MANGILIMAN, Neil Francel D.

JD 2-2
201980051

5. Escape from Taxation

A. Shifting of tax burden

Shifting is the transfer of the burden of tax by the original payer or the one on whom
the tax was assessed or imposed to another or someone else without violating the law.

Examples of taxes when shifting may apply are VAT, percentage tax, excise tax on
excisable articles, ad valorem tax that oil companies pay to BIR upon removal of
petroleum products from its refinery.

Ways of shifting the tax burden

1. Forward shifting – When the burden of tax is transferred from a factor of production
through the factors of distribution until it finally settles on the ultimate purchaser or
consumer.
2. Backward shifting – When the burden is transferred from the consumer through the
factors of distribution to the factors of production.
3. Onward shifting – When the tax is shifted two or more times either forward or
backward.

Direct and Indirect taxes

It is direct taxes when the impact or liability for the payment of tax as well as
incidence or burden of tax of the tax falls on the same person. On the other hand, it is
indirect taxes when the impact or liability for the payment of tax falls on one person
but the incidence or burden thereof can be shifted or passed to another.

B. Tax avoidance / tax minimization

Tax avoidance is a scheme where the taxpayer uses legally permissible alternative
method of assessing taxable property or income, in order to avoid or reduce tax
liability.

It is a tax saving device within the means sanctioned by law. This method should be
used by the taxpayer in good faith and at arm’s length (CIR v. The Estate of Benigno
Toda Jr., G.R. No. 30554, February 28, 2004).

C. Tax evasion / tax dodging

Tax evasion is a scheme where the taxpayer uses illegal or fraudulent means to defeat
or lessen payment of a tax.
 It 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 (CIR v. The
Estate of Benigno Toda Jr. G.R. No. 30554, February 28, 2004).

Elements to be considered in determining that there is tax evasion:

1. Course of action is unlawful;

2. Accompanying state of mind which is described as being evil, in bad faith,
willful or deliberate and not accidental; and
3. End to be achieved, i.e., payment of less than that known by the taxpayer to
be legally due, or non-payment of tax when it is shown that the tax is due.

6. Tax Exemption

The grant of immunity to particular persons or corporations or to persons or corporations of a

particular class from a tax which persons and corporations generally within the same state or
taxing district are obliged to pay. It is an immunity or privilege; it is freedom from a financial
charge or burden to which others are subjected. It is strictly construed against the taxpayer.

It is a waiver of the government's right to collect the amounts that would have been collectible
under our tax laws. Thus, when the law speaks of a tax exemption, it should be understood as
freedom from the imposition and payment of a particular tax. [Secretary of Finance v.
Lazatin, G.R. No. 210588 (2016)]

Taxation is the rule; exemption is the exception. He who claims exemption must be able to
justify his claim or right thereto, by a grant expressed in terms “too plain to be mistaken and
too categorical to be misinterpreted.” If not expressly mentioned in the law, it must at least be
within its purview by clear legislative intent. [Jaka Investments Corp. v. CIR, G.R. No.
147629 (2010)]

Kinds of tax exemption

1. As to basis:

 Constitutional – Immunities from taxation which originate from the Constitution.

 Statutory – Those which emanate from legislation.

 Contractual – Agreed to by the taxing authority in contracts lawfully entered into by

them under enabling laws.

 Implied – When particular persons, properties or excises are deemed exempt as they
fall outside the scope of the taxing provision.
  Treaty

 Licensing ordinance

2. As to extent:

 Total – Connotes absolute immunity

 Partial – One where a collection of a part of the tax is dispensed with

3. As to object:

 Personal – Granted directly in favor of certain persons

 Impersonal – Granted directly in favor of a certain class of property

Principles of Tax Exemption:

a. As the power of taxation is a high prerogative of sovereignty, the relinquishment is

never presumed and any reduction or diminution thereof with respect to its mode or its
rate, must be strictly construed, and the same must be couched in clear and unmistakable
terms in order that it may be applied. [Floro Cement v. Gorospe, G.R. No. L-46787
(1991)

b. When granted, they are strictly construed against the taxpayer [Luzon Stevedoring Co.
v. CTA, G.R. No. L-30232 (1988)]

c. Tax exemptions are strictly construed against the taxpayer, they being highly
disfavored and may almost be said “to be odious to the law.” [Manila Electric Company
v. Vera, supra] Revocation of Tax Exemption

General Rule: Revocable by the government.

Exception: Contractual tax exemptions may not be unilaterally so revoked by the taxing
authority without thereby violating the nonimpairment clause of the Constitution.

7. Doctrine of Equitable Recoupment

The doctrine of equitable recoupment allows a taxpayer whose claim for refund has been
barred by prescription to offset such claims against a current assessment.

The doctrine also allows the government to offset taxes that have not been collected from the
taxpayer against a current claim for refund, although the government is time-barred from
collecting the previous taxes.
 The doctrine finds NO application in this jurisdiction.

8. Prohibition on Compensation and Set-off.

General rule: Taxes cannot be subject to compensation [South African Airways v. CIR, G.R.
No. 180356 (2010)]

Reasons:
a. This would adversely affect the government revenue system [Philex Mining v. CA,
G.R. No. 125704 (1998)].

b. 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. We
find no cogent reason to deviate from the aforementioned distinction. [South African
Airways v. CIR, supra]

Exception: If the claims against the government have been recognized and an amount has
already been appropriated for that purpose. Where both claims have already become:
a. Due,
b. Demandable, and
c. Fully liquidated, compensation takes place by operation of law under Art. 1200 in
relation to Articles 1279 and 1290 of the NCC, and both debts are extinguished to the
concurrent amount. [Domingo v. Garlitos, G.R. No. L-18994 (1963)]

9. Compromise

Compromise is a contract whereby the parties, by reciprocal concessions, avoid litigation or put
an end to one already commenced. It implies the mutual agreement by the parties in regard to the
thing or subject matter which is to be compromised.
Compromises are generally allowed and enforceable when the subject matter thereof is not
prohibited from being compromised and the person entering such compromise is duly authorized
to do so.

Requisites of a tax compromise:

a. The taxpayer must have a tax liability.
b. There must be an offer (by the taxpayer or Commissioner) of an amount to be paid by
the taxpayer.
c. There must be acceptance (by the Commissioner or the taxpayer, as the case may be)
of the offer in settlement of the original claim.

10. Tax Amnesty

Tax amnesty, being a general pardon or intentional overlooking by the State of its authority to
impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. It
partakes of an absolute 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 (Asia International
Auctioneers, Inc. v. CIR, G.R. No. 179115, September 26, 2012).

A tax amnesty, much like a tax exemption, is never favored or 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 (Asia International Auctioneers, Inc. v. CIR, G.R. No.
179115, September 26, 2012).

11. Power to Tax and the Power to Destroy

12. Taxpayer’s Suit and Citizen’s Suit

It is a case where the act complained of directly involves the illegal disbursement of public funds
collected through taxation.

In the case of Abaya v. Ebdane (515 SCRA 720), the prevailing doctrine in the taxpayer’s suits
is:
 To allow the taxpayers to question contracts entered into by the National Government or
government owned and controlled corporations allegedly in contravention of law;
 To allow the taxpayer to sue when there is a claim that public funds are illegally
disbursed or public money is being deflected to any improper purpose, or that there is a
wastage of public funds through the enforcement of an invalid or unconstitutional law;
 Significantly, a taxpayer need not be a party to the contract to challenge its validity.

M. Construction and Interpretation of Tax Laws, Rules and Regulations

1. Tax Laws

General Rule: Tax laws are construed strictly against the government and liberally in
favor of the taxpayer. [Manila Railroad Co. v. Coll. Of Customs, G.R. No. L-30264
(1929)].

No person or property is subject to taxation unless within the terms or plain import of a
taxing statute. [see 72 Am. Jur. 2d 44] Taxes, being burdens, are not to be presumed
beyond what the statute expressly and clearly declares. [Coll. v. La Tondena, G.R. No. L-
10431 (1962)].

Thus, a tax payable by “individuals” does not

apply to “corporations.”

Exceptions:
 The rule of strict construction as against the government is not applicable where
 the language of the statute is plain and there is no doubt as to the legislative intent
[see 51 Am. Jur. 368]. E.g. Word “individual” was changed by the law to
“person”. This clearly indicates that the tax applies to both natural and juridical
persons, unless otherwise expressly provided.
 The rule does not apply where the taxpayer claims exemption from the tax.

2. Tax Rules and Regulations

Tax exemptions must be shown to exist clearly and categorically, and supported by clear
legal provisions. [NPC v. Albay, G.R. No. 87479 (1990)]

General Rule:
In the construction of tax statutes, exemptions are not favored and are construed
strictissimi juris against the taxpayer. [Republic Flour Mills v. Comm. & CTA, G.R. No.
L-25602 (1970)]
 NPC v. Albay [supra]: Tax exemptions must be shown to exist clearly and
categorically, and supported by clear legal provisions.
 Floro Cement v. Gorospe [supra]: Claims for an exemption must be able to point
out some provision of law creating the right, and cannot be allowed to exist upon a
mere vague implication or inference.
 RCPI v Provincial Assessor of South Cotabato [G.R. No. 144486 (2005)]:
Exemptions are strictly construed against the taxpayer and liberally in favor of the
taxing authority—it is the taxpayer’s duty to
justify the exemption by words too plain to be mistaken and too categorical to be
misinterpreted.
 CIR v. CA [supra]: Refunds are in the nature of exemption and must be construed
strictly against the grantee/taxpayer.
 Quezon City v. ABS-CBN Broadcasting Corporation [G.R. No. 166408 (2008)]:
Since taxation is the rule and exemption
the exception, the intention to make an
exemption ought to be ex

Exceptions:
 When the law itself expressly provides for a liberal construction, that is, in case of
doubt, it shall be resolved in favor of exemption;
 When the exemption is in favor of the government itself or its agencies, or of
religious, charitable, and educational institutions because the general rule is that
they are exempt from tax.
 When the exemption is granted under special circumstances to special classes of
persons.
 If there is an express mention or if the taxpayer falls within the purview of the
exemption by clear legislative intent, the rule on strict construction does not
apply. [Comm. v. Arnoldus Carpentry Shop, Inc., G.R. No. 71122 (1988)].

3. Tax Exemption and Tax Exclusion

 General Rule: Statutes granting tax exemptions are construed in strictissimi juris against
the taxpayers and liberally in favor of the taxing authority (MCIAA v. Marcos, G.R. No.
120082 September 11, 1996).

Tax refunds are in the nature of tax exemptions which are construed in strictissimi juris
against the taxpayer and liberally in favor of the government (Kepco Philippines
Corporation v. CIR, G.R. No. 179961, January 31, 2011).

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. Thus, the omission or removal of PAGCOR from exemption from the
payment of corporate income tax is to require it to pay corporate income tax (PAGCOR v.
BIR, G.R. No. 172087, March 15, 2011).

Exceptions:
 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 (MCIAA v. Marcos, G.R. No. 120082,
September 11, 1996).
 The exemption granted in favor of NAPOCOR must be liberally construed. It is a
recognized principle that the rule on strict interpretation does not apply in the case
of exemptions in favor of a government political subdivision or instrumentality. In
the case of property owned by the state or a city or other public corporations, the
express exemption should not be construed with the same degree of strictness that
applies to exemptions contrary to the policy of the state, since as to such property
"exemption is the rule and taxation the exception” (Maceda v. Macaraig, G.R. No.
88291, May 31, 1991).

 Erroneous payment of the tax, or absence of law for the government’s exaction
(CIR v. Fortune Tobacco Corporation, G.R. Nos. 167274-75, July 21, 2008).

4. Penal Provisions of Tax Laws

Penal provisions of tax laws must be strictly construed. It is not legitimate to stretch the
language of a rule, however beneficent its intention, beyond the fair and ordinary meaning
of its language.

A penal statute should be construed strictly against the State and in favor of the accused.
The reason for this principle is the tenderness of the law for the rights of individuals and
the object is to establish a certain rule by conformity to which mankind would be safe, and
the discretion of the court limited. [People v. Purisima, G.R. No. L-42050-66 (1978)].

5. Non-retroactive Application to Taxpayer

Tax laws, including rules and regulations operate prospectively unless otherwise
legislatively intended by express terms or by necessary implication (Gulf Air Company,
Philippine Branch v. CIR, G.R. No. 182045, September 19, 2012).