Part One: General Principles of Taxation
concern to be exercised by the local legislative bodies
I. CONCEPT, NATURE, UNDERLYING BASIS, AND
PURPOSE OF TAXATION
CONCEPT OF TAXATION
Taxation is a mode by which governments make exactions for
revenue in order to support their existence and carry out their
legitimate objectives.
(1) power to tax
(2) act or process by which the taxing power is exercised
NATURE OF TAXATION
QUESTION: 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.
ANSWER: 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 tax on the
constituency who are to pay it (Mactan Cebu International
Airport v. Marcos, 261 SCRA 677).
Being an inherent power, the legislature can enact laws to
raise revenues even without the grant of said power in the
Constitution. It must be noted that Constitutional provisions
relating to the power of taxation do not operate as grants of
power to the Government, but instead merely constitute as
limitations upon a power which would otherwise be practically
without limit (Cooley, Constitutional Limitations, 1927, 8th Ed.,
p. 787).
1. It is an attribute of sovereignty.
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 (Pepsi-Cola Bottling Company of the Phil. v.
Mun. of Tanauan, Leyte, 69 SCRA 460).
QUESTION: Why is the power to tax considered inherent in a
sovereign State?
ANSWER: 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
the power to tax.
2. It is legislative in character.
The power of taxation is essentially in a legislative function.
The power to tax includes the authority to: (1) determine the
(a) nature (kind); (b) object (purpose); (c) extent (amount or
rate); (d) coverage (subjects and objects); (e) apportionment of
the tax (general or limited application); (f) situs (place) of the
imposition; and (g) method of collection; (2) grant tax
exemptions or condonations; and (3) specify or provide for the
administrative as well as judicial remedies that either the
government or the taxpayers may avail themselves in the
proper implementation of the tax measure (Philippine
Petroleum Corp. v. Mun. of Pililla, 198 SCRA 82).
3. It is generally not delegated to executive or judicial
department.
The power to tax 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 (Pepsi-Cola Bottling
Company of the Phil. v. Mun. of Tanauan, Leyte, 69 SCRA
460). Delegation of the power to tax is, however, allowed in
the following cases:
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
(a) To local governments in respect of matters of local
thereof (Sec. 5, Art. X, 1987 Constitution);
(b) When allowed by the Constitution. Thus, the Congress
may, by law, authorize the President to fix within specified
limits, and subject to such limitations and restrictions as it
may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts
within the framework of the national development program
of the Government (Sec. 28 [2], Art. VI, 1987 Constitution);
Delegation of legislative powers to the President is permitted
in Sections 23(2) and 28(2) of Article VI of the Constitution. By
virtue of a valid delegation of legislative power, it may also be
exercised by the President and administrative boards, as well
as the lawmaking bodies of all municipal levels, including the
barangay (Camarines Norte Electric Cooperative v. Torres,
G.R. No. 127249). Such delegation confers upon the President
quasi-legislative power which may be defined as the
authority delegated by the lawmaking 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;
(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
(4) It must be reasonable (Hon. Exec. Secretary v.
Southwing Heavy Industries, et al., G.R. No. 164171).
(c) When the delegation relates merely to administrative
implementation that may call for some degree of
discretionary powers under a set of sufficient standards
expressed by law (Cervantes v. Auditor General, 91 Phil.
359), or implied from the policy and purpose of the Act
(Maceda v. Macaraig, 197 SCRA 771).
In every case of permissible delegation, there must be a
showing that the delegation itself is valid. It is valid only if the
law (a) is complete in itself, setting forth therein the policy to
be executed, carried out or implemented by the delegate; and
(b) fixes a standard — the limits of which are sufficiently
determinate and determinable — to which the delegate must
conform in the performance of his functions. A sufficient
standard is one which defines legislative policy, marks its
limits, maps out its boundaries and specifies the public agency
to apply it. It indicates the circumstances under which the
legislative command is to be effected. Both tests are intended
to prevent a total transference of legislative authority to the
delegate, who is not allowed to step into the shoes of the
legislature and exercise a power essentially legislative
(Abakada Guro Party List v. Ermita, G.R. No. 168056).
QUESTION: May Congress, under the 1987 Constitution,
abolish the power to tax of local governments?
ANSWER: No. Congress cannot abolish what is expressly
granted by the fundamental law. The only authority conferred
to Congress is to provide the guidelines and limitations on the
local government’s exercise of the power to tax (Sec. 5, Art. X,
1987 Constitution).
4. It is subject to constitutional and inherent limitations.
The power to tax is said to be the strongest of all the powers of
government. It is unlimited, plenary, comprehensive, and
supreme. In the absence of constitutional restrictions, the
principal check on its abuse resting in the responsibility of
members of Congress to their constituents. However, the
power of taxation is subject to constitutional and inherent
limitations.
Constitutional injunction against deprivation of property without
due process of law may not be passed over under the guise of
the taxing power, except when the taking of the property is in
the lawful exercise of the taxing power, as when, (1) the tax is
for a public purpose; (2) the rule on uniformity of taxation is
observed; (3) either the person or property taxed is within the
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jurisdiction of the government levying the tax; and (4) in the
assessment and collection of certain kinds of taxes, notice and
opportunity for hearing are provided (Pepsi-Cola Bottling
Company of the Phil. v. Mun. of Tanauan, Leyte, 69 SCRA
460).
QUESTION: Taxes are assessed for the purpose of
generating revenue to be used for public needs. Taxation itself
is the power by which the State raises revenue to defray the
expenses of government. A jurist said that a tax is what we
pay for civilization.
In our jurisdiction, which of the following statements may be
erroneous?
1. Taxes are pecuniary in nature.
2. Taxes are enforced charges and contributions.
3. Taxes are imposed on persons and property within the
territorial jurisdiction of a State.
4. Taxes are levied by the executive branch of the
government.
5. Taxes are assessed according to a reasonable rule of
apportionment.
ANSWER: Taxes are levied by the executive branch of the
government.
This statement is erroneous because “levy” refers to the act of
imposition by the legislature which is done through 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, 186 SCRA 1980).
THEORY OR UNDERLYING BASIS OF TAXATION
“Taxes are the lifeblood of the Government and their
prompt and certain availability are an imperious need.”
(Commissioner v. Pineda, 21 SCRA 105, cited in Cebu
Portland Cement v. CTA, 156 SCRA 535)
Upon taxation depends the Government’s ability to serve
the people for whose benefit taxes are collected. (Vera v.
Fernandez, 89 SCRA 199)
Taxation is the indispensable and inevitable price for civilized
society; without taxes, the government would be
paralyzed. (Commissioner v. Algue, Inc., 158 SCRA 9)
Revenues derived from taxes are intended primarily to
finance the government and its activities and are thus
exempt from execution. (Mun. of Makati v. CA, 190 SCRA
206)
The power to tax, an inherent prerogative, has to be availed of
to assure the performance of vital state functions. It is the
source of the bulk of public funds. (Sison v. Ancheta, 130
SCRA 654)
1. Lifeblood Theory
- The existence of government is a necessity; it cannot exist
nor endure without the means to pay its expenses; and for
those means, the government has the right to compel all its
citizens and property within its limits to contribute in the form
of taxes.
- Without revenue raised from taxation, the government will
not survive, resulting in detriment to society. Without taxes,
the government would be paralyzed for lack of motive power
to activate and operate it — Lifeblood Doctrine. (CIR v.
Algue, Inc., 158 SCRA 9).
2. Necessity Theory - The exercise of the power to tax
emanates from necessity, because without taxes, government
cannot fulfill its mandate of promoting the general welfare and
well-being of the people (CIR v. Bank of the Philippine Islands,
52 SCRA 373).
3. Benefits-Protection Theory - Taxes are what we pay for
civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate
it. Hence, despite the natural reluctance to surrender part of
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 for its part, is expected to
respond in the form of tangible and intangible benefits
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
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 (CIR v. Algue, Inc., 158 SCRA 9).
The Power to Tax Involves the Power to Destroy
The power to taxation is sometimes also called the “power to
destroy.” Therefore, it should be exercised with caution to
minimize the injury to the proprietary rights of a taxpayer. It
must be exercised fairly, equally, and uniformly, lest the tax
collector kills the “hen that lays the golden eggs.” In order to
maintain the general public’s trust and confidence in the
government, this power must be used justly and not
treacherously (Roxas v. Court of Tax Appeals, 23 SCRA 276).
Taxation does not necessarily and unavoidably destroy. To
carry it to the excess of destruction would be an abuse; to
presume it would banish that confidence which is essential to
all governments.
PURPOSE OF TAXATION
Taxation is used not only to raise revenues but also for other
essential purposes of government. The following are the
objectives of taxation:
1. Revenue - To raise revenue to promote the general welfare
and protection of its citizens. The power of taxation is
circumscribed by inherent and constitutional limitations.
2. Regulatory - Taxation is no longer envisioned as a
measure merely to raise revenue to support the existence of
government; taxes may be levied with a regulatory purpose to
provide means for the rehabilitation and stabilization of a
threatened industry which is affected with public interest as to
be within the police power of the state. There can be no doubt
that the oil industry is greatly imbued with public interest and
stabilization of oil prices is a prime concern which the state via
its police power may properly address (Caltex Philippines, Inc.
v. COA, 208 SCRA 726). The “lawful subjects” and “lawful
means” tests are used to determine the validity of a law
enacted under the police power. While police power is inherent
in the state, it is not in municipal corporations (Balacuit v. CFI
of Agusan del Norte, 163 SCRA 182).
Section 73 of Commonwealth Act 123 and Section 61 of the
Land Transportation and Traffic Code require owners of
vehicles to pay registration fee in the registration of their
vehicles. The purpose of the 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 (Philippine Airlines, Inc. v. Edu,
G.R. No. L-41383).
The amount of license fees that may be imposed upon the
operation of slot machines, which include juke box, pinball,
and other coin-operated contrivances, based on an ordinance
passed by the Municipal Board of Manila for regulatory
purposes, cannot be prohibitive, extortionate, confiscatory, or
in an unlawful restraint of trade, but should be approximately
commensurate with and sufficient to cover all the necessary or
portable expenses for issuing the license and of such
inspection, regulation and supervision as may be lawful
(Morcoin Co. Ltd. v. City of Manila, et al., G.R. No. L-15351).
3. Promotion of general welfare - Taxation may be used as
an implement of the police power to promote the general
welfare of the people.
QUESTION: The police power, the power to tax, and the
power of eminent domain are inherent powers of the
government. May a tax be validly imposed in the exercise of
the police power and not of the power to tax?
ANSWER: The police power may be exercised for the purpose
of requiring licenses for which license 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 regulation. 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
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exercised jointly with the power of taxation for the purpose of
raising revenues (Lutz v. Araneta, 98 Phil. 148).
4. Reduction of social inequality - Progressive system of
taxation prevents the undue concentration of wealth in the
hands of a few individuals. Progressive is key stoned on the
principle that those who are able to pay shoulder the bigger
portion of the tax burden.
5. Encourage economic growth by granting incentives
and exemptions - The power to tax and the power to exempt
are inherent in the State and in local governments. But the
power to condone taxes does not exist, save in the
condonation of taxes (e.g., real property tax) which can be
granted only for certain justifiable reasons expressly stated in
the law (Sec. 276, Local Government Code).
6. Protectionism - To protect local industries from foreign
competition.
II. PRINCIPLES OF A SOUND TAX SYSTEM (Based on
Adam Smith’s Canons of Taxation)
In evolving a tax system, certain principles have been
suggested in order to make it sound (not necessarily to make
the law valid), viz:
1. Fiscal Adequacy - The sources (proceeds) of tax revenue
should coincide with, and approximate the needs of,
government expenditures. Neither an excess nor a
deficiency of revenue vis-á-vis the needs of government
would be in keeping the principle.
2. Theoretical Justice - The tax system should be fair to the
average taxpayer and based upon his ability to pay. The
1987 Constitution requires taxation to be equitable. (Sec.
28, Art. VI, Philippine Constitution)
3. Administrative Feasibility - The tax system should be
capable of being properly and efficiently administered by
the government and enforced with least inconvenience to
the taxpayer.
QUESTION: True or False. A law that allows taxes to be paid
either in cash or in kind is valid.
ANSWER: True. There is no law which requires payment of
taxes in cash only. However, a law allowing payment of taxes
in kind, although valid, may pose problems of valuation,
hence, will violate the principle of administrative feasibility.
NOTE: The non-observance of these canons, which are
merely intended to make the tax system sound, will not render
the tax impositions by the taxing authority invalid, except to the
extent that specific constitutional or statutory limitations are
impaired.
A violation of the principle of a sound tax system may or
may not invalidate a tax law.
A tax law will retain its validity even if it is not in consonance
with the principles of fiscal adequacy and administrative
feasibility because the Constitution does not expressly require
so. These principles are only designated to make our tax
system sound. However, if a tax law runs contrary to the
principle of theoretical justice, such violation will render the law
unconstitutional considering that under the Constitution, the
rule of taxation should be uniform and equitable (J.
Dimaampao, 2015).
An inequitable tax measure may be declared void because
of the constitutional provision requiring taxation to be
“equitable.” (Sec. 28, Art. VI, Philippine Constitution)
III. ASPECTS OF TAXATION
The rule on taxation embraces the following aspects (also
referred to as the phases, processes, stages of, or steps in,
taxation), viz.:
1. Levy - which is the act of imposition by the legislature
such as by its enactment of the law. The term is
understood to include not only the mandate on when and
how the tax is imposed but also, whenever it may be
appropriate, the grant of tax exemptions, tax amnesties or
tax condonations. The latter (tax exemptions, etc.), like tax
impositions, are themselves subject to the due observance
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
of the limitations of taxation. (Commissioner v. Botelbo
Shipping Corporation, 20 SCRA 487)
2. Assessment and Collection - which is the act of
administration and implementation of the tax law by the
executive through its administrative agencies. The term
“assessment” which here means notice and demand for
payment of a tax liability, should not be confused with
“assessment” relative to real property taxation, which
refers to the listing and valuation of taxable real property.
3. Payment - which is the act of compliance by the taxpayer,
including such options, schemes or remedies as may be
legally open or available to him.
4. Refund - The recovery of any alleged to have been
erroneously or illegaly assessed or collected, or of any
penalty claimed to have been collected without authority,
or of any sum alleged to have been excessively, or in any
manner wrongfully collected.
Case/s:
Vera v. Fernandez
(89 SCRA 199)
That abolition of the Committee on Claims does not alter
the bask railing kid down giving exception on the claim for
taxes from being filed as the other claims mentioned in the
Rule should be filed before the Court. Claims for taxes may he
collected even after the distribution of the decedent’s estate
among his heirs who shall be liable therefor in proportion of
their share in the inheritance. (Government of the Philippines
vs. Pamintuan, 55 Phil. 13). 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 foe 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.
Commissioner v. Algue
(158 SCRA 9)
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. It is therefore necessary to reconcile the
apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxation, which is the
promotion of the common good, may be achieved.
It is said that taxes are what we pay for civilized society.
Without taxes, the government would be paralyzed for lack of
the motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of 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, for 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.
IV. ESSENTIAL CHARACTERISTICS OF TAX
ATTRIBUTES OR CHARACTERISTICS OF TAXES
1. It is a forced charge, imposition, or contribution. As
such, it operates ad invitum; i.e., it is in no way dependent
upon the will or contractual assent, express or implied, of
the person taxed. It is not contractual, either express or
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 implied, but positive acts of government (Panay Electric
Co. v. Collector of Internal Revenue, G.R. No. L-10574).
6. It is assessed in accordance with some reasonable
rule of the apportionment which means that
conformity with the constitutional mandate for
Congress to evolve a progressive tax system, taxes
must be based on taxpayer’s ability to pay (Sec. 28 [a],
Art. VI, 1987 Constitution).
7. It is a pecuniary burden payable in money, but
backpay certificates may be used in payment of tax
(Borja v. Gella, 8 SCRA 602). The taxpayer is not allowed
to settle his tax liability by conveying property (real or
personal) in view of the problem of assigning value to such
property.
8. It is imposed by the State on persons, property, or
excises within its jurisdiction, in accordance with the
principle of territoriality. As the State may exercise its
power of taxation only within its territorial jurisdiction, said
power may not be exercised within the premises of
embassies and diplomatic missions of a sending state
located in the host or receiving state which is considered,
by fiction of international law, as an extension of the
territorial jurisdiction of the sending state, thereby granting
the sending state exclusive sovereignty within its premises.
9. It is levied by the legislative body of the State. Taxes
are obligations created by law (Vera v. Fernandez, 89
SCRA 199). A tax creates a civil liability on the part of the
delinquent taxpayer, although the non-payment thereof
creates a criminal liability which could be the subject of
criminal prosecution under existing laws. It is one’s civil
liability to pay national internal revenue taxes that gives
rise to criminal liability, not the other way around. Criminal
cases cannot operate to discharge defendant-appellee
from the duty of paying the taxes which the law requires to
be paid, since that duty is imposed by statute prior to and
independently of any attempts by the taxpayer to evade
payment (Republic v. Patanao, 20 SCRA 712).
1. It is levied for a public purpose.
10. It is personal to the taxpayer. A corporation’s tax
delinquency cannot be enforced against its stockholders. A
corporation is vested by law with a personality that is
separate and distinct from those of the persons composing
it as well as that of any other legal entity to which it may be
related (Sunio v. NLRC, 127 SCRA 390). Stockholders
may be held liable for the unpaid taxes of a dissolved
corporation, if it appears that the corporate assets have
passed into their hands without the payment of taxes. The
creditor of a dissolved corporation may follow its assets
once they passed into the hands of the stockholders. The
legal death of the corporation does not prevent such action
that would physical death of an individual prevent the
government from assessing and collecting taxes from his
administrator who holds the property which the decedent
had formerly possessed.
The coconut levy funds are deemed as an exercise of
the State’s police and taxing power. Coconut levy funds
partake of the nature of taxes which, in general, are enforced
proportional contributions from persons and properties exacted
by the State by virtue of its sovereignty for the support of
government and for all public needs. Based on this definition,
a tax has three elements, namely: (a) it is an enforced
proportional contribution from persons and properties; (b) it is
imposed by the State by virtue of its sovereignty; and (c) it is
levied for the support of the government. The coconut levy
funds fall squarely into these elements (Republic v.
COCOFED, et al., G.R. Nos. 147062-64).
V. CLASSIFICATION OF TAXES
Taxes, which are the imposed burdens in the exercise of the
power of taxation, may be grouped into the following kinds or
categories, viz.;
1. According to Subject Matter or Object:
(a) Personal, capitation or poll taxes - Taxes of fixed
amounts upon residents or persons of a certain class
without regard to their property or business (e.g., the basic
community tax).
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
(d) Property taxes - Taxes assessed on things or property of
a certain class (e.g., real estate taxes).
(e) Excise or license taxes - Taxes on privilege, occupation
or business not falling within the classification of poll taxes
or property taxes (e.g., “internal revenue taxes” and
customs duties).
2. According to Burden or Incidence:
(a) Direct taxes - Taxes which are demanded from persons
who are primarily burdened to pay them (e.g., income,
estate, and donor’s taxes).
(f) Indirect taxes - Taxes levied upon transactions of
activities before the articles subject matter thereof reach
the consumers to whom the burden of the tax may
ultimately be charged or shifted (e.g., Value-Added Tax)
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, 223 SCRA 217).
3. According to Determination of Amount (Tax Rates):
(a) Specific taxes - Taxes imposed per head, unit or number,
or by weight or volume and which require no assessment
beyond a listing and classification of the subjects or
articles to be taxed (e.g., certain excise taxes under the
National Internal Revenue Code; see Tan v. Municipality
of Pagbilao, 7 SCRA 887)
(g) Ad valorem taxes - Taxes based upon the value of the
article subject to tax (e.g., certain taxes on mineral
products under the National Internal Revenue Code).
4. According to Purpose:
(a) General or Fiscal - Taxes imposed for the general
purposes of the government (e.g., income taxes).
(h) Special, Regulatory or Sumptuary - Taxes imposed for
a particular legitimate object of government (e.g., the
educational fund tax under Real Property Taxation of the
Local Government Code).
In exempting the Philippine Air Lines (which was by its Charter
exempt from all taxes) from motor vehicle registration fees, the
Court held that since the fees imposed are mainly used for
revenue and only a fifth thereof is retained by the Land
Transportation Commission for regulation, the same should be
considered as taxes rather than license fees. (Philippine Air
Lines v. Romeo Edu, et al., 164 SCRA 320)
5. According to Scope or Authority Imposing the Tax:
(a) National - Taxes imposed by the national government
(e.g., internal revenue taxes and customs duties). The real
property tax under the then Property Tax Code, the
Supreme Court held in Meralco Securities v. Central
Board of Assessment Appeals (114 SCRA 260), a national
tax since the tax has always been imposed by the national
government and enforced through out the Philippines.
(i) Municipal or Local - Taxes imposed by local
governments (e.g., business taxes that may be imposed
under the Local Government Code).
6. According to Graduation (Tax Base and Tax Rate):
(a) Progressive - The tax rate increases as the tax base
increases (e.g., income tax).
(j) Regressive - The tax rate decreases as the tax base
increases.
(k) Mixed - The tax rates are partly progressive and partly
regressive.
(l) Proportionate - The tax rates are fixed (in amounts or in
percentage) on a flat tax base.
Some authors prefer to classify taxes according to purpose
as (a) fiscal or (b) regulatory; and according to scope as (a)
general or (b) special. While it may be true that certain
impositions may partake of the nature of both taxes (for
revenue) and fees (for regulation), so termed as “regulatory
taxes,” it would be more appropriate to consider their real
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essence. If the imposition is principally for regulation, then it
must be considered a license fee; otherwise, a tax.
IV. DISTINGUISHED FROM CERTAIN KINDS OF
EXACTIONS
A tax should be distinguished form other forms of exactions,
such as:
1. A license fee - which is imposed for the regulation of
lawful business or occupation in the exercise of police power,
the amount of which is invariably limited to cover the expenses
of issuing the license and the cost of the necessary
surveillance, inspection or supervision by the government.
(City of Ozamis v. Lumapos and Hon. Marave, 65 SCRA
33; Villegas v. Hiu Tsai, 86 SCRA 270; Procter & Gamble v.
Municipality of Jagna, 94 SCRA 894) For non-useful
occupations, a wider degree or latitude of discretion is
generally conceded in the determination of the amount.
(Morcom v. City of Manila, 1 SCRA 310) If unpaid, the
business or activity subject to the license fee can become
illegal, unlike, generally, that of the non-payment of the tax.
(Golden Ribbon Lumber v. City of Butuan, 12 SCRA 611)
TAX LICENSE FEE
Purpose Imposed to raise For regulation and
revenue control
many instances, it refers to "revenue-raising exactions on
privileges or activities". On the other hand, license fees are
commonly called taxes. But legally speaking, the latter are "'for
the purpose of raising revenues", in contrast to the f ormer
which are imposed "in the exercise of the police power for
purposes of regulation". (Compañia General de Tabacos de
Filipinas v. City of Manila, L-16619)
Golden Ribbon Lumber v. City of Butuan
(12 SCRA 611)
Appellant’s claim that the questioned tax is one on
business or a privilege tax for the operation of a lumber mill or
a lumber yard is without merit. The character or nature of a tax
is determined not by the title of the act or ordinance imposing it
but by its operation, practical results and incidents. Neither the
original ordinance in question nor the amendatory ones show
that the tax provided for therein is imposed by reason of the
enjoyment of the privilege to engage in a particular trade or
business. Neither do they provide that payment thereof is a
condition precedent to the enjoyment of such privilege or that
its non-payment would result in the cancellation of any
previous license granted. The only consequence of its non-
payment appears to be the imposition of a surcharge or liability
to suffer the penal sanctions prescribed in Section 3 of the
original ordinance. These circumstances lead to the
conclusion that the questioned tax cannot be considered as
one imposed upon a party for engaging in the business of
operating a lumber mill or a lumber yard.

Basis Collected under Collected under Progressive Development Corporation v. Quezon City
the power of police power (172 SCRA 629)
taxation The term “tax” frequently applies to all kinds of exactions
of monies which become public funds. It is often loosely used
Amount Generally, amount Limited to the to include levies for revenue as well as levies for regulatory
is unlimited necessary purposes such that license fees are frequently called taxes
expenses of although license fee is a legal concept distinguishable
regulation and from tax: the former is imposed in the exercise of police power
control primarily for purposes of regulation, while the latter is imposed
under the taxing power primarily for purposes of raising
Subject Imposed on Imposed on the revenues. Thus, if the generating of revenue is the primary
persons, property, exercise of a right purpose and regulation is merely incidental, the imposition is a
rights or or privilege tax; but if regulation is the primary purpose the fact that
transaction incidentally revenue is also obtained does not make the
imposition a tax.
Effect of Non- Non-payment Non-payment
Payment does not make the makes the To be considered a license fee, the imposition
business illegal business illegal questioned must relate to an occupation or activity that so
engages the public interest in health, morals, safety and
Time of Payment Normally paid Normally paid development as to require regulation for the protection and
after the start of before the promotion of such public interest; the imposition must also
business commencement of bear a reasonable relation to the probable expenses of
business. regulation, taking into account not only the cost of direct
regulation but also its incidental consequences as well. When
an activity, occupation or profession is of such a character that
inspection or supervision by public officials is reasonably
Case/s: necessary for the safeguarding and furtherance of public
Victorias Milling Co., Inc. v. Municipality of Victorias health, morals and safety, or the general welfare, the
(G.R. No. L-21183) legislature may provide that such inspection or supervision or
other form of regulation shall be carried out at the expense of
Under the provisions of Section 1 of Commonwealth the persons engaged in such occupation or performing such
Act 472 and pertinent jurisprudence, a municipality is activity, and that no one shall engage in the occupation or
authorized to impose three kinds of licenses: (1) license for carry out the activity until a fee or charge sufficient to cover the
regulation of useful occupations or enterprises; (2) license for cost of the inspection or supervision has been paid.
restriction or regulation of non-usef ul occupations or Accordingly, a charge of a fixed sum which bears no relation at
enterprises; and (3) license for revenue (Cf. Cu all to the cost of inspection and regulation may be held to be a
Unjieng v. Patstone, 42 Phil. 818). The first two easily fall tax rather than an exercise of the police power.
within the broad police power granted under the general
welfare clause (Sec, 2238, Rev. Adm. Code). The third class, We believe and so hold that the five percent (5%) tax
however, is for revenue purposes. It is not a license fee, imposed in Ordinance No. 9236 constitutes, not a tax on
properly speaking, and yet it is generally so termed. It rests on income, not a city income tax (as distinguished from
the taxing power. That taxing power must be expressly the national income tax imposed by the National Internal
conferred by statute upon the municipality (Sec. 2287, Rev. Revenue Code) within the meaning of Section 2 (g) of the
Adm. Code; Cu Unjieng v.  Patstone,  supra;  People v. Local Autonomy Act, but rather a license tax or fee for the
Felisarta, L-15346). regulation of the business in which the petitioner is engaged.
While it is true that the amount imposed by the questioned
The use of the term "municipal license tax" does not ordinances may be considered in determining whether the
necessarily connote the idea that the tax is imposed as a exaction is really one for revenue or prohibition, instead of one
revenue measure in the guise of a license tax. For really, this of regulation under the police power, it nevertheless will be
runs counter to the declared purpose to make money. presumed to be reasonable.
Besides, the term "license tax" has not acquired a fixed
meaning. It is often "used indiscriminately to designate Philippine Airlines v. Edu
impositions exacted for the exercise of various privileges. In (164 SCRA 320)

Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021 5 of 22

 If the purpose is primarily revenue, or if revenue is, at otherwise, the procedure found in Section 187 must be
least, one of the real and substantial purposes, then the followed when an ordinance imposes a tax; the institution of an
exaction is properly called a tax (Umali, ed.) Such is the case action in court without complying with the requirements of the
of motor vehicle registration fees. The conclusions become provision will lead to the dismissal of the case on the ground of
inescapable in view of Section 70(b) of Rep. Act 587 quoted in non-exhaustion of administrative remedies. However, when an
the Calalang case. The same provision appears as Section ordinance imposes a fee, direct recourse to the courts may be
59(b) in the Land Transportation Code. It is patent therefrom had without prior protest before the Secretary of Justice.
that the legislators had in mind a regulatory tax as the law Simply put, fees are not subject to the procedure outlined
refers to the imposition on the registration, operation or under Section 187.
ownership of a motor vehicle as a “tax or fee.” Though
Considering the foregoing, there was no procedural
nowhere in Rep. Act 4136 does the law specifically state that
barrier preventing CEPALCO from instituting the instant
the imposition is a tax, Section 59(b) speaks of “taxes or fees x
petition for declaratory relief before the RTC at the first
x x for the registration or operation or on the ownership of any
instance.
motor vehicle, or for the exercise of the profession of chauffeur
x x x” making the intent to impose a tax more apparent. Thus, 2. A toll - which is an act or demand on proprietorship or
even Rep. Act 5448 cited by the respondents, speaks of an ownership. Its imposition is generally contractual in nature,
“additional tax,” where the law could have referred to an and it may be demanded by private persons or entities. (City
original tax and not one in addition to the tax already imposed of Ozamis v. Lumapas, 65 SCRA 33)
on the registration, operation, or ownership of a motor vehicle
under Rep. Act 4136. Simply put, if the exaction under Rep. TAX TOLL
Act 4136 were merely a regulatory fee, the imposition in Rep.
Act 5448 need not be an “additional” tax. x x x In view of the Definition An enforced A conseideration
foregoing, we rule that motor vehicle registration fees as at proportional paid for the use of
present exacted pursuant to the Land Transportation and contribution from a road, bridge or
Traffic Code are actually taxes intended for additional persons and the like, of a public
revenues of government even if one fifth or less of the amount property for public nature
collected is set aside for the operating expenses of the agency purpose/s
administering the program.
Presently, Sec. 61 of the Land Transportation and Traffic Basis Demand of Demand of
Code provides: “Sec. 61. Disposal of Monies Collected.— sovereignty proprietorship
Monies collected under the provisions of this Act shall be
deposited in a special trust account in the National Treasury to Amount Generally, the Amount is limited
constitute the Highway Special Fund, which shall be amount is to the cost and
apportioned and expended in accordance with the provisions unlimited maintenance of
of the ‘Philippine Highway Act of 1935.’ Provided, however, public
That the amount necessary to maintain and equip the Land improvement
Transportation Commission but not to exceed twenty per cent
of the total collection during one year, shall be set aside for the Purpose For the support of For the use of
purpose. (As amended by RA 6374, approved August 6, the government another’s property
1971).” It appears clear from the above provisions that the
legislative intent and purpose behind the law requiring owners Authority May be imposed May be imposed
of vehicles to pay for their registration is mainly to raise funds by the State only by private
for the construction and maintenance of highways and to a individual or
much lesser degree, pay for the operating expenses of the entities
administering agency.
Fees may be properly regarded as taxes even though
they also serve as an instrument of regulation. As stated by a Case/s:
former presiding judge of the Court of Tax Appeals and writer City of Ozamis v. Lumapas
on various aspects of taxes: “It is possible for an exaction to (65 SCRA 33)
be both tax and regulation. License fees are often looked to as
a source of revenue as well as a means of regulation. It is not pretended that the public utility vehicles are
(Sonzinsky v. U.S., 300 U.S. 506) This is true, for example, of subject to the payment, if they pass without stopping thru the
automobile license fees. In such case, the fees may properly aforesaid sections of Zulueta Street. Considering that the
be regarded as taxes even though they also serve as an public utility vehicles are only charged the fee when said
instrument of regulation. If the purpose is primarily revenue, or vehicles stop on “any portion of the existing parking areas for
if revenue is at least one of the real and substantial purposes, the purpose of loading or unloading passengers or cargoes,”
then the exaction is properly called a tax. (1955 CCH Fed. Tax the fees collected are actually in the nature of parking fees and
Course, Par. 3101, citing Cooley on Taxation (2nd Ed.) 592, not toll fees for the use of Zulueta Street. This is clear from the
593; Calalang v. Lorenzo, 97 Phil. 212; Lutz v. Araneta, 98 Stipulation of Facts which shows that fees were not exacted
Phil. 198.) These exactions are sometimes called regulatory for mere passage thru the street but for stopping in the
taxes. (See Secs. 4701, 4711, 4741, 4801, 4811, 4851, and designated parking areas therein to unload or load passengers
4881, U.S. Internal Revenue Code of 1954, which classify or cargoes. It was not, therefore, a toll fee for the use of public
taxes on tobacco and alcohol as regulatory taxes.)” (Umali, roads, within the context of Section 59[b] of Republic Act No.
Reviewer in Taxation, 1980, pp. 12-13, citing Cooley on 4136, which requires the authorization of the President of the
Taxation, 2nd Edition, 591-593). Philippines.

City of Cagayan de Oro v. Cagayan Electric Power & Light 3. A special assessment or levy - which is a demand for
Co., Inc. (G.R. No. 224825) contribution to help defray the cost of improvement on real
property owners of a particular locale directly benefited by
A cursory reading of the whereas clauses makes it is such improvement. It is not a personal liability of the person
apparent that the purpose of the ordinance is to regulate the assessed but one assessable on the property itself.
construction and maintenance of electric and
telecommunications posts erected within Cagayan de Oro TAX SPECIAL
City. It is clear that the ordinance in this case serves a ASSESSMENT
regulatory purpose and is, hence, an exercise of police power.
Nowhere in the text of the ordinance is it shown that it was
enacted to raise revenue.
Review by the Secretary of Justice is mandatory only
when what is being questioned is a tax ordinance or revenue
measure. Section 187 does not require the same from parties
who assail ordinances imposing regulatory fees. Stated
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021 6 of 22
 Graves v. New York, Justice Frankfurter, after referring to it as
Nature An enforced An enforced an “unfortunate remark,” characterized it as “a flourish of
proportional proportional rhetoric [attributable to] the intellectual fashion of the times
contribution from contribution from [allowing] a free use of absolutes.” This is merely to
persons and owners of lands emphasize that it is not and there cannot be such a
property for public especially those constitutional mandate. Justice Frankfurter could rightfully
purpose/s who are peculiarly conclude: “The web of unreality spun from Marshall’s famous
benefited by public dictum was brushed away by one stroke of Mr. Justice
improvements Holmes’s pen: ‘The power to tax is not the power to destroy
while this Court sits.’ ” So it is in the Philippines.
Subject Imposed on Levied only on
persons, property land
Pepsi Cola v. Mun. of Tanauan
rights or
(69 SCRA 460)
transactions
The power of taxation x x x may be delegated to local
Person Liable A personal liability Not a personal governments in respect of matters of local concern. This is
of the taxpayer liability of the sanctioned by immoral practice. By necessary implication, the
person assessed legislative power to create political corporations for purposes
of local self-government carries with it the power to confer on
Purpose For the support of Contribution to the such local governmental agencies the power to tax. x x x The
the government cost of public plenary nature of the taxing power thus delegated, contrary to
improvement plaintiff-appellant’s pretense, would not suffice to invalidate the
said law as confiscatory and oppressive. In delegating the
Scope Regular Exaction Exceptional as to authority, the State is not limited to the exact meassure of that
time and locality which is exercised by itself. When it is said that the taxing
power may be delegated to municipalities and the like, it is
meant taxes there may be delegated such measure of power
to impose and collect taxes as the legislature may deem
Case/s:
expedient. Thus, municipalities may be permitted to tax
Philex Mining Corp. v. CIR subjects which for reasons of public policy the State has not
(295 SCRA 687) deemed wise to tax for more general purposes.
In several instances prior to the instant case, we have
There is no validity to the assertion that the delegated
already made the pronouncement that taxes cannot be subject
authority can be declared unconstitutional on the theory of
to compensation for the simple reason that the government
double taxation. It must be observed that the delegating
and the taxpayer are not creditors and debtors of each other.
authority specifies the limitations and enumerates the taxes
There is a material distinction between a tax and debt. Debts
over which local taxation may not be exercised. x x x
are due to the Government in its corporate capacity, while
Moreover, double taxation, in general, is not forbidden by our
taxes are due to the Government in its sovereign capacity. We
fundamental law, since We have not adopted as part thereof
find no cogent reason to deviate from the aforementioned
the injunction against double taxation found in the Constitution
distinction. Prescinding from this premise, in Francia v.
of the United States and some states of the Union. Double
Intermediate Appellate Court, we categorically held that taxes
taxation becomes obnoxious only where the taxpayer is taxed
cannot be subject to set-off or compensation, thus: “We have
twice for the benefit of the same governmental entity or by the
consistently ruled that there can be no off-setting of taxes
same jurisdiction for the same purpose, but not in a case
against the claims that the taxpayer may have against the
where one tax is imposed by the State and the other by the
government. A person cannot refuse to pay a tax on the
city of municipality.
ground that the government owes him an amount equal to or
greater than the tax being collected. The collection of a tax A. Inherent Limitations
cannot await the results of a lawsuit against the government.”
The nature itself of taxation carries its own limitations, such as
4. A debt or an ordinary obligation - which is based upon a the requirement that it should be for a public purpose, that it be
juridical tie, created by law, contracts, quasi-contracts, delicts legislative, that it is territorial and that it should be subject to
or quasi-delicts (Art. 1156, Civil Code), between parties for international comity. A violation of these inherent limitations
their private interest or resulting from their own acts or can amount to the taking of property without due process of
omissions. In Victoria Milling v. Philippine Ports Authority (153 law (Pepsi-Cola v. Mun. of Tanauan, 69 SCRA 460); hence,
SCRA 317), an imposition by the ports authority of 10% in this sense, it can be said that any tax law contravening any
government share on earnings of arrastre and stevedoring limitation of taxation, in effect, will likewise be unconstitutional.
operators was held to be a contractual compensation rather
This nature of taxation, at times, also referred to as the
than a tax. But for certain purposes, taxes may be considered
attributes, tenets, principles, due process, basic
debts, in the generic sense, such as their (taxes) collection
characteristics, elements, requisites, or inherent limitations of
being enforceable by court action (Sambrano v. CTA, 101
taxation, may be explained, as follows:
Phil. 1); in the application of certain statutes of limitation
(Republic v. Far East American Co., 7 SCRA 399); and in the 1. Taxation is for a public purpose. - The proceeds of the
matter of deductible items from gross income. (Commissioner tax must be used (a) for the support of the State or (b) for
v. Prieto, 109 Phil. 592) some recognized objects of government or directly to
promote the welfare of the community.
VII. SCOPE AND LIMITATIONS OF TAXATION
The mere fact that a particular taxpayer receives no special or
immediate benefit is of no moment for it is the general good
Case/s:
that matters in taxation. The symbiotic relationship between
Sison v. Ancheta
the taxing authority and the subject of taxation is enough to
(130 SCRA 654)
justify the imposition. (Commissioner v. Algue, Inc., 158
The power to tax moreover, to borrow from Justice SCRA 9)
Malcolm, “is an attribute of sovereignty. It is the strongest of all
Tax is considered for public purpose if:
the powers of government.” It is, of course, to be admitted that
for all its plenitude, the power to tax is not unconfined. There 1. It is for the welfare of the nation and/or for greater portion
are restrictions. The Constitution sets forth such limits. of the population;
Adversely affecting as it does property rights, both the due 11. It affects the area as a community rather than as
process and equal protection clauses may properly be individuals; and
invoked, as petitioner does, to invalidate in appropriate cases 12. It is designed to support the services of the government for
a revenue measure. If it were otherwise, there would be truth some of its recognized objects.
to the 1803 dictum of Chief Justice Marshall that “the power to
tax involves the power to destroy.” In a separate opinion in Tests in determining public purpose:

Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021 7 of 22

1. Duty test -Whether the thing to be furthered by the
appropriation of public revenue is something which is the duty
of the State as a government to provide.
NOTE: The term “public purpose” is not defined. It is an elastic
concept that can be hammered to fit modern standards.
Jurisprudence states that “public purpose” should be given a
broad interpretation. It does not only pertain to those purposes
which are traditionally viewed as essentially government
functions, such as building roads and delivery of basic
services, but also includes those purposes designed to
promote social justice. Thus, public money may now be used
for the relocation of illegal settlers, low-cost housing and urban
agrarian reform (Planters Products, Inc. v. Fertiphil
Corporation, G.R. No. 166006, March 14, 2008).
2. Promotion of general welfare test - Whether the proceeds
of the tax will directly promote the welfare of the community in
equal measure. When a tax law is only a mask to exact funds
from the public when its true intent is to give undue benefit and
advantage to a private enterprise, that law will not satisfy the
requirement of "public purpose" (Planters Products, Inc. v.
Fertiphil Corporation, G.R. No. 166006, March 14, 2008).
Determination when enacted tax law is for public purpose
It lies in the Congress. However, this will not prevent the court
from questioning the propriety of such statute on the ground
that the law enacted is not for a public purpose; but once it is
settled that the law is for a public purpose, the court may no
longer inquire into the wisdom, expediency or necessity of
such tax measure.
NOTE: If the tax measure is not for public purpose, the act
amounts to confiscation of property.
Principles Relative to Public Purpose
1. Tax revenue must not be used for purely private purposes
or for the exclusive benefit of private persons.
2. Inequalities resulting from the singling out of one particular
class for taxation or exemption infringe no constitutional
limitation because the legislature is free to select the subjects
of taxation.
NOTE: Legislature is not required to adopt a policy of “all or
none” for the Congress has the power to select the object of
taxation (Lutz v. Araneta, G.R. No. L-7859, 22 December
1955).
3. An individual taxpayer need not derive direct benefits from
the tax.
4. Public purpose is continually expanding. Areas formerly left
to private initiative now lose their boundaries and may be
undertaken by the government if it is to meet the increasing
social challenges of the times.
5. The public purpose of the tax law must exist at the time of
its enactment (Pascual v. Secretary of Public Works, G.R.
No. L-10405, December 29, 1960).
QUESTION: Are subsequent laws, which convert a public fund
to private properties, valid?
ANSWER: No. Taxes could be exacted only for a public
purpose; they cannot be declared private properties of
individuals although such individuals fall within a distinct group
of persons (Pambansang Koalisyon ng mga Samahang
Magsasaka at Manggagagawa sa Niyugan v. Exec. Sec., G.R.
Nos. 147036-37).
QUESTION: Lutz assailed the constitutionality of Sections 2
and 3 of C.A. 567, which provided for an increase of the
existing tax on the manufacture of sugar. Lutz alleged such tax
as unconstitutional and void for not being levied for a public
purpose but for the aid and support of the sugar industry
exclusively. Is the tax law increasing the existing tax on the
manufacture of sugar valid?
ANSWER: Yes. The protection and promotion of the sugar
industry is a matter of public concern. The legislature may
determine within reasonable bounds what is necessary for its
protection and expedient for its promotion. Legislative
discretion must be allowed full play, subject only to the test of
reasonableness. If objective and methods alike are
constitutionally valid, there is no reason why the State may not
levy taxes to raise funds for their prosecution and attainment.
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
Taxation may be made to implement the State’s police power
(Lutz v. Araneta, G.R. No. L-7859).
QUESTION: Is the tax imposed on the sale, lease or
disposition of videograms for a public purpose?
ANSWER: Yes. Such tax is imposed primarily for answering
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
videotapes. While the direct beneficiary of said imposition is
the movie industry, the citizens are held to be its indirect
beneficiaries (Tio v. Videogram Regulatory Board, G.R. No.
75697).
Case/s:
Pascual v. Secretary of Public Works
(G.R. No. L-10405)
"It is a general rule that the legislature is without power
to appropriate public revenues for anything but a public
purpose. * * * It is the essential character of the direct object of
the expenditure which must determine its validity as justifying
a tax and not the magnitude of the interests to be affected nor
the degree to which the general advantage of the community,
and thus the public welfare, may be ultimately benefited by
their promotion. Incidental advantage to the public or to the
state, which results from the promotion of private interests,
and the prosperity of private enterprises or business, does not
justify their aid by the use of public money."
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 public 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.
The test of the constitutionality of a statute requiring the
use of public funds is whether the statute is designed to
promote the public interests, as opposed to the furtherance of
the advantage of individuals, although such advantage to
individuals might incidentally serve the public.
Where the land on which projected feeder roads are to
be constructed belongs to a private person, an appropriation
made by Congress for that purpose is null and void, and a
donation to the Government, made over five (5) months after
the approval and effectivity of the Act for the purpose of giving
a "semblance of legality" to the appropriation, does not cure
the basic defect. Consequently, a judicial nullification of said
donation need not precede the declaration of
unconstitutionality of said appropriation.
Lutz v. Araneta
(98 Phil. 148)
As the protection and promotion of the sugar industry is
a matter of public concern, the Legislature may determine
within reasonable bounds what is necessary for its protection
and expedient for its promotion. Here, the legislative discretion
must be allowed full play, subject only to the test of
reasonableness; and it is not contended that the means
provided in section 6 of Commonwealth Act No. 567 bear no
relation to the objective pursued or are oppressive in
character. If objective and methods are alike constitutionally
valid, no reason is seen why the state may not levy taxes to
raise funds for their prosecution and attainment. Taxation may
be made the implement of the state’s police power.
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 “inequalities which result from a singling out of one
particular class for taxation or exemption infringe no
constitutional limitation.
Gomez v. Palomar
(25 SCRA 827)
The eradication of a dreaded disease is a public
purpose, but if by public purpose the petitioner means benefit
to a taxpayer as a return for what he pays, then it is sufficient
answer to say that the only benefit to which the taxpayer is
constitutionally entitled is that derived from his enjoyment of
8 of 22
the privileges of living in an organized society, established and
safeguarded by the devotion of taxes to public purposes.
Tio v. Videogram Regulatory Board
(151 SCRA 208)
Petitioner also submits that the thirty percent (30%) tax
imposed is harsh and oppressive, confiscatory, and in restraint
of trade. However, it is beyond serious question that a tax
does not cease to be valid merely because it regulates,
discourages, or even definitely deters the activities taxed. The
power to impose taxes is one so unlimited in force and so
searching in extent, that the courts scarcely venture to declare
that it is subject to any restrictions whatever, except such as
rest in the discretion of the authority which exercises it. In
imposing a tax, the legislature acts upon its constituents. This
is, in general, a sufficient security against erroneous and
oppressive taxation. The tax imposed by the DECREE 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, thereby depriving the Government of an additional source
of revenue. It is an end-user tax, imposed on retailers for every
videogram they make available for public viewing, It is similar
to the 30% amusement tax imposed or borne by the movie
industry which the theater-owners pay to the government, but
which is passed on to the entire cost of the admission ticket,
thus shifting the tax burden on the buying or the viewing
public. It is a tax that is imposed uniformly on all videogram
operators. 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. And while it was also
an objective of the DECREE to protect the movie industry, the
tax remains a valid imposition.
2. Taxation is inherently legislative. - Along with police
power (for public good or welfare) and eminent domain (for
public use), taxation (for revenue) is an inherent power of
sovereignty. (Luzon Stevedoring Co. v. CTA, 163 SCRA 647)
It follows that it is also legislative in character and a legislative
prerogative. (National Power Corporation v. Albay, 186 SCRA
198) These powers are not inherent in, but merely delegated
by constitutional mandate or by law to, local governments.
The legislative taxing power includes the authority:
(a) to determine the nature (kind), object (purpose), extent
(amount or rate), coverage (subjects and objects) and
situs (place) of the tax imposition,
(m) to grant tax exemptions or condonations (Petro v. Pililla,
198 SCRA 82), and
(n) to specify or provide for the administrative, as well as
judicial remedies that either the government or the tax
payers may avail themselves of in the proper
implementation of the tax measure.
Only the legislature has the full discretion as to the persons,
property, occupation or business to be axed provided these
are all within the State’s territorial jurisdiction. It can also fully
determine the amount or rate of tax, the kind of tax to be
imposed and method of collection (1 Cooley 176- 184).
GENERAL RULE: The power to tax is exclusively vested in
the legislative body, being inherent in nature; hence, it may not
be delegated (Delegata potestas non potest delegari).
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 (ABAKADA Guro Party List v.
Hon. Exec. Sec., G.R. No. 168056, September 1, 2005). It
cannot be delegated without infringing upon the theory of
separation of powers (Pepsi-Cola Bottling Company of the
Phil. v. Mun. of Tanauan, 69 SCRA 460, February 27,
1976).
Non-Delegable Legislative Powers
1. Selection of subject to be taxed
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
13. Determination of purposes for which taxes shall
be levied
14. Fixing of the rate/amount of taxation
15. Situs of tax
16. Kind of tax
Being thus legislative in nature, the power to tax may not be
delegated, except —
(a) To local governments (to be exercised by the local
legislative bodies thereof) or political subdivisions (Cu
Unjieng v. Patstone, 42 Phil. 818);
Refers to the power of LGUs to create its own sources of
revenue and to levy taxes, fees and charges (Art. X, Sec. 5,
1987 Constitution)
NOTE: Art. X, Sec. 5 of the Constitution does not change the
doctrine that municipal corporations do not possess inherent
powers of taxation; what it does is to confer municipal
corporations a general power to levy taxes and otherwise
create sources of revenue and they no longer have to wait for
a statutory grant of these powers and the power of the
legislative authority relative to the fiscal powers of local
governments has been reduced to the authority to impose
limitations on municipal powers. Thus, in interpreting statutory
provisions on municipal fiscal powers, doubts will be resolved
in favor of municipal corporations (Quezon City et al. v. ABS-
CBN Broadcasting Corporation, G.R. No. 162015, March 6,
2006).
(o) To the President;
The authority of the President to fix tariff rates, import or export
quotas, tonnage and wharfage dues or other duties and
imposts (Art. VI, Sec. 28(2), 1987 Constitution).
NOTE: When Congress tasks the President or his/her alter
egos to impose safeguard measures under the delineated
conditions, the President or the alter egos may be properly
deemed as agents of Congress to perform an act that
inherently belongs as a matter of right to the legislature. It is
basic agency law that the agent may not act beyond the
specifically delegated powers or disregard the restrictions
imposed by the principal (Southern Cross Cement Corporation
v. Cement Manufacturers Association of the Phil., G.R. No.
158540, August 3, 2005).
(p) When allowed by the Constitution; or
(q) When the delegation relates merely to administrative
implementation that may call for some degree of
discretionary powers under a set of sufficient standards
expressed by law (Cervantes v. Auditor General, 91 Phil.
359) or implied from the policy and purpose of the Act
(Maceda v. Macaraig, 197 SCRA 771).
NOTE: Technically, this does not amount to a delegation of
the power to tax because the questions which should be
determined by Congress are already answered by Congress
before the tax law leaves Congress.
Stated in another way, taxation may exceptionally be
delegated, subject to such well-settled limitations as —
(a) The delegation shall not contravene any constitutional
provision or the inherent limitations of taxations;
(r) The delegation is effected either by the Constitution or
validly enacted legislative measures or statute; and
(s) The delegated levy power, except when the delegation is
by express provision of the Constitution itself, should only
be in favor of the local legislative body of the local or
municipal government concerned.
Case/s:
Abakada Guro Party List v. Ermita
(G.R. No. 168056)
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.
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3. Tax is territorial. - Taxation may be exercised only within
the territorial jurisdiction of the taxing authority. (61 Am. Jur.
88) Within the territorial jurisdiction, the taxing authority may
determine the “place of taxation” (tax situs).
GENERAL RULE: The taxing power of a country is limited to
persons and property within and subject to its jurisdiction.
REASONS:
1. Taxation is an act of sovereignty which could only be
exercised within a country’s territorial limits.
17. This is based on the theory that taxes are paid
for the protection and services provided by the taxing
authority which could not be provided outside the territorial
boundaries of the taxing State.
XPN/S:
1. Where tax laws operate outside territorial jurisdiction –
i.e. Taxation of resident citizens on their incomes
derived abroad.
2. Where tax laws do not operate within the territorial
jurisdiction of the State.
(a) When exempted by treaty obligations; or
(b) When exempted by international comity.
In fixing the tax situs, the following criteria are generally
observed, viz.:
(a) For poll taxes, the possible tax situs is the residence of
the taxpayer; for instance, it would be violative of the rule
on territoriality for the Philippine poll tax to be imposed
even on its non-resident citizens. (51 Am. Jur. 88)
(t) For property taxes, the tax situs can only be where the
property is situated; thus the real property tax under the
Real Property Tax Code cannot be imposed on real
property located abroad, although owned by Filipino
citizens. (51 Am. Jur. 458)
(u) For excise taxes, the tax situs can be the place: (1) where
the privilege is exercised; (2) where the taxpayer is a
national of; or (3) where he has his residence. In the
selection of the appropriate criteria, the taxing authority is
given wide latitude; among the circumstances often
considered are the nature of the tax, the extent of benefit
that may be derived by the taxpayer (Wells Fargo Bank &
Union Trust Co. v. Collector, 70 Phil. 325; Meralco v.
Yatco, 69 Phil. 89) and equity principles (Sec. 28, Art. VI,
Philippine Constitution). But, unless otherwise stated, the
tax situs is deemed to be the place where the privilege is
exercised. Under the National Internal Revenue Code,
all three (3) criteria (nationality, residence, and place of
the exercise of privilege) are used in the levy of income
tax, as well as estate and gifts taxes, but not of business
taxes.
4. Taxation is subject to international comity. -
It refers to the respect accorded by nations to each other
because they are sovereign equals. Thus, the property or
income of a foreign state may not be the subject of taxation by
another State.
This is a limitation founded on reciprocity designed to maintain
harmonious and productive relationships among the various
state. Under international comity, a state must recognize the
generally-accepted tenets of international law, among which
are the principles of sovereign equality among states and of
their freedom from suit without their consent, that limits that
authority of a government to effectively impose taxes in a
sovereign state and its instrumentalities, as well as in its
property held and activities undertaken in that capacity.
The Philippine Constitution, indeed, has expressly adopted the
generally accepted principles of international law as part of the
law of the land. (Sec. 2, Art. II, Philippine Constitution) Under
international comity, a state must recognize the generally
accepted tenets of international law, among which are the
principles of sovereign equality among states and of their
freedom from suit without their consent, that limit the
authority of a government to effectively impose taxes on a
sovereign state and its instrumentalities, as well as on its
property held, and activities undertaken, in that capacity.
Even where one enters the territory of another, there is an
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
implied understanding that the former does not thereby submit
itself to the authority and jurisdiction of the latter.
REASONS:
1. Par in parem non habet imperium. As between equals
there is no sovereign (Doctrine of Sovereign Equality).
18. The concept that when a foreign sovereign enters the
territorial jurisdiction of another, it does not subject itself to
the jurisdiction of the other.
19. The rule of international law that a foreign government may
not be sued without its consent so that it is useless to
impose a tax which could not be collected.
Although the above principles have not all been covered by
direct or specific constitutional provisions or limitations, the
Supreme Court in Pepsi-Cola v. Municipality of Tanauan (69
SCRA 460) has adopted the position that a violation thereof
would contravene the general clause on due process (Sec.
1, Art. III, Philippine Constitution), and any tax thereby levied
shall amount to the taking of property without due
process of law. The Court held that the constitutional
injunction against deprivation of property without due process
of law may not be passed over under the guise of the taxing
powers, except when the taxing of the property is in the lawful
exercise of the taxing power, as when: (1) the tax is for a
public purpose; (2) the rule on uniformity of taxation is
observed; (3) either the person or property taxed is within the
jurisdiction of the government levying the tax; and (4) in the
assessment and collection of certain kinds of taxes, notice and
opportunity for hearing are provided. In a way, therefore, the
due process clause can be said to be the constitutional
basis for these inherent limitations.
Principle of Pacta Sunt Servanda in Taxation
Observance of any treaty obligation binding upon the
government of the Philippines is anchored on the constitutional
provision that the Philippines “adopts the generally accepted
principles of international law as part of the law of the land
(Art. II, Sec. 2, 1987 Constitution). Pacta sunt servanda is a
fundamental international law principle that requires agreeing
parties to comply with their treaty obligations in good faith.
Hence, the application of the provisions of the NIRC must be
subject to the provisions of tax treaties entered into by the
Philippines with foreign countries. (Air Canada vs. CIR, G.R.
No. 169507, January 11, 2016)
5. Exemption of government agencies and
instrumentalities.
Properties of the national government as well as those of the
local government units are not subject to tax, otherwise it will
result in the absurd situation of the government “taking money
from one pocket and putting it in another.” (Cooley on
Taxation, Sec. 621, 4th Ed., as cited in Board of Assessment
Appeals of Laguna v. CTA, G.R. No. L-18125)
GENERAL RULE: The government is exempt from tax.
REASON: Otherwise, we would be “taking money from one
pocket and putting it in another.” (Board of Assessment
Appeals of Laguna v. CTA, G.R. No. L-18125, May 31, 1963).
XPN: When it chooses to tax itself. Nothing prevents Congress
from decreeing that even instrumentalities or agencies of the
government performing government functions may be subject
to tax. Where it is done precisely to fulfill a constitutional
mandate and national policy, no one can doubt its wisdom
(MCIAA v. Marcos, G.R. No. 120082).
Government may tax itself.
Since sovereignty is absolute and taxation is an act of high
sovereignty, the State if so minded could tax itself, including its
political subdivisions (Maceda v. Macaraig, G.R. No. 88291).
National government is exempt from local taxation.
If the taxing authority is the LGU, R.A. No. 7610 expressly
prohibits LGUs from levying tax on the National Government,
its agencies and instrumentalities and other LGUs.
In Manila International Airport Authority v. CA, G.R. No.
155650 (2006) MIAA’s Airport Lands and Buildings are exempt
from estate tax imposed by local governments. Being an
instrumentality of the national government, it is exempt from
local taxation. Also, the real properties of MIAA are owned by
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the Republic of the Philippines and thus exempt from real
estate tax.
Agency of the Government - It refers to any of the various
units of the government, including a department, bureau,
office, instrumentality, or government-owned or controlled
corporation, or a local government or a local government or a
distinct unit therein.
Taxability of Agencies of Government
1. Performing governmental functions: tax exempt unless
expressly taxed
2. Performing proprietary functions: subject to tax unless
expressly exempted
Instrumentality of the Government - It refers to any agency
of national government, not integrated within the department
framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering
special funds, and enjoying operational autonomy, usually
through charter.
Taxability of Instrumentalities of Government
A government instrumentality falls under Section 133 (o) of the
LGC, which states:
“Sec. 133. Common Limitations on the Taxing Powers of Local
Government Units. - Unless otherwise provided herein, 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.”
Government-Owned and Controlled Corporation (GOCC) -
It refers to any agency:
(a) organized as a stock or non-stock corporation;
(b) vested with functions relating to public needs whether
governmental or proprietary in nature; and
(c) owned by the Government directly or through its
instrumentalities either wholly, or, where applicable as in
the case of stock corporations, to the extent of at least
fifty-one (51) percent of its capital stock.
NOTE: Government instrumentality may include a GOCC and
there may and there may be “instrumentality” that does not
qualify as GOCC.
Taxability of GOCCs
GOCCs perform proprietary functions; hence they are subject
to taxation. However, certain corporations have been granted
exemption under Section 27 (c) of R.A. No. 8424 as amended
by R.A. 9337, which took effect on July 1, 2005, to wit:
1. Government Service Insurance System (GSIS)
3. Social Security System (SSS)
4. Philippine Health Insurance Corporation (PHIC)
5. Philippine Charity Sweepstakes Office (PCSO)
B. Constitutional Limitations
Taxation, being inherent in sovereignty, need not be clothed
with any constitutional authority for it to be exercised by a
sovereign state. Instead, constitutional provisions are
meant and intended more to regulate and define, rather
than to grant, the power emanating therefrom. In the
Philippine Constitution, these provisions may vaguely be
grouped into direct (those that are peculiar to taxation) and
indirect (any other provision that may also be pertinent,
although not specifically relating to taxation).
ARTICLE III
Sec. 1. No person shall be deprived of life, liberty, or property
without due process of law, nor shall any person be denied the
equal protection of the laws.
Sec. 10. No law impairing the obligation of contracts shall be
passed.
Sec. 20. No person shall be imprisoned for debt or non-
payment of a poll tax.
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
ARTICLE VI
Sec. 28. (1) The rule of taxation shall be uniform and
equitable. The Congress shall evolve a progressive system of
taxation.
(2) The Congress may, by law, authorize the President to fix
within specified limits, and subject to such limitations and
restrictions as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or
imposts within the framework of the national development
program of the Government.
(3) Charitable institutions, churches and personages 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.
(4) No law granting any tax exemption shall be passed without
the concurrence of a majority of all the Members of the
Congress.
Sec. 29. (3) All money collected on any tax levied for a special
purpose shall be treated as a special fund and paid out for
such purpose only. If the purpose for which a special fund was
created has been fulfilled or abandoned, the balance, if any,
shall be transferred to the general funds of the Government.
ARTICLE VIII
Sec. 5. The Supreme Court shall have the following powers:
(2) Review, revise, reverse, modify, or affirm on appeal or
certiorari, as the law or the Rules of Court may provide, final
judgments and orders of lower courts in:
(b) All cases involving the legality of any tax, impost,
assessment, or toll, or any penalty imposed in relation thereto.
ARTICLE X
Sec. 5. Each local government unit shall have the power to
create its own sources of revenues and to levy taxes, fees,
and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments.
ARTICLE XIV
Sec. 4. (3) All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and exclusively
for educational purposes shall be exempt from taxes and
duties. Upon the dissolution or cessation of the corporate
existence of such institutions, their assets shall be disposed of
in the manner provided by law.
Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to such
exemptions, subject to the limitations provided by law,
including restrictions on dividends and provisions for
reinvestment.
QUESTION: What is a poll tax?
ANSWER: A poll tax is one levied on persons who are
residents within the territory of the taxing authority without
regard to their property, business or occupation. Thus, only the
basic community tax under the LGC could qualify as a poll tax,
and the non-payment of other (additional) taxes imposed, not
being in the nature of poll taxes, may validly be subjected by
law to imprisonment.
In other words, while a person may not be imprisoned for non-
payment of a cedula or poll tax, he may be imprisoned for non-
payment of other kinds of taxes where the law so expressly
provides.
QUESTION: Does the Constitution prohibit regressive taxes?
ANSWER: No, the Constitution does not really prohibit the
imposition of regressive taxes. What it simply provides is that
Congress shall evolve a progressive system of taxation.
QUESTION: Is VAT regressive?
ANSWER: Yes. The principle of progressive taxation has no
relation with the VAT system in as much 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
11 of 22
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 converse, 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
(ABAKADA Guro v. Ermita, G.R. No. 168056).
QUESTION: Explain the requirement of uniformity as a
limitation in the imposition and/or collection of taxes.
ANSWER: The tax is uniform when it operates with the same
force and effect in every place where the subject of it is found.
“Uniformity” means that all property belonging to the same
class shall be taxed alike. It does not signify an intrinsic, but
simply a geographic, uniformity (Churchill & Tait v.
Concepcion, 34 Phil. 969). Uniformity does not require the
same treatment; it simply requires reasonable basis for
classification.
QUESTION: To what kind of tax does the exemption in Sec.
28 (3), Art. VI of the 1987 Constitution apply?
ANSWER: This exemption applies only to property taxes.
What is exempted is not the institution itself but lands,
buildings, and improvements actually, directly, and exclusively
used for religious, charitable, and educational purposes.
QUESTION: Is the proof of actual use necessary for tax
exemption purposes under the Constitution?
ANSWER: Yes, because tax exemptions are strictly construed
against the taxpayer. There must be evidence to show that the
taxpayer has complied with the requirements of exemption.
Furthermore, real property taxation is based on use and not on
ownership; hence, the same rule must also be applied for real
property tax exemptions. (CIR v. CA, G.R. No. L-124043)
QUESTION/S: De La Salle University leases out a portion of
its property to private concessionaires, i.e., commercial
canteens and bookstores. The lease payments were factually
proven to be used for educational purposes.
a. Is the land owned by De La Salle University subject to real
property tax?
b. Are the lease payments received by De La Salle University
subject to income tax?
c. Are the lease payments received by De La Salle University
subject to VAT?
ANSWER/S:
a. Yes. The leased portion of the building may be subject to
real property tax. The test of exemption from taxation is the
use of the property for purposes mentioned in the Constitution.
The lease of a portion of a school building for commercial
purposes, removes such asset from the property tax
exemption granted under the Constitution. There is no
exemption because the asset is not used actually, directly and
exclusively for educational purposes. The commercial use of
the property is also not incidental to and reasonably necessary
for the accomplishment of the main purpose of a university,
which is to educate its students (Abra Valley College, Inc. v.
Aquino, 245 Phil. 83; 162 SCRA 106, cited in CIR vs. De La
Salle University, Inc., G.R. No. 196596).
b. and c.: No. If the university actually, directly and exclusively
uses for educational purposes the revenues earned from the
lease of its school building, such revenues shall be exempt
from taxes and duties. The tax exemption no longer hinges on
the use of the asset from which the revenues were earned, but
on the actual, direct and exclusive use of the revenues for
educational purposes. To avail of the exemption, the taxpayer
must factually prove that it used actually, directly and
exclusively for educational purposes the revenues or income
sought to be exempted.
In sum, The crucial point of inquiry then is on the use of the
assets or on the use of the revenues. These are two things
that must be viewed and treated separately (CIR vs. De La
Salle University, Inc., G.R. No. 196596).
QUESTION: May Congress, under the 1987 Constitution,
abolish the power to tax of local governments? (2003 Bar)
ANSWER: No. The Congress cannot abolish the local
government’s power to tax as it cannot abrogate what is
expressly granted by the fundamental law. The only authority
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
conferred to Congress is to provide the guidelines and
limitations on the local government’s exercise of the power to
tax.
QUESTION: Why must appropriation, revenue, or tariff bills
originate from the Congress?
ANSWER: On the theory that, elected as they are from the
districts, the members of the House of Representatives can be
expected to be more sensitive to the local needs and
problems.
QUESTION: When is deprivation of life, liberty and property by
the government done in compliance with due process?
ANSWER: If the act is done:
a. Under authority of a law that is valid or the Constitution
itself (substantive due process); and
b. After compliance with fair and reasonable methods of
procedure prescribed by law (procedural due process).
QUESTION: When may violation of due process be invoked
by the taxpayer?
ANSWER: The due process clause may be invoked where a
taxing statute is so arbitrary that it finds no support in the
Constitution, as where it can be shown to amount to a
confiscation of property (Reyes v. Almanzor, G.R. Nos. L-
49839-46).
While it is true that the Philippines as a State is not obliged to
admit aliens within its territory, once an alien is admitted, he
cannot be deprived of life without due process of law. This
guarantee includes the means of livelihood. The shelter of
protection under the due process and equal protection clause
is given to all persons, both aliens and citizens (Villegas v. Hiu
Chiong Tsai Pao Ho, G.R. No. L-29646).
QUESTION: Is the imposition of fixed license fee a prior
restraint on the freedom of the press and religious freedom?
ANSWER: Yes. As a license fee is fixed in the amount and
unrelated to the receipts of the taxpayer, the license fee, when
applied to a religious sect, is actually being imposed as a
condition for the exercise of the sect’s right under the
Constitution (Tolentino v. Secretary of Finance, G.R. No.
115873).
QUESTION: Is VAT registration restrictive of religious and
press freedom?
ANSWER: No. The VAT registration fee, although fixed in
amount, is not imposed for the exercise of a privilege but only
for defraying part of the cost of registration (Tolentino v.
Secretary of Finance, G.R. No. 115873).
Case/s:
City of Baguio v. De Leon
(25 SCRA 938)
The 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. Where Congress has clearly expressed
its intention, the statute must be sustained even though double
taxation results.
Equality and uniformity in taxation means that all
taxable articles or kind or property of the same class shall be
taxed at the same rate. A tax is considered uniform when it
operates with the same force and effect in every place where
the subject may be found. Where the statute or ordinance in
question applies equally to all persons, firms and corporations
placed in similar situation there is no infringement of the rule
on equality. Inequalities which result from a singling out of one
particular class for taxation or exemption infringe no
constitutional limitation.
Sison v. Ancheta
(130 SCRA 654)
The power to tax moreover, to borrow from Justice
Malcolm, “is an attribute of sovereignty. It is the strongest of all
the powers of government.” It is, of course, to be admitted that
for all its plenitude, the power to tax is not unconfined. There
12 of 22
are restrictions. The Constitution sets forth such limits. where “the differentiation” complained of “conforms to the
Adversely affecting as it does property rights, both the due practical dictates of justice and equity” it “is not discriminatory
process and equal protection clauses may properly be within the meaning of this clause and is therefore uniform.”
invoked, as petitioner does, to invalidate in appropriate cases There is quite a similarity then to the standard of equal
a revenue measure. If it were otherwise, there would be truth protection for all that is required is that the tax “applies equally
to the 1803 dictum of Chief Justice Marshall that “the power to to all persons, firms and corporations placed in similar
tax involves the power to destroy.” In a separate opinion in situation.”
Graves v. New York, Justice Frankfurter, after referring to it as
Herrera v. QC Board of Assessment Appeals
an “unfortunate remark,” characterized it as “a flourish of
(G.R. No. L-15270)
rhetoric [attributable to] the intellectual fashion of the times
[allowing] a free use of absolutes.” This is merely to The admission of paypatients does not detract from the
emphasize that it is not and there cannot be such a charitable character of a hospital, if all of its funds are devoted
constitutional mandate. Justice Frankfurter could rightfully “exclusively to the maintenance of the institution” as a “public
conclude: “The web of unreality spun from Marshall’s famous charity” (84 C.J.S., 617; see, also, 51 Am. Jur. 607; Cooley on
dictum was brushed away by one stroke of Mr. Justice Taxation, Vol. 2, p. 1562; 144 A.L.R., 1489-1492). In other
Holmes’s pen: ‘The power to tax is not the power to destroy words, “where rendering charity is its primary object, and the
while this Court sits.’ ” So it is in the Philippines. funds derived from payments made by patients able to pay are
devoted to the benevolent purposes of the institution, the mere
The difficulty confronting petitioner is thus apparent. He
fact that a profit has been made will not deprive the hospital of
alleges arbitrariness. A mere allegation, as here, does not
its benevolent character” (Prairie Du Chian Sanitarium Co. vs.
suffice. There must be a factual foundation of such
City of Prairie Du Chian, 242 Wis. 262, 7 NW [2d] 832, 144
unconstitutional taint. Considering that petitioner here would
A.L.R. 1480). The fact, therefore, that in the case at bar, St.
condemn such a provision as void on its face, he has not
Catherine’s Hospital, which is a charitable institution, admits
made out a case. This is merely to adhere to the authoritative
pay-patients, does not bar it from claiming that it is devoted
doctrine that where the due process and equal protection
exclusively to benevolent purposes, it being admitted that the
clauses are invoked, considering that they are not fixed rules
income derived from paypatients is devoted to the
but rather broad standards, there is a need for proof of such
improvement of the charity wards, which represent almost two-
persuasive character as would lead to such a conclusion.
thirds (2/3) of the bed capacity of the hospital, aside from “out-
Absent such a showing, the presumption of validity must
charity patients” who come only for consultation.
prevail.
The exemption in favor of property used exclusively for
It is undoubted that the due process clause may be
charitable or educational purposes is “not limited to property
invoked where a taxing statute is so arbitrary that it finds no
actually indispensable” therefor (Cooley on Taxation, Vol. 2, p.
support in the Constitution. An obvious example is where it
1430), but extends to facilities which are “incidental to and
can be shown to amount to the confiscation of property. That
reasonably necessary for” the accomplishment of said
would be a clear abuse of power. It then becomes the duty of
purposes, such as, in the case of hospitals, “a school for
this Court to say that such an arbitrary act amounted to the
training nurses, a nurses’ home, property used to provide
exercise of an authority not conferred. That properly calls for
housing facilities for interns, resident doctors, superintendents,
the application of the Holmes dictum. It has also been held
and other members of the hospital staff, and recreational
that where the assailed tax measure is beyond the jurisdiction
facilities for student nurses, interns and residents” (84 C.J.S.,
of the state, or is not for a public purpose, or, in case of a
621), such as “athletic fields”, including “a farm used for the
retroactive statute is so harsh and unreasonable, it is subject
inmates of the institution” (Cooley on Taxation, Vol. 2, p.
to attack on due process grounds.
1430).
The equal protection clause is, of course, inspired by
The existence of “St. Catherine’s School of Midwifery”,
the noble concept of approximating the ideal of the laws’s
with an enrollment of about 200 students, who practice partly
benefits being available to all and the affairs of men being
in St. Catherine’s Hospital and partly in St. Mary’s Hospital,
governed by that serene and impartial uniformity, which is of
which, likewise, belongs to petitioners, does not, and cannot
the very essence of the idea of law. There is, however,
affect the exemption to which St. Catherine’s Hospital is
wisdom, as well as realism, in these words of Justice
entitled under the Constitution. The fact that the size of the
Frankfurter: “The equality at which the ‘equal protection’
enrollment and the students, aside from the amount they paid
clause aims is not a disembodied equality. The Fourteenth
for board and lodging, warrant the belief that a substantial
Amendment enjoins ‘the equal protection of the laws,’ and
profit is derived from the operation of the said school, is
laws are not abstract propositions. They do not relate to
immaterial to the issue of whether or not real estate taxes
abstract units A, B and C, but are expressions of policy arising
should be paid, because “all lands, buildings and
out of specific difficulties, addressed to the attainment of
improvements used exclusively for religious, charitable or
specific ends by the use of specific remedies. The Constitution
educational purposes shall be exempt from taxation”, pursuant
does not require things which are different in fact or opinion to
to the Constitution, regardless of whether or not material
be treated in law as though they were the same.” Hence the
profits are derived from the operation of the institutions in
constant reiteration of the view that classification if rational in
question. In other words, Congress may, if it deems fit to do
character is allowable. As a matter of fact, in a leading case of
so, impose taxes upon such “profits”, but said “lands, buildings
Lutz V. Araneta, this Court, through Justice J.B.L. Reyes, went
and improvements” are beyond its taxing power.
so far as to hold “at any rate, it is inherent in the power to tax
that a state be free to select the subjects of taxation, and it has The fact that a garage located in the hospital was being
been repeatedly held that ‘inequalities which result from a used in the operation of the school of midwifery because the
singling out of one particular class for taxation, or exemption students enrolled therein were entitled to transportation and
infringe no constitutional limitation.’ ” that the hospital directress who received no compensation,
and her family, resided in the building, were incidental to the
Petitioner likewise invoked the kindred concept of
operation of the hospital, and, accordingly, did not affect the
uniformity. According to the Constitution: “The rule of taxation
charitable character of the hospital and the educational nature
shall be uniform and equitable.” This requirement is met
of the school.
according to Justice Laurel in Philippine Trust Company v.
Yatco, decided in 1940, when the tax “operates with the same Abra Valley College v. Aquino
force and effect in every place where the subject may be (162 SCRA 106)
found.” He likewise added: “The rule of uniformity does not call
The test of exemption from taxation is the use of the
for perfect uniformity or perfect equality, because this is hardly
property for purposes mentioned in the Constitution.
attainable.” The problem of classification did not present itself
in that case. It did not arise until nine years later, when the As early as 1916, in YMCA of Manila vs. Collector of
Supreme Court held: “Equality and uniformity in taxation Internal Revenue, 33 Phil. 217 [1916], this Court ruled that
means that all taxable articles or kinds of property of the same while it may be true that the YMCA keeps a lodging and a
class shall be taxed at the same rate. The taxing power has boarding house and maintains a restaurant for its members,
the authority to make reasonable and natural classifications for still these do not constitute business in the ordinary
purposes of taxation, * * *. As clarified by Justice Tuason, acceptance of the word, but an institution used exclusively for

Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021 13 of 22

religious, charitable and educational purposes, and as such, it
is entitled to be exempted from taxation.
In the case of Bishop of Nueva Segovia v. Provincial
Board of Ilocos Norte, 51 Phil. 352 [1972], this Court included
in the exemption a vegetable garden in an adjacent lot and
another lot formerly used as a cemetery. It was clarified that
the term “used exclusively” considers incidental use also.
Thus, the exemption from payment of land tax in favor of the
convent includes, not only the land actually occupied by the
building but also the adjacent garden devoted to the incidental
use of the parish priest. The lot which is not used for
commercial purposes but serves solely as a sort of lodging
place, also qualifies for exemption because this constitutes
incidental use in religious functions.
The phrase “exclusively used for educational purposes”
was further clarified by this Court in the cases of Herrera vs.
Quezon City Board of Assessment Appeals, 3 SCRA 186
[1961] and Commissioner of Internal Revenue vs. Bishop of
the Missionary District, 14 SCRA 991 [1965], thus““Moreover,
the exemption in favor of property used exclusively for
charitable or educational purposes is ‘not limited to property
actually indispensable’ therefor (Cooley on Taxation, Vol. 2, p.
1430), but extends to facilities which are incidental to and
reasonably necessary for the accomplishment of said
purposes, such as in the case of hospitals, ‘a school for
training nurses, a nurses’ home, property use to provide
housing facilities for interns, resident doctors, superintendents,
and other members of the hospital staff, and recreational
facilities for student nurses, interns, and residents’ (84 CJS
6621), such as ‘athletic fields’ including ‘a firm used for the
inmates of the institution.’ ”
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 purposes 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.
Lutz v. Araneta
(98 Phil. 148)
As the protection and promotion of the sugar industry is
a matter of public concern, the Legislature may determine
within reasonable bounds what is necessary for its protection
and expedient for its promotion. Here, the legislative discretion
must be allowed full play, subject only to the test of
reasonableness; and it is not contended that the means
provided in section 6 of Commonwealth Act No. 567 bear no
relation to the objective pursued or are oppressive in
character. If objective and methods are alike constitutionally
valid, no reason is seen why the state may not levy taxes to
raise funds for their prosecution and attainment. Taxation may
be made the implement of the state’s police power.
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 “inequalities which result from a singling out of one
particular class for taxation or exemption infringe no
constitutional limitation.
VIII. INTERPRETATION AND CONSTRUCTION OF TAX
STATUTES
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
The established rules in statutory construction are equally
applicable to tax statutes; after all, the primordial consideration
is, every time, the legislative intent. But where doubts exist in
determining that intent, the doubt must be resolved liberally in
favor of tax payers and strictly against the taxing authority.
(Commissioner v. Fireman’s Ins. Co., 148 SCRA 315)
The exemptions (or equivalent provisions such as tax
amnesties and tax condonations) are not presumed (Floro
Cement v. Gorospe, 200 SCRA 480) and, when granted, are
strictly construed against the grantee (Luzon Stevedoring Co.
v. CTA, 163 SCRA 647), such provisions being highly
disfavored and may almost be said “to be odious to the law.”
(Manila Electric Co. v. Vera, 67 SCRA 351)
Case/s:
Commissioner v. Fireman Insurance Co.
(G.R. No. L-30644)
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).
Floro Cement v. Gorospe
(G.R. No. L-46787)
On the exemption claimed by petitioner, this Court has
laid down the rule that as the power of taxation is a high
prerogative of sovereignty, the relinquishment is never
presumed and any reduction or diminution thereof with respect
to its mode or its rate, must be strictly construed, and the
same must be coached in clear and unmistakable terms in
order that it may be applied. More specifically stated, the
general rule is that any claim for exemption from the tax
statute should be strictly construed against the taxpayer
(Luzon Stevedoring Corporation v. Court of Appeals, 163
SCRA 647). He who claims an exemption must be able to
point out some provision of law creating the right; it cannot be
allowed to exist upon a mere vague implication or inference. It
must be shown indubitably to exist, for every presumption is
against it, and a wellfounded doubt is fatal to the claim (Manila
Electric Company v. Ver, 67 SCRA 351).
CIR v. Guerrero
(21 SCRA 180)
Exemption, being obnoxious to taxation, is not favored
and never presumed; if granted, it must be categorically and
unmistakably expressed in terms that admit of no doubt, yet
such exempting provision must be interpreted in strictissimi
juris against the taxpayer and liberally in favor of the taxing
authority. No such grant is apparent from the face of the
Ordinance. No such grant could be implied from its history,
much less from its transitory character.
IX. CLASSIFICATION OF TAX EXEMPTIONS
a. Express (by exemption provisions in the Constitution,
statutes, treaties, franchises or similar legislative acts)
b. Implied or by Omission - There is no tax by silence but,
where the law levies a tax, so also must the tax exemption be
explicit in the law. While exemptions are not presumed, the
government, however, unless otherwise expressed, is deemed
not subject to a law imposing taxes (SSS v. Bacolod City, 115
SCRA 412) but there is no prohibition against the government
taxing itself (Bisaya Land Transportation Co., Inc. v. Collector
of Internal Revenue, 105 Phil. 1338). There is no tax
exemption solely on the ground of equity, but equity can be
used as a basis for a statutory exemption; thus, at times the
law (e.g., Secs. 276 and 277, Local Government Code)
authorizes the condonation of taxes on equitable
considerations.
c. Contractual - Contractual tax exemptions are those agreed
to by the taxing authority in contracts lawfully entered into by
them under enabling laws. These exemptions must not be
confused with the tax exemptions granted under franchises
which are not contracts within the purview of the non-
impairment clause of the Constitution (Cagayan Electric Co.
v. Commissioner, 138 SCRA 629, but see Prov. of Misamis
Oriental v. Cagayan Electric, 181 SCRA 38, reiterated in
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Comm. v. CTA, 195 SCRA 445). In entering into a contract,
the government sheds its cloak of authority and waives its
governmental immunity; a franchise is a special privilege
conferred by governmental authority, acting as such on an
undertaking that is within the scope of governmental functions.
Contractual tax exemptions covering matters that are not
essentially government in nature, such as those contained in
government bonds or debentures, unlike in franchises, may
not be revoked without impairing the obligations of contracts
(Casanovas v. Hord, 8 Phil. 125). Parenthetically, in the case
of legislative franchises, the Court, in CIR v. CTA (195 SCRA
445), had this to say: “A legislative franchise partakes of the
nature of a contract.” In the case of Prov. Of Misamis
Oriental v. Cagayan Electric Power and Light Company,
Inc. (181 SCRA 38), it was held: “So was the exemption
upheld in favor of the Carcar Electric and Ice Plant Company
when it was required to pay the corporate franchise tax undeer
Sec. 259 of the Internal Revenue Code, as amended by R.A.
No. 39 (Carcar Electric and Ice Plant v. Collector of Internal
Revenue, 53 O.G. [No.4] 1068). Such exemption is part of the
inducement for the acceptance of the franchise and the
rendition of public service by the grantee. As a charter is in the
nature of a private contract, the imposition of another franchise
tax on the corporation by the local authority would constitute
an impairment of the contract between the government and
the Corporation. Franchises spring from contracts between the
sovereign power and private citizens made upon valuable
considerations, for purposes of individual advantages as well
as public benefit. It is generally considered that the obligation
resting upon the grantee to comply with the terms and
conditions of the grant constitutes a sufficient consideration. It
can also be said that the benefit to the community may
constitute the sole consideration for the grant of a franchise by
the state. Such being the case, the franchise is the law
between the parties and they are bound by terms thereof.”
Case/s:
Cagayan Electric Company v. CIR
(138 SCRA 629)
The Tax Court acted correctly in holding that the
exemption was restored by the subsequent enactment on
August 4, 1969 of Republic Act No. 6020 which reenacted the
said tax exemption. Hence, the petitioner is liable only for the
income tax for the period from January 1 to August 3, 1969
when its tax exemption was modified by Republic Act No.
5431.
However, it cannot be denied that the said 1969
assessment appears to be highly controversial. The
Commissioner at the outset was not certain as to petitioner’s
income tax liability. It had reason not to pay income tax
because of the tax exemption in its franchise. For this reason,
it should be liable only for tax proper and should not be held
liable for the surcharge and interest.
Prov. of Misamis Oriental v. Cagayan Electric
(181 SCRA 38)
So was the exemption upheld in favor of the Carcar
Electric and Ice Plant Company when it was required to pay
the corporate franchise tax under Section 259 of the Internal
Revenue Code, as amended by R.A. No. 39 (Carcar Electric &
Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No. 4]
1068). This Court pointed out that such exemption is part of
the inducement for the acceptance of the franchise and the
rendition of public service by the grantee. As a charter is in the
nature of a private contract, the imposition of another franchise
tax on the corporation by the local authority would constitute
an impairment of the contract between the government and
the corporation.
Local Tax Regulation No. 3-75 issued by the
Secretary of Finance on June 26, 1976, has made it crystal
clear that the franchise tax provided in the Local Tax Code
(P.D. No. 231, Sec. 9) may only be imposed on companies
with franchises that do not contain the exempting clause. Thus
it provides: “The franchise tax imposed under local tax
ordinance pursuant to Section 9 of the Local Tax Code, as
amended, shall be collected from businesses holding franchise
but not from business establishments whose franchise contain
the ‘in-lieu-of-all-taxes-proviso.’ ”
X. SPECIFIC DOCTRINES IN TAXATION
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
1. Prospectivity of Tax Laws
GENERAL RULE: Tax laws are prospective in application
(Civil Code, Art. 4; CIR v. PNB, G.R. No. 195147)
XPN: When the language of the statute clearly demands or
expresses that it shall have a retroactive effect (Lorenzo v.
Posadas, G.R. No. L-43082).
Retroactive application of revenue laws may also be allowed if
it will not deny due process. There is violation of due process
when the tax law imposes harsh and oppressive tax.
(Dimaampao)
Non-Retroactivity of Rulings
GENERAL RULE: Any revocation, modification, or reversal of
any of the rules and regulations, rulings, and circulars
promulgated by the Commissioner shall not be given
retroactive application if it will be prejudicial to the taxpayers
(NIRC, Sec. 246).
Illustration: During the period from December 10, 2003 (when
BIR Ruling No. DA-489-03 was issued) to October 6, 2010
(when the CIR v. Aichi Forging Company of Asia, Inc. case
was promulgated wherein the BIR Ruling No. DA-489-03 was
invalidated), taxpayers-claimants need not observe the 120-
day period before it could file a judicial claim for refund of
excess input VAT before the CTA. Before and after the
aforementioned period (i.e., December 10, 2003 to October 6,
2010), the observance of the 120-day (Now: 90-day pursuant
to TRAIN Law) period is mandatory and jurisdictional to the
filing of such claim (CIR v. CE Luzon Geothermal Power
Company, Inc., G.R. No. 190198). Thus, the Aichi ruling was
not applied retroactively.
XPN/S:
a. Where the taxpayer deliberately misstates or omits
material facts from his return or any document;
c. Where the facts subsequently gathered by the BIR are
materially different from the facts on which the ruling is
based;
d. Where the taxpayer acted in bad faith (NIRC, Sec. 246); or
e. Where it is the Court and not the Commissioner which
declared null and void a BIR issuance (Phil. Bank of
Communications v. CIR, G.R. No. 112024).
Taxes may be imposed retroactively by law but, unless so
expressed by such law, these taxes must only be imposed
prospectively. (Hydro Resources v. CA, 192 SCRA 604) Tax
laws are neither political nor penal in nature, and they are
deemed laws of the occupied territory rather than of the
occupying enemy (Hilado v. Collector, 100 Phil. 288); hence,
the “ex post facto” rule, except for the penalty imposed (not the
interest), would be inapplicable. (Central Azucarera de Don
Pedro v. CTA, 20 SCRA 344) A harsh retroactivity of the law,
however, may make it inequitable and violative of the
Constitution; similarly, due process is violated if the tax is
oppressive.
In Fernandez v. Fernandez (99 Phil. 934), the Supreme Court,
in declaring the “war profit tax” to be valid said:
“Appellant’s contention that the law is invalid or
unconstitutional because it acts retroactively, thus violating the
due process of law clause, is not supported by reason or
authority. Property taxes and benefits assessments on real
estate, retroactively, are not open to the objection that they
infringe upon the due process of law clause of the
Constitution; that taxes on income are not subject to the
constitutional objection because of their retroactivity. The
universal practice has been to increase taxes on income
already earned; yet notwithstanding this retroactive operation,
income taxes have not been successfully assailed as invalid.
The uniform ruling of the courts in the United States has been
to reject the contention that the retroactive application of
revenue acts is a denial of the due process guaranteed by the
Fifth Amendment. In order to declare a tax as transgressing
the constitutional limitation, it must be so harsh and oppressive
in its retroactive application. Far from being unjust or harsh
and oppressive, our war profit tax is both wise and just. x x x
The law may not be considered harsh and oppressive because
the force of its impact fell on those who had amassed wealth
or increased their wealth during the war, but did not touch the
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less fortunate. The policy followed is the same as that which
underlies the Income Tax Law, imposing the burden upon
those who have, relieving those who have not. No one can
dare challenge the law as harsh and oppressive.”
But the legislative intent evincing that a tax statute should
operate retroactively should be explicit and perfectly clear. “A
statute should be considered as prospective in its operation,
whether it enacts, amends, or repeals x x x, unless the
language of the statute clearly demands or expresses that it
shall have a retroactive effect.” (Lorenzo v. Posadas, 64 Phil.
353)
In the same way that taxes can be made retroactive, so also
tax exemptions may be revoked. Contractual tax exemptions,
however, may mot be unilaterally so revoked by the taxing
authority without thereby violating the non-impairment clause
of the Constitution.
Republic v. Fernandez
(G.R. No. L-9141)
Appellant's contention that the law is invalid or
unconstitutional because it acts retroactively, thus violating the
due process of law clause, is not supported by reason or
authority. Property taxes and benefits assessments on real
estate, retroactively applied, are not open to the objection that
they infringe upon the due process of law clause of the
Constitution; that taxes on income are not subject to the
constitutional objection because of their retroactivity. The
universal practice has been to increase taxes on income
already earned; yet notwithstanding this retroactive operation,
income taxes have not been successfully assailed as invalid.
The uniform ruling of the courts in the United State has been
to reject the contention that the retroactive application of
revenue acts is a denial of the due process guaranteed by the
Fifth Amendment. In order to declare a tax as transgressing
the constitutional limitation, it must be so harsh and oppressive
in its retroactive application. Far from being unjust or harsh
and oppressive our war profit tax is both wise and just.
CIR v. Marubeni Corporation
(G.R. No. 137377)
By virtue of Section 8 as aforequoted, the provisions
of E.O. No. 41 not contrary to or inconsistent with the
amendatory act were reenacted in E.O. No. 64. Thus, Section
4 of E.O. No. 41 on the exceptions to amnesty coverage also
applied to E.O. No. 64. With respect to Section 4 (b) in
particular, this provision excepts from tax amnesty coverage a
taxpayer who has “income tax cases already filed in court as
of the effectivity hereof.” As to what Executive Order the
exception refers to, respondent argues that because of the
words “income” and “hereof,” they refer to Executive Order No.
41. In view of the amendment introduced by E.O. No. 64,
Section 4 (b) cannot be construed to refer to E.O. No. 41 and
its date of effectivity. The general rule is that an amenda-tory
act operates prospectively. While an amendment is generally
construed as becoming a part of the original act as if it had
always been contained therein, it may not be given a
retroactive effect unless it is so provided expressly or by
necessary implication and no vested right or obligations of
contract are thereby impaired.
There is nothing in E.O. No. 64 that provides that it
should retroact to the date of effectivity of E.O. No. 41, the
original issuance. Neither is it necessarily implied from E.O.
No. 64 that it or any of its provisions should apply retroactively.
Executive Order No. 64 is a substantive amendment of E.O.
No. 41. It does not merely change provisions in E.O. No. 41. It
supplements the original act by adding other taxes not covered
in the first. It has been held that where a statute amending a
tax law is silent as to whether it operates retroactively, the
amendment will not be given a retroactive effect so as to
subject to tax past transactions not subject to tax under the
original act. In an amendatory act, every case of doubt must
be resolved against its retroactive effect.
2. Imprescriptibility of Taxes
GENERAL RULE: The right to assess and to collect are
imprescriptible (CIR v. Ayala Securities Corp., G.R. No. L-
29485)
XPN: When the laws provide for statute of limitations (CIR v.
Standard Chartered Bank, G.R. No. 192173)
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
Example/s:
a. Assessment of internal revenue taxes within three (3)
years after the last day prescribed by law for filing of the
return (NIRC, as amended by TRAIN, Sec. 203); in cases
of fraud, at any time within ten (10) years after the
discovery of the fraud (NIRC, Sec. 222).
b. For LGUs, five (5) year prescriptive period for assessment
and collection (LGC, Secs. 194 and 270).
Unless otherwise provided by the tax law itself, taxes are
imprescriptible. (CIR v. Ayala Securities Corp., G.R. No. L-
29485)
The National Internal Revenue Code provides for statutes of
limitation (Secs. 203 and 222) in the assessment and
collection of taxes therein imposed. In CIR v. Ayala Securities
Corp. (101 SCRA 231), however, the prescriptive periods
therein contained were considered to be applicable only to
those taxes that were thereunder required to be reported or
returned by the taxpayer for tax purposes. The Court thus held
that the then 25% surtax imposed on unreasonably
accumulated surplus profits of corporations (Sec. 29, NIRC) is
imprescriptible and there is no time limit on the right of the
Commissioner to assess the same. Where, however, the
taxpayer, although not required, files a return and declares his
tax liability, then the prescriptive periods may become
operative. (Collector v. Bisaya Land Transportation Co., G.R.
No. L-12100)
For the purpose of safeguarding taxpayers from any
unreasonable examination, investigation or assessment, our
tax law provides a statute of limitations in the collection of
taxes. Thus, the law on prescription; being a remedial
measure, should be liberally construed in order to afford such
protection. As a corollary, the exceptions to the law on
prescription should perforce be strictly construed. (CIR v. CA,
G.R. No. 104171)
The Tariff and Customs Code does not express any general
statute of limitation; it provides, 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 three years (R.A. No. 9135) 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
the import entry was merely tentative.” (Sec. 1603)
The Local Government Code prescribes prescriptive periods
for the assessment (5 years) and collection (5 years) of taxes
(Secs. 194 and 270, LGC) unlike that which obtained under
the then Local Tax Code and the Real Property Tax Code.
CIR v. Ayala Securities Corp.
(G.R. No. L-29485)
The Court is persuaded by the fundamental principle
invoked by petitioner that limitations upon the right of the
government to assess and collect taxes will not be presumed
in the absence of clear legislation to the contrary and that
where the government has not by express statutory provision
provided a limitation upon its right to assess unpaid taxes,
such right is imprescriptible.
The Court, therefore, reconsiders its ruling in its
decision under reconsideration that the right to assess and
collect the assessment in question had prescribed after five
years, and instead rules that there is no such time limit on the
right of the Commissioner of Internal Revenue to assess the
25% tax on unreasonably accumulated surplus provided in
section 25 of the Tax Code, since there is no express statutory
provision limiting such right or providing for its prescription.
The underlying purpose of the additional tax in question a
corporation’s improperly accumulated profits or surplus is as
set forth in the text of section 25 of the Tax Code itself to avoid
the situation where a corporation unduly retains its surplus
earnings instead of declaring and paying dividends to its
shareholders or members who would then have to pay the
income tax due on such dividends received by them. The
record amply shows that respondent corporation is a mere
holding company of its shareholders through its mother
company, a registered co-partnership then set up by the
individual shareholders belonging to the same family and that
16 of 22
the prima facie evidence and presumption set up by the Tax
Code, therefore, applied without having been adequately
rebutted by the respondent corporation.
3. Double Taxation
Double Taxation means taxing for the same tax period the
same thing or activity twice, when it should be taxed but once,
for the same purpose and with the same kind of character of
tax. Hence, there would be no double taxation where a lessor
of a property has to reckon with and pays a real estate tax on
the leased premises, a real estate dealer’s tax based on rental
receipts, and an income tax on such rentals, these impositions
being of different character and purposes (Villanueva v. City of
Iloilo, 26 SCRA 578). There is also, thus, no double taxation
when a tax is imposed on soap and other similar products of a
taxpayer and another tax on the storage of copra, a raw
material for the taxpayer’s product. (Procter & Gamble
Philippines v. Municipality of Jagna, 94 SCRA 894) Double
taxation is one of direct duplicate taxation when the levies
are made by the same taxing authority; otherwise, the case is
merely one of indirect duplicate taxation (or not an
“obnoxious double taxation,” said the Supreme Court in
Commissioner v. Lednicky (11 SCRA 603).
Standing alone and not being forbidden by our fundamental
law, double taxation is not a valid defense against the validity
of a tax measure. (Pepsi-Cola v. Tanauan, 69 SCRA 460). But
from it might emanate such defenses against taxation as
oppressiveness and inequality of the tax.
Measures that are normally adopted by sovereign taxing
authorities in order to avoid the resulting inequities of double
taxation include —
(a) Treaty provisions against double taxation;
(v) Reciprocity provisions; and
(w) Tax credit provisions.
Kinds of Double Taxation:
1. Direct Duplicate
Taxation/Obnoxious/Objectionable/Prohibited/Strict
Sense - It is the objectionable kind of double taxation in its
prohibited sense, since it violates the equal protection
clause of the Constitution (City of Baguio v. De Leon, G.R.
No. L-24756)
Element/s:
a. The same property or subject matter is taxed twice when it
should be taxed only once;
f. Both taxes are levied for the same purpose; and
g. Imposed by the same taxing authority;
i. Within the same jurisdiction;
ii. During the same taxing period; and
iii. Covering the same kind or character of tax (Villanueva
v. City of Iloilo, G.R. No. L-26521)
Illustration: The City of Manila imposed local business tax on
manufacturers of liquors, distilled spirits, and wines and local
business tax on businesses subject to excise, VAT, or
percentage tax under the NIRC.
The Court held that there is direct duplicate taxation if
respondent is subjected to the two local business taxes, 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 conducting business within
the City of Manila contribute to city revenues; (3) by the same
taxing authority - petitioner City of Manila; (4) within the same
taxing jurisdiction - within the territorial jurisdiction of the City
of Manila; (5) for the same taxing periods - per calendar year;
and (6) of the same kind or character - a local business tax
imposed on gross sales or receipts of the business (Nursery
Care Corp. v. Acevedo and the City of Manila, G.R. No.
180651).
2. Indirect Duplicate Taxation/Broad Sense - It extends to
all cases in which there is a burden of two or more pecuniary
impositions. It is usually allowed as long as there is no
violation of the equal protection and uniformity clauses of the
Constitution (Valencia & Roxas).
Example/s:
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
a. A tax upon a corporation for its property and upon its
shareholders for their shares;
h. A tax upon the same property imposed by two different
states; and
i. A tax on a mortgage as personal property and upon the
mortgaged property as real estate.
3. International Juridical Double Taxation - The imposition
of comparable taxes in two or more states on the same
taxpayer, in respect of the same subject matter and for
identical periods (CIR v. S.C. Johnson & Son, Inc., G.R. No.
127105).
This double taxation usually takes place when a person is a
resident of the first contracting State and derives income from,
or owns capital in the other contracting State and both States
impose taxes on such income or capital. In order to eliminate
double taxation, the two contracting States enter into a tax
treaty (CIR v. S.C. Johnson & Son, Inc., G.R. No. 127105).
International juridical double taxation only occurs when the
State of residence of the taxpayer imposes tax on the income
of said taxpayer from sources within and without their State
(CIR v. S.C. Johnson & Son, Inc., G.R. No. 127105).
Reason for Avoiding International Juridical Double
Taxation: To encourage the free flow of goods and services
and the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and
dynamic economies (CIR v. S.C. Johnson & Son, Inc., G.R.
No. 127105).
4. Local Double Taxation - Happens when an LGU will
impose a tax that is already imposed by the National
Government or by another LGU that has territorial jurisdiction
over such LGU (Recalde).
To avoid “local double taxation,” Congress prevents LGUs
from imposing taxes which are already imposed by the
National Government “unless otherwise provided in the Local
Government Code.” This limitation, known as the pre-emption
rule, is common to all LGUs.
The Philippine tax system provides for certain schemes in
order to avoid or minimize the harsh or burdensome effects of
double taxation. The means, however, depend on whether
there is international double taxation or local double taxation.
Modes of Relief from Double Taxation:
1. Tax Credits - An amount is subjected from an individual or
entity’s tax liability to arrive at the total tax liability (CIR v.
Central Luzon Drug Corp., G.R. No. 159647).
20. Reduction of the Philippine Income Tax Rate - An
example is the Tax Sparring Rule wherein the dividend
earned by a non-resident foreign corporation (NRFC)
within the Philippines is reduced by imposing a lower rate
of 15% (in lieu of the 30%), on the condition that the
country to which the NRFC is domiciled shall allow a credit
against the tax due from the NRFC, which taxes are
deemed to have been paid in the Philippines (NIRC, Sec.
28(B)(5)(b)); CIR v. Procter & Gamble, G.R. No. L-
66838).
Methods Resorted to by a Tax Treaty in Order to Eliminate
Double Taxation:
First Method: An exclusive right to tax is conferred in one of
the contracting states; however, for other items of income or
capital, both states are given the right to tax although the
amount of tax that may be imposed by the state of source is
limited (Recalde).
Second Method: The state of source is given a full or limited
right to tax together with the state of residence. In this case,
the treaty makes it incumbent upon the state of residence to
allow relief in order to avoid double taxation.
Two ways under the Second Method:
1. Exemption Method - The income or capital, which is
taxable in the state of source or situs, is exempt in the
state of residence, although in some instances it may be
taken into account in determining the rate of tax applicable
to the taxpayer’s remaining income or capital. (This may
be done by using the tax deduction method, which allows
foreign income taxes to be deducted from gross income, in
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 effect, exempting the payment from being further taxed.)
The focus here is on the income or capital itself.
6. The Credit Method - Although the income or capital,
which is taxed in the state of source, is still taxable in the
state of residence, the tax paid in the former is credited
against the tax levied in the latter (CIR v. S.C. Johnson &
Son, Inc., G.R. No. 127105).
Most Favored Nation Clause in Tax Treaties
The purpose of the most favored nation clause is to grant to
the contracting party treatment not less favorable than that
which has been or may be granted to the “most favored”
among other countries. It is intended to establish the principle
of equality of international treatment by providing that the
citizens or subjects of the contracting nations may enjoy the
privileges accorded by either party to those of the most
favored nation (CIR v. S.C. Johnson & Son, Inc., G.R. No.
127105).
BIR Cannot Impose Additional Requirements.
In Deutsche Bank AG Manila Branch v. CIR, the Supreme
Court categorically held that the BIR should not impose
additional requirements that would negate the availment of the
reliefs provided for under international agreements, especially
since said tax treaties do not provide for any prerequisite at all
for the availment of the benefits under said agreements. It
bears reiterating that the application for a tax treaty relief from
the BIR should merely operate to confirm the entitlement of the
taxpayer to the relief. (CBK Power Company Limited v. CIR,
G.R. No. 193383-84)
Procter & Gamble v. Mun. of Jagna
(G.R. No. L-24265)
Thus, it can be said that plaintiff’s payment of storage
fees imposed by the Ordinance in question does not amount to
double taxation. For double taxation to exist, the same
property must be taxed twice, when it should be taxed but
once. Double taxation has also been defined as taxing the
same person twice by the same jurisdiction for the same thing.
Surely, a tax on plaintiff’s products is different from a tax on
the privilege of storing copra in a bodega situated within the
territorial boundary of defendant municipality.
CIR v. Sps. Lednicky
(G.R. Nos. L-18169, L-18286, & L-21434)
Double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same
governmental entity. In the present case, although the
taxpayer would have to pay two taxes on the same income but
the Philippine government only receives the proceeds of one
tax, there is no obnoxious double taxation.
4. Power to Tax Involves the Power to Destroy
The power to tax includes the power to destroy if its is used
validly as an implement of the police power in discouraging
and in effect, ultimately prohibiting certain things or enterprises
inimical to the public welfare. But where the power to tax is
used solely for the purpose of raising revenues, the modern
view is that it cannot be allowed to confiscate or destroy. If this
is sought to be done, the tax may be successfully attacked as
an unconditional exercise of the discretion usually vested in
the legislature in ascertaining the amount of the tax. (Cruz,
Constitutional Law, 2015)
The Philippine Supreme Court expressed its view on the
doctrine, viz.: “Adversely affecting as it does property rights,
both the due process and equal protection clauses may
properly be invoked, x x x to invalidate in appropriate cases a
revenue measure. If it were otherwise, there would be truth to
the 1803 dictum of Chief Justice Marshall that the power to tax
involves the power to destroy. In a separate opinion in Graves
v. New York, Justice Frankfurter, after referring to it as an
unfortunate remark, characterized it as a flourish of rhetoric
[attributable to] the intellectual fashion of times [allowing] a
free use of absolutes. This is merely to emphasize that it is not
and there cannot be such a constitutional mandate. Justice
Frankfurter could rightfully conclude: “The web of unreality
spun from Marshall’s famous dictum was brushed away by
one stroke of Mr. Justice Holmes’ pen: ‘The power to tax is not
the power to destroy while this court sits.’ So it is in the
Philippines.” (Sison v. Ancheta, 130 SCRA 654)
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
The doctrine seeks to describe, in an extreme, the
consequential nature of taxation and its resulting implications,
to wit: (a) the power to tax must be exercised with caution to
minimize injury to the proprietary rights of a taxpayer (Roxas
v. CTA, 23 SCRA 276); but (b) if the tax is lawful and not
violative of any of the inherent and constitutional limitations,
the fact alone that it may destroy an activity or object of
taxation will not entirely permit the courts to afford any relief;
and (c) a subject or object that may not be destroyed by the
taxing authority may not likewise be taxed. Thus, a tax may
not be imposed on the exercise of a fundamental right since to
otherwise permit it would amount to destroying that
fundamental right. In McCulloch v. Maryland (51 Am. Jur. 80),
the doctrine was used to support the holding that states of the
union are prohibited from taxing the U.S. Federal Government.
It is from this latter context or, in general, when taxation
disregards its own limitations that the phrase “the power to tax
is not the power to destroy while (the) court sits” had perhaps
correctly evolved. (Panhandle Oil Co. v. Mississippi, 77 U.S.
21)
The concept is reiterated in the case of Commissioner of
Internal Revenue v. Tokyo Shipping Co. Ltd. (G.R. No. 68252),
where the Supreme Court remarked that after 15 long years
and the expenses of litigation the money that will be finally
refunded to the private respondent is just worth a damaged
nickel.
This is not, however, the kind of success the government,
especially the BIR, needs to increase its collection of taxes.
Fair deal is expected by our taxpayers from the BIR and the
duty demands that BIR should refund without any
unreasonable delay what is has erroneously collected.
The power of taxation is sometimes also called 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
kills 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.
While ordinarily the government does not tax its own political
subdivisions or its other entities, it may, however, do so by
providing for it explicitly. (Standard Oil Co. v. Posadas, 55
Phil. 715; Board of Assessment Appeals v. CTA, 8 SCRA 225)
5. Escape from Taxation
The “doctrine of escape from taxation” permits the taxpayer to
minimize (if not to escape) payment of tax by lawful means,
the same is effected through the following:
a. Tax Avoidance;
b. Tax Evasion;
c. Shifting;
d. Capitalization;
e. Transformation; and
f. Exemption.
a. Tax Avoidance - Also called tax minimization. It is
reducing or totally escaping payment of taxes through
legally permissible means.
Tax avoidance is the tax saving device within the means
sanctioned by law. This method should be used by the
taxpayer in good faith and at arm’s length. (CIR v. Estate of
Benigno Toda Jr., G.R. No. 147188)
A taxpayer has legal right to decrease the amount of what
would otherwise be his taxes or altogether avoid them by
means which the law permits. (Delpher Trades Co. v. IAC,
G.R. No. L-69259)
Example/s:
i. Selling shares of stock through a stock exchange in order
to avail of the lower tax rates; estate planning within the
means sanctioned by the Tax Code.
ii. Availing of all deductions allowed by law or refraining from
engaging in activities subject to tax.
b. Tax Evasion - An illegal means of escaping taxation. It
connotes fraud through the use of pretenses and forbidden
18 of 22
devices to lessen or defeat taxes. (Yutivo Sons Hardware v.
CTA, G.R. No. L-13203) Hence, it subjects the taxpayer to
further or additional civil or criminal liabilities. Tax evasion is
sometimes referred to as tax dodging.
A scheme used outside of those lawful means and when
availed of usually subjects the taxpayer to (further or
additional) civil or criminal liabilities. (CIR v. Estate of Benigno
Toda, Jr., G.R. No. 147188)
Element/s of Tax Evasion:
i. The end to be achieved, i.e., payment of less than that
known by the taxpayer to be legally due, or paying no tax
when it is shown that the tax is due;
iii. An accompanying state of mind which is described as
being evil, in bad faith, willful, or deliberate and not
coincidental; and
iv. A course of action or failure of action which is unlawful.
(CIR v. Estate of Benigno Toda, Jr., G.R. No. 147188)
NOTE: Failure to report sales, receipts or income in an
amount exceeding 30% of that declared per return, and a
claim of deductions in an amount exceeding 30% of actual
deductions, shall render the taxpayer liable for substantial
underdeclaration of sales, receipts or income or for
overstatement of deductions. (NIRC, Sec. 248 (b))
Tax Avoidance v. Tax Evasion
TAX AVOIDANCE TAX EVASION
As to Legality
Legal and not subject to Illegal and subject to criminal
criminal penalty. or civil penalty.
As to Manner of Commission
Accomplished by legal Accomplished by breaking
procedures or means which the letter of the law.
may be contrary to the intent
of the law yet do not violate
the letter of the law.
As to Effects
Minimization of taxes. Almost always results in the
absence of tax payments.
c. Shifting - The transfer of the burden of tax by the original
payer or the one on whom the tax was assessed or imposed
(impact of taxation) to another (incidence of taxation).
NOTE: Only indirect taxes, as opposed to direct taxes may be
shifted. (CIR v. PLDT, G.R. No. 140230)
Indirect Taxes - The liability for the payment of the tax
remains with the taxpayer, but the burden thereof is shifted or
passed on to the purchaser (e.g. VAT, excise tax, other
percentage tax, document stamp tax). (ING Bank N.V. v. CIR,
G.R. No. 167679)
The imposition of indirect taxes is not a violation of the
principle that taxes are personal liabilities, the payment of
which cannot be transferred to another person. When the
seller passes on the tax to his buyer, he is only shifting the tax
burden (not the liability to pay it) to the purchaser as part of the
costs of the goods sold or services rendered.
The Constitution does not prohibit the imposition of indirect
taxes like the VAT. The Constitution has been interpreted to
mean simply that direct taxes are to be preferred and as much
as possible, indirect taxes should be minimized. (Tolentino v.
Sec. of Finance, G.R. No. 115455)
Direct Taxes - Those that cannot be shifted and are exacted
from the very person who, it is intended or desired, should pay
them. (e.g. income tax) Those wherein both the incidence of
the tax as well as the impact thereof falls on the same person.
Impact of Taxation - Point on which tax is originally imposed;
falls on one on whom the tax is formally assessed.
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
Incidence of Taxation - Point on which the tax burden finally
rests or settles down.
Illustration: In VAT wherein the seller is required by law to
pay tax, but the burden is actually shifted or passed on to the
buyer.
Impact v. Incidence
Start ng vitug acosta
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 arm’s length. Tax evasion, upon
the other hand, is a scheme used outside of those lawful
means and, when availed of, it usually subjects the taxpayer to
further or additional civil or criminal liabilities. To borrow a
phrase: “ A tax evader breaks the law, the tax avoider
sidesteps it.” (Schultz & Harrison on American Public Finance)
The organization of a corporation prompted more on the
mitigation of tax liabilities than for legitimate business
purposes, could for example, constitute one of tax evasion.
(Norton and Harrison & Co. v. Comm., G.R. No. L-36772;
Comm. v. Rufine, 148 SCRA 42)
An “estate planning” (conveyance of property to a family
corporation for shares) within the means sanctioned by
Section 35 (now Section 34) of the Tax code has been held to
be one of Tax avoidance. (Delpher Trades Corp. v. IAC, 157
SCRA 349)
Delpher Trades Corp. v. IAC
(G.R. No. 69259)
The records do not point to anything wrong or
objectionable about this “estate planning” scheme resorted to
by the Pachecos. “The legal right of a taxpayer to decrease
the amount of what otherwise could be his taxes or altogether
avoid them, by means which the law permits, cannot be
doubted.” (Liddell & Co., Inc. v. The Collector of Internal
Revenue, 2 SCRA 632 citing Gregory v. Halvering, 293 U.S.
465, 7 L. ed. 596)
6. Doctrine of Equitable Recoupment
Strictly, this common law doctrine to the effect that a claim for
refund barred by prescription may be allowed to offset
unsettled tax liabilities should be pertinent only to taxes arising
from the same transaction on which an overpayment is made
and underpayment is due. The doctrine finds no sound
application to cases where the taxes involved are totally
unrelated.
Accordingly, the mere mandatory provision for instance, of
Section 229, NIRC, requiring a claim for refund to be in writing
and filed within two (2) years from payment with the
Commissioner of Internal Revenue cannot and should not
really be constraint against the application of the doctrine even
where that period had already lapsed; precisely, it is an
invocation of equity rather than of law.
In Collector v. University of Santo Tomas (104 Phil. 1062), the
Supreme Court however, altogether rejected the doctrine
saying that it was not convinced of the wisdom and propriety
thereof, and that it may work to tempt both the collecting
agency an the taxpayer to delay and neglect their respective
pursuits of legal action within the period set by law.
7. Set-off of Taxes
In Republic v. Mambulao Lumber Co. (6 SCRA 622), The
Supreme Court enunciated the rule that taxes are not subject
to set-off or legal compensation. In the subsequent case of
Domingo v. Garlitos (8 SCRA 443), the tribunal reversed itself
when it ruled that where the taxes and the taxpayer’s claim are
fully liquidated, due and demandable, legal compensation
under Article 1279, Civil Code can take place by operation of
law, and both debt are extinguished to the concurrent amount.
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The decision in Republic v. Mambulao Lumber Co., which has
adopted the prevailing rule in common law, appears to be the
better view among other things, the following reasons: (1)
taxes are of a distinct kind, essence and nature, and these
impositions cannot be so classed in merely the same category
as ordinary obligations; (2) The applicable laws ad principles
governing each are peculiar, not necessarily common to each;
and (3) public policy is better subserved if the integrity and
independence of taxes be maintained. Where, however, the
two (2) claims are pleaded and proved before the same court
which has jurisdiction over both claims, conventional wisdom
dictates the practicability of set-off.
In Francia v. IAC (162 SCRA 753), although legal
compensation was clearly inapplicable since the tax sought to
be to be the object of set-off was due to a city, whereas the
other liability was the compensation due the taxpayer from the
national government arising from the latter’s exercise of
eminent domain, the Court nonetheless expressed that taxes
are not subject to legal compensation in an apparent step to
revert to the Mambulao Lumber doctrine.
“We have consistently ruled that there can be no offsetting of
taxes against the claims that the taxpayer may have against
the government. A person cannot refuse to pay a tax on the
ground that the government owes him an amount equal to or
greater than the tax being collected. The collection of tax
cannot await the results of a lawsuit against the government.”
(Philex Mining Corp. v. CIR, CA and CTA, G.R. No. 125704)
In Republic v. Sampaguita Pictures Inc. (172 SCRA 623), the
Supreme Court allowed taxes due from the taxpayer to be
considered paid through the delivery of negotiable certificate of
indebtedness issued by the Philippine Government which had
theretofore already been presented and surrender to the
National Treasurer.
It may be noteworthy that in Commissioner v. Esso Standard
Eastern Inc. (172 SCRA 364), the Supreme Court affirmed the
Tax Court’s decision applying a tax credit approved in 1964 for
overpayment of Esso’s 1959 income tax to its 1960 deficiency
income tax and, thus sanctioned the imposition of penalty
interest only on the balance thereof. The obligation to return
the excess, said the court arose from the time of payment and
not when the payee admitted the obligation. Any contrary rule
would be unjust and absurd considering that the money
overpaid was all the while with the government.
Philex Mining Corp. v. CIR
(G.R. No. 125704)
In several instances prior to the instant case, we have
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. We
find no cogent reason to deviate from the aforementioned
distinction. Prescinding from this premise, in Francia v.
Intermediate Appellate Court, we categorically held that taxes
cannot be subject to set-off or compensation, thus: “We have
consistently ruled that there can be no off-setting of taxes
against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the
ground that the government owes him an amount equal to or
greater than the tax being collected. The collection of a tax
cannot await the results of a lawsuit against the government.”
8. Mandatory and Directory Provisions of Tax Statutes
Kinds of Provisions of Tax Laws:
1. Mandatory - those provisions intended for the security of
the citizens or which are designed to insure equality of
taxation or certainty as to the nature and amount of each
person’s tax; and
7. Directory - those provisions designed merely for the
information or direction of officers or to secure methodical
and systematic modes of proceedings (Aban).
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
Viuda Y Hijos de Pedro P. Roxas v. Rafferty
(G.R. No. L-12182)
It is a general rule that those provisions of a statute
relating to the assessment of taxes, which are intended for the
security of the citizen or to insure the equality of taxation, or for
certainty as to the nature and amount of each person's tax, are
mandatory; but those designed merely for the information or
direction of officers, or to secure methodical and systematic
modes of proceedings, are merely directory.
In the majority of jurisdictions, statutes requiring the
assessor to notify the taxpayer have been held to be
mandatory, so that an assessor can not make a valid
assessment unless he has given proper notice. Those
provisions of the Manila Charter (section 2487 of the
Administrative Code of 1917) requiring the city assessor and
collector to notify the person whose tax is proposed to be
changed some time in the month of November are mandatory.
9. Taxpayer Suit
It is only when an act complained of, which may include a
legislative enactment, directly involves the illegal disbursement
of public funds, derived from taxation that the “taxpayer’s suit”
may be allowed. (Pascual v. Sec. of Public Works, 110 Phil.
331) Hence, that suit would be improper to question the
“inaction of the Commission on Elections to call a special
election” (Lozada and Igot v. COMELEC, G.R. No. L-59068),
or to stop said Commission from holding an exercise of
suffrage (Dumlao v. COMELEC, 95 SCRA 392), or where the
disbursement does not involve funds raised by taxation.
(Gonzales v. Marcos, 65 SCRA 624)
In Maceda v. Macaraig, Jr. (197 SCRA 771), the petitioner
alleged that he was instituting the suit in his capacity as a
taxpayer and a duly-elected Senator of the Philippines. Public
respondent, on the other hand, argued that in a taxpayer’s
suit, the petitioner must show that he sustained direct injury as
a result of the action and that it is not sufficient for him to have
a mere general interest common to all members of the public.
The Court disagreed and ruled that the petitioner could file the
petition since it involves and issue on the legality of the tax
refund to NPC by way of tax credit certificates and the use of
said assigned tax credits by respondent oil companies, to pay
for their tax and duty liabilities to the Bureau of Internal
Revenue and Bureau of Customs or what could thus be case
for illegal expenditure of tax money.
10. Compromises
As a general principle, a tax compromise may be entered into
and made binding when (a) the subject matter thereof is not
expressly prohibited from being compromised and (b) the
public official entering into it is authorized by law.
In National Taxation, the NIRC expressly authorizes the CIR to
enter, under certain conditions, into a compromise of both the
civil and criminal liabilities of the taxpayer. (Sec. 204, NIRC)
The power to compromise in respect to customs duties is, at
best, limited to cases where potestive authority is specially
granted such as in the remission of duties by the Collector of
Customs (Sec. 709, TCC) and cases involving the imposition
of fines, surcharges and forfeitures which may be
compromised by the Commissioner subject to the approval of
the Secretary of Finance. (Sec. 2136, TCC)
In Local Taxation, no provision exist under the LGC, while the
tax (not criminal) liability is not prohibited from being
compromised (Arts. 2034 and 2035, Civil Code); there is no
specific authority, however, given to any public official to
execute the compromise so as to render it effective.
Considering the broad constitutional and statutory delegation
of tax powers to local government units, it could be legally
feasible for the local tax ordinance itself to provide for and
allow tax compromise and to name the proper official to enter
into the compromise.
XI. SOURCES OF TAX LAWS
The following may be said to be the sources of tax laws:
20 of 22
 1. Constitution
2. National Internal Revenue Code
3. Tariff and Customs Code
4. Local Government Code (Book II)
5. Local tax ordinances / City or municipal tax
codes
6. Tax treaties and international agreements
7. Special laws
8. Court decisions
9. Revenue rules and regulations and
administrative rulings and opinions (Tabag, 2015)
Sources of Tax Laws:
1. Constitution;
2. Legislation or statutes, including presidential
decrees and executive orders on taxation and tax
ordinances, tax treaties, and conventions with foreign
countries;
3. Contemporaneous construction by executive or
administrative officers, including Revenue
Regulations by the Department of Finance and
administrative issuances by the BIR or the BOC;
4. Administrative rules and regulations, rulings, and
opinions of tax officials particularly the CIR,
including opinions of the Secretary of Justice (De
Leon, NIRC Annotated)
5. Judicial Decisions - decisions of the Supreme Court
applying or interpreting existing tax laws are binding
on all subordinate courts and have the force and effect
of law. They form part of the legal system of the
Philippines (Civil Code, Art. 8). They constitute
evidence of what the law means (People v. Licera,
G.R. No. L-39990)
6. Interpretation of American Courts - since Philippine
Income tax laws are of American origin, interpretations
by American courts on parallel Philippine tax laws
have persuasive effect on the interpretation of the
latter (Bañas v. CA, G.R. No. 102967)
XII. TAX TREATIES
Tax treaty - The purpose is to reconcile the national fiscal
legislation of the contracting parties in order to help the
taxpayer avoid simultaneous taxation in two different
jurisdictions (international double taxation). This is to
encourage the free flow of goods and services and the
movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and
dynamic economies.
Tax treaty resorts to several methods:
1. First, it sets out the respective rights to tax of the state of
source or situs and of the state of residence with regard to
certain classes of income or capital. In some cases, an
exclusive right to tax is conferred on one of the contracting
states; however, for other items of income or capital, both
states are given the right to tax, although the amount of tax
that may be imposed by the state of source is limited;
2. The second method for the elimination of double taxation
applies whenever the state of source is given a full or
limited right to tax together with the state of residence. In
this case, the treaties make it incumbent upon the state of
residence to allow relief in order to avoid double taxation.
There are two methods of relief:
a. Exemption method - the income or capital which is
taxable in the state of source or situs is exempted in
the state of residence, although in some instances it
may be taken into account in determining the rate of
tax applicable to the taxpayer's remaining income or
capital;
b. Credit method - although the income or capital
which is taxed in the state of source is still taxable in
the state of residence, the tax paid in the former is
credited against the tax levied in the latter.
The basic difference between the two methods is that in the
exemption method, the focus is on the income or capital itself,
whereas the credit method focuses upon the tax (CIR v. S.C.
Johnson and Son, Inc., G.R. No. 127105).
Deutsche Bank AG Manila Branch v. CIR
(G.R. No. 188550)
Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021
Under Section 28(A)(5) of the NIRC, any profit remitted
to its head office shall be subject to a tax of 15% based on the
total profits applied for or earmarked for remittance without any
deduction of the tax component. However, petitioner invokes
paragraph 6, Article 10 of the RP-Germany Tax Treaty, which
provides that where a resident of the Federal Republic of
Germany has a branch in the Republic of the Philippines, this
branch may be subjected to the branch profits remittance tax
withheld at source in accordance with Philippine law but shall
not exceed 10% of the gross amount of the profits remitted by
that branch to the head office.
Our Constitution provides for adherence to the general
principles of international law as part of the law of the land.
The time-honored international principle of pacta sunt
servanda demands the performance in good faith of treaty
obligations on the part of the states that enter into the
agreement. Every treaty in force is binding upon the parties,
and obligations under the treaty must be performed by them in
good faith. More importantly, treaties have the force and effect
of law in this jurisdiction.
Tax treaties are entered into “to reconcile the national
fiscal legislations of the contracting parties and, in turn, help
the taxpayer avoid simultaneous taxations in two different
jurisdictions.” CIR v. S.C. Johnson and Son, Inc., 309 SCRA
37 (1999), further clarifies that “tax conventions are drafted
with a view towards the elimination of international juridical
double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same taxpayer
in respect of the same subject matter and for identical periods.
The apparent rationale for doing away with double taxation is
to encourage the free flow of goods and services and the
movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and
dynamic economies. Foreign investments will only thrive in a
fairly predictable and reasonable international investment
climate and the protection against double taxation is crucial in
creating such a climate.” Simply put, tax treaties are entered
into to minimize, if not eliminate the harshness of international
juridical double taxation, which is why they are also known as
double tax treaty or double tax agreements.
“A state that has contracted valid international
obligations is bound to make in its legislations those
modifications that may be necessary to ensure the fulfillment
of the obligations undertaken.” Thus, laws and issuances must
ensure that the reliefs granted under tax treaties are accorded
to the parties entitled thereto. The BIR must not impose
additional requirements that would negate the availment of the
reliefs provided for under international agreements. More so,
when the RP-Germany Tax Treaty does not provide for any
pre-requisite for the availment of the benefits under said
agreement.
Bearing in mind the rationale of tax treaties, the period
of application for the availment of tax treaty relief as required
by RMO No. 1-2000 should not operate to divest entitlement to
the relief as it would constitute a violation of the duty required
by good faith in complying with a tax treaty. The denial of the
availment of tax relief for the failure of a taxpayer to apply
within the prescribed period under the administrative issuance
would impair the value of the tax treaty. At most, the
application for a tax treaty relief from the BIR should merely
operate to confirm the entitlement of the taxpayer to the relief.
Section 229 of the NIRC provides the taxpayer a
remedy for tax recovery when there has been an erroneous
payment of tax. The outright denial of petitioner’s claim for a
refund, on the sole ground of failure to apply for a tax treaty
relief prior to the payment of the BPRT, would defeat the
purpose of Section 229.
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SOURCES:
Tax Law and Jurisprudence
- Justice Jose C. Vitug, Ernesto D. Acosta
Reviewer on Taxation
- Victorino C. Mamalateo, Mary Joy B. Mamalateo-Jusay
Tax Principles and Remedies
- Justice Japar B. Dimaampao
2019 Golden Notes (Taxation Law)
- Faculty of Civil Law UST Manila
San Beda Law Centralized Bar Operations - Memory Aid
2019 (Taxation Law)
- San Beda University College of Law Centralized Bar
Operations
eSCRA (for case doctrines)

Taxation 1 - Atty. Betheena Dizon A.Y. 2020-2021 22 of 22