Sec. 204, NIRC). No suit
or proceeding shall be maintained in any court for the recovery of any tax hereafter alleged to have
been erroneously or illegally assessed or collected, until a claim for refund or credit has been duly filed
with the Commissioner. In any case, no such suit or proceeding shall be filed after the expiration of two
(2) years from the date of payment of the tax, regardless of any supervening cause that may arise after
the payment (Sec. 229, NIRC). Based on the foregoing, the BIR lawyer can raise the defense of
prescription for the year 2004, but not for 2005. Since the withholding tax return for 2004 was filed on
January 10, 2005, and considering that the claim for refund or credit was filed only on April 10, 2007,
more than two years have elapsed between the date of payment and the date of filing the written claim
for refund or credit.
b. The proper person to claim refund or tax credit is the person on whom the tax is imposed by the statute.
In one case, the Supreme Court ruled that the BIR should not be allowed to defeat an otherwise valid
claim for refund by raising the question of the withholding agent’s alleged incapacity to file the claim for
refund for the first time on appeal. The Government must follow the same rules of procedure which bind
private parties (Commissioner v Proctor & Gamble PMC, 204 SCRA 377).
Q: Taxes were generally imprescriptible; statutes, however, may provide otherwise. State the rules that have been
adopted on this score by:
(a) The National Internal Revenue Code (b) The
Tariff and Customs Code; and (c) The Local
Government Code.
A: The rules that have been adopted on prescription are as follows:
(a) National Internal Revenue Code—The Statute of Limitation for assessment of tax if a return is filed within
three (3) years from the last day prescribed by law for the filing of the return, or if filed after the last day,
within three years from the date of the actual filing. If no return is filed or the return filed is false or fraudulent,
the period to assess is within ten years from discovery of the omission, fraud or falsity. The period to collect
the tax is within three years from date of assessment. In the case, however, of omission to file or if the return
filed is false or fraudulent, the period to collect is within ten years from discovery without need of assessment.
(b) Tariff and Customs Code—It does not express any general Statute of Limitation. It provided, 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 (1) year,
from the 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 import entry was merely tentative” (Sec. 1603, TCC).
(c) Local Government Code—Local taxes, fees, or charges shall be assessed within five (5) years from the date
they became due. In case of fraud or intent to evade the payment of taxes, fees or charges, the same may
be assessed within ten years from discovery of the fraud or intent to evade payment. They shall also be
collected either by administrative or judicial action within five (5) years from date of assessment (Sec. 194,
LGC).
Q: the Commissioner of Internal Revenue issued an assessment for deficiency income tax for taxable year
2000 last July 31, 2006 in the amount of P10 million, inclusive of surcharge and interests. If the delinquent
taxpayer is your client, what steps will you take? What is your defense?
A: Since my client has already lost the right to protest (the assessment having been issued on July 31, 2006, and that
he is already categorized as a delinquent taxpayer), I will advise him to wait for a collection action to be instituted by
the Commissioner. Once collection is pursued, I will file a petition for review with the CTA to question the validity of the
Commissioner’s action. My defense would be prescription. Since the assessment was issued beyond the prescriptive
period to assess, the assessment is invalid and any action to collect an invalid assessment is not warrant (Phil.
Journalists, Inc. v. CIR, 447 SCRA 214 [2004]).
Q: Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in
international shipping. He and his wife, who manage their business, filed a joint income tax return for 1997 on
March 15, 1998. After an audit of the return, the BIR issued on April 20, 2001 a deficiency income tax
assessment for the sum of P250,000 inclusive of interest and penalty. For failure of Mr. and Mrs. Sebastian to
pay the tax within the period stated in the notice of assessment, the BIR issued on August 19, 2001 warrants
of distraint and levy to enforce collection of the tax.
If you are the lawyer of Mr. and Mrs. Sebastian, what possible defense or defenses will you raise in behalf of
your clients against the action of the BIR in enforcing collection of the tax by the summary remedies of
warrants of distraint and levy? Explain your answer.
A: I will raise the defense of prescription. The right of the BIR to assess prescribes after three years counted from the
last day prescribed by law for the filing of the income tax returns when the said return is filed on time (Sec. 203, NIRC).
The last day for filing the 1997 income tax return is April 15, 1998. Since the assessment was issued only on April 20,
2001, the BIR’s right to assess has already prescribed.
Q: Mr. Castro inherited from his father, who died on June 10, 1994, several pieces of real property in Metro
Manila. The estate tax return was filed and the estate tax due in the amount of P250,000.00 was paid on
December 6, 1994. The Tax Fraud Division of the BIR investigated the case on the basis of confidential
information given by Mr. Santos on January 6, 1998 that the return filed by Mr. Castro was fraudulent and that
he failed to declare all properties left by his father with intent to evade payment of the correct tax. As a result,
a deficiency estate tax assessment for P1,250,000.00, inclusive of 50% surcharge for fraud, interest and
penalty, was issued against him on January 10, 2001. Mr. Castro protested the assessment, on the ground of
prescription. Decide Mr. Castro’s protest.
A: The protest should be resolved against Mr. Castro. What was filed is a fraudulent return making the prescriptive
period for assessment 10 years from discovery of the fraud (Sec. 222, NIRC). Accordingly, the assessment was issued
within the prescriptive period to make an assessment based on a fraudulent return.
Q: On September 19, 1973, the BIR sent a notice of assessment to X to pay P300,000.00 as forest charges for
the years 1970-1973. X made a partial payment of P100,000.00 on September 28, 1973. X died in November
1977. On July 29, 1979, the BIR filed in the Testate Estate Proceedings of X a claim for P200,000.00, the unpaid
forest charges left by X. The administrator of the estate opposed the claim on the ground of prescription.
Decide.
A: Where the assessment was made, the tax may be collected within five (5) years (now three [3] years) from the
date of assessment (Collector v. Pineda, 2 SCRA 401).
In the case at bar, X, on the basis of the notice of assessment, voluntarily made partial payment to the BiR in the
amount of P100,000.00. However, it took the BIR almost more than five (5) years to take the necessary legal action to
collect the remaining amount of taxes due.
This is clearly beyond the five (5) (now three [3] year) period for the collection of taxes. Hence, the claim filed by the
BIR against the Estate of X for the payment of P200,000.00 has prescribed.
(NOTE: Under R.A. 8424 [1998], the period to collect an assessed tax is five years from the date of the
assessment.)
Q: A Co., a Philippine Corporation, filed its 1995 income Tax Return (ITR) on April 15, 1996 showing a net loss.
On Nov. 10, 1996, it amended its 1995 ITR to show more losses. After a tax investigation, the BIR disallowed
certain deductions claimed by A Co., putting A co. in a net income position. As a result, on august 5, 1999, the
BIR issued a deficiency income assessment against A Co. A Co. protested the assessment on the ground that
it has prescribed. Decide.
A: The right of the BIR to assess the tax has not prescribed. The rule is that internal revenue taxes shall be assessed
within three years after the last day prescribed by law for the filing of the return (Sec. 203, NIRC). However, if the return
originally filed is amended substantially, the counting of the three-year period starts from the date the amended return
was filed (CIR v Phoenix Assurance Co., 14 SCRA 52). There is a substantial amendment in this case because a new
return was filed declaring more losses, which can only be done either (1) in reducing gross income, or (2) in increasing
the items of deductions claimed.
Q:
(1)Distinguish a false return from a fraudulent return.
(2)Explain the extent of the authority of the Commissioner of internal Revenue to compromise and abate
taxes. A:
(1) The distinction between a false return and a fraudulent return is that the first merely implies a deviation from
the truth or fact whether intentional or not, whereas the second is intentional and deceitful with the sole aim
of evading the payment of the correct tax due.
(2) The authority of the Commissioner to compromise encompasses both civil and criminal liabilities of the
taxpayer. The civil compromise is allowed only in cases (a) where the tax assessment is of doubtful validity,
or (b) when the financial position of the taxpayer demonstrates a clear inability to pay the tax. The
compromise of the tax liability is possible at any stage of litigation and the amount of compromise is left to
the discretion of the Commissioner, except with respect to final assessments issued against large taxpayers
wherein the Commissioner cannot compromise for less than 50%. Any compromise involving large taxpayers
lower than 50% shall be subject to the approval of the Secretary of Finance. [NOTE: this requirement had
been deleted in R.A. 8424.] All criminal violations except those involving fraud, can be compromised by the
Commissioner but only prior to the filing of the information with the Court.
Q: What constitutes prima facie evidence of a false or fraudulent return to justify the imposition of a 50%
surcharge on the deficiency tax due from a taxpayer? Explain.
A:There is a prima facie evidence of false or fraudulent return when the taxpayer substantially under-declared his
taxable sales, receipts or income, or substantially overstated his deductions. The taxpayer’s failure to report sales,
receipts or income in an amount exceeding 30% of that declared per return, and a claim of deduction in an amount
exceeding 30% of actual deduction shall render the taxpayer liable for substantial underdeclaration and over-
declaration, respectively, and will justify the imposition of the 50% surcharge on the deficiency tax due from the
taxpayer (Sec. 248, NIRC).
Q: What constitutes prima facie evidence of a false or fraudulent return?
A: There is prima facie evidence of a false or fraudulent return when the taxpayer has willfully and knowingly filed it
with the intent to evade a part or all of the tax legally due from him (Ungab v. Cusi, 97 SCRA 877). There must appear
a design to mislead or deceive on the part of the taxpayer, or at least culpable negligence. A mistake, which is not
culpable in respect of its value, would not constitute a false return (Words and Phrases, Vol. 16, page 173).
Q: On August 5, 1997, Adamson co., Inc. (Adamson) filed a request for reconsideration of the deficiency
withholding tax assessment on July 10, 1997, covering the taxable year 1994. After administrative hearings,
the original assessment of P150,000.00 was reduced to P75,000.oo and a modified assessment was thereafter
issued on August 5, 1999. Despite repeated demands, Adamson failed and refused to pay the modified
assessment. Consequently, the BIR brought an action for collection in the RTC on September 15, 2000.
Adamson moved to dismiss the action on the ground that the government’s right to collect the tax by judicial
action has prescribed. Decide the case.
A: The right of the Government to collect by judicial action has not prescribed. The filing of the request for
reconsideration suspended the running of the prescriptive period and commenced to run again when a decision on the
protest was made on August 5, 1999. It must be noted that in all cases covered by an assessment, the period to collect
shall be five (5) years from the date of the assessment but this period is suspended the filing of a request for
reconsideration which was acted upon by the Commissioner (Commissioner v. Wyeth Suaco Laboratories, 202 SCRA
125 [1991]).
Q: Mr. Reyes, a Filipino citizen engaged in the real estate business, filed his 1994 income tax return on March
20, 1995. On December 15, 1995, he left the Philippines as an immigrant to join his family in Canada. After the
investigation of said return, the BIR issued a notice of deficiency of income tax assessment on April 15, 1998.
Mr. Reyes returned to the Philippines as a balikbayan on December 8, 1998. Finding his name to be in the list
of delinquent taxpayers, he filed a protest against the assessment on the ground that he did not receive the
notice of assessment and that the assessment had prescribed. Will the protest prosper/ Explain.
A: No. Prescription has not set in because the period of limitations for the BIR to issue an assessment was suspended
during the time that Mr. Reyes was out of the Philippines or from the period December 15, 1995 up to December 8,
1998 (Sec. 223 in relation to Sec. 203, NIRC).

CHAPTER XXXI: TAX CREDIT OR REFUND
Q:Congress enacts a law granting grade school and high school students a 10%discount on all school-prescribed
textbooks purchased from any bookstore.
The law allows bookstores to claim in full the discount as a tax credit.
1. If in taxable year a bookstore has no tax due on which to enjoy the tax credit, can the bookstore claim
from the BIR a tax refund in lieu of tax credit? Explain
2. Can the BIR require the bookstore to deduct the amount of the discount from their gross income?
Explain.
3. If a bookstore closes its business due to losses without being able to recoup the discount, can it
claim reimbursement of the discount from the government on the ground that without such reimbursement,
the law constitutes taking of private property for public use without just compensation? Explain. A:
1. No, the law is clear that bookstores can only claim the discount as a tax credit. The term “tax credit”
connotes that the amount, when claimed, shall only be treated as a reduction from any tax liability, plain
and simple. There is nothing in the law that grants a refund when the bookstore has no tax liability against
which the tax credit can be used. (CIR v Central Luzon Drug Corp., 456 SCRA 414 [2005]).
2. No, tax credit which reduces the tax liability, is different from a tax deduction, which merely reduces the
income to arrive at the tax base. Since the law allowed the bookstores to claim in the full discount as a tax
credit, the BIR is not allowed to expand or contract the legislative mandate (CIR v Central Luzon Drug
Corp., ibid.).
3. No, the bookstore cannot claim reimbursement The tax credit privilege given to it is the compensation for
the subsidy taken by the government for the benefit of a class of taxpayers to which the students belong.
However, the privilege granted is limited only to the reduction of a present or future tax liability, because by
its nature, it is the existence of a lack of a tax liability that determines whether the discount can be used as
a tax credit. Accordingly, if the business continues to operate at a loss and no other taxes are due,
compelling the business to close shop, the credit can never be applied and will be lost altogether. (CIR v
Central Luzon Drug Corp., ibid.).
Q:On April 6, 2012, the corporation filed its annual corporate income tax return for 2011, showing an overpayment of
income tax of P1 million, which is to be carried over to the succeeding year(s). On May 15, 2012, the corporate
sought advice from you and said that it contemplates to files an amendment return for 2011, which shows that
instead of carryover of the excess income tax payment, the same shall be considered as a claim for tax refund and
the small box shown as “refund” in the return will be filled up. Within the year, the corporation will file the formal
request for refund for the excess payment. (a) Will you recommend to the corporation such a course of action and
justify that the amendment return is the latest official act of the corporation as to how it may treat such overpayment
of tax or should you consider the option granted to taxpayers as irrevocable, once previously exercised by it? (b)
Should the petition for review filed with the CTA on the basis of the amended tax return be denied by the BIR and
CTA, could the corporation still carry over such excess payment of income tax in the succeeding years, considering
that there is no prescriptive period provided for in the income tax law with respect to carry over of excess income tax
payments?
A:
a. No. Once the option to carry over and apply the excess quarterly income tax against the income tax due
for the taxable quarters of the succeeding taxable years has been made, such options shall be considered
irrevocable for the taxable year and no application for tax refund or issuance of tax credit certificate shall
be allowed therefor (Sec. 76, NIRC).
b. Yes. The carryover of excess income tax payments is no longer limited to the succeeding taxable year.
Unutilized excess income tax payments may now be carried over to the succeeding taxable years until
fully utilized. In addition, the option to carry over excess income tax payments is now irrevocable. Hence,
unutilized excess income tax payments may no longer be refunded. (Belle Corporation v CIR, G.R. No.
181298, January 10, 2011; CIR v P.L. Management Int’l Phils, Inc., G.R. No. 160949. April 4, 2011).
Q:
a. State the conditions required by the Tax Code before the Commissioner of Internal Revenue could authorize
the refund or credit of taxes erroneously or illegally received.
b. Does a withholding agent have the right to file an application for tax refund? Explain. A:
a. The conditions are: (1) a written claim for refund is filed by the taxpayer with the Commissioner of Internal
Revenue (Sec. 24, NIRC); (2) the claim for refund must be a categorical demand for reimbursement
(Bermejo v Collector of Internal Revenue, 87 Phil 96 [1950]) ; (3) the claim for refund or tax credit must be
filed with the Commissioner, or the suit or proceeding therefor must be commenced in court within two
years from date of payment of the tax or penalty, regardless of any supervening cause, (Sec. 29, NIRC).
b. Yes. A withholding agent should be allowed to claim for tax refund, because under the law, said agent is
the one who is held liable for any violation of the withholding tax law should such violation occur
(Commissioner v Wander Philippines, 160 SCRA 570 [1988]). Furthermore, since the withholding agent is
made personally liable to deduct and withhold any tax under Section 53(c) of the Tax Code, it is imperative
that he be considered the taxpayer for all legal intents and purposes. Thus, by any reasonable standard,
such person should be regarded as a party-in-interest to bring suit for refund of taxes (Commissioner v
Procter & Gamble PMC and CTA, 204 SCRA 377 [1991]).
Q:On March 12, 2001, REN paid his taxes. Ten months later, he realized that he had overpaid and so he
immediately filed a claim for refund with the Commissioner of Internal Revenue.
On February 27, 2003, he received the decision of the Commissioner, denying REN’s claim for refund. On
March 24, 2003, REN filed an appeal with the CTA. Was his appeal on time or not? Reason.
A:The appeal was not filed on time. The two-year period of limitation for filing a claim for refund is not only a limitation
for pursuing the claim at the administrative level but also a limitation for appealing the case to the CTA. The law
provides that “no suit or proceeding shall be filed after the expiration of two years from the date of payment of the tax
or penalty, regardless of any supervening cause that may arise after payment” (Sec. 29, NIRC). Since the appeal
was only made on March 24, 2003, more than two years had already elapsed from the time taxes were paid on
March 12, 2003. Accordingly, REN had lost his judicial remedy because of prescription.
Q:Apple Computer Corp. (ACC) is a foreign corporation doing business in the Philippines through a local branch
located at Makati, Metro Manila. In 1985, the local branch applied with the Central Bank for authority to remit to ACC
branch profits amounting to P8,000.00. After paying the 15% branch remittance tax of P1,200,000.00, the branch
office remitted to ACC the balance of P6,800,000.00. In January 1986, the branch office was advised by its legal
counsel that it overpaid the branch remittance tax since the basis of the computation thereof should be the amount
actually remitted and not the amount applied for. Accordingly, the branch office applied for a refund in the amount of
P180,000.00.
If you were the Commissioner of Internal Revenue, would you grant the claim for refund?
A:If I were the Commissioner of Internal Revenue, I would allow the claim for refund. The remittance tax should be
computed on the amount actually remitted (Marubeni Corporation v Commissioner, G.R. No. 76573, September 14,
1989). In the refund of taxes, the claim therefor can be filed within two years from the time of the payment so long as
the tax payment was made before an assessment by the Commissioner has become final (Sec. 230, NIRC).
Q: XCEL Corporation filed its quarterly income tax return for the first quarter of 1985 and paid an income tax of
P500,000.00 on May 15, 1985. In the subsequent quarters, SCEL suffered losses so that on April 15, 1986, it
declared a net loss of P1,000,000.00 in its annual income tax return. After failing to get refund, XCEL filed on March
1, 1988 a case with the Court of Tax Appeal store cover the P500, 000.oo in taxes paid on May 15, 1985. Is the
action to recover the taxes filed timely?
A:The action for refund was filed in the Court of Tax Appeals on time. In the case of
Commissioner v TMX Sales, Inc., 205 SCRA 184, which is similar to this case, the Supreme Court ruled that in the
case of overpaid quarterly corporate income tax, the two year period for filing claims for refund in the BIR as well as
in the institution of an action for refund in the CTA, the two year prescriptive period for tax refunds (Sec 230, NRIC) is
counted from the filing of the final, adjustment return under section 67 of the Tax Code, and not from the filing of the
quarterly return and payment of the quarterly tax. The CTA action on March 1, 1988 was clearly within the
reglementary two year period from the filing of the final adjustment return of the corporation on April 15, 1986.
Q: A corporation files its income tax return on a calendar year basis.
For the first quarter of 1993, it paid on 30 May 1993 its quarterly income tax in the amount of P3.0 million.
On 20 August 1993, it paid the second quarterly income tax of P0.5 million. The third quarter resulted in a net loss,
and no tax was paid. For the fourth and final return for 1993, the company reported a net loss for the year, and the
taxpayer indicated in the income tax return that it opted to claim a refund of the quarterly income tax payments.
On 10 January 1994, the corporation filed with the Bureau of Internal Revenue a written claim for the
refund of P3.5 million.
BIR failed to act on the claim for refund; hence, on 2 March 1996, the corporation filed a petition for review
with the Court of Tax Appeals on its claim for refund of the overpayment of its 1993 quarterly income tax. BIR, in its
answer to the petition, alleged that the claim for refund was filed beyond the reglementary period.
Did the claim for refund prescribe?
A:The claim for refund has prescribed. The counting of the two year prescriptive period for filing a claim for refund is
counted not from the date when the quarterly income taxes were paid but on the date when the final adjustment
return or annual income tax return was filed (CIR v TMX Sales, G.R. No. 83736, January 15, 1992; CIR v Philam Life
Insurance Co., Inc., G.R. No. 105208, May 29,1995). It is obvious that the annual income tax return was filed before
January 10, 1994 because the written claim for refund was filed with the BIR on January 10, 1994. Since the two-
year prescriptive period is not only a limitation of action for bringing the case to the judicial stage, the petition for
review filed with the CTA on March 2, 1996 is beyond the reglementary period.
Q: A.What must a taxpayer do in order to claim refund of, or tax credit of, taxes and penalties which he alleged to
have been erroneously, illegally or excessively assessed or collected?
A. Can the Commissioner grant a refund or tax credit even without a written claim for it?
A: A. The taxpayer must comply with the following procedures in claiming a refund of, or tax credit for, taxes and
penalties which he alleges to have been erroneously, illegally or excessively assessed or collected:
1. He should file a written claim for refund with the Commissioner within two years after the date of
payment of the tax or penalty (Sec. 204, NIRC);
2. The claim filed must state a categorical demand for reimbursement (Mermejo v Collector, 87
Phil. 96 [1950]);
3. The suit or proceeding for recovery must be commenced in court within two years from date of
payment of the tax or penalty regardless of any supervening event that will arise after payment
(Sec. 229, NIRC). [NOTE: If the answer given is only number 1, it is suggested that the same
shall be given full credit, considering that this is the only requirement for the Commissioner to
acquire jurisdiction over the claim.]
B. Yes. When the taxpayer files a return which on its face shows an overpayment of the tax and the option to
refund/claim a tax credit was chosen by the taxpayer, the Commissioner shall grant the refund or tax credit
without the need for a written claim. This is so, because a return filed showing an overpayment shall be
considered as a written claim for credit or refund (Secs. 76 and 204, NIRC). Moreover, the law provides
that the Commissioner may, even without a written claim therefore, refund or credit any tax where on the
face of the return upon which payment was made, such payment appears clearly to have been erroneously
paid (Sec. 229, NIRC).
Q: On June 16, 1997, the Bureau of Internal Revenue (BIR) issued against the estate of Jose de la Cruz a notice of
deficiency estate tax assessment, inclusive of surcharge, interest and compromise penalty. The Executor of the
estate of Jose de la Cruz (Executor) filed a timely protest against the assessment and requested for waiver of the
surcharge, interest and penalty. The protest was denied by the Commissioner of Internal Revenue (Commissioner)
with the finality on September 13, 1997. Consequently, the Executor was made to pay the deficiency assessment on
October 10, 1997. The following day, the Executor filed a petition with the Court of Tax Appeals (CTA) praying for the
refund of the surcharge, interest and compromise penalty. The CTA took cognizance of the case and ordered the
Commissioner to make a refund. The Commissioner filed a petition for review with the Court of Tax Appeals assailing
the jurisdiction of the CTA and the Order to make refund to the Estate on the ground that no claim for refund was
filed with the BIR.
a) Is the stand of the Commissioner correct? Reason.
A: A.Yes. There was no claim for refund or credit that has been duly filed with the
Commissioner of Internal Revenue which is required before a suit or proceeding can be filed in any court (Sec. 229,
NIRC). The denial of the claim by the Commissioner is the one which will vest the Court of Tax Appeals jurisdiction
over the refund case should the taxpayer decide to appeal on time.
b) Why is the filing of an administrative claim with the BIR necessary? B:
The filing of an administrative claim for refund with the BIR is necessary in order:
1) To afford the Commissioner an opportunity to consider the claim and to have a chance to correct the
errors of subordinate officers (Gonzales v CTA, et al., 14 SCRA 79); and
2) To notify the Government that such taxes have been questioned and the notice should be borne in
mind in estimating the revenue available for expenditures (Bermejo v Collector; G.R.No. L-3028, July
29, 1950)
Q:Is a protest at the time of payment of taxes/duties a requirement to preserve the taxpayer’s right to claim a refund?
Explain.
A:For taxes imposed under the NIRC, protest at the time of payment is not required to preserve the taxpayers’ right
to claim refund. This is clear under Section 230 of NIRC which provides that a suit or proceeding may be maintained
for the recovery of national internal revenue tax or penalty alleged to have been erroneously assessed or collected,
whether such tax or penalty has been paid under protest or not.
For duties imposed under the Tariff and Customs Code, a protest at the time of payment is required to
preserve the taxpayers’ claim for refund. The procedure under the TCC is to the effect that when a ruling or decision
of the Collector of Customs is made whereby liability for duties is determined, the party adversely affected may
protest such ruling or decision by presenting to the Collector, at the time when payment is made, or within fifteen
days thereafter, a written protest setting forth his objections to the ruling or decision in question (Sec. 2308, TCC).
Q:ABCD Corporation is a domestic corporation with individual and corporate shareholders who are residents of the
US. For the 2nd quarter of 1983, these USbased individual and corporate shareholders received cash dividends from
the corporation. The corresponding withholding tax on dividend income – 30% for individual, and 35% for corporate
nonresident stockholders – was deducted at source and remitted to the BIR. On May 15, 1984, ABCD filed with the
CIR a formal claim for refund, alleging that under the RP-US Tax Treaty, the deduction of withholding tax on
dividends was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax due on the
cash dividends given to its non-resident stockholders in the US. The Commissioner denied the claim. On
January 17, 1985, ABCD filed a petition with the CTA, reiterating its demand for refund. (a) Does ABCD Corporation
have the legal personality to file the refund on behalf of its non-resident stockholders? (b) Is the contention of ABCD
Corporation correct?
A: a. In Procter & Gamble PMC, supra, involving the refund of alleged over-withheld final withholding tax on
dividends paid out to a non-resident foreign corporation, the defense of the Government against the claim to the
effect that a mere withholding agent is not the proper party that should claim such refund, was not interposed by the
Government in the lower court but was raised only for the first time on appeal. The Supreme Court sustained the
Government’s position and ruled that estoppel does not preclude the Government from its right to bring up such
defense even for the first time on appeal. However, the Supreme Court, in a subsequent resolution, ruled that the
BIR should not be allowed to defeat an otherwise valid claim for refund by raising the question of the withholding
agent’s alleged incapacity to file the claim for refund for the first time on appeal. The Government must follow the
same rules of procedure which bind private parties. (Commissioner v Procter & Gamble, PMC, 204 SCRA 377).
a. Yes, ABCD is correct. The applicable final withholding income tax rate on the cash dividends paid it to
non-resident shareholders is only 25% of the gross dividend, pursuant to the RP-US Tax Treaty.
Considering that the final withholding taxes deducted and remitted to BIR are 30% (for individuals)
and 35% (for corporations), there was overpayment of income tax.
Q: Lily’s Fashion Inc. is a garment manufacturer located and registered as a Subic Bay Freeport Enterprise under
Republic Act No. 7227 and a non-VAT taxpayer. As such, it is exempt from payment of all local and national internal
revenue taxes. During its operations, it purchased various supplies and materials necessary in the conduct of its
manufacturing business. The suppliers of these goods shifted to Lily’s Fashion, Inc. the 10% VAT on the purchased
items amounting to
P500,000.00. Lily’s Fashion, Inc. filed with the BIR a claim for refund for the input tax shifted to it by the suppliers. If
you were the Commissioner of Internal Revenue, will you allow the refund?
A: No. The exemption of Lily’s Fashion, Inc. is only for taxes for which it is directly liable; hence, it cannot claim
exemption for a tax shifted to it, which is not at all considered a tax to the buyer but a part of the purchase price.
Lily’s Fashion, Inc. is not the taxpayer insofar as the passed-on tax is concerned and therefore, it cannot claim a
refund of a tax merely shifted to it. Only taxpayers are allowed to file a claim for refund (Phil. Acetylene Co. v CIR, 20
SCRA 1056 [1987]).
Q: A Co. is the wholly owned subsidiary of B Co., a non-resident German company. A Co. has a trademark licensing
agreement with B Co. On February 10, 1995, A Co. remitted to B Co. royalties of P10,000,000.00, which A Co.
subjected to a WT of 25% or P2,500,000.00 with the BIR. Upon advice of counsel, A Co. realized that the proper WT
rate is 10%. On March 20, 1996, A Co. filed a claim for refund of
P2,500,000.00 with the BIR. The BIR denied the claim on November 15, 1996. On November 28, 1996 A Co.
filed a petition for review with the CTA. The BIR attacked the capacity of A Co., as agent, to bring the refund
case. Decide the issue. A: A Co., the withholding agent of the non-resident foreign corporation, is entitled to claim
the refund of excess withholding tax paid on the income of said corporation in the Philippines. Being a withholding
agent, it is the one held liable for any violation of the withholding tax law should such a violation occur. In the same
vein, it should be allowed to claim a refund in case of over-withholding. (CIR v Wander Phils., Inc., GR No. 68378,
April 15, 1988, 160 SCRA 573; CIR v Procter & Gamble PMC, 204 SCRA 377).
CHAPTER XXXII LOCAL BUSINESS TAXES
Q:Congress, after much public hearing and consultations with various sectors of society, came to the
conclusion that it will be good for the country to have only one system of taxation by centralizing the
imposition and collection of all taxes in the national government. Accordingly, it is thinking of passing a law
that would abolish the taxing power of all local government units. In your opinion, would such a law be valid
under the present Constitution? Explain your answer. A: No. The law centralizing the imposition and collection
of all taxes in the national government would contravene the Constitution which mandates that: “Each local
government unit shall have the power to create their own sources of revenue and to levy taxes, fees, and charges
subject to such guidelines and limitations as Congress may provide consistent with the basic policy of local
autonomy.” It is clear that Congress can only give the guidelines and limitations on the exercise by the local
governments of the power to tax but what was granted by the fundamental law cannot be withdrawn by Congress.
Q: In order to raise revenue for the repair and maintenance of the newly constructed City Hall of Makati, the City
Mayor ordered the collection of P1.00, called “elevator tax”, every time a person rides any of the high-tech elevators
in the city hall during the hours of 8:00am to 10:00 am and 4:00pm to 6:00 pm. Is the “elevator tax” a valid
imposition? Explain.
A: No. The imposition of a tax, fee or charge or the generation of revenue under the Local Government Code shall
be exercised by the Sanggunian of the local government unit concerned through an approporiate ordinance (Sec.
132, LGC). The city mayor alone could not order the collection of the tax. As such, the “elevator tax” is an invalid
imposition.
Q:The City of Manila enacted an ordinance, imposing 5% tax on gross receipts on rentals of space in privately-
owned public markets. BAT Corporation questioned the validity of the ordinance, stating that the tax is an income
tax, which cannot be imposed by the city government. Do you agree with the position of BAT Corporation? Explain.
A: Bo, I do not agree with the position of BAT Corporation. The 5% tax on gross receipts of rentals of space in
privately-owned public markets imposed under the ordinance of City of Manila is not an income tax, which may not
be imposed by the city government, but a valid license tax or fee for the regulation of business. (Progressive
Development Corporation v Quezon City, GR No. 36081, April 24, 1989).
Q: XYZ Shipping Corporation is a branch of an international shipping line with voyages between Manila and West
Coast of the U.S. The company’s vessels load and unload cargoes at the Port of Manila, albeit it does not have a
branch or sales office in Manila. All the bills of lading and invoices are issued by the branch in Makati which is also
the company’s principal office. The City of Manila enacted an ordinance levying a 2% tax on gross receipts of
shipping lines using the Port of Manila. Can the city government of Manila legally impose said levy on the
corporation?
A: The situs is the place or incident of an event or location of property, and the situs of a tax is, therefore, the place
where the tax has to be paid. Section 150 of the LGC provides for the situs of the tax imposed on taxpayers
enumerated therein. The recording of sales of goods and services subject to the local business taxes shall be made
in the branch or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be paid to the
municipality or city where such branch or sales outlet is located. In cases where there is no such branch or sales
outlet in the city or municipality where the sale or transaction is made, the sale shall be duly recorded in the principal
office and the taxes due shall accrue and shall be paid to such city or municipality (Sec. 150[a], LGC). In this case,
the principal office in Makati City which issued the bills of landing and the invoices to the customers has no branch in
the City of Manila, where the business transactions take place. In view thereof, the sales allocation shall be made as
follows: 30% to the sales recorded in the principal office in Makati City shall be taxable by the city where the principal
office is located, and 70% of the total sales recorded in Makati City shall be taxable by the City of Manila, where
transaction is had (Sec. 150[b], LGC).
Q: What is the basis for the computation of business tax on contractors under the Local Government Code?
A: “Gross sales or receipts” include the total amount of money or its equivalent representing the contract price,
compensation or service fee, including the amount charged or the materials supplied with the services and deposits
or advance payments actually or constructively received during the taxable quarter for the services performed or to
be performed for another person, excluding discounts if determinable at the time of sales, sales return, excise tax,
and value added tax (Sec.131 [n], LGC).
Q: ABC Corporation is registered as a holding company and has an office in the City of Makati. It has no actual
business operations. It invested in another company and its earnings are limited to dividends from this investment,
interests on its bank deposits, and foreign exchange gains from its foreign currency account. The City of Makati
assessed ABC Corporation as a contractor or one that sells services for a fee. Is the City of Makati correct?
A: No. The corporation cannot be considered as a contractor because it does not render services for a fee. A
contractor is one whose activity consists essentially in the sale of all kinds of services for a fee, regardless of whether
or not the performance of the service calls for the exercise or use of the physical or mental faculties of such
contractor or its employees. To be considered as a contractor, the corporation must derive income from doing active
business of selling services and not from deriving purely passive income. Only income arising from the performance
of services to its customers is subject to local business tax. Accordingly, a mere holding company cannot be
assessed by the City of Makati as a contractor (Sec. 131 [h], LGC; Orlyete Company [Phil. Branch]) v City of Makati,
CTA, November 14, 2012).
Q: Mr. Fermin, a resident of Quezon City, is a Certified Public Accountant-Lawyer engaged in the practice of his two
professions. He has his main office in Makati City and maintains a branch office in Pasig City. Mr. Fermin pays his
professional tax as a CPA in Makati City and his professional tax as a lawyer in Pasig City.
a. May Makati City, where he has his main office, require him to pay his professional tax as a lawyer? Explain.
b. May Quezon City, where he has his residence and where he also practices his two professions, go after him
for the payment of his professional tax as a CPA and a lawyer? Explain.
A: a. No. Mr. Fermin is given the option to pay either in the city where he practices his profession or where he
maintains his principal office in case he practices his profession in several places. The professional tax paid as a
lawyer in Pasig City, a place where he practices his profession, will entitle him to practice his profession in any part
of the Philippines without being subjected to any other national or local tax, license, or fee for the practice of such
profession (Sec. 139, in relation to Sec. 151, LGC).
b. No. The professional tax shall be paid only once for every taxable year and the payment shall be made
either in the city where he practices his profession or where he maintains his principal office. The city
of residence cannot require him to pay his professional taxes (Sec. 139, in relation to Sec. 151, LGC).
Q: MNO Corporation was organized on July 1, 2006 to engage in trading of school supplies, with principal place of
business in Cubao, Quezon City. Its book of accounts and income statement show the following date:
July 1, 2006 to December 31, 2006 P5,000,000
January 1,2007 to June 30, 2007 10,000,000
July 1, 2007 to December 31, 2007 15,000,000
Since MNO Corporation adopted fiscal year ending June 30 as its taxable year for income tax purposes, it
paid its 2%business tax for fiscal year ended June 30,2007 based on gross sales of P15,000,000. However, the
Quezon City treasurer assesses the corporation for deficiency business tax for 2007 based on gross sales of
P25,000,000, alleging that local business taxes should be computed based on calendar year.
a. Is the position of the city treasurer tenable? Explain.
b. May the deficiency business tax be paid on installments without surcharge and interest? Explain. A:
a. Yes, the City Treasurer is correct in using the gross sales for the calendar year of P25 million for purposes
of computing the 2% local business tax for the year 2007. The tax period of local taxes, fees and charges
is the calendar year, except when otherwise provided in the Code (Sec. 165, LGC). The use of the fiscal
year by corporations for purposes of computing taxes is allowed only under the National Internal Revenue
Code, but not under the Local Government Code.
b. The local levies may be paid on quarterly installments (Sec. 165, LGC) within the first twenty days of each
quarter. The time for payment may be extended by the Sanggunian concerned, without surcharges or
penalties, but only for a period not exceeding six months (Sec. 167, LGC).
Q: Ferremaro, Inc., a manufacturer of handcrafted shoes, maintains its principal office in Cubao, Quezon City. It has
branches/sales offices in Cebu and Davao. Its factory is located in Marikina City, where most of its workers live. Its
principal office in Quezon City is also a sales office. Sales of finished product for 2009 in the amount of P10 million
were made at the following locations: (i) Cebu – 25%; (ii) Dacao – 15%’ and (iii) Quezon City – 60%. Where should
the applicable local taxes on the shoes be paid?
A: The sales made in the Cebu branch (25%) and the Davao branch (15%) shall be reported by the respective
branches in their books and the local taxes due thereon will be paid to the city of Cebu and Davao, respectively.
However, the sales recorded in the books of Quezon City to the extent of 60% shall be allocated as follows: 30% of
60% shall be paid to the Quezon City government, while the 70% of the 60% shall be allocated and paid to the
Marikina City government, where the factory is located.
Q:The municipality of Argao, Province of Cebu passed a tax ordinance requiring all professionals practicing in the
municipality to pay a tax equivalent to 2% of their gross income. A certified true copy of the ordinance was sent to the
Secretary of
Finance for review on March 1, 1989 and was received by him on the same day. On
15 August 1989 even as the tax ordinance remained unacted upon by the Secretary of Finance, the municipality
started collecting the tax to question. The members of the Philippine Bar in the municipality questioned the legality of
the ordinance and sought the suspension of the collection of the tax, but the municipality argued that since the
Secretary has not taken any action on the ordinance for more than one hundred twenty days after his receipt thereof,
the legality of the ordinance can no longer be questioned and insisted on the collection of the tax. Is the tax
ordinance in question legal?
A: No, the tax ordinance is not legal as the Local Tax Code allows provinces and cities, to the exclusion of
municipalities, to impose an annual occupation tax on all persons engaged in the exercise of practice of their
profession or calling in specified amounts which in the case of lawyers is P75.00 per annum (Secs 11 and 12 in
relation to Sec. 23, Local Tax Code). A person authorized to practice his profession or calling shall pay the tax to the
province where he practices his professions or calling or maintains his office. No local government unit can impose a
tax on income (Sec. 5. Local Tax Code).
2) Is the Municipality correct in insisting on collecting the tax?
B: No, the Municipality was incorrect in insisting on the collection of the tax. Once the tax on occupation is paid as
stated in paragraph (a) above, the lawyer is entitled to practice his profession or calling in all parts of the Philippines
without being subject to any other national or local tax, license or fee for the practice of such profession or calling.
3) Will the inaction of the Secretary of Finance bar the professionals in the Municipality from questioning the legality
of that ordinance?
C: The inaction of the Secretary of Finance does not bar the professionals in the Municipality from questioning the
legality of the ordinance. While it is true that the Secretary of Finance may himself suspend the tax ordinance within
a 120-day period from receipt thereof, his failure to do so, however, has no preclusive effect on taxpayers who may
be adversely affected by the ordinance.
4) What remedies are available to the taxpayer to enable him to question the legality of that ordinance?
D: The taxpayer may pursue his remedies either administratively or judicially. He may, as the case warrants, file a
formal protest with the Secretary of Finance or query with the Provincial Fiscal whose opinion is appealable to the
Secretary of Justice whose decision may be contested in the proper court. The other remedy would be to file a
special civil action for declaratory relief (if circumstances still warrant) or to pay the tax and thereafter to file an action
for refund within six [now 2] years after such payment.
Q: 1. Tax lien- Local taxes, fees, charges and other revenues constitute a lien, superior to all liens, charges or
encumbrances in favor of any person, enforceable by appropriate administrative or judicial action, not only upon any
property or rights therein which may be subject to the lien but also upon property used in business, occupation,
practice of profession or calling, or exerciseo f privilege with respect to which the lien is imposed. The lien may be
extinguished upon full payment of the delinquent local tax fee or charge, including related surcharges or interest
(Sec. 173, LGC).
2. Distraint and levy – The civil remedies for the collection of local taxes, fees or charges, including the applicable
surcharges and interests, fees or charges, may either be (a) by the administrative remedies of distraint of personal
property of whatever kind, including securities and bank accounts, and levy of real property and interest therein, or
(b) by judicial action. Either of these remedies, or both, may be pursued concurrently or simultaneously at the
discretion of the local government unit concerned (Sec. 174, LGC).
3. Judicial action. – The local government may institute an ordinary civil action with the regular courts of proper
jurisdiction for the collection of delinquent taxes, fees, charges or revenues (Sec. 183, LGC). The term “civil action”
would preclude a criminal case as a proper remedy for the collection of delinquent local taxes (Republic v Patanao,
20 SCRA 712)
Q: How are retiring businesses taxed under the Local Government Code?
A: Upon the termination of business subject to tax under Section 143 of the Local Government Code, it is required to
submit a sworn statement of gross sales or receipts for the current year. If the tax paid during the year be less than
the tax due on said gross sales or receipts of the current year, the difference shall be paid before the business is
considered officially retired (Sec 145, LGC).
Q: On May 15, 2009, La Manga Trading Corporation received a deficiency business tax assessment of P1,500,000
from Pasay City Treasurer. On June 30, 2009, the corporation contested the assessment by filing a written protest
with the City Treasurer. On October 10, 2009, the corporation received a collection letter from the City Treasurer,
drawing it to file on October 25, 2009 an appeal against the assessment before the Pasay Regional Trial Court. (a)
Was the protest of the corporation filed on time? (b) Was the appeal with the Pasay RTC filed on time? A: a.Yes.
Since the business tax assessment was received on May 15, 2009 and the protest thereto was filed on June 30,
2009, or a total period of 49 days, the taxpayer thus timely filed such protest. The law allows the taxpayer to files its
protest within 60 days from the date of receipt of assessment.
b.The taxpayer shall, within 30 days from receipt of the denial of the protest or from the lapse of the 60-day period
prescribed within which to appeal with the court of competent jurisdiction; otherwise, the assessment becomes
conclusive and unappealable. The fifth sentence of Section 195 of the LGC of 1991 does not provide for any
administrative appeal. Hence, the taxpayer can only appeal to a court of competent jurisdiction. In this case, the local
treasurer is acting as a quasi-judicial agency. Under Section 49 of the 1997 Rules of Civil Procedure, appeals from
quasi-judicial agencies, in the exercise of judicial functions, shall be brought to the Court of Appeals. In this case,
the appeal was brought by the corporation to the Pasay RTC, which is not the court of competent jurisdiction. Thus,
the appeal was not filed on time.
Q: X, a taxpayer who believes that an ordinance passed by the City Council of Pasay is unconstitutional for being
discriminatory against him, wants to know from you, his tax lawyer whether or not he can file an appeal. In the
affirmative, he asks you where such appeal should be made: the Secretary of Finance, or the Secretary of Justice, or
the Court of Tax Appeals, or the regular courts. What would you advice your client, X?
A: The appeal should be filed with the Secretary of Justice. Any question on the constitutionality or legality of a tax
ordinance may be raised on appeal with the Secretary of Justice within 30 days from the effectivity thereof (Sec. 187,
LGC; Hagonoy Market Vendor Association v Mun. of Hagonoy, GR No. 137621, February 6, 2002).
CHAPTER XXXIII: REAL PROPERTY TAX
Q: Mr. Jose Castillo is a citizen, who purchased a parcel of land in Makati City in 1970 at a consideration of P1
million. In 2011, the land, which remained undeveloped and idle, had a fair market value of P20 million. The
Assessor of Makati re-assessed in 20122 the property at P10 million. When is Mr. Castillo liable for real property tax
on the land based on the re-assessed fair market value, beginning 2011 or 2012?
A. Mr. Castillo shall be liable to the real property tax based on the re-assessed fair market value of P10 million
beginning 2012. All re-assessments made after the first day of any year shall take effect on the first of January of the
succeeding year (Sec. 21, LGC). The fair market value of P20 million as determined by the Commissioner shall be
used only for the purposes of national internal revenue taxes.
Q: A city outside of Metro Manila plans to enact an ordinance that will impose a special levy on idle lands located in
residential subdivisions within its territorial jurisdiction in addition to the basic real property tax. If the lot owners of a
subdivision located in the said city seeks your legal advice on the matter, what would your advice be? Discuss.
A: My advice would be that the city’s plan to enact on ordinance that will impose such special levy on idle lands is not
legally allowed, unless these lands are specially benefited by a public works projects or improvements funded by the
city government (Sec. 240, LGC). I will likewise advise them that before the city council could enact an ordinance
imposing a special levy, it shall conduct a public hearing thereon; notify in writing the owners of the real property to
be affected or the persons having legal interest therein as to the date and place thereof and afford the latter the
opportunity to express their positions or objections relative to the proposed ordinance (Sec. 242, LGC).
Q: In view of the street widening and cementing of roads and the improvement of drainage and sewers in the district
of Ermita, the City Council of the City of Manila passed on an ordinance imposing and collecting a special levy on
lands in the district. Jose Reyes a landowner and resident of Ermita, submitted a protest again the special levy fifteen
(15) days after the last publication of the ordinance alleging that the special levy was exorbitant since the rate thereof
was more than the maximum rate of two percent (2%) of the assessed value of the real properties allowed by
Section 39 of Presidential Decree No. 464, as amended. Assuming that Jose Reyes is able to prove that the rate of
the special levy is more than the aforesaid percentage limitation of 2%, will his protest prosper? A: The special levy
under the Real Property Tax Code on lands, specially benefited by the proposed infrastructure, may not exceed 60%
of the cost of said improvement. All lands comprised within the district benefited are subject to the special levy
except lands exempt from the real property tax (Sec. 47, Real Property Tax). The protest shall be filed not later than
30 days after the publication of the ordinance and may be submitted to the City Sanggunian signed by a majority of
the landowners affected by the proposed work. If no such protest is filed in the manner above specified, the city
ordinance shall become final and effective. The levy imposed under the ordinance should be within the limit of 60%
of the total cost of the proposed improvement.
The rate of two percent (2%) of the assessed value under Section 39 of P.D. 464 refers to the real property tax and
not to special levies.
Q: May local governments impose an annual reality tax in addition to the basic real property tax on idle or vacant lots
located in residential subdivisions within their respective territorial jurisdictions?
A: Not all local government units may do so. Only provinces, cities, and municipalities within the Metro Manila area
(Sec. 232, LGC) may impose an ad valorem tax not exceeding five percent (5%) of the assessed value (Sec. 236,
LGC) of idle or vacant residential lots in a subdivision, duty approved by proper authorities regardless of area (Sec.
237, LGC)