MODULE I: Taxation: General Concepts

Sison v. Ancheta, 130 SCRA 654

Why is power to tax also considered as a power to build?

The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state functions.
It is the source of the bulk of public funds. To paraphrase a recent decision, taxes being the lifeblood of the
government, their prompt and certain availability is of the essence.

What was the ruling of the Supreme Court with respect to due process clause?
The Court ruled that the due process clause may be invoked where a taxing statute is so arbitrary that it finds
no support in the Constitution. An obvious example is where it can be shown to amount to the confiscation of
property. That would be a clear abuse of power. It then becomes the duty of this Court to say that such an arbitrary
act amounted to the exercise of an authority not conferred. It has also been held that where the assailed tax measure
is beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and
unreasonable, it is subject to attack on due process grounds.

Philippine Health Care Providers, Inc. v. CIR, 18 September 2009

Is the imposition of documentary stamp tax amounting to Php 376M considered as highly oppressive?
The imposition is highly oppressive.

It is undisputed that the assessed DST to date which amounts to ₱376 million is way beyond its net worth of
₱259 million. Given the realities on the ground, imposing the DST on the petitioner would be highly oppressive. It is
not the purpose of the government to throttle private business. On the contrary, the government ought to encourage
private enterprise. Petitioner, just like any concern organized for a lawful economic activity, has a right to maintain a
legitimate business.

How did the Supreme Court explain the dictum, “the power to tax is a power to destroy”?
 The Court explained that, as a general rule, the power to tax is an incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the constituency who is to pay it. So potent indeed is the
power that it was once opined that "the power to tax involves the power to destroy."

Therefore, it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must
be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg."
Can legitimate enterprises be taxed out of existence?
No. Legitimate enterprises can enjoy the constitutional protection not to be taxed out of existence. Incurring
losses because of a tax imposition may be an acceptable consequence but killing the business of an entity is another
matter and should not be allowed. It is counter-productive and ultimately subversive of the nation’s thrust towards a
better economy which will ultimately benefit the majority of our people.

Commissioner v. Algue, 17 February 1988

Explain Lifeblood Doctrine.
Taxes are the lifeblood of the government for without taxes, the government can neither exist nor endure. The
source of the power to tax is the main existence of the state.

How should the collection of tax be made and what is the real purpose of taxation?
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance.
Additionally, the collection of tax should be made reasonably and in accordance with law and the prescribed
procedure as any arbitrariness will negate the very reason for government itself.

The real purpose of taxation is the promotion of the common good.

How was symbiotic relationship, as a rationale of taxation, explained in this case?

 The Court explained the symbiotic relationship as a rationale of taxation by stating that: “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 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.”

NAPOCOR v. City of Cabanatuan, G.R. No. 149110, April 9, 2003

What is the source of the exercise of taxing power?
The taxing power is a principal attribute of sovereignty. Its exercise derives its source from the very existence of
the state whose social contract with its citizens obliges it to promote public interest and common good.

What is the theory behind the exercise of the power to tax?

The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot
fulfill its mandate of promoting the general welfare and well-being of the people.

Can a local government unit exercise the power of taxation? Is its power inherent?
Yes. Although as a general rule, LGUs cannot exercise the power of taxation, by virtue of Article X, section 5 of
the 1987 Constitution, such power is no longer vested exclusively on Congress; local legislative bodies are now given
direct authority to levy taxes, fees and other charges. To enforce this exception to the rule, the Constitution mandated
the creation of the Local Government Code that will, consistent with the basic policy of local autonomy, set the
guidelines and limitations to this grant of taxing powers.
Derived from this development, the local government’s power to tax is not inherent but delegated.

Considered as the most revolutionary piece of legislation on local autonomy,42 the LGC effectively deals with the
fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes which were prohibited by previous
laws such as the imposition of taxes on forest products, forest concessionaires, mineral products, mining operations,
and the like. The LGC likewise provides enough flexibility to impose tax rates in accordance with their needs and
capabilities. It does not prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates and
leaves the determination of the actual rates to the respective Sanggunian. One of the most significant provisions of the
LGC is the removal of the blanket exclusion of instrumentalities and agencies of the national government from the
coverage of local taxation.

LGUs have no inherent power to tax except to the extent that such power might be delegated to them either by
the basic law or by the statute.

PAL v. Edu, 15 August 1988

Does the appellation provided by law determine whether the imposition is a tax or a fee?
No. Although motor vehicle registration fees are regulatory taxes, since unlike in the Land Transportation Code
that the legislators had in mind a regulatory tax as the law refers to the imposition on the registration, operation or
ownership of a motor vehicle as a "tax or fee, nowhere in Rep. Act 4136 does the law specifically state that the
imposition is a tax.

If the exaction under R.A. 4136 were merely a regulatory fee, the imposition in R.A. 5448 need not be an
"additional" tax. R.A.4136 also speaks of other "fees," such as the special permit fees for certain types of motor
vehicles and additional fees for change of registration. These are not to be understood as taxes because such fees are
very minimal to be revenue-raising. Without changing the earlier deputy of registration payments as "fees," their
nature has become that of "taxes."

The Court in this case finally ruled that motor vehicle registration fees as at present exacted pursuant to the
Land Transportation and Traffic Code are actually taxes intended for additional revenues. of government even if one
fifth or less of the amount collected is set aside for the operating expenses of the agency administering the program.
What is the test in determining whether an imposition is a tax or fee?
The nature of exaction is the test in determining whether an imposition is a tax or fee.

Can fees be properly regarded as taxes?

Yes. Fees may be properly regarded as taxes even though they also serve as an instrument of regulation. If the
purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is
properly called a tax.

What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?
The imposition of a vehicle registration fee is not an exercise by the state of its police power, but of its taxation
power. It is classified as a regulatory tax.

Ferrer, Jr., Vs. City Mayor Herbert Bautista, Et.Al., G.R. No. 210551, June 30, 2015
What is the nature of garbage fees? Are they taxes or regulatory fees?
The fee imposed for garbage collections under Ordinance No. SP-2235 is a charge fixed for the regulation of an
activity. Certainly, as opposed to petitioner’s opinion, the garbage fee is not a tax.

What is the test in determining whether an imposition is a tax or a fee?

The designation given by the municipal authorities does not decide whether the imposition is properly a license
tax or a license fee. The determining factors are the purpose and effect of the imposition as may be apparent from the
provisions of the ordinance.

Tio v. Videogram, 151 SCRA 208

Is the imposition of 30% tax on the gross receipts of videogram establishments payable to the local government is harsh,
confiscatory, oppressive and/or in unlawful restraint of trade in violation of the due process clause of the Constitution?
No. 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.

Is the imposition of the tax merely regulatory in nature?

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 tax is imposed in order to protect the movie industry. Is it still considered for public purpose?
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.

The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax
was to favor one industry over another.

It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly
held that "inequities which result from a singling out of one particular class for taxation or exemption infringe no
constitutional limitation". Taxation has been made the implement of the state's police power.

Smart Communications Inc., vs. Municipality ofMalvar, Batangas, G.R. No. 204429, February 18, 2014
What is the nature of the exaction imposed in Ordinance No.18?
The exactions are not local taxes. Ordinance No. 18 expressly provides for the standards which Smart must
satisfy prior to the issuance of the specified permits, clearly indicating that the fees are regulatory in nature.

Ordinance No. 18 aims to regulate the "placing, stringing, attaching, installing, repair and construction of all
gas mains, electric, telegraph and telephone wires, conduits, meters and other apparatus" within the Municipality. The
fees are not imposed to regulate the administrative, technical, financial, or marketing operations of
telecommunications entities, such as Smart’s; rather, to regulate the installation and maintenance of physical
structures – Smart’s cell sites or telecommunications tower. The regulation of the installation and maintenance of
such physical structures is an exercise of the police power of the Municipality. Clearly, the Municipality does not
encroach on NTC’s regulatory powers.

Is the Municipality empowered to impose such exaction?

Yes. Even if the fees do not appear in Section 143 or any other provision in the LGC, the Municipality is
empowered to impose taxes, fees and charges, not specifically enumerated in the LGC or taxed under the Tax Code or
other applicable law. Section 186 of the LGC, granting local government units wide latitude in imposing fees.

Lutz v. Araneta, 98 Phil 148

What is the purpose of the imposition of tax under CA No. 567?
Analysis of the Act, and particularly of Section 6 will show that the tax is levied with a regulatory purpose, to
provide means for the rehabilitation and stabilization of the threatened sugar industry. In other words, the act is
primarily an exercise of the police power.

Is the imposition for general welfare?

Yes. Taxation may be made the implement of the state’s police power.
The sugar production is one of the great industries of our nation, sugar occupying a leading position among its export
products; that it gives employment to thousands of laborers in fields and factories; that it is a great source of the
state's wealth, is one of the important sources of foreign exchange needed by our government, and is thus pivotal in
the plans of a regime committed to a policy of currency stability.

Its promotion, protection and advancement, therefore redounds greatly to the general welfare. Hence it was
competent for the legislature to find that the general welfare demanded that the sugar industry should be stabilized in
turn; and in the wide field of its police power, the lawmaking body could provide that the distribution of benefits
therefrom be readjusted among its components to enable it to resist the added strain of the increase in taxes that it
had to sustain.

CIR v. Central Luzon Drug Corporation, April 15, 2005

How is the power to tax being used as an implement of power of eminent domain?
The taxation power can be used as an implement for the exercise of the power of eminent domain. Tax measures
are but "enforced contributions exacted on pain of penal sanctions" and "clearly imposed for a public purpose." As an
implement of eminent domain in this case, the privilege enjoyed by senior citizens does not come directly from the
State, but rather from the private establishments concerned. Accordingly, the tax credit benefit granted to these
establishments can be deemed as their just compensation for private property taken by the State for public use.

2) What is the reason behind just compensation?

The reason behind just compensation is social justice. For this reason, a just compensation for income that is taken
away from respondent becomes necessary. It is in the tax credit that our legislators find support to realize social
justice, and no administrative body can alter that fact. In recent years, the power to tax has also become a most
effective tool to realize social justice, public welfare, and the equitable distribution of wealth.

Diaz v. Secretary of Finance, GR No. 193007, 19 July 2011

State petitioners’ argument on administrative feasibility.
The petitioners assert that the substantiation requirements for claiming input VAT make the VAT on tollway
operations impractical and incapable of implementation. They cite the fact that, in order to claim input VAT, the
name, address and tax identification number of the tollway user must be indicated in the VAT receipt or invoice. The
manner by which the BIR intends to implement the VAT – by rounding off the toll rate and putting any excess
collection in an escrow account – is also illegal, while the alternative of giving "change" to thousands of motorists in
order to meet the exact toll rate would be a logistical nightmare. Thus, according to them, the VAT on tollway
operations is not administratively feasible.

Will a violation of administrative feasibility result to the invalidity of the tax imposition?
No. As a general rule, non-observance of the canon, however, will not render a tax imposition invalid, except to
the extent that specific constitutional or statutory limitations are impaired." Thus, even if the imposition of VAT on
tollway operations may seem burdensome to implement, it is not necessarily invalid unless some aspect of it is shown
to violate any law or the Constitution.
 MODULE II: Inherent Limitations on the exercise of the power of taxation

Planters Products Inc. v. Fertiphil Corporation, GR No. 166006, 14 March 2008

Is the tax for public purpose?
No. The ₱10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy, no doubt,
was a big burden on the seller or the ultimate consumer. It increased the price of a bag of fertilizer by as much as five
percent. A plain reading of the LOI also supports the conclusion that the levy was for revenue generation. The LOI
expressly provided that the levy was imposed "until adequate capital is raised to make PPI viable." Taxes are exacted
only for a public purpose. The ₱10 levy is unconstitutional because it was not for a public purpose. The levy was
imposed to give undue benefit to PPI.

An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public purpose.
They cannot be used for purely private purposes or for the exclusive benefit of private persons. The reason for this is
simple. The power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be
used only for a public purpose. It would be a robbery for the State to tax its citizens and use the funds generated for a
private purpose. As an old United States case bluntly put it: "To lay with one hand, the power of the government on
the property of the citizen, and with the other to bestow it upon favored individuals to aid private enterprises and
build up private fortunes, is nonetheless a robbery because it is done under the forms of law and is called taxation."
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 or agrarian reform.

Pascual v. Secretary of Public Works, 110 Phil 331

Is the appropriation for public purpose?
 No. It is a general rule that the legislature is without power to appropriate public revenue 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 interest 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 to the public,
which results from the promotion of private interest and the prosperity of private enterprises or business, does not
justify their aid by the use public money.

What is the effect of the donation of the property to the government?

The donation made to the government, over five months after the approval and effectivity of R.A. 920 for the
purpose of giving a “semblance of legality” to the appropriation, does not cure the basic defect. A judicial nullification
of said donation need not precede the declaration of unconstitutionality of said appropriation. However, RA 920 was
declared as unconstitutional.

Lutz v. Araneta, 98 Phil 148

What is the use of the funds raised under the Sugar Stabilization Act?
The funds raised under the Sugar Stabilization Act, specifically Section 6, shows that the tax is levied with a
regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. In other
words, the act is primarily an exercise of the police power.
Sugar production is one of the great industries of our nation, sugar occupying a leading position among its export
products; that it gives employment to thousands of laborers in fields and factories; that it is a great source of the
state's wealth, is one of the important sources of foreign exchange needed by our government, and is thus pivotal in
the plans of a regime committed to a policy of currency stability. Its promotion, protection and advancement, therefore
redounds greatly to the general welfare. Hence it was competent for the legislature to find that the general welfare
demanded that the sugar industry should be stabilized in turn; and in the wide field of its police power, the lawmaking
body could provide that the distribution of benefits therefrom be readjusted among its components to enable it to
resist the added strain of the increase in taxes that it had to sustain
 The protection of a large industry constituting one of the great sources of the state's wealth and therefore,
directly or indirectly affecting the welfare of so great a portion of the population of the State is affected to such an
extent by public interests as to be within the police power of the sovereign.

Is it still for public purpose, considering that the funds shall be used by the sugar industry alone? Yes. That the tax to
be levied should burden the sugar producers themselves can hardly be a ground of complaint; indeed, it appears
rational that the tax be obtained precisely from those who are to be benefited from the expenditure of the funds
derived from it. 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 been repeatedly held that "inequalities which result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation".

From the point of view, it appears of no moment that the funds raised under the Sugar Stabilization Act should
be exclusively spent in aid of the sugar industry, since it is that very enterprise that is being protected. It may be that
other industries are also in need of similar protection; that the legislature is not required by the Constitution to adhere
to a policy of "all or none."
Analysis of the Act, and particularly of Section 6, will show that the tax is levied with a regulatory purpose, to
provide means for the rehabilitation and stabilization of the threatened sugar industry. In other words, the act is
primarily an exercise of the police power.

Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of public
concern, it follows that 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 fully play, subject only to the test of
reasonableness; and it is not contended that the means provided in Section 6 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
Pepsi v. Municipality of Tanauan, 69 SCRA 460
Is the power to tax purely legislative?
Yes. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to
every independent government, without being expressly conferred by the people. It is a power that is purely legislative
and which the central legislative body cannot delegate either to the executive or judicial department of the government
without infringing upon the theory of separation of powers. The exception, however, lies in the case of municipal
corporations, to which, said theory does not apply. Legislative powers may be delegated to local governments in
respect of matters of local concern.

Is there undue delegation of taxing powers in this case?

No. By necessary implication, the legislative power to create political corporations for purposes of local self-
government carries with it the power to confer on such local governmental agencies the power to tax. Under the New
Constitution, local governments are granted the autonomous authority to create their own sources of revenue and to
levy taxes. Section 5, Article XI provides: "Each local government unit shall have the power to create its sources of
revenue and to levy taxes, subject to such limitations as may be provided by law." Withal, it cannot be said that
Section 2 of Republic Act No. 2264 emanated from beyond the sphere of the legislative power to enact and vest in local
governments the power of local taxation.

Will there be double taxation if a local government unit is permitted to impose taxes?
No. double taxation, in general, is not forbidden by our fundamental law, since since We have not adopted as
part thereof the injunction against double taxation found in the Constitution of the United States and some states of
the Union. Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same
governmental entity or by the same jurisdiction for the same purpose, but not in a case where one tax is imposed by
the State and the other by the city or municipality.

There is no validity to the assertion that the delegated authority can be declared unconstitutional on the theory
of double taxation. It must be observed that the delegating authority specifies the limitations and enumerates the
taxes over which local taxation may not be exercised. The reason is that the State has exclusively reserved the same
for its own prerogative.

Pepsi v. City of Butuan, 24 SCRA 789

Is double taxation forbidden?
No. Independently of whether or not the tax in question, when considered in relation to the sales tax prescribed
by Acts of Congress, amounts to double taxation, on which we need not and do not express any opinion - double
taxation, in general, is not forbidden by our fundamental law. We have not adopted, as part thereof, the injunction
against double taxation found in the Constitution of the United States and of some States of the Union.

Does the tax ordinance violate the uniformity requirement of taxation?

Yes. It is true that the uniformity essential to the valid exercise of the power of taxation does not require identity
or equality under all circumstances, or negate the authority to classify the objects of taxation. The classification made
in the exercise of this authority, to be valid, must, however, be reasonable and this requirement is not deemed
satisfied unless: (1) it is based upon substantial distinctions which make real differences; (2) these are germane to the
purpose of the legislation or ordinance; (3) the classification applies, not only to present conditions, but, also, to future
conditions substantially identical to those of the present; and (4) the classification applies equally all those who belong
to the same class.

These conditions are not fully met by the ordinance in question. Indeed, if its purpose were merely to levy a
burden upon the sale of soft drinks or carbonated beverages, there is no reason why sales thereof by sellers other than
agents or consignees of producers or merchants established outside the City of Butuan should be exempt from the
tax.

Ferrer, Jr., Vs. City Mayor Herbert Bautista, Et.Al., G.R. No. 210551, June 30, 2015
Discuss power to tax of local government units.
 The rule governing the taxing power of provinces, cities, municipalities and barangays is summarized in Icard v.
City Council of Baguio: It is settled that a municipal corporation unlike a sovereign state is clothed with no inherent
power of taxation. The charter or statute must plainly show an intent to confer that power or the municipality, cannot
assume it. And the power when granted is to be construed in strictissimi juris. Any doubt or ambiguity arising out of
the term used in granting that power must be resolved against the municipality. Inferences, implications, deductions –
all these – have no place in the interpretation of the taxing power of a municipal corporation. Per Section 5, Article X of
the 1987 Constitution, "the power to tax is no longer vested exclusively on Congress; local legislative bodies are now
given direct authority to levy taxes, fees and other charges." Nevertheless, such authority is "subject to such guidelines
and limitations as the Congress may provide."In conformity with Section 3, Article X of the 1987 Constitution,
Congress enacted Republic Act No. 7160, otherwise known as the Local Government Code of 1991. Book II of the LGC
governs local taxation and fiscal matters.

Indeed, LGUs have no inherent power to tax except to the extent that such power might be delegated to them
either by the basic law or by the statute. "Under the now prevailing Constitution, where there is neither a grant nor a
prohibition by statute, the tax power must be deemed to exist although Congress may provide statutory limitations
and guidelines. The basic rationale for the current rule is to safeguard the viability and self-sufficiency of local
government units by directly granting them general and broad tax powers. Nevertheless, the fundamental law did not
intend the delegation to be absolute and unconditional; the constitutional objective obviously is to ensure that, while
the local government units are being strengthened and made more autonomous , the legislature must still see to it
that (a) the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions; (b) each local
government unit will have its fair share of available resources; (c) the resources of the national government will not be
unduly disturbed; and (d) local taxation will be fair, uniform, and just." Subject to the provisions of the LGC and
consistent with the basic policy of local autonomy, every LGU is now empowered and authorized to create its own
sources of revenue and to levy taxes, fees, and charges which shall accrue exclusively to the local government unit as
well as to apply its resources and assets for productive, developmental, or welfare purposes, in the exercise or
furtherance of their governmental or proprietary powers and functions.
LRTA v. CBAA, 12 October 2000
Are the carriageways and terminal stations considered as public roads?
No. Petitioner's carriageways and terminal stations are anchored, at certain points, on public roads. However, it
must be emphasized that these structures do not form part of such roads, since the former have been constructed
over the latter in such a way that the flow of vehicular traffic would not be impeded. These carriageways and terminal
stations serve a function different from that of the public roads. The former are part and parcel of the light rail transit
(LRT) system which, unlike the latter, are not open to use by the general public. The carriageways are accessible only
to the LRT trains, while the terminal stations have been built for the convenience of LRTA itself and its customers who
pay the required fare.

Is LRTA performing governmental function? Is LRTA an instrumentality?

No. The Light Rail Transit Authority and the Metro Transit Organization function as service-oriented business
entities, which provide valuable transportation facilities to the paying public. Though the creation of the LRTA was
impelled by public service -- to provide mass transportation to alleviate the traffic and transportation situation in
Metro Manila -- its operation undeniably partakes of ordinary business. Petitioner is clothed with corporate status and
corporate powers in the furtherance of its proprietary objectives. Indeed, it operates much like any private corporation
engaged in the mass transport industry.

Are the properties subject to real property tax?

Yes. Under the Real Property Tax Code, real property "owned by the Republic of the Philippines or any of its
political subdivisions and any government-owned or controlled corporation so exempt by its charter, provided,
however, that this exemption shall not apply to real property of the abovenamed entities the beneficial use of which
has been granted, for consideration or otherwise, to a taxable person. Even granting that the national government
indeed owns the carriageways and terminal stations, the exemption would not apply because their beneficial use has
been granted to petitioner, a taxable entity.

MCIAA v. City of Lapu-lapu, 15 June 2015

Is MCIAA a GOCC?
MCIAA is NOT a Government-Owned or Controlled Corporation. MCIAA is a government instrumentality.

MCIAA is not a government-owned or controlled corporation under Section 2(13) of the Introductory Provisions
of the Administrative Code because it is not organized as a stock or non-stock corporation. Neither is MCIAA a
government-owned or controlled corporation under Section 16, Article XII of the 1987 Constitution because MCIAA is
not required to meet the test of economic viability. A government-owned or controlled corporation must be "organized
as a stock or non-stock corporation." MCIAA is not organized as a stock or non-stock corporation. MCIAA is not a
stock corporation because it has no capital stock divided into shares. MCIAA has no stockholders or voting shares.

MCIAA is a government instrumentality vested with corporate powers and performing essential public services
pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code.

Is it exempt from real property tax?

Yes. As a government instrumentality, MCIAA is not subject to any kind of tax by local governments under
Section 133(o) of the Local Government Code. The only exception is when MCIAA leases its real property to a "taxable
person" as provided in Section 234(a) of the Local Government Code, in which case the specific real property leased
becomes subject to real estate tax. MCIAA's properties that are actually, solely and exclusively used for public
purpose, consisting of the airport terminal building, airfield, runway, taxiway and the lots on which they are situated,
EXEMPT from real property tax imposed by the City of Lapu-Lapu.

Are instrumentalities exempt from tax?

Generally, under Section 133(o) of the Local Government Code, a government instrumentality is not a taxable
person because it is not subject to "taxes, fees or charges of any kind" by local governments. The only exception is
when it leases its real property to a "taxable person" as provided in Section 234(a) of the Local Government Code, in
which case the specific real property leased becomes subject to real estate tax.
MIAA v. Paranaque, GR No. 155650, 20 July 2006
Is MIAA a GOCC?
NO. MIAA is an instrumentality of the government.
A government-owned or controlled corporation must be "organized as a stock or non-stock corporation." MIAA is not
organized as a stock or non-stock corporation. MIAA is not a stock corporation because it has no capital stock divided
into shares. MIAA is also not a non-stock corporation because it has no members.

MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental
functions. MIAA is like any other government instrumentality, the only difference is that MIAA is vested with corporate
powers. And when the law vests in a government instrumentality corporate powers, the instrumentality does not
become a corporation. Unless the government instrumentality is organized as a stock or non-stock corporation, it
remains a government instrumentality exercising not only governmental but also corporate powers.
Likewise, when the law makes a government instrumentality operationally autonomous, the instrumentality remains
part of the National Government machinery although not integrated with the department framework. The MIAA
Charter expressly states that transforming MIAA into a "separate and autonomous body will make its operation more
"financially viable.

Is it exempt from real property tax?

Under Section 133 of the LGC, unless otherwise provided, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities and local government units.

Section 133(o) recognizes the basic principle that local governments cannot tax the national government, which
historically merely delegated to local governments the power to tax. While the 1987 Constitution now includes taxation
as one of the powers of local governments, local governments may only exercise such power "subject to such
guidelines and limitations as the Congress may provide." When local governments invoke the power to tax on national
government instrumentalities, such power is construed strictly against local governments. The rule is that a tax is
never presumed and there must be clear language in the law imposing the tax. Any doubt whether a person, article or
activity is taxable is resolved against taxation. This rule applies with greater force when local governments seek to tax
national government instrumentalities.
Are instrumentalities exempt from tax?
Yes. There is no point in national and local governments taxing each other, unless a sound and compelling
policy requires such transfer of public funds from one government pocket to another. There is also no reason for local
governments to tax national government instrumentalities for rendering essential public services to inhabitants of
local governments. The only exception is when the legislature clearly intended to tax government instrumentalities for
the delivery of essential public services for sound and compelling policy considerations. There must be express
language in the law empowering local governments to tax national government instrumentalities. Any doubt whether
such power exists is resolved against local governments. Otherwise, mere creatures of the State can defeat National
policies thru extermination of what local authorities may perceive to be undesirable activities or enterprise using the
power to tax as "a tool for regulation". The power to tax which was called by Justice Marshall as the "power to destroy"
(Mc Culloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which
has the inherent power to wield it.

MIAA v. Pasay City, GR No. 163072, 02 April 2009

What are the differences between a GOCC and an instrumentality?
The term government "instrumentality" is broader than the term "government-owned or controlled corporation."
Introductory Provisions of the Administrative Code of 1987:
SEC. 2. General Terms Defined. – (10) Instrumentality refers to any agency of the 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 a charter. This term includes regulatory agencies, chartered institutions and government-owned or
controlled corporations.
 SEC. 2. General Terms Defined– (13) Government-owned or controlled corporation refers to any agency
organized as a stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and 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: Provided, That government-owned or controlled corporations may further be
categorized by the department of Budget, the Civil Service Commission, and the Commission on Audit for the
purpose of the exercise and discharge of their respective powers, functions and responsibilities with respect to
such corporations.

The fact that two terms have separate definitions means that while a government "instrumentality" may include
a "government-owned or controlled corporation," there may be a government "instrumentality" that will not qualify as
a "government-owned or controlled corporation."
Are NAIA Pasay properties of MIAA exempt from real property tax?
Yes. Airport Lands and Buildings of MIAA are properties devoted to public use and thus are properties of public
dominion. Properties of public dominion are owned by the State or the Republic. Article 420 of the Civil Code.
Furthermore, the airport lands and buildings of MIAA are properties of public dominion intended for public use, and
as such are exempt from real property tax under Section 234(a) of the Local Government Code. However, under the
same provision, if MIAA leases its real property to a taxable person, the specific property leased becomes subject to
real property tax.12 In this case, only those portions of the NAIA Pasay properties which are leased to taxable persons
like private parties are subject to real property tax by the City of Pasay.
 MODULE III: Constitutional Limitations on the exercise of the power of taxation
CREBA v. Exec. Sec. Romulo, March 9, 2010
What is the argument of the petitioner with respect to the imposition of MCIT as a violation of due process?
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly
oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law. It
explains that gross income as defined under said provision only considers the cost of goods sold and other direct
expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to
produce gross income, were not taken into account. Thus, pegging the tax base of the MCIT to a corporation’s gross
income is tantamount to a confiscation of capital because gross income, unlike net income, is not "realized gain."

What is the ruling of the Supreme Court anent this argument?

MCIT Is Not Violative of Due Process.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no
limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature (which
imposes the tax) to its constituency who are to pay it. Nevertheless, it is circumscribed by constitutional limitations.
At the same time, like any other statute, tax legislation carries a presumption of constitutionality. The constitutional
safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or property without due
process of law." In Sison, Jr. v. Ancheta, et al., we held that the due process clause may properly be invoked to
invalidate, in appropriate cases, a revenue measure when it amounts to a confiscation of property. But in the same
case, we also explained that we will not strike down a revenue measure as unconstitutional (for being violative of the
due process clause) on the mere allegation of arbitrariness by the taxpayer. There must be a factual foundation to
such an unconstitutional taint. This merely adheres to the authoritative doctrine that, where the due process clause is
invoked, considering that it is not a fixed rule but rather a broad standard, there is a need for proof of such persuasive
character. Income means all the wealth which flows into the taxpayer other than a mere return on capital. Capital is a
fund or property existing at one distinct point in time while income denotes a flow of wealth during a definite period of
time. Income is gain derived and severed from capital. For income to be taxable, the following requisites must exist:(1)
there must be gain;(2) the gain must be realized or received and (3) the gain must not be excluded by law or treaty
from taxation.

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other
words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital. The MCIT is
imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods,
i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed. Furthermore,
the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal
income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a corporation,
pegging the rate at a very much reduced 2% and uses as the base the corporation’s gross income. Besides, there is no
legal objection to a broader tax base or taxable income by eliminating all deductible items and at the same time
reducing the applicable tax rate.

What is the argument of the petitioner with respect to the collection of CWT as a violation of due process?
Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives its
members of their property without due process of law because, in their line of business, gain is never assured by mere
receipt of the selling price. As a result, the government is collecting tax from net income not yet gained or earned.

What is the ruling of the Supreme Court?

There is no deprivation of property without due process. The withholding tax system is a procedure through
which taxes (including income taxes) are collected. Under Section 57 of RA 8424, the types of income subject to
withholding tax are divided into three categories: (a) withholding of final tax on certain incomes; (b) withholding of
creditable tax at source and (c) tax-free covenant bonds. Petitioner is concerned with the second category (CWT) and
maintains that the revenue regulations on the collection of CWT on sale of real estate categorized as ordinary assets
are unconstitutional.
 It is stressed that the CWT is creditable against the tax due from the seller of the property at the end of the
taxable year. The seller will be able to claim a tax refund if its net income is less than the taxes withheld. Nothing is
taken that is not due so there is no confiscation of property repugnant to the constitutional guarantee of due process.
More importantly, the due process requirement applies to the power to tax. The CWT does not impose new taxes nor
does it increase taxes. It relates entirely to the method and time of payment.

City of Manila v. CocaCola Bottlers Philippines, GR No. 181845, 4 August 2009

What is direct double taxation? Is it prohibited?
Double taxation means taxing the same property twice when it should be taxed only once; that is, "taxing the
same person twice by the same jurisdiction for the same thing." It is obnoxious when the taxpayer is taxed twice,
when it should be but once. Otherwise described as "direct duplicate taxation," the two taxes must be imposed on the
same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the
same taxing period; and the taxes must be of the same kind or character.

Is there double taxation in this case?

YES. The Court finds that there is indeed double taxation if respondent is subjected to the taxes under both
Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter - the
privilege of doing business in the City of Manila; (2) for the same purpose - to make persons 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.

The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax Ordinance No.
7794 is specious. The Court revisits Section 143 of the LGC, the very source of the power of municipalities and cities
to impose a local business tax, and to which any local business tax imposed by petitioner City of Manila must
conform. It is apparent from a perusal thereof that when a municipality or city has already imposed a business tax on
manufacturers, etc. of liquors, distilled spirits, wines, and any other article of commerce, pursuant to Section 143(a) of
the LGC, said municipality or city may no longer subject the same manufacturers, etc. to a business tax under Section
143(h) of the same Code. Section 143(h) may be imposed only on businesses that are subject to excise tax, VAT, or
percentage tax under the NIRC, and that are "not otherwise specified in preceding paragraphs." In the same way,
businesses such as respondent's, already subject to a local business tax under Section 14 of Tax Ordinance No. 7794
[which is based on Section 143(a) of the LGC], can no longer be made liable for local business tax under Section 21 of
the same Tax Ordinance [which is based on Section 143(h) of the LGC]

Villegas v. Hiu Chiong Tsai Pao Ho, 10 November 1978

Is the ordinance constitutional? Explain. (If you answer in the negative, you must specifically mention the constitutional
provision violated)
YES. The ordinance in question violates the due process of law and equal protection rule of the Constitution.
Requiring a person before he can be employed to get a permit from the City Mayor of Manila who may withhold or
refuse it at will is tantamount to denying him the basic right of the people in the Philippines to engage in a means of
livelihood. 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.

Can the Mayor approve or disapprove the Mayor’s permit?

YES. BUT, this authority and discretion to grant and refuse permits of all classes conferred upon the Mayor of
Manila by the Revised Charter of Manila is not uncontrolled discretion but legal discretion to be exercised within the
limits of the law. Ordinance No. 6537 does not lay down any criterion or standard to guide the Mayor in the exercise of
his discretion. It has been held that where an ordinance of a municipality fails to state any policy or to set up any
standard to guide or limit the mayor's action, expresses no purpose to be attained by requiring a permit, enumerates
no conditions for its grant or refusal, and entirely lacks standard, thus conferring upon the Mayor arbitrary and
unrestricted power to grant or deny the issuance of building permits, such ordinance is invalid, being an undefined
and unlimited delegation of power to allow or prevent an activity per se lawful.

CIR v. CA and Fortune, GR No. 119761, 29 August 1996

What are the two kinds of administrative issuances? Distinguish.
The two kinds of administrative issuances - a legislative rule and an interpretative rule.
Legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation by providing
the details thereof. In the same way that laws must have the benefit of public hearing, it is generally required that
before a legislative rule is adopted there must be hearing. On the other hand, interpretative rules are designed to
provide guidelines to the law which the administrative agency is in charge of enforcing. It should be understandable
that when an administrative rule is merely interpretative in nature, its applicability needs nothing further than its
bare issuance for it gives no real consequence more than what the law itself has already prescribed. When, upon the
other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least
cumbersome the implementation of the law but substantially adds to or increases the burden of those governed, it
behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly
informed, before that new issuance is given the force and effect of law.

Was there compliance with due process requirement?

NO, the BIR itself, in its RMC 10-86, has observed and provided:
It has been observed that one of the problem areas bearing on compliance with Internal Revenue Tax rules and
regulations is lack or insufficiency of due notice to the tax paying public. Unless there is due notice, due compliance
therewith may not be reasonably expected. And most importantly, their strict enforcement could possibly suffer from
legal infirmity in the light of the constitutional provision on `due process of law' and the essence of the Civil Code
provision concerning effectivity of laws, whereby due notice is a basic requirement (Sec. 1, Art. IV, Constitution; Art. 2,
New Civil Code).
 “In order that there shall be a just enforcement of rules and regulations, in conformity with the basic element of
due process, the following procedures are hereby prescribed for the drafting, issuance and implementation of the said
Revenue Tax Issuances:"(1). This Circular shall apply only to: (a) Revenue Regulations; (b) Revenue Audit
Memorandum Orders; and (c) Revenue Memorandum Circulars and Revenue Memorandum Orders bearing on internal
revenue tax rules and regulations. "(2). Except when the law otherwise expressly provides, the aforesaid internal
revenue tax issuances shall not begin to be operative until after due notice thereof may be fairly presumed. "Due
notice of the said issuances may be fairly presumed only after the following procedures have been taken: "(5). Strict
compliance with the foregoing procedures is enjoined." Nothing on record could tell us that it was either impossible or
impracticable for the BIR to observe and comply with the above requirements before giving effect to its questioned
circular. All taken, the Court is convinced that the hastily promulgated RMC 37-93 has fallen short of a valid and
effective administrative issuance.

Commissioner of Customs v. Hypermix Feeds Corporation, GR No. 179579, 01 February 2012

Is the CMO unconstitutional for being violative of equal protection clause?
Yes. The equal protection clause means that no person or class of persons shall be deprived of the same
protection of laws enjoyed by other persons or other classes in the same place in like circumstances. Thus, the
guarantee of the equal protection of laws is not violated if there is a reasonable classification. For a classification to be
reasonable, it must be shown that (1) it rests on substantial distinctions; (2) it is germane to the purpose of the law;
(3) it is not limited to existing conditions only; and (4) it applies equally to all members of the same class.
Unfortunately, CMO 27-2003 does not meet these requirements. We do not see how the quality of wheat is affected by
who imports it, where it is discharged, or which country it came from. Even if other millers excluded from CMO 27-
2003 have imported food grade wheat, the product would still be declared as feed grade wheat, a classification
subjecting them to 7% tariff. On the other hand, even if the importers listed under CMO 27-2003 have imported feed
grade wheat, they would only be made to pay 3% tariff, thus depriving the state of the taxes due. The regulation,
therefore, does not become disadvantageous to respondent only, but even to the state. It is also not clear how the
regulation intends to "monitor more closely wheat importations and thus prevent their misclassification." A careful
study shows that it not only fails to achieve this end, but results in the opposite. The application of the regulation
forecloses the possibility that other corporations that are excluded from the list import food grade wheat; at the same
time, it creates an assumption that those who meet the criteria do not import feed grade wheat. In the first case,
importers are unnecessarily burdened to prove the classification of their wheat imports; while in the second, the state
carries that burden. Procedural: Because petitioners failed to follow the requirements enumerated by the Revised
Administrative Code, the assailed regulation must be struck down. Further, petitioner Commissioner of Customs went
beyond his powers of delegated authority when the regulation limited the powers of the customs officer to examine and
assess imported articles.

ABAKADA Guro Party List v. Purisima, 14 October 2008 (Rational Basis Test)
What is Rational Basis Test?
The equal protection of the laws clause of the Constitution allows classification. Classification in law, as in the
other departments of knowledge or practice, is the grouping of things in speculation or practice because they agree
with one another in certain particulars. A law is not invalid because of simple inequality. The very idea of classification
is that of inequality, so that it goes without saying that the mere fact of inequality in no manner determines the matter
of constitutionality. All that is required of a valid classification is that it be reasonable, which means that the
classification should be based on substantial distinctions which make for real differences, that it must be germane to
the purpose of the law; that it must not be limited to existing conditions only; and that it must apply equally to each
member of the class. This Court has held that the standard is satisfied if the classification or distinction is based on a
reasonable foundation or rational basis and is not palpably arbitrary.

Does the Ordinance violate Equal Protection of Laws?

Yes. The guaranty of equal protection of the laws is not a guaranty of equality in the application of the laws
upon all citizens of the State. It is not, therefore, a requirement, in order to avoid the constitutional prohibition against
inequality, that every man, woman and child should be affected alike by a statute. Equality of operation of statutes
does not mean indiscriminate operation on persons merely as such, but on persons according to the circumstances
surrounding them. It guarantees equality, not identity of rights. The Constitution does not require that things which
are different in fact be treated in law as though they were the same. The equal protection clause does not forbid
discrimination as to things that are different. It does not prohibit legislation which is limited either in the object to
which it is directed or by the territory within which it is to operate. The equal protection clause recognizes a valid
classification, that is, a classification that has a reasonable foundation or rational basis and not arbitrary. With
respect to RA 9335, its expressed public policy is the optimization of the revenue-generation capability and collection
of the BIR and the BOC. Since the subject of the law is the revenue- generation capability and collection of the BIR
and the BOC, the incentives and/or sanctions provided in the law should logically pertain to the said agencies.
Moreover, the law concerns only the BIR and the BOC because they have the common distinct primary function of
generating revenues for the national government through the collection of taxes, customs duties, fees and charges.
The BIR performs the following functions to Assess and collect all taxes, fees and charges and account for all revenues
collected. On the other hand, the BOC has the following functions: Collect custom duties, taxes and the corresponding
fees, charges and penalties and Account for all customs revenues collected. Both the BIR and the BOC are bureaus
under the DOF. They principally perform the special function of being the instrumentalities through which the State
exercises one of its great inherent functions – taxation. Indubitably, such substantial distinction is germane and
intimately related to the purpose of the law. Hence, the classification and treatment accorded to the BIR and the BOC
under RA 9335 fully satisfy the demands of equal protection.

Association of Customs Brokers v. Manila, 93 Phil 107

Is there a violation of Equal Protection of Laws?
Yes. It is also our opinion that the ordinance infringes the rule of the uniformity of taxation ordained by our
Constitution. Note that the ordinance exacts the tax upon all motor vehicles operating within the City of Manila. It
does not distinguish between a motor vehicle for hire and one which is purely for private use. Neither does it
distinguish between a motor vehicle registered in the City of Manila and one registered in another place but
occasionally comes to Manila and uses its streets and public highways. The distinction is important if we note that the
ordinance intends to burden with the tax only those registered in the City of Manila as may be inferred from the word
"operating" used therein. The word "operating" denotes a connotation which is akin to a registration, for under the
Motor Vehicle Law no motor vehicle can be operated without previous payment of the registration fees. There is no
pretense that the ordinance equally applies to motor vehicles who come to Manila for a temporary stay or for short
errands, and it cannot be denied that they contribute in no small degree to the deterioration of the streets and public
highway. The fact that they are benefited by their use they should also be made to share the corresponding burden.
And yet such is not the case. This is an inequality which we find in the ordinance, and which renders it offensive to
the Constitution.

Shell v. Vano, 94 Phil 387

Does the Ordinance violate Equal Protection of Laws?
No. The contention that the ordinance is discriminatory and hostile because there is no other person in the
locality who exercises such “designation” or “occupation” is without merit because the fact that there is no other
person in the locality who exercises such a designation or calling does not make the ordinance discriminatory and
hostile, inasmuch as it is and will be applicable to any person or firm who exercises such calling or occupation named
or designated as “installation manager.”

Ormoc Sugar Central v. Ormoc Treasurer, 17 February 1968

Does the Ordinance violate Equal Protection of Laws?
Yes. The Constitution in the Bill of Rights provides: "… nor shall any person be denied the equal protection of
the laws." In Felwa vs. Salas, the Court ruled that the equal protection clause applies only to persons or things
identically situated and does not bar a reasonable classification of the subject of legislation. A classification is
reasonable where (1) it is based on substantial distinctions which make real differences; (2) these are germane to the
purpose of the law; (3) the classification applies not only to present conditions but also to future conditions which are
substantially identical to those of the present; (4) the classification applies only to those who belong to the same class.
A perusal of the requisites instantly shows that the questioned ordinance does not meet them, for it taxes only
centrifugal sugar produced and exported by the Ormoc Sugar Company, Inc. and none other. At the time of the taxing
ordinance's enactment, Ormoc Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc. Still,
the classification, to be reasonable, should be in terms applicable to future conditions as well. The taxing ordinance
should not be singular and exclusive as to exclude any subsequently established sugar central, of the same class as
plaintiff, for the coverage of the tax. As it is now, even if later a similar company is set up, it cannot be subject to the
tax because the ordinance expressly points only to Ormoc City Sugar Company, Inc. as the entity to be levied upon.
Wherefore, the decision appealed from is hereby reversed. The challenged ordinance is declared unconstitutional and
the defendant-appellees are ordered to refund the Php 12, 087.50 plaintiff-appellant paid under protest.

Kapatiran v. Tan, 30 June 1988

Is there a violation of the equal protection clause?
No. The petitioner’s assertions in this regard are not supported by facts and circumstances to warrant their
conclusions. They have failed to adequately show that the VAT is oppressive, discriminatory, or unjust. Petitioners
merely rely upon newspaper articles which are actually hearsay and have evidentiary value. To justify nullification of a
law, there must be a clear and unequivocal breach of the Constitution, not a doubtful argumentative implication.

As the Court sees, E.O. No. 273 satisfies all the requirements of a valid tax. It is uniform; the sales tax adopted
in E.O. No. 273 is applied similarly on all goods and services sold to the public, which are not exempt, at the constant
rate of 0% or 10%. As stated by Justice Laurel in Philippine Trust Company v. Yatco, “a tax is considered uniform
when it operates with the same force and effect in every place where the subject may be found.”

Citing Eastern Theatrical Co. v. Alfonso, the Court held that equality and uniformity in taxation means that all
taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the
authority to make reasonable and natural classifications for purpose of taxation.

Thereat, to satisfy this requirement, all that is needed is that the statute or ordinance in question “applies
equally to all persons, firms and corporations placed in similar situations.” Further, the Court is on record accepting
the view in a leading American case that “inequalities which result from a singling out of one particular class for
taxation or exemption infringe no constitutional limitation.”

The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged in
business with an aggregate gross annual sales exceeding Php 200, 000. Small corner sari-sari stores are consequently
exempt from its application. Likewise exempt from the tax are sales of farm and marine products, spares as they are
from the incidence of the VAT, are expected to be relatively lower and within the reach of the general public.

In any event, if petitioners seriously believe that the adoption and continued application of the VAT are
prejudicial to the general welfare or the interests of the majority of the people, they should seek recourse and relief
from the political branches of the government. The Court, following the time-honored doctrine of separation of powers,
cannot substitute its judgment for that of the President as to the wisdom, justice and advisability of the adoption of
the VAT. The Court can only look into and determine whether or not EO 273 was enacted and made effective as law, in
the manner required by, and consistent with, the Constitution, and to make sure that it was not issued in grave abuse
of discretion amounting to lack or excess of jurisdiction; and, in this regard, the Court finds no reason to impede its
application or continued implementation. Thereat, the petitions are dismissed.

Philreca v. DILG, 10 June 2003

Is there a violation of the equal protection clause?
None. The equal protection clause under the Constitution means that "no person or class of persons shall be
deprived of the same protection of laws which is enjoyed by other persons or other classes in the same place and in
like circumstances." Thus, the guaranty of the equal protection of the laws is not violated by a law based on
reasonable classification. Classification, to be reasonable, must (1) rest on substantial distinctions; (2) be germane to
the purposes of the law; (3) not be limited to existing conditions only; and (4) apply equally to all members of the same
class.

We hold that there is reasonable classification under the Local Government Code to justify the different tax
treatment between electric cooperatives covered by P.D. No. 269, as amended, and electric cooperatives under R.A. No.
6938.

Is there a substantial distinction between cooperatives registered with NEA and cooperatives registered with CDA?
 Yes. Substantial distinctions exist between cooperatives under P.D. No. 269 (NEA), and cooperatives under R.A.
No. 6938 (CDA). These distinctions are manifest in at least two material respects which go into the nature of
cooperatives envisioned by R.A. No. 6938 and which characteristics are not present in the type of cooperative
associations created under P.D. No. 269, as amended. There is substantial distinction in these two material aspects:
Capital Contributions by Members - equitable contributions required under RA 6938, PD 269 does not satisfy this
requirement

Extent of Government Control over Cooperatives- Principle of subsidiarity- gov’t supports only when necessary.
PD 269 is highly dependent on NEA which is a gov’t administration.

Judy Anne Santos v. People, GR No. 173176, 26 August 2008

Does the case involve a violation of equal protection clause in the enactment of a law?
No. The unlawful administration by officers of a statute fair on its face, resulting in its unequal application to
those who are entitled to be treated alike, is not a denial of equal protection unless there is shown to be present in it
an element of intentional or purposeful discrimination. This may appear on the face of the action taken with respect to
a particular class or person, or it may only be shown by extrinsic evidence showing a discriminatory design over
another not to be inferred from the action itself. But a discriminatory purpose is not presumed, there must be a
showing of "clear and intentional discrimination." Appellant has failed to show that, in charging appellant in court,
that there was a "clear and intentional discrimination" on the part of the prosecuting officials.

In this case, The Information against petitioner appears valid on its face; and that it was filed in violation of her
constitutional rights to due process and equal protection of the laws is not evident on the face thereof. Petitioner was
not able to duly establish to the satisfaction of this Court that she and Velasquez were indeed similarly situated, i.e.,
that they committed identical acts for which they were charged with the violation of the same provisions of the NIRC;
and that they presented similar arguments and evidence in their defense - yet, they were treated differently.

What is the argument of Judy Anne re: equal protection clause?

 She asserts that she has been denied equal protection of the laws when similar charges for violation of the
NIRC, as amended, against Regina Encarnacion A. Velasquez (Velasquez) was dismissed by the DOJ for the reason
that Velasquez's tax liability was not yet fully determined when the charges were filed.

Was there a violation of the equal protection clause?

None. In People v. Dela Piedra, this Court explained that: The prosecution of one guilty person while others
equally guilty are not prosecuted, however, is not, by itself, a denial of the equal protection of the laws. Where the
official action purports to be in conformity to the statutory classification, an erroneous or mistaken performance of the
statutory duty, although a violation of the statute, is not without more a denial of the equal protection of the laws. The
unlawful administration by officers of a statute fair on its face, resulting in its unequal application to those who are
entitled to be treated alike, is not a denial of equal protection unless there is shown to be present in it an element of
intentional or purposeful discrimination. This may appear on the face of the action taken with respect to a particular
class or person, or it may only be shown by extrinsic evidence showing a discriminatory design over another not to be
inferred from the action itself. But a discriminatory purpose is not presumed, there must be a showing of "clear and
intentional discrimination." Appellant has failed to show that, in charging appellant in court, that there was a "clear
and intentional discrimination" on the part of the prosecuting officials. In the case at bar, no evidence of a clear and
intentional discrimination against petitioner was shown, whether by Prosecution Attorney Torrevillas in recommending
the filing of Information against petitioner or by the CTA First Division in denying petitioner's Motion to Quash. The
only basis for the petitioner's claim of denial of equal protection of the laws was the dismissal of the charges against
Velasquez while those against her were not.

Ferrer, Jr., Vs. City Mayor Herbert Bautista, Et.Al., G.R. No. 210551, June 30, 2015
Was there a violation of the equal protection clause?
There is no violation in Ordinance No. SP-2095. There is a violation in Ordinance No. SP-2235.

Equal protection requires that all persons or things similarly situated should be treated alike, both as to rights
conferred and responsibilities imposed. The guarantee means that no person or class of persons shall be denied the
same protection of laws which is enjoyed by other persons or other classes in like circumstances. Similar subjects
should not be treated differently so as to give undue favor to some and unjustly discriminate against others. The law
may, therefore, treat and regulate one class differently from another class provided there are real and substantial
differences to distinguish one class from another.

Ratio:
I. For Ordinance No. SP- 2095 - Valid.
An ordinance based on reasonable classification does not violate the constitutional guaranty of the equal
protection of the law. The requirements for a valid and reasonable classification are:
1. it must rest on substantial distinctions;
2. it must be germane to the purpose of the law;
3. it must not be limited to existing conditions only; and
4. it must apply equally to all members of the same class.

For the purpose of undertaking a comprehensive and continuing urban development and housing program, the
disparities between a real property owner and an informal settler as two distinct classes are too obvious and need not
be discussed at length. The differentiation conforms to the practical dictates of justice and equity and is not
discriminatory within the meaning of the Constitution. Notably, the public purpose of a tax may legally exist even if
the motive which impelled the legislature to impose the tax was to favor one over another. It is inherent in the power
to tax that a State is free to select the subjects of taxation. Inequities which result from a singling out of one particular
class for taxation or exemption infringe no constitutional limitation. Further, the reasonableness of Ordinance No. SP-
2095 cannot be disputed. It is not confiscatory or oppressive since the tax being imposed therein is below what the
UDHA actually allows: LGUs to collect SHT on lands with an assessed value of more than P50,000.00 and SP- 2095-
only covers lands with an assessed value exceeding P100,000.00.
 Even better, on certain conditions, the ordinance grants a tax credit equivalent to the total amount of the special
assessment paid beginning in the sixth (6th) year of its effectivity. Far from being obnoxious, the provisions of the
subject ordinance are fair and just.

Ordinance No. SP-2235; invalid for lack of uniformity (Since there is no substantial distinction, there should
also be no difference in the rates imposed); and for not being germane to the purpose of the law;

Lack of Uniformity: In this case, the alleged bases of Ordinance No. S-2235 in imposing the garbage fee is the
volume of waste currently generated by each person in Quezon City, which purportedly stands at 0.66 kilogram per
day, and the increasing trend of waste generation for the past three years. Respondents did not elaborate any further.
The figure presented does not reflect the specific types of wastes generated – whether residential, market, commercial,
industrial, construction/demolition, street waste, agricultural, agro-industrial, institutional, etc. It is reasonable,
therefore, for the Court to presume that such amount pertains to the totality of wastes, without any distinction,
generated by Quezon City constituents. It violates the equal protection clause of the Constitution and the provisions of
the LGC that an ordinance must be equitable and based as far as practicable on the taxpayer’s ability to pay, and not
unjust, excessive, oppressive, confiscatory. In the subject ordinance, the rates of the imposable fee depend on land or
floor area and whether the payee is an occupant of a lot, condominium, social housing project or apartment. For the
purpose of garbage collection, there is, in fact, no substantial distinction between an occupant of a lot, on one hand,
and an occupant of a unit in a condominium, socialized housing project or apartment, on the other hand. Most likely,
garbage output produced by these types of occupants is uniform and does not vary to a large degree; thus, a similar
schedule of fee is both just and equitable. The rates being charged by the ordinance are unjust and inequitable: a
resident of a 200 sq. m. unit in a condominium or socialized housing project has to pay twice the amount than a
resident of a lot similar in size; unlike unit occupants, all occupants of a lot with an area of 200 sq. m. and less have
to pay a fixed rate of Php100.00; and the same amount of garbage fee is imposed regardless of whether the resident is
from a condominium or from a socialized housing project. [A] lack of uniformity in the rate charged is not necessarily
unlawful discrimination. The establishment of classifications and the charging of different rates for the several classes
is not unreasonable and does not violate the requirements of equality and uniformity. Discrimination to be unlawful
must draw an unfair line or strike an unfair balance between those in like circumstances having equal rights and
privileges. Discrimination with respect to rates charged does not vitiate unless it is arbitrary and without a reasonable
fact basis or justification.

Not germane to the purpose of the law: Indeed, the classifications under Ordinance No. S-2235 are not germane
to its declared purpose of “promoting shared responsibility with the residents to attack their common mindless
attitude in over-consuming the present resources and in generating waste.” Instead of simplistically categorizing the
payee into land or floor occupant of a lot or unit of a condominium, socialized housing project or apartment,
respondent City Council should have considered factors that could truly measure the amount of wastes generated and
the appropriate fee for its collection. Factors include, among others, household age and size, accessibility to waste
collection, population density of the barangay or district, capacity to pay, and actual occupancy of the property.

Mindanao Shopping Destination Corporation, et.al. v. Duterte, 06 June 2017

What is the argument re: equal protection clause?
Invoking the LGC, petitioners appealed to the DOJ, asserting the unconstitutionality and illegality of Section 69
(d), for being unjust, excessive, oppressive, confiscatory and contrary to the 1987 Constitution and the provisions of
the LGC.

Is there a violation of the equal protection clause?

No. Under Section 131 of R.A. 7160, wholesale and retail are now defined, classified and taxed differently. It
cannot be said then that Davao City, on its own, deliberately grouped these two business activities under one business
tax. Corollarily, it is only sound that by analogy, wholesalers and retailers should likewise be treated and classified
differently to provide accuracy to the very meaning of its rootword and to give meaning to the intention of the law. The
assailed ordinance merely imposes and collects the proper and legal tax due to the local government pursuant to the
LGC. While it may appear that there was indeed a significant adjustment on the tax rate of retailers which affected the
petitioners, it must, however, be emphasized that the adjustment was not by virtue of a unilateral increase of the tax
rate of petitioners as retailers, but again, merely incidental as a result of the correction of the classification of
wholesalers and retailers and its corresponding tax rates in accordance with the provisions of the LGC.

The assailed ordinance merely corrected the old ordinance so that it will be in accord with the LGC. To rule
otherwise is tantamount to pronouncing that Davao City can no longer correct the apparent error in classifying
wholesaler and retailer in the same category under its old tax ordinance. Such proposition runs counter to the well-
entrenched principle that estoppel does not apply to the government, especially on matters of taxation. Taxes are the
nation's lifeblood through which government agencies continue to operate and with which the State discharges its
functions for the welfare of its constituents. In any case, an ordinance based on reasonable classification does not
violate the constitutional guaranty of the equal protection of the law. The requirements for a valid and reasonable
classification are: (1) it must rest on substantial distinctions; (2) it must be germane to the purpose of the law; (3) it
must not be limited to existing conditions only; and (4) it must apply equally to all members of the same class. For the
purpose of rectifying the erroneous classification of wholesaler and retailer in the old ordinance in order to conform to
the classification and the tax rates as imposed by the LGC is neither invalid nor unreasonable. The differentiation of
wholesaler and retailer conforms to the practical dictates of justice and equity and is not discriminatory within the
meaning of the Constitution. It is inherent in the power to tax that a State is free to select the subjects of taxation.
Inequities which result from a singling out of one particular class for taxation or exemption infringe no constitutional
limitation.

American Bible Society v. City of Manila, 101 Phil 386

Is there a violation of freedom of religion in the imposition of license fee?
Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted, guarantees the freedom of
religious profession and worship. The constitutional guaranty of the free exercise and enjoyment of religious profession
and worship carries with it the right to disseminate religious information. Any restraints of such right can only be
justified like other restraints of freedom of expression on the grounds that there is a clear and present danger of any
substantive evil which the State has the right to prevent". It may be true that in the case at bar the price asked for the
bibles and other religious pamphlets was in some instances a little bit higher than the actual cost of the same but this
cannot mean that appellant was engaged in the business or occupation of selling said "merchandise" for profit. For
this reason, We believe that the provisions of City of Manila Ordinance No. 2529, as amended, cannot be applied to
appellant, for in doing so it would impair its free exercise and enjoyment of its religious profession and worship as well
as its rights of dissemination of religious beliefs. With respect to Ordinance No. 3000, as amended, which requires the
obtaining the Mayor's permit before any person can engage in any of the businesses, trades or occupations
enumerated therein, the court did not find that it imposes any charge upon the enjoyment of a right granted by the
Constitution, nor tax the exercise of religious practices.

Re: Letter of Tony Q. Valenciano, Holding of Religious Rituals at the Hall of Justice Building in Quezon City,
AM No 10-4- 19-SC, 07 March 2017
Is there a violation of the non-establishment clause?
There is no violation. In order to give life to the constitutional right of freedom of religion, the State adopts a
policy of accommodation. Accommodation is a recognition of the reality that some governmental measures may not be
imposed on a certain portion of the population for the reason that these measures are contrary to their religious
beliefs. As long as it can be shown that the exercise of the right does not impair the public welfare, the attempt of the
State to regulate or prohibit such right would be an unconstitutional encroachment. On the opposite side of the
spectrum is the constitutional mandate that "no law shall be made respecting an establishment of religion,"35
otherwise known as the non-establishment clause. Indeed, there is a thin line between accommodation and
establishment, which makes it even more imperative to understand each of these concepts by placing them in the
Filipino society's perspective. The non-establishment clause reinforces the wall of separation between Church and
State. It simply means that the State cannot set up a Church; nor pass laws which aid one religion, aid all religion, or
prefer one religion over another nor force nor influence a person to go to or remain away from church against his will
or force him to profess a belief or disbelief in any religion; that the state cannot punish a person for entertaining or
professing religious beliefs or disbeliefs, for church attendance or nonattendance; that no tax in any amount, large or
small, can be levied to support any religious activity or institution whatever they may be called or whatever form they
may adopt or teach or practice religion; that the state cannot openly or secretly participate in the affairs of any
religious organization or group and vice versa.36 Its minimal sense is that the state cannot establish or sponsor an
official religion. In the same breath that the establishment clause restricts what the government can do with religion,
it also limits what religious sects can or cannot do. They can neither cause the government to adopt their particular
doctrines as policy for everyone, nor can they cause the government to restrict other groups. To do so, in simple terms,
would cause the State to adhere to a particular religion and, thus, establish a state religion.

Father Bernas further elaborated on this matter, "In effect, what non-establishment calls for is government
neutrality in religious matters. Such government neutrality may be summarized in four general propositions: (1)
Government must not prefer one religion over another or religion over irreligion because such preference would violate
voluntarism and breed dissension; (2) Government funds must not be applied to religious purposes because this too
would violate voluntarism and breed interfaith dissension; (3) Government action must not aid religion because this
too can violate voluntarism and breed interfaith dissension; [and] (4) Government action must not result in excessive
entanglement with religion because this too can violate voluntarism and breed interfaith dissension."

Establishment entails a positive action on the part of the State. Accommodation, on the other hand, is passive.
In the former, the State becomes involved through the use of government resources with the primary intention of
setting up a state religion. In the latter, the State, without being entangled, merely gives consideration to its citizens
who want to freely exercise their religion.

Guided by the foregoing, it is our considered view that the holding of Catholic masses at the basement of the QC
Hall of Justice is not a case of establishment, but merely accommodation. First, there is no law, ordinance or circular
issued by any duly constitutive authorities expressly mandating that judiciary employees attend the Catholic masses
at the basement. Second, when judiciary employees attend the masses to profess their faith, it is at their own initiative
as they are there on their own free will and volition, without any coercion from the judges or administrative officers.
Third, no government funds are being spent because the lightings and airconditioning continue to be operational even
if there are no religious rituals there. Fourth, the basement has neither been converted into a Roman Catholic chapel
nor has it been permanently appropriated for the exclusive use of its faithful. Fifth, the allowance of the masses has
not prejudiced other religions.
Tolentino v. Secretary of Finance, 25 August 1994
How were the concepts of Uniformity, Equitability and Progressivity of Taxation explained in this case?
As to Uniformity, what it contends is that by withdrawing the exemption previously granted to print media
transactions involving printing, publication, importation or sale of newspapers, Republic Act No. 7716 has singled out
the press for discriminatory treatment and that within the class of mass media the law discriminates against print
media by giving broadcast media favored treatment. But the Court is unable to find a differential treatment of the
press by the law, much less any censorial motivation for its enactment. If the press is now required to pay a value-
added tax on its transactions, it is not because it is being singled out, much less targeted, for special treatment but
only because of the removal of the exemption previously granted to it by law. The withdrawal of exemption is all that is
involved in these cases. Other transactions, likewise previously granted exemption, have been delisted as part of the
scheme to expand the base and the scope of the VAT system. The law would perhaps be open to the charge of
discriminatory treatment if the only privilege withdrawn had been that granted to the press. But that is not the case.
Unless justified, the differential treatment of the press creates risks of suppression of expression. In contrast, in the
cases at bar, the statute applies to a wide range of goods and services. The argument that, by imposing the VAT only
on print media whose gross sales exceeds P480,000 but not more than P750,000, the law discriminates is without
merit since it has not been shown that as a result the class subject to tax has been unreasonably narrowed. The fact
is that this limitation does not apply to the press along but to all sales. Nor is impermissible motive shown by the fact
that print media and broadcast media are treated differently. The press is taxed on its transactions involving printing
and publication, which are different from the transactions of broadcast media. There is thus a reasonable basis for the
classification.

As to Equitability, there is basis for passing upon claims that on its face the statute violates the guarantees of
freedom of speech, press and religion. The possible "chilling effect" which it may have on the essential freedom of the
mind and conscience and the need to assure that the channels of communication are open and operating
importunately demand the exercise of this Court's power of review. There is, however, no justification for passing upon
the claims that the law also violates the rule that taxation must be progressive and that it denies petitioners' right to
due process and that equal protection of the laws. The reason for this different treatment has been cogently stated by
an eminent authority on constitutional law thus: "[W]hen freedom of the mind is imperiled by law, it is freedom that
commands a momentum of respect; when property is imperiled it is the lawmakers' judgment that commands respect.
This dual standard may not precisely reverse the presumption of constitutionality in civil liberties cases, but obviously
it does set up a hierarchy of values within the due process clause." Indeed, the absence of threat of immediate harm
makes the need for judicial intervention less evident and underscores the essential nature of petitioners' attack on the
law on the grounds of regressivity, denial of due process and equal protection and impairment of contracts as a mere
academic discussion of the merits of the law. For the fact is that there have even been no notices of assessments
issued to petitioners and no determinations at the administrative levels of their claims so as to illuminate the actual
operation of the law and enable us to reach sound judgment regarding so fundamental questions as those raised in
these suits.

As to Progressivity of Taxation, the broad argument against the VAT is that it is regressive and that it violates
the requirement that "The rule of taxation shall be uniform and equitable [and] Congress shall evolve a progressive
system of taxation." Just as vigorously as it is asserted that the law is regressive, the opposite claim is pressed by
respondents that in fact it distributes the tax burden to as many goods and services as possible particularly to those
which are within the reach of higher-income groups, even as the law exempts basic goods and services. It is thus
equitable. Lacking empirical data on which to base any conclusion regarding these arguments, any discussion
whether the VAT is regressive in the sense that it will hit the "poor" and middle-income group in society harder than it
will the "rich," as the Cooperative Union of the Philippines (CUP) claims in G.R. No. 115873, is largely an academic
exercise. Indeed, regression is not a negative standard for courts to enforce. What Congress is required by the
Constitution to do is to "evolve a progressive system of taxation." This is a directive to Congress, just like the directive
to it to give priority to the enactment of laws for the enhancement of human dignity and the reduction of social,
economic and political inequalities (Art. XIII, § 1), or for the promotion of the right to "quality education" (Art. XIV, § 1).
These provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable rights.

British American Tobacco v. Camacho, G.R. No. 163583, 15 April 2009

Is there a violation of Uniformity, Equitability and Progressivity of Taxation?
NONE. The assailed law does not violate the equal protection and uniformity of taxation clauses. Petitioner
argues that the classification freeze provision violates the equal protection and uniformity of taxation clauses because
Annex "D" brands are taxed based on their 1996 net retail prices while new brands are taxed based on their present-
day net retail prices. Petitioner asserts that the assailed provisions accord a special or privileged status to Annex "D"
brands while at the same time discriminate against other brands.

As to the Equitability of Taxation, the classification freeze provision addressed Congress’s administrative
concerns in the simplification of tax administration of sin products, elimination of potential areas for abuse and
corruption in tax collection, buoyant and stable revenue generation, and ease of projection of revenues. Consequently,
there can be no denial of the equal protection of the laws since the rational-basis test is amply satisfied. The rational
basis test was properly applied to gauge the constitutionality of the assailed law in the face of an equal protection
challenge. It has been held that "in the areas of social and economic policy, a statutory classification that neither
proceeds along suspect lines nor infringes constitutional rights must be upheld against equal protection challenge if
there is any reasonably conceivable state of facts that could provide a rational basis for the classification." Under the
rational basis test, it is sufficient that the legislative classification is rationally related to achieving some legitimate
State interest. A legislative classification that is reasonable does not offend the constitutional guaranty of the equal
protection of the laws. The classification is considered valid and reasonable provided that: (1) it rests on substantial
distinctions; (2) it is germane to the purpose of the law; (3) it applies, all things being equal, to both present and future
conditions; and (4) it applies equally to all those belonging to the same class. The first, third and fourth requisites are
satisfied. The classification freeze provision was inserted in the law for reasons of practicality and expediency. That is,
since a new brand was not yet in existence at the time of the passage of RA 8240, then Congress needed a uniform
mechanism to fix the tax bracket of a new brand. The current net retail price, similar to what was used to classify the
brands under Annex "D" as of October 1, 1996, was thus the logical and practical choice. Further, with the
amendments introduced by RA 9334, the freezing of the tax classifications now expressly applies not just to Annex "D"
brands but to newer brands introduced after the effectivity of RA 8240 on January 1, 1997 and any new brand that
will be introduced in the future.
 The classification freeze provision could hardly be considered arbitrary, or motivated by a hostile or oppressive
attitude to unduly favor older brands over newer brands. Congress was unequivocal in its unwillingness to delegate
the power to periodically adjust the excise tax rate and tax brackets as well as to periodically resurvey and reclassify
the cigarette brands based on the increase in the consumer price index to the DOF and the BIR. Congress doubted the
constitutionality of such delegation of power, and likewise, considered the ethical implications thereof. Curiously, the
classification freeze provision was put in place of the periodic adjustment and reclassification provision because of the
belief that the latter would foster an anti-competitive atmosphere in the market. Yet, as it is, this same criticism is
being foisted by petitioner upon the classification freeze provision. To our mind, the classification freeze provision was
in the main the result of Congress’s earnest efforts to improve the efficiency and effectivity of the tax administration
over sin products while trying to balance the same with other State interests.

As to Uniformity of Taxation, petitioner’s contention that the assailed provisions violate the uniformity of
taxation clause is similarly unavailing. A tax "is uniform when it operates with the same force and effect in every place
where the subject of it is found." It does not signify an intrinsic but simply a geographical uniformity.6 A levy of tax is
not unconstitutional because it is not intrinsically equal and uniform in its operation.7 The uniformity rule does not
prohibit classification for purposes of taxation. In the instant case, there is no question that the classification freeze
provision meets the geographical uniformity requirement because the assailed law applies to all cigarette brands in the
Philippines. And, for reasons already adverted to in our August 20, 2008 Decision, the above four-fold test has been
met in the present case.

As to Progressive Taxation: The assailed law does not transgress the constitutional provisions on regressive and
inequitable taxation. It may be conceded that the assailed law imposes an excise tax on cigarettes which is a form of
indirect tax, and thus, regressive in character. While there was an attempt to make the imposition of the excise tax
more equitable by creating a four-tiered taxation system where higher priced cigarettes are taxed at a higher rate, still,
every consumer, whether rich or poor, of a cigarette brand within a specific tax bracket pays the same tax rate. To this
extent, the tax does not take into account the person’s ability to pay. Nevertheless, this does not mean that the
assailed law may be declared unconstitutional for being regressive in character because the Constitution does not
prohibit the imposition of indirect taxes but merely provides that Congress shall evolve a progressive system of
taxation.

Cagayan Power and Light Co. v. CIR, GR No. 60126, September 25, 1985
Is there a violation of the non-impairment clause?
None. Congress could impair CEPALCO’s legislative franchise by making it liable for income tax from which
heretofore it was exempted by virtue of the exemption provided for in section 3 of its franchise. The Constitution
provides that a franchise is subject to amendment, alteration or repeal by the Congress when the public interest so
requires. Section 1 of petitioner's franchise, R.A. 3247, provides that it is subject to the provisions of the Constitution
and to the terms and conditions established in Act No. 3636 whose section 12 provides that the franchise is subject to
amendment, alteration or repeal by Congress. Republic Act No. 5431, had the effect of withdrawing petitioner's
exemption from income tax. 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.

What is contractual tax exemption?

Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the
Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained
in government bonds or debentures, lawfully entered into by them under enabling laws in which the government,
acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax
exemptions of this kind may not be revoked without impairing the obligations of contracts. These contractual tax
exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise partakes the
nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. Indeed, Article XII,
Section 11, of the 1987 Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit
that no franchise for the operation of a public utility shall be granted except under the condition that such privilege
shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires. [PAGCOR
v. BIR, G.R. No. 172087, March 15, 2011]

City Government of Quezon City v. Bayantel, G.R. No. 162015, March 6, 2006
Is there a violation of the non-impairment clause?
The case did not directly answer this question. But, according to the Book of Ma’am Tin, (Page 104-106) Any
withdrawal of tax exemption granted in the franchises of telecommunication, electric, airline, and other public utility
companies is constitutional. The non-impairment clause is not applicable because tax exemption granted in these
franchises is not contractual in nature.

Smart Communications v. City of Davao, 16 September 2008

Is there a violation of the non-impairment clause?
None. Smart likewise claims a violation of the non-impairment clause since the franchise is in the nature of the
contract between the government and Smart.
However, we find that there is no violation of Article III, Section 10 of the 1987 Philippine Constitution. As previously
discussed, the franchise of Smart does not expressly provide for exemption from local taxes. Absent the express
provision on such exemption under the franchise, we are constrained to rule against it. The "in lieu of all taxes" clause
in Section 9 of R.A. No. 7294 leaves much room for interpretation. Due to this ambiguity in the law, the doubt must be
resolved against the grant of tax exemption.

Smart’s franchise was granted with the express condition that it is subject to amendment, alteration or repeal.
As held in Tolentino vs. Secretary of Finance:
“Existing laws are read into contracts in order to fix obligations as between parties, the reservation of essential attributes of sovereign
power is also read into contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment presupposes
the maintenance of a government which retains adequate authority to secure the peace and good order of society.
In truth, the Contract Clause was never been though as a limitation on the exercise of the State’s power of taxation save only where a tax
exemption has been granted for a valid consideration xxx.”
Is Smart liable to pay the franchise tax imposed by the City of Davao?
Yes.

Smart alleges that the “in lieu of all taxes” clause of its franchise exempts it from all taxes, both local and
national, except the national franchise tax (now VAT), income tax and real property tax. The uncertainty in the “in lieu
of all taxes” clause in RA No. 7294 on whether Smart is exempted from both local and national franchise tax must be
construed strictly against Smart which claims exemption. Smart has the burden of providing that, aside from the
imposed 3% franchise tax, Congress intended it to be exempt from all kinds of franchise taxes-whether local or
national. Smart, failed in this regard.

Tax exemptions can only be given force if they are clear and categorical. If Congress intended Smart to be
exempted from municipal and provincial taxes, it could have used the same language as the Clavecilla franchise which
stated: “in lieu of any and all taxes of any kind, nature or description levied, established ot collected by any authority
whatsoever, municipal, provincial or national, from which the grantee is hereby expressly exempted. The
interpretation of the franchise granted to Smart is that it refers only to national and not to local taxes.
Smart also claims that the clause “in lieu of all taxes” is in the nature of a tax exclusion and not a tax
exemption. The distinction between the two:

Tax Exemption- This means that the taxpayer does not pay any tax at all. An exemption is an immunity or
privilege; it is the freedom from a charge or burden to which others are subjected.

Tax Exclusion- The removal of otherwise taxable items from the reach of taxation e.g exclusions from gross
income and allowable deductions. An exclusion is also an immunity or privilege which frees a taxpayer from a
charge to which others are subjected. The rule that a tax exemption should be applied strictly against the
taxpayer and liberally in favor of the government applies equally to tax exclusion.

Smart pays VAT, income tax and real property tax. Thus, what it enjoys it more accurately a tax exclusion.
 Smart posits that the franchise of GLOBE contains a provision exempting it from municipal or local franchise
tax, and that Smart should like benefit by these. In granting the franchise of GLOBE under RA No. 7925, Congress did
not intend it to operate as a blanket tax exemption to all telecommunications entities. GLOBE pays only 1.5% of its
gross receipts in lieu of any and all taxes of any kind, nature or description levies, established or collected by any
authority whatsoever, municipal, provincial or national. This grant to GLOBE is clear and categorical. No such
provision is found in the franchise of Smart, the kind of tax from which it is exempted is not clearly specified.

If the contention of Smart is to be followed. The Government will be burdened of having to keep track of all
granted telecommunications franchises, lest some companies be treated unequally. It is different if Congress enacts a
law specifically granting uniform advantages, favor, privilege, exemption or immunity to all telecommunication
entities.

Lladoc v. CIR, 14 Phil 292

Is donee’s tax covered by the Constitutional Tax exemption? Explain
Section 22 (3), Art. VI of the Constitution of the Philippines, exempts from taxation cemeteries, churches and
parsonages or convents, appurtenant thereto, and all lands, buildings, and improvements used exclusively for
religious purposes. The exemption is only from the payment of taxes assessed on such properties enumerated, as
property taxes, as contra distinguished from excise taxes.

The phrase "exempt from taxation" as employed in Section 22(3), Article VI of the Constitution of the Philippines,
should not be interpreted to mean exemption from all kinds of taxes. A gift tax is not a property tax, but an excise tax
imposed on the transfer of property by way of gift inter vivos, the imposition of which on property used exclusively for
religious purposes, does not constitute an impairment of the Constitution. As well observed by the learned respondent
Court, the phrase "exempt from taxation," as employed in the Constitution (supra) should not be interpreted to mean
exemption from all kinds of taxes. And there being no clear, positive or express grant of such privilege by law, in favor
of petitioner, the exemption herein must be denied.
In view here of and considering that as heretofore stated, the assessment at bar had been properly made and the
imposition of the tax is not a violation of the constitutional provision exempting churches, parsonages or convents,
etc. (Art VI, sec. 22 [3], Constitution), the Head of the Diocese, to which the parish Victorias Pertains, is liable for the
payment thereof.

Abra Valley College v. Aquino, 15 June 1988

Are the properties of Abra Valley exempt from real property tax?
Only the ground floor of the college building which is being used and rented by a commercial establishment, the
Northern Marketing Corporation is used exclusively for educational purposes, and thus, not exempted to tax.

As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217 [1916], this Court ruled that
while it may be true that the YMCA keeps a lodging and a boarding house and maintains a restaurant for its
members, still these do not constitute business in the ordinary acceptance of the word, but an institution used
exclusively for 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. (Cooley on Taxation, Vol. 2, p. 1430).

The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution
(Apostolic Prefect v. City Treasurer of Baguio, 71 Phil, 547 [1941]).

It must be stressed however, that while this Court allows a more liberal and non-restrictive interpretation of the
phrase "exclusively used for educational purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935
Philippine Constitution, reasonable emphasis has always been made that exemption extends to facilities which are
incidental to and reasonably necessary for the accomplishment of the main purposes. Otherwise stated, the use of the
school building or lot for commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the
use of the second floor of the main building in the case at bar for residential purposes of the Director and his family,
may find justification under the concept of incidental use, which is complimentary to the main or primary purpose—
educational, the lease of the first floor thereof to the Northern Marketing Corporation cannot by any stretch of the
imagination be considered incidental to the purpose of education.

Herrera v. QC Board of Assessment Appeals, 30 September 1961

Are the properties exempt from real property tax?
YES. It is well settled, in this connection, that the admission of pay-patients does not detract from the charitable
character of a hospital, if all its funds are devoted "exclusively to the maintenance of the institution" as a "public
charity". "In other words, where rendering charity is its primary object, and the funds derived from payments made by
patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that a profit has been
made will not deprive the hospital of its benevolent character".
 Thus, we have held that the U.S.T. Hospital was not established for profit-making purposes, although it had 140
paying beds maintained only to partly finance the expenses of the free wards, containing 203 beds for charity patients.
Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is "not limited to
property actually indispensable" therefor, 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.”
Within the purview of the Constitutional exemption from taxation, the St. Catherine's Hospital is, therefore, a
charitable institution, and the fact that it admits pay-patients does not bar it from claiming that it is devoted
exclusively to benevolent purposes, it being admitted that the income derived from pay-patients is devoted to the
improvement of the charity wards, which represent almost two-thirds (2/3) of the bed capacity of the hospital, aside
from "out-charity patients" who come only for consultation.

Again, the existence of "St. Catherine's School of Midwifery", which, likewise, belongs to petitioners herein, does
not, and cannot, affect the exemption to which St. Catherine's Hospital is entitled under our fundamental law. On the
contrary, it furnishes another ground for exemption. Seemingly, the Court of Tax Appeals was impressed by the fact
that the size of said enrollment and the matriculation fee charged from the students of midwifery warrants the belief
that petitioners derive a substantial profit from the operation of the school aforementioned. Such factor is, however,
immaterial to the issue in the case at bar, for "all lands, building and improvements used exclusively for religious,
charitable or educational purposes shall be exempt from taxation," pursuant to the Constitution, regardless of
whether or not material profits are derived from the operation of the institutions in question. In other words, Congress
may, if it deems fit to do so, impose taxes upon such "profits", but said "lands, buildings and improvements" are
beyond its taxing power.

Is the ruling in this case still applicable under the 1987 Philippine Constitution?
This ruling is no longer applicable because it was promulgated on September 30, 1961 before the 1973 and
1987 Constitutions took effect. If real property is used for one or more commercial purposes, it is not used exclusively
for the exempted purposes but it is subject to taxation.
Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil 352
Are the properties exempt from real property tax?
Yes. The exemption in favor of the convent in the payment of the land tax (sec. 344 [c] Administrative Code)
refers to the home of the parties who presides over the church and who has to take care of himself in order to
discharge his duties. In therefore must, in the sense, include not only the land actually occupied by the church, but
also the adjacent ground destined to the ordinary incidental uses of man. Except in large cities where the density of
the population and the development of commerce require the use of larger tracts of land for buildings, a vegetable
garden belongs to a house and, in the case of a convent, its use is limited to the necessities of the priest, which comes
under the exemption. In regard to the lot which formerly was the cemetery, while it is no longer used as such, neither
is it used for commercial purposes and, according to the evidence, is now being used as a lodging house by the people
who participate in religious festivities, which constitutes an incidental use in religious functions, which also comes
within the exemption.
The judgment appealed from is reversed in all it parts and it is held that both lots are exempt from land tax and the
defendants are ordered to refund to plaintiff whatever was paid as such tax, without any special pronouncement as to
costs.

Is the ruling in this case still applicable under the 1987 Philippine Constitution?
This ruling is no longer applicable because it was promulgated on September 30, 1961 before the 1973 and
1987 Constitutions took effect. If real property is used for one or more commercial purposes, it is not used exclusively
for the exempted purposes but it is subject to taxation. See also case ng Lung Center)

Lung Center of the Philippines v. QC, 29 June 2004

Are the properties exempt from real property tax?
The portions of the land leased to private entities as well as those parts of the hospital leased to private
individuals are not exempt from such taxes. On the other hand, the portions of the land occupied by the hospital and
portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes.
 The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi juris
against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception.
The effect of an exemption is equivalent to an appropriation. Hence, a claim for exemption from tax payments must be
clearly shown and based on language in the law too plain to be mistaken.

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that the petitioner
shall enjoy the tax exemptions and privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation organized primarily to
help combat the high incidence of lung and pulmonary diseases in the Philippines, all donations, contributions,
endowments and equipment and supplies to be imported by authorized entities or persons and by the Board of
Trustees of the Lung Center of the Philippines, Inc., for the actual use and benefit of the Lung Center, shall be exempt
from income and gift taxes, the same further deductible in full for the purpose of determining the maximum
deductible amount under Section 30, paragraph (h), of the National Internal Revenue Code, as amended. It is plain as
day that under the decree, the petitioner does not enjoy any property tax exemption privileges for its real properties as
well as the building constructed thereon.

What is the meaning of the phrase “actually, directly and exclusively”?

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the
petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real
properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as
possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is
defined, "in a manner to exclude; as enjoying a privilege exclusively."40 If real property is used for one or more
commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation.41 The words
"dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the
Constitutions and the law.42 Solely is synonymous with exclusively.
 What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and
immediate and actual application of the property itself to the purposes for which the charitable institution is
organized. It is not the use of the income from the real property that is determinative of whether the property is used
for tax-exempt purposes.

What is the definition and importance of the “test of charity”?

To determine whether an enterprise is a charitable institution/entity or not, the elements which should be
considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the
methods of administration, the nature of the actual work performed, the character of the services rendered, the
indefiniteness of the beneficiaries, and the use and occupation of the properties.

In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing laws, for the
benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of education
or religion, by assisting them to establish themselves in life or otherwise lessening the burden of government.12 It may
be applied to almost anything that tend to promote the well-doing and well-being of social man. It embraces the
improvement and promotion of the happiness of man.13 The word "charitable" is not restricted to relief of the poor or
sick.14 The test of a charity and a charitable organization are in law the same. The test whether an enterprise is
charitable or not is whether it exists to carry out a purpose reorganized in law as charitable or whether it is
maintained for gain, profit, or private advantage.

Did Lung Center pass the test of charity?

The petitioner is a charitable institution within the context of the 1973 and 1987 Constitutions. As a general
principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it
derives income from paying patients, so long as the money received is devoted or used altogether to the charitable
object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating
the institution. Its exemption from the payment of real property will however, depend on the usage of its property.
CIR v. De La Salle University, GR No. 196596, 09 November 2016
What is the argument of the CIR in ruling against the tax exemption of De La Salle? DLSU's rental income is taxable
regardless of how such income is derived, used or disposed of. DLSU's operations of canteens and bookstores within
its campus even though exclusively serving the university community do not negate income tax liability. The
Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be harmonized with Section 30 (H) of
the Tax Code, which states among others, that the income of whatever kind and character of a non-stock and non-
profit educational institution from any of its properties, real or personal, or from any of its activities conducted for
profit regardless of the disposition made of such income, shall be subject to tax imposed by this Code. The
Commissioner argues that the CTA En Banc misread and misapplied the case of Commissioner of Internal Revenue v.
YMCA to support its conclusion that revenues however generated are covered by the constitutional exemption,
provided that, the revenues will be used for educational purposes or will be held in reserve for such purposes. The
Commissioner posits that a tax-exempt organization like DLSU is exempt only from property tax but not from income
tax on the rentals earned from property. Thus, DLSU's income from the leases of its real properties is not exempt from
taxation even if the income would be used for educational purposes.

Is De La Salle exempt from tax?

Yes. The requisites for availing the tax exemption under Article XIV, Section 4 (3), namely:
(1) the taxpayer falls under the classification non-stock, non-profit educational institution; and
(2) the income it seeks to be exempted from taxation is used actually, directly and exclusively for educational
purposes.

A plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the revenues
and income must have also been sourced from educational activities or activities related to the purposes of an
educational institution. The phrase all revenues is unqualified by any reference to the source of revenues. Thus, so
long as the revenues and income are used actually, directly and exclusively for educational purposes, then said
revenues and income shall be exempt from taxes and duties. Thus, when a non-stock, non-profit educational
institution proves that it uses its revenues actually, directly, and exclusively for educational purposes, it shall be
exempted from income tax, VAT, and LBT. On the other hand, when it also shows that it uses its assets in the form of
real property for educational purposes, it shall be exempted from RPT.

We further declare that the last paragraph of Section 30 of the Tax Code is without force and effect for being
contrary to the Constitution insofar as it subjects to tax the income and revenues of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purpose. We make this declaration in the exercise of
and consistent with our duty to uphold the primacy of the Constitution. We stress that our holding here pertains only
to non- stock, non-profit educational institutions and does not cover the other exempt organizations under Section 30
of the Tax Code. For all these reasons, we hold that the income and revenues of DLSU proven to have been used
actually, directly and exclusively for educational purposes are exempt from duties and taxes.

Angeles University v. City of Angeles, GR No. 189999, 27 June 2012

Is Angeles University exempt from paying building permit fee?
No. Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the
AUF is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real
properties are actually, directly and exclusively used for charitable purposes. Exclusive is defined as possessed and
enjoyed to the exclusion of others; debarred from participation or enjoyment; and exclusively is defined, in a manner
to exclude; as enjoying a privilege exclusively. If real property is used for one or more commercial purposes, it is not
exclusively used for the exempted purposes but is subject to taxation. The words dominant use or principal use
cannot be substituted for the words used exclusively without doing violence to the Constitutions and the law. Solely is
synonymous with exclusively. What is meant by actual, direct and exclusive use of the property for charitable
purposes is the direct and immediate and actual application of the property itself to the purposes for which the
charitable institution is organized. It is not the use of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes.
 AUF failed to discharge its burden to prove that its real property is actually, directly and exclusively used for
educational purposes. While there is no allegation or proof that petitioner leases the land to its present occupants, still
there is no compliance with the constitutional and statutory requirement that said real property is actually, directly
and exclusively used for educational purposes. The respondents correctly assessed the land for real property taxes for
the taxable period during which the land is not being devoted solely to petitioners’ educational activities.

CIR v. CA, 14 October 1998 (YMCA)

What is an educational institution?
The term "educational institution" or "institution of learning" has acquired a well-known technical meaning, of
which the members of the Constitutional Commission are deemed cognizant. Under the Education Act of 1982, such
term refers to schools. The school system is synonymous with formal education, which "refers to the hierarchically
structured and chronologically graded learnings organized and provided by the formal school system and for which
certification is required in order for the learner to progress through the grades or move to the higher levels."

Is YMCA an educational institution?

No. The Court has examined the "Amended Articles of Incorporation" and "By-Laws" of the YMCA, but found
nothing in them that even hints that it is a school or an educational institution. Furthermore, under the Education
Act of 1982, even non-formal education is understood to be school-based and "private auspices such as foundations
and civic-spirited organizations" are ruled out. It is settled that the term "educational institution," when used in laws
granting tax exemptions, refers to a school seminary, college or educational establishment. Therefore, the private
respondent cannot be deemed one of the educational institutions covered by the constitutional provision under
consideration.

Is YMCA exempt from income and real property tax?

YMCA is exempt from real property but is not to the extent of income tax. YMCA is exempt from the payment of
property tax, but not income tax on the rentals from its property. The bare allegation alone that it is a non-stock, non-
profit educational institution is insufficient to justify its exemption from the payment of income tax.
 Sec. 27. Exemptions from tax on corporations. — The following organizations shall not be taxed under this Title
in respect (g) Civic league or organization not organized for profit but operated exclusively for the promotion of social
welfare; (h) Club organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, no
part of the net income of which inures to the benefit of any private stockholder or member; xxx Notwithstanding the
provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from
any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the
disposition made of such income, shall be subject to the tax imposed under this Code.

In this case, the exemption claimed by the YMCA is expressly disallowed by the very wording of the last
paragraph of then Section 27 of the NIRC which mandates that the income of exempt organizations (such as the
YMCA) from any of their properties, real or personal, be subject to the tax imposed by the same Code. Because the last
paragraph of said section unequivocally subjects to tax the rent income of the YMCA from its real property, the Court
is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted attempt at
construction. As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence, for the
YMCA to be granted the exemption it claims under the aforecited provision, it must prove with substantial evidence
that (1) it falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be
exempted from taxation is used actually, directly, and exclusively for educational purposes. However, the Court notes
that not a scintilla of evidence was submitted by private respondent to prove that it met the said requisites.

Hon. Kim S. Jacinto Henares, in her official capacity as Commissioner of the Bureau of Internal Revenue v. St.
Paul College of Makati, G.R. No. 215383; 08 March 2017
What are the arguments of the taxpayer?
SPCM alleged that RMO No. 20-2013 imposes as a prerequisite to the enjoyment by non-stock, non-profit
educational institutions of the privilege of tax exemption under Sec. 4(3) of Article XIV of the Constitution both a
registration and approval requirement, i.e., that they submit an application for tax exemption to the BIR subject to
approval by CIR in the form of a Tax Exemption Ruling (TER) which is valid for a period of [three] years and subject to
renewal.
What are the arguments of the CIR?
On 25 July 2016, the present CIR Caesar R. Dulay issued RMO No. 44-2016, which provides that in line with
the Bureau's commitment to put in proper context the nature and tax status of non-profit, non-stock educational
institutions, this Order is being issued to exclude non-stock, non-profit educational institutions from the coverage of
Revenue Memorandum Order No. 20-2013, as amended.

"All revenues and assets of non-stock, non-profit educational institutions used actually, directly and
exclusively (or educational purposes shall be exempt from taxes and duties."

This constitutional exemption is reiterated in Section 30 (H) of the 1997 Tax Code, as amended, which provides
as follows:

"Sec. 30. Exempt from Tax on Corporations. - The following organizations shall not be taxed under this
Title in respect to income received by them as such:
xxx xxx xxx
(H) A non-stock and non-profit educational institution; x x x."

What is the ruling of the Supreme Court regarding these arguments?

The Petition was denied on the ground of mootness.

A moot and academic case is one that ceases to present a justiciable controversy by virtue of supervening
events, so that an adjudication of the case or a declaration on the issue would be of no practical value or use. Courts
generally decline jurisdiction over such case or dismiss it on the ground of mootness.
 With the issuance of RMO No. 44-2016, a supervening event has transpired that rendered this petition moot
and academic, and subject to denial. The CIR, in her petition, assails the RTC Decision finding RMO No. 20-2013
unconstitutional because it violated the non-stock, non-profit educational institutions' tax exemption privilege under
the Constitution. However, subsequently, RMO No. 44-2016 clarified that non-stock, nonprofit educational
institutions are excluded from the coverage of RMO No. 20-2013. Consequently, the RTC Decision no longer stands,
and there is no longer any practical value in resolving the issues raised in this petition.

It is clear and unmistakable from the aforequoted constitutional provision that non-stock, non-profit
educational institutions are constitutionally exempt from tax on all revenues derived in pursuance of its purpose as an
educational institution and used actually, directly and exclusively for educational purposes. This constitutional
exemption gives the non-stock, non-profit educational institutions a distinct character. And for the constitutional
exemption to be enjoyed, jurisprudence and tax rulings affirm the doctrinal rule that there are only two requisites: (1)
The school must be non-stock and non-profit; and (2) The income is actually, directly and exclusively used for
educational purposes. There are no other conditions and limitations.

CIR v. Ateneo De Manila University, CTA Case No. 7246, 11 March 2010
What are the arguments of the taxpayer regarding the tax exemption of Ateneo?
Petitioner argues that revenue from concession fees it received for the fiscal years ending March 3I, 200I, March
31, 2002, and March 3 I, 2003 were actually, directly, and exclusively used for educational purposes. Thus, it should
be exempted from income tax.

What are the arguments of the CIR?

Respondent's argument is that Section 4(3), Article XIV of the 1987 Constitution requires that the canteen must
be owned and operated by the educational institution, not by concessionaires.
Petitioner also relies on the application of the Abra Valle/ case to bolster its argument that respondent is liable for
deficiency income tax and VAT.
What is the ruling of the Supreme Court regarding these arguments?
In Commissioner of Internal Revenue vs. Court of Appeals, the Supreme Court gave only two requirements that
the educational institution must prove, that: (I) it falls under the classification nonstock, non-profit educational
institution, and (2) the income it seeks to be exempted from taxation is used actually, directly, and exclusively for
educational purposes.

As regards the first requisite, the parties already stipulated that petitioner is a non-stock, non-profit educational
institution. Hence, no evidence is necessary to prove the same. As regards the second requisite, petitioner's witness,
Mr. Jose P. Salvador, Jr., testified that the canteen in Grade School is used as a medium for teaching Preparatory
Level and Grade School students since it links the students' classroom lessons with practical
applications in real life.

Petitioner's witness, Ms. Leonora P. Wijancho, affirmed that income from cafeteria concession fees is
commingled with the other funds that make up 'other educational income,' and such income is made available for
school operations such as salaries, employee benefits, faculty development, supplies and expenses, new books,
scholarships, research, new equipment, and major improvements.

From the foregoing, this Court holds that petitioner has proven that the concession fees it received for the fiscal
years ending March 3 I, 200 I, March 31 , 2002, and March 3 I, 2003 were actually, directly, and exclusively used for
educational purposes.

The Abra Valley College case is not applicable in the instant case as it involves property tax and the
interpretation of Article VI, Section 22, paragraph 3 of the 1935 Philippine Constitution (now Article VI, Section 28,
paragraph 3 of the 1987 Philippine Constitution). The present case involves income tax, the VAT and the construction
of Article XIV, Section 4, paragraph 3 of the 1987 Constitution.
ABAKADA Guro Party List, et al., v. The Honorable Executive Secretary Eduardo Ermita, et al., G.R. No.
168056, 1 September 2005
Is it legally permissible for the Senate to adopt its own version of a revenue bill? Explain extensively.
Yes. To begin with, it is not the law – but the revenue bill – which is required by the Constitution to originate
exclusively in the House of Representatives. It is important to emphasize this, because a bill originating in the House
may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. At this point, what
is important to note is that, as a result of the Senate action, a distinct bill may be produced.

To insist that a revenue statute – and not only the bill which initiated the legislative process culminating in the
enactment of the law – must substantially be the same as the House bill would be to deny the Senate’s power not only
to concur with amendments but also to propose amendments. It would be to violate the coequality of legislative power
of the two houses of Congress and in fact make the House superior to the Senate. The Senate can propose its own
version even with respect to bills which are required by the Constitution to originate in the House.

Does RA No. 9337 infringe the constitutional requirement that a revenue bill must originate exclusively from the House of
Representatives?
No. As the Court has said, the Senate can propose amendments and in fact, the amendments made on
provisions in the tax on income of corporations are germane to the purpose of the house bills which is to raise
revenues for the government. Likewise, the Court finds the sections referring to other percentage and excise taxes
germane to the reforms to the VAT system, as these sections would cushion the effects of VAT on consumers.
Considering that certain goods and services which were subject to percentage tax and excise tax would no longer be
VAT-exempt, the consumer would be burdened more as they would be paying the VAT in addition to these taxes.
Thus, there is a need to amend these sections to soften the impact of VAT.
 MODULE IV: Doctrines and Principles in Taxation

Rene A.V. Saguisag, et al. v. Executive Secretary Paquito N. Ochoa, Jr., et al., G.R. Nos. 212426;
12 January 2016
What are the requisites of a taxpayer’s suit?
For a taxpayer’s suit to prosper, two requisites must be met namely, (1) public funds derived from taxation are
disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some irregularity is
committed; and (2) the petitioner is directly affected by the alleged act.

Was there a validly filed taxpayer’s suit?

The court agrees with the OSG that the petitions cannot qualify as taxpayers' suits. The SC emphasizes that a
taxpayers' suit contemplates a situation in which there is already an appropriation or a disbursement of public funds.
A reading of Article X(l) of EDCA would show that there has been neither an appropriation nor an authorization of
disbursement of funds. The cited provision reads: “All obligations under this Agreement are subject to the availability
of appropriated funds authorized for these purposes. This provision means that if the implementation of EDCA would
require the disbursement of public funds, the money must come from appropriated funds that are specifically
authorized for this purpose. Under the agreement, before there can even be a disbursement of public funds, there
must first be a legislative action. Until and unless the Legislature appropriates funds for EDCA, or unless petitioners
can pinpoint a specific item in the current budget that allows expenditure under the agreement, we cannot at this
time rule that there is in fact an appropriation or a disbursement of funds that would justify the filing of a taxpayers'
suit.

Republic v. Heirs of Cesar Jalandoni, 20 Sept 1965

What were the alleged acts constituting evasion of tax?
1. That the market value of the lands reported in the return filed by Cesar Jalandoni was under declared The
difference between the amounts appearing in the returns filed and the undeclared properties of the estate of the
deceased is a substantial understatement of the true value of the estate in question.
 2. That seven lots belonging to the estate of the deceased including their improvements, were omitted from the
return.
3. A substantial understatement of stocks;

Was there tax evasion?

None. There was no tax evasion.

Of the seven lots alleged to have been excluded from the return, three were actually included. As the record
shows, these three lots were already declared in the return submitted by Bernardino Jalandoni as part of his property
and his wife for purposes of income tax, there is reason to believe that their omission from the return submitted by
Cesar Jalandoni was merely due to an honest mistake or inadvertence as properly explained by appellants.

The same thing may be said with regard to the alleged undervaluation of certain sugar and rice lands reported
by Cesar Jalandoni, for the same can at most be considered as the result of an honest difference of opinion and not
necessarily an intention to commit fraud. Certainly if there is any mistake in the valuation made by Jalandoni the
same can only be considered as honest mistake, or one based on excusable inadvertence, he being not an expert in
appraising real estate. The deficiency assessment, moreover, was made by the Collector of Internal Revenue more than
five years from the filing of the return, and experience shows that such an intervening period is sufficiently long to,
warrant an increase in value of real estate which is precisely what was found by the Collector of Internal Revenue with
regard to the lands in question. It is certainly an error to impute fraud based on an honest difference of opinion.

The court finds it unreasonable to impute with regard to the appraisal made by appellants of the shares of
stock, simply because Cesar Jalandoni placed in his return an aggregate market value instead of mentioning the book
value declared by said corporations in the returns filed by them with the Bureau of Internal Revenue. The fact that the
value given in the returns did not tally with the book value appearing in the corporate books is not in itself indicative
of fraud especially when we take into consideration the circumstance that said book value only became known several
months after the death of the deceased. Moreover, it is a known fact that stock securities frequently fluctuate in value
and a mere difference of opinion in relation thereto cannot serve as proper basis for assessing an intention to defraud
the government.

Having reached the conclusion that, the heirs of the deceased have not committed any act indicative of an
intention to evade the payment of the inheritance or estate taxes due the government, as evidenced by their
willingness in the past to pay all the taxes properly assessed against them.

CIR v. Norton and Harrison, 31 August 1964

What were the alleged acts constituting evasion of tax?
The acquisition of all the stocks of the Jackbilt by the Norton & Harrison Co., merged the two corporations into
a single corporation and should not be taxed separately.

Jackbilt is merely an adjunct, business conduit or alter ego, of Norton and Harrison and that the fiction of
corporate entities, separate and distinct from each, should be disregarded.

The offices of Norton and Jackbilt are located in the same compound. Payments were effected by Norton of
accounts for Jackbilt and vice versa. Payments were also made to Norton of accounts due or payable to Jackbilt and
vice versa.

If the income of Norton should be considered separate from the income of Jackbilt, then each would declare
such earning separately for income tax purposes and thus pay lesser income tax. The combined taxable Norton-
Jackbilt income would subject Norton to a higher tax.

Was there tax evasion?

There was tax evasion.
 Based upon the 1954-1955 income tax return of Norton and Jackbilt, and assuming that both of them are
operating on the same fiscal basis and their returns are accurate, we would have the following result: Jackbilt
declared a taxable net income of P161,202.31 in which the income tax due was computed at P37,137.00 whereas
Norton declared as taxable, a net income of P120,101.59, on which the income tax due was computed at P25,628.00.
The total of these liabilities is P50,764.84. On the other hand, if the net taxable earnings of both corporations are
combined, during the same taxable year, the tax due on their total which is P281,303.90 would be P70,764.00. So
that, even on the question of income tax alone, it would be to the advantages of Norton that the corporations should
be regarded as separate entities.

Philippine Acetylene v. CIR, 17 August 1967

(compare with CIR v. Pilipinas Shell Corporation, GR No.188497, 19 February 2014)
Compare both cases in relation to shifting of tax.

In the case of Philippine Acetylene v. CIR, petitioner manufacturer who sold its oxygen and acetylene gases to
NPC, a tax-exempt entity, cannot claim exemption from the payment of sales tax simply because its buyer NPC is
exempt from taxation. The Court explained that the percentage tax on sales of merchandise imposed by the Tax Code
is due from the manufacturer and not from the buyer.

A tax exemption being enjoyed by the buyer cannot be the basis of a claim for tax exemption by the
manufacturer or seller of the goods for any tax due to it as the manufacturer or seller. The excise tax imposed on
petroleum products under Sec. 148 is the direct liability of the manufacturer who cannot thus invoke the excise tax
exemption granted to its buyers who are international carriers.

In the case of CIR v. Pilipinas Shell Corp., there can be no outright exemption from the payment of excise tax on
petroleum products sold to international carriers.
 The Court holds that Sec. 135 (a) should be construed as prohibiting the shifting of the burden of the excise tax
to the international carriers who buys petroleum products from the local manufacturers. Said provision thus merely
allows the international carriers to purchase petroleum products without the excise tax component as an added cost
in the price fixed by the manufacturers or distributors/sellers. Consequently, the oil companies which sold such
petroleum products to international carriers are not entitled to a refund of excise taxes previously paid on the goods.

Can tax liability be shifted?

The tax liability cannot be shifted to the purchaser as the same is imposed by the law on the manufacturer or
producer.

The Tax Code provides that the burden of payment of excise tax is with the manufacturer of the petroleum
products. However, in the long run, the amount of tax to be paid is added to the consumer as part of the price. The
method of listing the price and the tax separately and defining taxable gross receipts as the amount received less the
amount of the tax added, merely avoids payment by the seller of a tax on the amount of the tax. Nonetheless, the
effect would still be the same. Even if the purchaser pay the seller more for the goods, the tax liability is still with the
producer.

Therefore, the tax burden is not even shifted to purchaser at all.

Silkair Singapore v. CIR, GR No. 173594, 6 February 2008

Was the tax liability shifted?
The tax liability was not shifted to Silkair Singapore since Petron Corp. did not pass the burden of the tax to the
latter, and even if it did, the additional amount for jet fuel is not a tax but part of the price which Silkair had to pay as
a purchaser.

Section 130 (A)(2) of the NIRC provides that unless otherwise specifically allowed, the return shall be filed and
the excise tax paid by the manufacturer or producer before removal of domestic products from place of production.
The burden of paying the excise tax for petroleum products sold to international carriers is with the manufacturer or
producer. If the tax is added to the cost of the goods sold to buyer, it is no longer a tax but a part of the price.

Hence, the burden of tax was not shifted to Silkair. Assuming arguendo that the tax was added to the cost of the
petroleum products, the same cannot be considered as tax but a part of the price which the international carriers had
to pay to obtain the article.

Can Silkair file a claim for refund?

Silkair cannot file a claim for refund because the right to claim for the refund of excise taxes paid on petroleum
products lies with Petron Corp. who paid and remitted the same to the BIR.

Pursuant to the NIRC, the excise tax on petroleum products sold to international carriers is the direct liability of
the manufacturer or producer. Upon its payment, any claim for refund should be filed also by the manufacturer or
producer, being the taxpayer contemplated under the law.

Therefore, it is Petron who should file a claim for refund having the statutory right to do so. Silkair cannot claim
for refund being a mere purchaser of the petroleum products.

CIR v. Estate of Benigno Toda Jr., G.R. No. 147188. September 14, 2004
What are the elements of tax evasion?
Tax evasion 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. Tax evasion connotes the integration of three factors:
1) the end to be achieved which consists of non-payment of tax or payment of tax less than what is legally due
to the taxpayer;
(2) an accompanying state of mind which is evil, in bad faith, willful, or deliberate and not accidental; and
(3) an unlawful course of action or failure of action
Was there tax evasion?
There was tax evasion in this case as the scheme resorted to by Cibeles Insurance Corporation (CIC) to reduce
the tax liability cannot be considered a legitimate tax planning because it is tainted with fraud.

Tax evasion is one of the two most common ways used by taxpayers in escaping from taxation. Under this
method, the taxpayer resorts to unlawful course of action which consists of bad faith, willful or deliberate state of
mind in order to escape payment of tax or to pay tax less than what is due to him. When availed of, this unlawful
scheme subjects the taxpayer to civil or criminal liabilities.

All the factors of tax evasion are present in this case. CIC made it appear that there were two sales of the
subject properties – from CIC to Altonaga and then from Altonaga to RMI. This scheme was adapted in order to reduce
the tax liability from 35% corporate income tax, which is the tax legally due to CIC, to 5% individual capital gains tax.
The sale of Altonaga was made in order to mitigate tax liabilities rather than for legitimate business purposes.
CIR v. CA and Ateneo, 18 April 1997
How should ambiguities in the law be construed?
A statute will not be construed as imposing a tax unless it does so clearly expressly, unambiguously. The Court
takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that" (a) statute will not be
construed as imposing a tax unless it does so clearly, expressly, and unambiguously. . . (A) tax cannot be imposed
without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in
construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be
extended by implication." Parenthetically, in answering the question of who is subject to tax statutes, it is basics 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.

What was the argument of Ateneo in excluding itself from liability?

That Ateneo is a non-stock, non-profit educational institution with auxiliary units and branches all over the
Philippines. One such auxiliary unit is the Institute of Philippine Culture (IPC), which has no legal personality
separate and distinct from that of private Respondent. The IPC is a Philippine unit engaged in social science studies of
Philippine society and culture. Occasionally, it accepts sponsorships for its research activities from international
organizations, private foundations and government agencies.
What was the argument of the CIR regarding Ateneo’s tax liability?
CIR contends that the respondent court erred in holding that private respondent is not an "independent
contractor" within the purview of Section 205 of the Tax Code. To CIR, the term "independent contractor", as defined
by the Code, encompasses all kinds of services rendered for a fee and that the only exceptions are the following:

‘a. Persons, association and corporations under contract for embroidery and apparel for export and gross
receipts of or from pioneer industry registered with the Board of Investment under R.A. No. 5186;
 b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section 182 [b] of the Tax
Code); and

c. Regional or area headquarters established in the Philippines by multinational corporations, including their
alien executives, and which headquarters do not earn or derive income from the Philippines and which act as
supervisory, communication and coordinating centers for their affiliates, subsidiaries or branches in the Asia
Pacific Region (Section 205 of the Tax Code).’

CIR thus submits that since private respondent falls under the definition of an "independent contractor" and is
not among the aforementioned exceptions, private respondent is therefore subject to the 3% contractor’s tax imposed
under the same Code."

What was the ruling of the Supreme Court regarding these arguments?
The court stressed that Ateneo is a non-stock, non-profit educational corporation. The fact that it accepted
sponsorship for IPC’s unfunded projects is merely incidental. For, the main function of the IPC is to undertake
research projects under the academic agenda of the private Respondent. Moreover, the records do not show that in
accepting sponsorship of research work, IPC realized profits from such work. On the contrary, the evidence shows that
for about 30 years, IPC had continuously operated at a loss, which means that sponsored funds are less than actual
expenses for its research projects. That IPC has been operating at a loss loudly bespeaks of the fact that education
and not profit is the motive for undertaking the research projects.

Then, too, granting arguendo that IPC made profits from the sponsored research projects, the fact still remains
that there is no proof that part of such earnings or profits was ever distributed as dividends to any stockholder, as in
fact none was so distributed because they accrued to the benefit of the private respondent which is a non-profit
educational institution.

Commissioner of Internal Revenue v. SM Prime Holdings, Inc., G.R. No. 183505, 26 February 2010
How should tax laws be construed?
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT on the gross
receipts of cinema/theater operators or proprietors derived from admission tickets. The removal of the prohibition
under the Local Tax Code did not grant nor restore to the national government the power to impose amusement tax on
cinema/theater operators or proprietors. Neither did it expand the coverage of VAT. Since the imposition of a tax is a
burden on the taxpayer, it cannot be presumed nor can it be extended by implication. A law will not be construed as
imposing a tax unless it does so clearly, expressly, and unambiguously. As it is, the power to impose amusement tax
on cinema/theater operators or proprietors remains with the local government.

Moreover, contrary to the view of petitioner, respondents need not prove their entitlement to an exemption from
the coverage of VAT. The rule that tax exemptions should be construed strictly against the taxpayer presupposes that
the taxpayer is clearly subject to the tax being levied against him.The reason is obvious: it is both illogical and
impractical to determine who are exempted without first determining who are covered by the provision.[62] Thus,
unless a statute imposes a tax clearly, expressly and unambiguously, what applies is the equally well-settled rule that
the imposition of a tax cannot be presumed.[63] In fact, in case of doubt, tax laws must be construed strictly against
the government and in favor of the taxpayer.

CIR v. SC Johnson and Son, 26 June 1999

What are tax treaties?
It is a bilateral agreement between 2 states.

What are the purposes of tax treaties?

The purpose of these international agreements is to reconcile the national fiscal legislation of the contracting
parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. 10 More precisely, the
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.
What are the two methods in avoiding the effects of double taxation?
Double taxation usually takes place when a person is resident of a contracting state and derives income from, or
owns capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate
double taxation, a tax treaty resorts to several methods. 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.

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 — the exemption method
and the credit method. In the 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. On the other hand, in 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. 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.

How was the tax avoided in this case?

In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a
part of the tax in the expectation that the tax given up for this particular investment is not taxed by the other country.
Thus the petitioner correctly opined that the phrase "royalties paid under similar circumstances" in the most favored
nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that are tax-related".

In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use
property or rights, i.e. trademarks, patents and technology, located within the Philippines. 17 The United States is the
state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty,
the state of residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that
may be collected by the state of source. 18 Furthermore, the method employed to give relief from double taxation is
the allowance of a tax credit to citizens or residents of the United States (in an appropriate amount based upon the
taxes paid or accrued to the Philippines) against the United States tax, but such amount shall not exceed the
limitations provided by United States law for the taxable year. 19 Under Article 13 thereof, the Philippines may impose
one of three rates — 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid by a
corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; or the
lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a
resident of a third state.

Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against German income and
corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other hand,
Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for double taxation, does
not provide for similar crediting of 20% of the gross amount of royalties paid.

Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue, 19 August 2013
Can an administrative issuance add conditions to the grant of tax exemption under a tax treaty?
No. An administrative issuance cannot add conditions to the grant of tax exemption when such requirements
would negate the availment of the reliefs provided for under the tax treaty.

In the case of Deutsche Bank AG Manila vs. CIR, the court ruled that 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.
 An administrative issuance 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 comply with the conditions under the administrative issuance would impair the value of
the tax treaty. At most, the application for a tax treaty relief from the administrative issuance should merely operate to
confirm the entitlement of the taxpayer to the relief.

Air Canada v. Commissioner of Internal Revenue, G.R. 169507; 11 January 2016

Can a tax treaty be used in justifying the taxability of the income of a foreign corporation? Yes. While petitioner is
taxable as a resident foreign corporation under Section 28(A)(1) of the 1997 National Internal Revenue Code on its
taxable income116 from sale of airline tickets in the Philippines, it could only be taxed at a maximum of 1 1/2% of
gross revenues, pursuant to Article VIII of the Republic of the Philippines-Canada Tax Treaty that applies to petitioner
as a "foreign corporation organized and existing under the laws of Canada."

Tax treaties form part of the law of the land, and jurisprudence has applied the statutory construction principle
that specific laws prevail over general ones.

The Agreement between the government of the Republic of the Philippines and the government of Canada on Air
Transport, entered into on January 14, 1997, reiterates the effectivity of Article VIII of the Republic of the Philippines-
Canada Tax Treaty.

Petitioner's income from sale of ticket for international carriage of passenger is income derived from
international operation of aircraft. The sale of tickets is closely related to the international operation of aircraft that it
is considered incidental thereto.

By reason of our bilateral negotiations with [Canada], we have agreed to have our right to tax limited to a certain
extent." Thus, we are bound to extend to a Canadian air carrier doing business in the Philippines through a local sales
agent the benefit of a lower tax equivalent to 1 1/2% on business profits derived from sale of international air
transportation.

Mitsubishi Corporation v. CIR, 05 June 2017

What is an exchange of notes? Is it a tax treaty?
Case law explains that an exchange of notes is considered as an executive agreement, which is binding on the
State even without Senate concurrence.

In Abaya v. Ebdane: An "exchange of notes" is a record of a routine agreement that has many similarities with
the private law contract. The agreement consists of the exchange of two documents, each of the parties being in the
possession of the one signed by the representative of the other. Under the usual procedure, the accepting State
repeats the text of the offering State to record its assent. The signatories of the letters may be government Ministers,
diplomats or departmental heads. The technique of exchange of notes is frequently resorted to, either because of its
speedy procedure, or, sometimes, to avoid the process of legislative approval.
It is stated that "treaties, agreements, conventions, charters, protocols, declarations, memoranda of understanding,
modus vivendi and exchange of notes" all refer to "international instruments binding at international law."

Significantly, an exchange of notes is considered a form of an executive agreement, which becomes binding
through executive action without the need of a vote by the Senate or Congress.

What is tax assumption?

In this case, a provision for tax assumption in the Exchange of Notes was provided to wit:
“The Government of the Republic of the Philippines will, itself or through its executing agencies or instrumentalities,
assume all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and nationals operating
as suppliers, contractors or consultants on and/or in connection with any income that may accrue from the supply of
products of Japan and services of Japanese nationals to be provided under the Loan.”
 As held by the Court, to "assume" means to take on, become bound as another is bound, or put oneself in place
of another as to an obligation or liability. This means that the obligation or liability remains, although the same is
merely passed on to a different person. In this light, the concept of an assumption is therefore different from an
exemption, the latter being the freedom from a duty, liability or other requirement or a privilege given to a judgment
debtor by law, allowing the debtor to retain a certain property without liability."

Was there a grant of tax exemption in this case?

No. As explicitly worded, the Philippine Government, through its executing agencies (i.e., NPC in this case)
particularly assumed "all fiscal levies or taxes imposed in the Republic of the Philippines on Japanese firms and
nationals operating as suppliers, contractors or consultants on and/or in connection with any income that may
accrue from the supply of products of Japan and services of Japanese nationals to be provided under the [OECF]
Loan."

The Philippine Government's assumption of "all fiscal levies and taxes," which includes the subject taxes, is
clearly a form of concession given to Japanese suppliers, contractors or consultants in consideration of the OECF
Loan, which proceeds were used for the implementation of the Project. As part of this, NPC entered into the June 21,
1991 Contract with Mitsubishi Corporation (i.e., petitioner's head office in Japan) for the engineering, supply,
construction, installation, testing, and commissioning of a steam generator, auxiliaries, and associated civil works for
the Project, which foreign currency portion was funded by the OECF loans. Thus, in line with the tax assumption
provision under the Exchange of Notes, Article VIII (B) (1) of the Contract states that NPC shall pay any and all forms
of taxes that are directly imposable under the Contract.

In this case, it is fairly apparent that the subject taxes in the amount of ₱52,612,812.00 was erroneously
collected from petitioner, considering that the obligation to pay the same had already been assumed by the Philippine
Government by virtue of its Exchange of Notes with the Japanese Government. Hence, it is the Philippine Government,
through the NPC, which should shoulder the payment of the same.
 It bears stressing that the CIR had already acknowledged, through its administrative issuances, that Japanese
contractors involved in the Project are not liable for the subject taxes.

All told, petitioner correctly filed its claim for tax refund under Sections 204 and 229 of the NIRC to recover the
erroneously paid taxes amounting to P44, 288,712.00 as income tax and P8, 324,100.00 as BPRT from the BIR. To
reiterate, petitioner's entitlement to the refund is based on the tax assumption provision in the Exchange of Notes.
Given that this is a case of tax assumption and not an exemption, the BIR is, therefore, not without recourse; it can
properly collect the subject taxes from the NPC as the proper party that assumed petitioner's tax liability.

CIR v. Acosta, GR154068, 3 August 2007

What was the argument of Acosta regarding the applicability of Section 229?
She filed an amended return indicating an overpayment of P 358,274 due to the income taxes withheld and paid
by Intel. Acosta invokes the liberal application of technicalities in tax refund cases.

While the petitioner argues that the 1997 NIRC cannot be applied retroactively as the case involved refund of
taxes withheld on a 1996 income, Acosta as respondent, however, points out that when the petition was filed with the
CTA on April 15, 1999, the 1997 NIRC was already in effect, hence, Section 204(c) should apply, despite the fact that
the refund being sought pertains to a 1996 income tax.

Should the provision of R.A. No. 8424 be applied in this case?

No. The issue on the retroactivity of Section 204(c) of the 1997 NIRC arose because the last paragraph of Section
204(c) was not found in Section 230 of the old Code. After a thorough consideration of this matter, the Court finds
that it cannot give retroactive application to Section 204(c) of RA 8424. It was stressed by the Court that tax laws are
prospective in operation, unless the language of the statute clearly provides otherwise. Moreover, a party seeking an
administrative remedy must not merely initiate the prescribed administrative procedure to obtain relief, but also
pursue it to its appropriate conclusion before seeking judicial intervention in order to give the administrative agency
an opportunity to decide the matter itself correctly and prevent unnecessary and premature resort to court action.
Revenue statutes are substantive laws and in no sense must their application be equated with that of remedial laws
which must be faithfully and strictly implemented.

CIR v. Petron Corporation GR No. 185568, 21 March 2012

Explain prospectivity of laws using the facts of this case.
During the taxable years 1995 to 1998, Petron corp. who was an assignee of various TCCs from various BOI-
registered entities. The same was used as payments for its excise tax liabilities. It was continuously accepted by the
DOF and the BIR’s Collection Program Division. On 2002, CIR assailed an assessment for deficiency taxes on those
taxable years on the ground that the TCCs have been cancelled for being fraudulent as seen on a post-audit
conducted.

The Supreme court ruled in favor of Petron stating that the post-audit may not be used to justify the assessment
for deficiency taxes because TCCs are immediately valid and effective and are not subject to post-audit as a
suspensive condition. Since the TCC’s have already been accepted by the Center as payment for the excise tax
liabilities, it cannot be subsequently cancelled since it has already been applied as payment. Therefore, since the tax
return Petron has filed during 1995-1998 are not fraudulent, there would be no basis for the assessment for the
deficiency taxes.

Nursery Care Corporation; Shoemart, Inc., Star Appliance Center, Inc., H&B, Inc., Supplies
Station, Inc., and Hardware Workshop, Inc. v. Anthony Acevedo, in his capacity as The
Treasurer of Manila; And the City of Manila, G.R. No. 180651, July 30, 2014
Is there double taxation?
Yes, there is double taxation in the case.
 The tax collected by the City of Manila was based on section 15 (Tax on Wholesalers, Distributors or Dealers),
section 17 (Tax on Retailers), and section 21 of the Revenue Code of Manila as condition for the renewal of their
business permit.

First, Same subject matter: Both taxes were imposed on persons who are sold good and services the only
difference is that under section 15 and 17, the persons were identified with particularity (as wholesaler or retailer).

Second, Same purpose: which is to make people conducting business in Manila contribute to city revenues.

Third, same authority: City of Manila

Fourth, same jurisdiction: Within the territorial jurisdiction of the city of Manila

Fifth, same taxing period: per calendar year

Sixth, same kind or character: both local business tax

What are the modes of eliminating double taxation?

The following are the modes of eliminating double taxation:

First, the exemption method. In the 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, the allowance of a credit against
Philippine tax of tax payable in any country other than the Philippines.
 Secondly, the Credit Method. In 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.

Philex Mining Corp. v. CIR G.R. No. 125704 August 29, 1998
Is set-off applicable to taxes?
No, taxes may not be subject to set-off or compensation. For set-off to be applicable, it is required that the
parties involved must be mutual debtors and creditors of each other. Such is not the case for purposes of tax. Taxes
are due to the government in its sovereign capacity, as such, the tax payer is not the creditor of the government.
Therefore, no set-off may take place.

What is the argument of Philex Mining regarding set-off?

According to Philex, credit/refund which it had already obtained should now be effective to off-set its excise tax
liabilities. Since the VAT input credit/refund it has been claiming has been granted, Phliex is contending that it has
now become due and demandable and is already fully liquidated, hence legal compensation may not properly take
place.

What is the ruling of the Supreme Court regarding this argument?

The Supreme Court ruled that the basis of taxes is not the consent of its subjects since the same is pursuant to
the sovereign power of the government. As such, it is not contract, therefore, the government and the taxpayer for the
purposes of tax are not in a creditor-debtor relationship. Hence, even if the refund has already been granted, set-off
may not be applicable because of the nature of the relationship between the tax payer and the government
 MODULE V: General Principles in Income Taxation
CONWI V. CIR
What is income?
Income may be defined as an amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its
equivalent. 4 Income can also be though of as flow of the fruits of one's labor.
Was there an income earned? Explain based on the factual circumstances of the case.
Yes. The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &
Gamble. It was a definite amount of money which came to them within a specified period of time of two years as
payment for their services.
Petitioners argue that since there were no remittances and acceptances of their salaries and wages in US dollars
into the Philippines, they are exempt from the coverage of such circulars. Petitioners forget that they are citizens of the
Philippines, and their income, within or without, and in these cases wholly without, are subject to income tax. Sec. 21,
NIRC, as amended, does not brook any exemption.
Madrigal v. Rafferty
Differentiate income and capital.
The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property
existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money
from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called an
income. Capital is wealth, while income is the service of wealth. A tax on income is not a tax on property. "Income," as
here used, can be defined as "profits or gains."
Was there an income earned? Explain based on the factual circumstances of the case.
 None for Susana. Prior to the liquidation the interest of the wife and in case of her death, of her heirs, is an
interest inchoate, a mere expectancy, which constitutes neither a legal nor an equitable estate, and does not ripen into
title until there appears that there are assets in the community as a result of the liquidation and settlement.
Susana Paterno has no absolute right to one-half the income of the conjugal partnership. Not being seized of a
separate estate, Susana Paterno cannot make a separate return in order to receive the benefit of the exemption which
would arise by reason of the additional tax. As she has no estate and income, actually and legally vested in her and
entirely distinct from her husband's property, the income cannot properly be considered the separate income of the
wife for the purposes of the additional tax.

Sison v. Ancheta,
What are the different types of income tax systems?
Gross System of Income Taxation - As there is practically no overhead expense, these taxpayers are not entitled
to make deductions for income tax purposes because they are in the same situation more or less.
System of Net Income Taxation – Removing all deductible items for all taxpayers within the class and fixing a set
of reduced tax rates to be applied to all of them.
What is the income tax system adopted by the Republic of the Philippines?
Both tax systems are adopted by the Philippines. In the case of the gross income taxation embodied in BP Blg.
135, the, discernible basis of classification is the susceptibility of the income to the application of generalized rules
removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all
of them. Taxpayers who are recipients of compensation income are set apart as a class. As there is practically no
overhead expense, these taxpayers are e not entitled to make deductions for income tax purposes because they are in
the same situation more or less.
On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no
uniformity in the costs or expenses necessary to produce their income. It would not be just then to disregard the
disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the
basis of gross income. There is ample justification then for the Batasang Pambansa to adopt the gross system of
income taxation to compensation income, while continuing the system of net income taxation as regards professional
and business income.
CIR v. Marubeni Corp
What is the subject matter of tax?
For the Port Development Project, the scope of the works under the contract covered turn-key supply, which
included grants of licenses and the transfer of technology and know-how, and the design and engineering, supply and
delivery, construction, erection and installation, supervision, direction and control of testing and commissioning of the
Wharf-Port Complex
For the Philphos Project, the scope of this works required for the completion of the ammonia storage complex
covered the supply, including grants of licenses and transfer of technology and know-how and the design and
engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing
and commissioning of the Ammonia Storage Complex.
What is the classification of the taxpayer?
The taxpayer is a resident foreign corporation. Respondent Marubeni Corporation is a foreign corporation
organized and existing under the laws of Japan. It is engaged in general import and export trading, financing and the
construction business. It is duly registered to engage in such business in the Philippines and maintains a branch
office in Manila.
Where is the source of the income?
The machines and equipment were designed, engineered and fabricated by Japanese firms sub-contracted by
Marubeni from the list of sub-contractors in the technical appendices to each contract.52 All sub-contractors and
manufacturers are Japanese corporations and are based in Japan and all engineering and design works were
performed in that country.
The materials and equipment under Portion I of the NDC Port Project were completely manufactured in Japan
according to the specifications of the project. After manufacture, they were rolled on to a barge and transported to
Isabel, Leyte.59 Upon reaching Isabel, the unloader and loader were rolled off the barge and pulled to the pier to the
spot where they were installed.60 Their installation simply consisted of bolting them onto the pier.
Is the income taxable?
No. Clearly, the service of "design and engineering, supply and delivery, construction, erection and installation,
supervision, direction and control of testing and commissioning, coordination. . . "72 of the two projects involved two
taxing jurisdictions. These acts occurred in two countries — Japan and the Philippines. While the construction and
installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and
supplies were completely designed and engineered in Japan.
CIR v. Juliane BaierNickel
What is the subject matter of tax?
The appointment letter of respondent as agent of JUBANITEX stipulated that the activity or the service which
would entitle her to 10% commission income, are "sales actually concluded and collected through her efforts.
What is the classification of the taxpayer?
The taxpayer is nonresident alien.
Except for the months of July and September 1995, respondent was in the Philippines in the months of March,
May, June, and August 1995,30 the same months when she earned commission income for services allegedly
performed abroad.
Where is the source of the income?
The Court reiterates the rule that "source of income" relates to the property, activity or service that produced the
income. With respect to rendition of labor or personal service, as in the instant case, it is the place where the labor or
service was performed that determines the source of the income. There is therefore no merit in petitioner’s
interpretation which equates source of income in labor or personal service with the residence of the payor or the place
of payment of the income.
 Except for the months of July and September 1995, respondent was in the Philippines in the months of March,
May, June, and August 1995,30 the same months when she earned commission income for services allegedly
performed abroad. Furthermore, respondent presented no evidence to prove that JUBANITEX does not sell
embroidered products in the Philippines and that her appointment as commission agent is exclusively for Germany
and other European markets.
Is the income taxable?
Yes. What she presented as evidence to prove that she performed income producing activities abroad, were
copies of documents she allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or designs and
fabrics to be used in the finished products as well as samples of sales orders purportedly relayed to her by clients.
However, these documents do not show whether the instructions or orders faxed ripened into concluded or collected
sales in Germany. At the very least, these pieces of evidence show that while respondent was in Germany, she sent
instructions/orders to JUBANITEX. She thus failed to discharge the burden of proving that her income was from
sources outside the Philippines and exempt from the application of our income tax law. Hence, the claim for tax
refund should be denied.
CIR v. Smart Communications
What is the subject matter of tax?
The subject matter of the tax was the payments made by Smart to Prism for Programming and Consultancy
Services for the installation of the Service Download Manager (SDM) and the Channel Manager (CM), and for the
installation and implementation of Smart Money and Mobile Banking Service SIM Applications (SIM Applications) and
Private Text Platform (SIM Application).
What is the classification of the taxpayer?
Respondent Smart Communications, Inc. is a corporation organized and existing under Philippine law. It is an
enterprise duly registered with the Board of Investments.
Where is the source of the income?
 The source of income for the royalties earned was from the Philippines. On the other hand, the source of the
business profits was from Malaysia.
Is the income taxable?
Yes, but only for the SDM program. It was established during the trial that Prism does not have a permanent
establishment in the Philippines. Hence, "business profits" derived from Prism’s dealings with respondent are not
taxable. The question is whether the payments made to Prism under the SDM, CM, and SIM Application agreements
are "business profits" and not royalties.
 MODULE VI: Concept of Gross Income
CIR v. Filinvest Development Corporation, GR No. 163653, 19 July 2011
What is gross income?
Pursuant to Section 28 of the 1993 NIRC the term gross income is understood to mean all income from whatever
source derived, including, but not limited to the following items: compensation for services, including fees,
commissions, and similar items; gross income derived from business; gains derived from dealings in property, interest;
rents; royalties; dividends; annuities; prizes and winnings; pensions; and partner's distributive share of the gross
income of general professional partnership. While it has been held that the phrase from whatever source derived
indicates a legislative policy to include all income not expressly exempted within the class of taxable income under our
laws, the term income has been variously interpreted to mean cash received or its equivalent the amount of money
coming to a person within a specific time or something distinct from principal or capital.” Otherwise stated, there
must be proof of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of
gross income sought to be distributed, apportioned or allocated by the CIR.

Explain the concept of gross income in relation to the factual circumstances of the case.
There is no actual or possible showing that the advances FDC extended to its affiliates had resulted to the
interests subsequently assessed by the CIR. For all its harping upon the supposed fact that FDC had resorted to
borrowings from commercial banks, the CIR had adduced no concrete proof that said funds were, indeed, the source
of the advances the former provided its affiliates. It cannot be gainsaid that a mere increase or appreciation in the
value of said shares cannot be considered income for taxation purposes. Since a mere advance in the value of the
property of a person or corporation in no sense constitute the `income specified in the revenue law, it has been held in
the early case of Fisher vs. Trinidad, that it constitutes and can be treated merely as an increase of capital. Hence, the
CIR has no factual and legal basis in assessing income tax on the increase in the value of FDC'd shareholdings in FAC
until the same is actually sold at a profit.

CBK Power Company Limited v. CIR, GR No. 193383-84, 14 January 2015

Is the income taxable?
 No. The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000.
Logically, noncompliance with tax treaties has negative implications on international relations, and unduly
discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-2000 involve an
administrative procedure, these may be remedied through other system management processes, e.g., the imposition of
a fine or penalty. But we cannot totally deprive those who are entitled to the benefit of a treaty for failure to strictly
comply with an administrative issuance requiring prior application for tax treaty relief.

Henderson v. Collector, 1 SCRA 649

Are there fringe benefits received?
Yes. Section 33(B) of the NIRC defines Fringe Benefits as “any good, service, or other benefit furnished or
granted by an employer, in cash or in kind, in addition to basic salaries, to an individual employee which includes
housing benefits.

Are these benefits taxable?

No.

What is Employer’s Convenience Rule?

The convenience of employer test mandates that any employee expenses paid for by the employer must be solely
for the convenience of the employer, and must be incurred on the employer's premises if applicable. If this is the case,
those expenses are not included in the employee's income. The benefit is provided by the employer to the employee but
the benefit is more beneficial to the employer than the employee.

PLDT v. CIR, GR No. 157264, 31 January 2008

Is the income received by the taxpayers taxable?
Yes. With respect to the redundant rank and file employees’ final payment/terminal pay, the cash salary
vouchers relative thereto have no payment acknowledgement receipts. Inasmuch as these cash vouchers were not
signed by the respective employees to prove actual receipt of payment, the same merely serves as proofs of
authorization for payment and not actual payment by the Petitioner of the redundant rank and file employee's
separation pay and other benefits. In other words, Petitioner failed to prove that the rank and file employees were
actually paid separation pay and other benefits. While SGV, the hired accounting firm of PLDT, certified that it had
been able to trace the remittance of the withheld taxes summarized in the Cash Salary Vouchers to the Monthly
Remittance Return of Income Taxes Withheld for the appropriate period covered by the final payment made to the
concerned executives, supervisors, and rank and file staff members of PLDT, the same cannot be appreciated in
PLDT';s favor as the courts cannot verify such claim. While the records of the case contain the Alphabetical List of
Employee from Whom Taxes Were Withheld for the year 1995 and the Monthly Remittance Returns of Income Taxes
Withheld for December 1995, the documents from which SGV, the former to the latter have not been presented.
Failure to present these documents is fatal to PLDT's case.

Commissioner of Internal Revenue V. Secretary of Justice and Philippine Amusement and Gaming
Corporation, G.R. No. 177387, November 09, 2016
What are the fringe benefits received by the employees?
Car Plan to qualified employees. PAGCOR asserted that the car plan was granted not only because it was
necessary to the nature of the trade of PAGCOR but it was also granted for its convenience. The records are lacking in
proof as to whether such benefit granted to PAGCOR's officers were, in fact, necessary for PAGCOR's business or for
its convenience and advantage. Accordingly, PAGCOR should have withheld the FBT from the officers who have
availed themselves of the benefits of the car plan and remitted the same to the BIR.

Are they taxable?

No. R.A. No. 7716, a general law, did not provide for the express repeal of PAGCOR's Charter, which is a special
law; hence, the general repealing clause under Section 20 of R.A. No. 7716 must pertain only to franchises of electric,
gas, and water utilities, while the term other franchises in Section 102 of the NIRC should refer only to transport,
communications and utilities, exclusive of PAGCOR's casino operations.
 MODULE VII: Concept of Deductions

CIR v. Central Luzon Drug Corporation., GR No. 148512, 26 June 2006; and
Bicolandia Drug Corp. v. CIR, GR. 142299, 22 June 2006
What is the difference between deductions and credit?
A tax credit means the amount when claimed shall be treated as a reduction from any tax liability. On the other
hand, a deduction is merely as deduction itself from gross sales as interpreted from the law.

What is the tax treatment of senior’s citizen discount?

The 20% discount required by the Senior’s Citizens Act to be given to senior citizens is a tax credit, not a
deduction from the gross sales of the establishment concerned.

CIR v. Lancaster Philippines, 12 July 2017

What is crop-method?
Crop Year Basis is a method applicable only to farmers engaged in the production of crops which take more
than a year from the time of planting to the process of gathering and disposal. Expenses paid or incurred are
deductible in the year the gross income from the sale of the crops are realized.

Was this method validly adopted by the taxpayer?

Yes. Lancaster, as a business engaged in the production and marketing of tobacco, to adopt the crop method of
accounting. A taxpayer is authorized to employ what it finds suitable for its purpose so long as it consistently does so,
and in this case, Lancaster does appear to have utilized the method regularly for many decades already.

CIR v. Isabela Cultural Corporation. GR No. 172231. 12 February 2007

What is all-events test?
The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be
determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if its basis is
unchangeable; the test is satisfied where a computation may be unknown, but is not as much as unknowable, within
the taxable year. The amount of liability does not have to be determined exactly; it must be determined with
"reasonable accuracy." Accordingly, the term "reasonable accuracy" implies something less than an exact or
completely accurate amount.

When were the expenses incurred? When were they recorded as expense?
The expenses for auditing and legal services were incurred in 1984 and 1985. As to the expenses for security
services, the records show that these expenses were incurred by ICC in 1986. The expenses for security services are
correctly recognized as deductions for the same year.

Can the expenses of the taxpayer be recognized in the year they were recorded?
Yes. Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting,
expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed
as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and
other allowable deductions for the current year but failed to do so cannot deduct the same for the next year.

ING Bank N.V v. CIR , Gr No. 167679, July 22, 2015

When were expenses incurred? When were they recorded as expense?
Petitioner ING Bank accrued or recorded the bonuses as deductible expense in its books. Therefore, its
obligation to withhold the related withholding tax due from the deductions for accrued bonuses arose at the time of
accrual and not at the time of actual payment.

Can the expenses of the taxpayer be recognized in the year they were recorded?
ING Bank already recognized a definite liability on its part considering that it had deducted as business expense
from its gross income the accrued bonuses due to its employees. Underlying its accrual of the bonus expense was a
reasonable expectation or probability that the bonus would be achieved. In this sense, there was already a
constructive payment for income tax purposes as these accrued bonuses were already allotted or made available to its
officers and employees.

CIR v. General Foods Inc., Gr No. 143672, April 24, 2003

Can the expenses be recognized in the year they were recorded?
No. While the subject advertising expense was paid or incurred within the corresponding taxable year and was
incurred in carrying on a trade or business, hence necessary, the parties’ views conflict as to whether or not it was
ordinary. To be deductible, an advertising expense should not only be necessary but also ordinary.

Should the expenses be disallowed?

Yes. The Court finds the subject expense for the advertisement of a single product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under then Section 29 (a) (1)
(A) of the NIRC.

The company’s media advertising expense for the promotion of a single product is doubtlessly unreasonable
considering it comprises almost one-half of the company’s entire claim for marketing expenses for that year under
review.

CM Hoskins v. CIR, Gr No. L-24059, November 28, 1969

Can the expenses be recognized?
No. Hoskins fails to pass the test. CTA was correct in holding that the payment of the company to Mr. Hoskins
of the sum P99,977.91 as 50% share of supervision fees received by the company was inordinately large and could not
be treated as an ordinary and necessary expenses allowed for deduction. It did not pass the test of reasonableness.

Gancayo v. Collector, 1 SCRA 980

Should the expenses be disallowed?
 No. In computing net income, no deduction shall be allowed in respect of any amount paid out for new buildings
or for permanent improvements, or betterments made to increase the value of any property or estate. The cost of farm
machinery, equipment and farm building represents a capital investment and is not an allowable deduction as an item
of expense. Hence, the farming expenses allegedly incurred for clearing and developing the farm which were necessary
to place it in a productive state, were not an ordinary expense but a capital expenditure. Accordingly, they are not
deductible. As for Gancayco's claim for representation expenses, a fraction was disallowed. Such disallowance is
justified by the record, for, apart from the absence of receipts, invoices or vouchers of the expenditures, petitioner
could not specify the items constituting the same, or when or on whom or on what they were incurred.

H. Tambunting, Inc. vs CIR, 29 July 2013

Should the expenses be disallowed?
Yes, the CTA En Bane aptly rejected Tam bunting's claim for deductions due to losses from fire and theft. The
documents it had submitted to support the claim, namely: (a) the certification from the Bureau of Fire Protection in
Malolos; (b) the certification from the Police Station in Malolos; (c) the accounting entry for the losses; and (d) the list
of properties lost, were not enough. What were required were for Tambunting to submit the sworn declaration of loss
mandated by Revenue Regulations 12-77. Its failure to do so was prejudicial to the claim because the sworn
declaration of loss was necessary to forewarn the BIR that it had suffered a loss whose extent it would be claiming as
a deduction of its tax liability, and thus enable the BIR to conduct its own investigation of the incident leading to the
loss. Indeed, the documents Tambunting submitted to the BIR could not serve the purpose of their submission
without the sworn declaration of loss.

Philex Mining Corporation v CIR, GR No. 148187, 16 April 2008

Should the expenses be disallowed?
Yes. PHILEX cannot claim the advances as a bad debt deduction from its gross income. Deductions for income
tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer, who must prove
by convincing evidence that he is entitled to the deduction claimed.27 In this case, petitioner failed to substantiate its
assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its gross income.
Consequently, it could not claim the advances as a valid bad debt deduction.

CIR v. Itogon Suyoc Mines, GR No. L-25399

Should the expenses be disallowed?
No. The Tax Code provides that interest upon the amount determined as a deficiency shall be assessed and shall
be paid upon notice and demand from the CIR. If in any preceding year the tax payer was entitled to a refund of any
amount due as tax, such amount, if not yet refunded, maybe deducted from the tax to be paid. Jurisprudence further
implies that makes even more formidable the case for respondent taxpayer. As there held, the imposition of the
monthly interest was considered as not constituting a penalty "but a just compensation to the state for the delay in
paying the tax, and for the concomitant use by the taxpayer of funds that rightfully should be in the government's
hands"

What is therefore sought to be avoided is for the taxpayer to make use of funds that should have been paid to
the government. Here, in view of the overpayment for the fiscal year 1959-1960, the sum of P13,155.20 had already
formed part of the public funds. It cannot be said, therefore, that respondent taxpayer was guilty of any delay enabling
it to utilize a sum of money that should have been in the government treasury.

The company’s expense deducted cannot then be disallowed, and the company is entitled to refund.

PICOP v. CIR, GR No. L-1069

What is the reason behind the Interest Retention Rule?

The Interest Retention Rule was enacted because big corporations have the habit of purchasing small
corporations for the sole purpose of using the net operating loss of the latter.
 R.A. No. 5186 introduced the carry-over of net operating losses as a very special incentive to be granted only to
registered pioneer enterprises and only with respect to their registered operations. The statutory purpose is to
encourage the establishment and to boost the continued operations of pioneer industries by allowing it to accumulate
its operating losses which is expected during the early years of the enterprise. The law permits the enterprise to offset
such losses against income to be earned by the same in its later years of operation after successful establishment and
regular operations. To promote its economic development goals, the Republic foregoes or defers taxing the income of
the pioneer enterprise until after that enterprise has recovered or offset its earlier losses. The statutory purpose can be
served only if the accumulated operating losses are carried over and charged off against income subsequently earned
and accumulated by the same enterprise engaged in the same registered operations.

In the instant case, to allow the deduction claimed by PICOP would be to permit one corporation to benefit from
the operating losses accumulated by another corporation or enterprise, RPPM. RPPM far from benefiting from the tax
incentive granted by the statute, gave up the struggle and went out of existence. Its former stockholders joined the
much larger group of Picop's stockholders.
 MODULE VIII: Individual Income Taxation
BDO v. Republic of the Philippines, GR NO. 198756, 13 January 2015
What are the incomes a holder of a bond can earn from such bond or any certificate of indebtedness?
Bonds as likened to deposit substitute.
A bond is similar to a bank deposit in the sense that the investor lends money to the issuer and the issuer pays
interest on the invested amount. However, unlike bank deposits, bonds are marketable securities. The market
mechanism provides quick mobility of money and securities. Thus, bondholders can sell their bonds before they
mature to other investors, in turn converting their financial assets to cash. In contrast, deposits, in the form of
savings accounts for instance, can only be redeemed by the issuing bank.
An investor in bonds may derive two (2) types of income:
First, the interest or the amount paid by the borrower to the lender/investor for the use of the lender's money.
Second, the gain, if any, that is earned when the bonds are traded before maturity date or when redeemed at
maturity.
What is the tax treatment of these incomes earned?
Trading gains, or gains realized from the sale or transfer of bonds (i.e., those with a maturity of more than five
years) in the secondary market, are exempt from income tax. On the other hand, gains realized from the trading of
short-term bonds (i.e., those with a maturity of less than five years) in the secondary market are subject to regular
income tax rates (ranging from 5% to 32% for individuals, and 30% for corporations) under Section 32107 of the
National Internal Revenue Code
Will they be possibly exempt from tax?
Interest income received by individuals from longterm deposits or investments with a holding period of not less
than five (5) years is exempt from the final tax.
What is a deposit substitute?
 Section 22(Y) specifically defined "public" to mean "twenty (20) or more individual or corporate lenders at any
one time (20 LENDER RULE). If there are 20 or more lenders, the debt instrument is considered a deposit substitute
and subject to 20% final withholding tax.
What is the tax treatment of the income derived from a deposit substitute?
We held that the number of lenders/investors at every transaction is determinative of whether a debt
instrument is a deposit substitute subject to 20% final withholding tax. When at any transaction, funds are
simultaneously obtained from 20 or more lenders/investors, there is deemed to be a public borrowing and the bonds
at that point in time are deemed deposit substitutes. Consequently, the seller is required to withhold the 20% final
withholding tax on the imputed interest income from the bonds.
DUMAGUETE CATHEDRAL CREDIT COOPERATIVE -VERSUS-CIR, GR NO. 182722, 22 JANUARY 2012
Is the interest income taxable?
No. The National Internal Revenue Code states that a final tax at the rate of twenty percent (20%) is hereby
imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from the
deposit substitutes and from trust funds and similar arrangement x x x for individuals under Section 24(B)(1) and for
domestic corporations under Section 27(D)(1). Considering the members deposits with the cooperatives are not
currency bank deposits nor deposit substitutes, Section 24(B)(1) and Section 27(D)(1), therefore, do not apply to
members of cooperatives and to deposits of primaries with federations, respectively.
CIR -VERSUS-CA AND ANSCOR, G.R. NO. 108576, JANUARY 20, 1999
Is redemption of shares taxable? What is the exception?
Although redemption and cancellation are generally considered capital transactions, as such, they are not
subject to tax. However, it does not necessarily mean that a shareholder may not realize a taxable gain from such
transactions. EXP: if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as
to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution
of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as
taxable income to the extent it represents a distribution of earnings or profits accumulated.
What are the elements for the applicability of the principle of Dividend Equivalence? Dividend Equivalence: if a
corporation cancels or redeems stock issues as a dividend at such time and in such manner as to make the
distribution or cancellation, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the
amount so distributed in redemption or cancelation of the stock shall be considered as taxable income to the extent it
represents a distribution of earnings or profits. This process of issuance redemption amounts to a distribution of cash
dividends, which was just delayed to escape the tax. Elements to consider:
(a) There is redemption or cancellation; (b) the transaction involves stock dividends; and
(c) The "time and manner" of the transaction makes it "essentially equivalent to a distribution of taxable dividends." Of
these, the most important is the third.
Is the redemption of the shares of Don Andres taxable?
In the instant case, there is no dispute that ANSCOR redeemed shares of stocks from a stockholder (Don
Andres) twice (28,000 and 80,000 common shares). But where did the shares redeemed come from? If its source is the
original capital subscriptions upon establishment of the corporation or from initial capital investment in an existing
enterprise, its redemption to the concurrent value of acquisition may not invite the application of Sec. 83(b) under the
1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the redeemed shares are from
stock dividend declarations other than as initial capital investment, the proceeds of the redemption is additional
wealth, for it is not merely a return of capital but a gain thereon. In the case of ANSCOR, the redeemable shares are
from stock dividends, hence, additional wealth subject to income tax.
COMMISSIONER OF INTERNAL REVENUE -VERSUS-GOODYEAR PHILIPPINES, INC., G.R. NO. 216130; 3
AUGUST 2016
Is the imposition of tax by the Commissioner proper?
NO. GTRC is a non-resident foreign corporation, specifically a resident of the US. Thus, pursuant to the cardinal
principle that treaties have the force and effect of law in this jurisdiction, the RP-US Tax Treaty complementarily
governs the tax implications of respondent's transactions with GTRC. Under Article 11 (5)41 of the RP-US Tax Treaty,
the term "dividends" should be understood according to the taxation law of the State in which the corporation making
the distribution is a resident, which, in this case, pertains to respondent, a resident of the Philippines. Accordingly,
attention should be drawn to the statutory definition of what constitutes "dividends," pursuant to Section 73 (A)42 of
the Tax Code which provides that "[t]he term 'dividends' x x x means any distribution made by a corporation to its
shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property." In
light of the foregoing, the Court therefore holds that the redemption price representing the amount of P97,732,314.00
received by GTRC could not be treated as accumulated dividends in arrears that could be subjected to 15% FWT.
REPUBLIC OF THE PHILIPPINES, REPRESENTED BY THE DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS
VS. ARLENE R. SORIANO, G.R. NO. 211666, FEBRUARY 25, 2015
What is the tax imposed on the sale of the property?
Capital gains tax due on the sale of real property is a liability for the account of the seller
Do you agree with the ruling of the Supreme Court?
Yes. since capital gains is a tax on passive income, it is the seller, not the buyer, who generally would shoulder
the tax; in addition, the capital gains tax remains a liability of the seller since it is a tax on the seller's gain from the
sale of the real estate
CIR -VERSUS-UCPB, GR NO. 179063, 23 OCTOBER 2009
What are the rules applicable to the accrual and payment of tax imposed on foreclosure sale of real properties? Discuss.
If the property is an ordinary asset of the mortgagor, the creditable expanded withholding tax shall be due and
paid within ten (10) days following the end of the month in which the redemption period expires.
For purposes of reckoning the one-year redemption period in the case of individual mortgagors, or the three-
month redemption period for juridical persons/mortgagors, the same shall be reckoned from the date of the
confirmation of the auction sale which is the date when the certificate of sale is issued.
Did UCPB pay the tax on time?
Yes. The executive judge approved the issuance of the certificate of sale to UCPB on March 1, 2002.
Consequently, the three-month redemption period ended only on June 1, 2002. Only on this date then did the
deadline for payment of CWT and DST on the extrajudicial foreclosure sale become due.; UCPB had, therefore, until
July 10, 2002 to pay the CWT and July 5, 2002 to pay the DST. Since it paid both taxes on July 5, 2002, it is not
liable for deficiencies

SUPREME TRANSLINER INC. V. BPI FAMILY SAVINGS BANK, G.R. NO. 165617, 25 FEBRUARY 2011
Did the tax accrue?
Considering that herein mortgagors exercised their right of redemption before the expiration of the statutory
one-year period, petitioner bank is not liable to pay the capital gains tax due on the extrajudicial foreclosure sale.
There was no actual transfer of title from the owners-mortgagors to the foreclosing bank. Hence, the inclusion of the
said charge in the total redemption price was unwarranted and the corresponding amount paid by the petitioners-
mortgagors should be returned to them.
CHINA BANKING CORPORATION -VERSUS-COURT OF APPEALS, G.R. NO. 125508. JULY 19, 2000
What are the differences of ordinary asset and capital asset?
Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived from the sale or
exchange of capital assets, and not from any other income of the taxpayer.
Ordinary asset: If the property sold is a capital asset, the income tax due is the normal corporate income tax or
normal income tax, as the case may be. Capital asset : If the real property sold is a capital asset, the income tax due is
g% CGT of the actual value or fair market value, whichever is higher
Ordinary asset: There must be an actual gain or income. Capital asset: The law presumes that there is capital
gain realized.
Is the property involved a capital asset?
 An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results in
either a capital gain or a capital loss. The gain or the loss is ordinary when the property sold or exchanged is not a
capital asset
What is the effect of the classification of the property?
It is very important to determine the kind of income tax applicable on the transaction as well as the tax rates on
the proper tax base.
CIR -VERSUS-FILINVEST DEVELOPMENT CORPORATION, G.R. NO. 163653, 19 JULY 2011
What are the elements of tax-free exchange?
The foregoing provision are as follows:
(a) the transferee is a corporation;
(b) the transferee exchanges its shares of stock for property/ies of the transferor;
(c) the transfer is made by a person, acting alone or together with others, not exceeding four persons; and,
(d) as a result of the exchange the transferor, alone or together with others, not exceeding four, gains
control of the transferee
Was there a tax-free exchange notwithstanding change in the percentage of ownership of Filinvest?
Since the term "control" is clearly defined as "ownership of stocks in a corporation possessing at least fifty-one
percent of the total voting power of classes of stocks entitled to one vote" under Section 34 (c) (6) [c] of the 1993 NIRC,
the exchange of property for stocks between FDC FAI and FLI clearly qualify as a tax-free transaction under paragraph
34 (c) (2) of the same provision. The law would apply even when the exchangor already has control of the corporation
at the time of the exchange.
 MODULE IX: Corporate Income Taxation
Oña v. CIR 45 SCRA 74
Is there an unregistered partnership? Explain.
There is an unregistered partnership.

The Civil Code provides that partnership is a contract whereby two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the profits among
themselves.

In this case, the Tax Court found that instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition, the heirs allowed their properties to remain under the management of
Lorenzo T. Oña and let him use their shares as part of the common fund for their purchase and sale transactions,
even in the payment of their income taxes on their respective shares.

Thus, the Supreme Court held that there is an existing unregistered partnership amongst the heirs.

What are the factual circumstances that led you to this conclusion?
The petitioners in this case did not merely limit themselves to holding the properties inherited by them. During
the past year, some of the said properties were sold at a considerable profit, and with the said profit, petitioners
engaged in the purchase and sale of corporate securities, through Lorenzo T. Oña. Further, all profits from these
ventures were divided among petitioners proportionately in accordance with their respective shares in the inheritance.
From the moment petitioners allowed not only their income from their respective shares of the inheritance but even
adding their inherited properties to be used by Lorenzo as a common fund to undertake several transactions with full
intention of deriving profits to be distributed proportionally amongst themselves.

These facts tantamount to actually contributing income to a common fund and, in effect, they thereby formed an
unregistered partnership within the purview of the provisions of the Tax Code.
Pascual and Dragon v. CIR 166 SCRA 560
Is there an unregistered partnership? Explain.

There is no unregistered partnership.

The Civil Code provides that partnership is a contract whereby two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the profits among
themselves. Moreover, such contract involves the character of habituality peculiar to business transactions engaged in
for the purpose of gain.

In this case, the Tax Court found no evidence that Pascual and Dragon entered into an agreement to contribute
money, property, or industry to a common fund, and that they intended to divide profits among themselves. Further,
the character of habituality is absent in this case because the purchase and sale events that has transpired are mere
isolated transactions.

What are the factual circumstances that led you to this conclusion?
Pascual and Dragon bought two parcels of land in 2016. They did not sell the same nor make any improvements
thereon. After 11 months, they bought another three parcels of land from one seller. It was only in 2019 when they
sold the two parcels of land after which they did not make any additional or new purchase. The remaining three parcel
were sold by them in 2020. The transactions were isolated. The character of habituality peculiar to business
transactions for the purpose f gain was not present.

The sharing of returns does not in itself establish a partnership whether or not the person sharing therein have
a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of
a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the
whole property.
Obillos v. CIR 139 SCRA 436
Is there an unregistered partnership? Explain.
There is no unregistered partnership.

The Civil Code provides that partnership is a contract whereby two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the profits among
themselves.

There was no intention to form a partnership in this case since the intention of the siblings was to build houses
on the residential lands. As the building of the houses was not feasible because of high cost of construction, their only
choice is to resell the lands and divide the profits among themselves. The profits in this case are merely incidental and
not the main intention of the parties.

What are the factual circumstances that led you to this conclusion?
Jose Obillos, Sr. bought two lots from Ortigas & Co., Ltd., and thereafter transferred his rights to his four
children to enable them to build their residences. In the Torrens title, the petitioners appear as co-owners of the
property. However, the building of the houses was not feasible because of high cost of construction. Allegedly, their
only option at the time was to resell the lands and divide the profits among themselves.

After holding the two lots for more than a year, the petitioners resold them to the Walled City Securities Corporation
and to Olga Cruz. They derived profit from the sale, divided such, and treated the profit as a capital gain and paid
income tax thereon.

Thus, the above narrated facts would only constitute a sale of co-ownership property. Clearly, the siblings had
no intention to form an unregistered partnership.
Evangelista v. CIR 102 Phil 140
Is there an unregistered partnership? Explain.
There is an unregistered partnership.

The Civil Code provides that sharing of gross returns alone on itself whether the persons involved have common
interest over the property does not entail that they formed unregistered partnership. There must be an intention to
form partnership. Moreover, such contract involves the character of habituality peculiar to business transactions
engaged in for the purpose of gain.

The series of transactions will show that the purpose was not limited to the conservation or preservation of the
common fund, or even the properties acquired by them. Such transactions involve contributing money, property, and
industry to a common fund with full intention to profit therefrom. The character of habituality peculiar to business
transactions engaged in for the purpose of gain was present. Thus, there is an unregistered partnership.

What are the factual circumstances that led you to this conclusion?
The siblings borrowed a sum of money from their father which, amount together with their personal funds, was
used by them for the purpose of buying several real properties. The real properties they bought were leased to various
tenants.

The siblings appointed their brother to manage their properties with full power to lease, collect, rent, issue
receipts, and other related business transactions. Through their brother, they had the real properties rented or leased
to various tenants for several years and they gained profits from the rental income.

Thus, the siblings have agreed to, and did, contribute money and property to a common fund with a purpose of
engaging in real estate transactions for monetary gain and then divide the same among themselves.

Air Canada v. Commissioner of Internal Revenue G.R. 169507; 11 January 2016

Is Air Canada a resident foreign corporation? Explain.
Air Canada is a resident foreign corporation.

Pursuant to jurisprudence, an offline international air carrier selling passage tickets in the Philippines, through
a general sales agent, is a resident foreign corporation doing business in the Philippines. As such, it is taxable under
Section 28(A)(1), and not Section 28(A)(3) of the 1997 National Internal Revenue Code, subject to any applicable tax
treaty to which the Philippines is a signatory.

Air Canada is "doing business" or "engaged in trade or business" in the Philippines. Aerotel performs acts or
works or exercises functions that are incidental and beneficial to the purpose of Air Canada's business. The activities
of Aerotel bring direct receipts or profits to Air Canada. Through Aerotel, Air Canada is able to engage in an economic
activity in the Philippines.

Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from sources within
the Philippines. Petitioner's income from sale of airline tickets, through Aerotel, is income realized from the pursuit of
its business activities in the Philippines. While it has no landing rights, such is an offline international air carrier
selling passage tickets in the Philippines, through a general sales agent.

Based on the factual circumstances of the case, will it be subject to tax? What type of tax?
Air Canada will be subject to corporate income tax.

The Supreme Court held that Air Canada is a resident foreign corporation, even if it has no landing rights,
because the said offline international air carrier sells passenger tickets in the Philippines, through a general sales
agent. As such, it is taxable as a resident foreign corporation, and not as a non-resident foreign corporation, subject to
any applicable tax treaty to which the Philippines is a signatory.
 An offline international carrier selling tickets in the Philippines is not subject to Gross Philippine Billings or
Common Carrier’s Tax. However, if there is a sale of ticket in the Philippines, such is subject to Normal Corporate
Income Tax.

CIR v. Proctor and Gamble 204 SCRA 378

What is Tax Sparing Rule?
The ordinary 35% tax rate applicable to dividend remittances to non-resident corporate stockholders of a
Philippine corporation, goes down to 15% if the country of domicile of the foreign stockholder corporation “shall allow”
such foreign corporation a tax credit for “taxes deemed paid in the Philippines,” applicable against the tax payable to
the domiciliary country by the foreign stockholder corporation.

How was it applied in this case?

Proctor and Gamble Philippines is a subsidiary of Proctor and Gamble USA. This means that P&G USA owns
shares of stock of P&G Philippines. If P&G Philippines declares dividends to its stockholders, the dividend income of
P&G USA will depend on the provisions of the tax laws of USA.

If US law grants P&G USA a tax credit for the amount of the dividend tax actually paid from the dividend
remittances to P&G USA. US law grants to P&G USA a deemed paid tax credit.

Applying the provisions of the present NIRC, how much is the tax forgone?
A rate of 15% will be the tax forgone from the original 30% percent.

Manila Banking Corporation v. CIR GR No. 168118 28 August 2006

Is MCIT applicable? Explain.
The Minimum Corporate Income Tax is applicable to Manila Banking.
 Under Revenue Regulation #9-98 stating that the law allows a 4 year period from the time the corporation were
registered with the BIR during which the MCIT should not be imposed.

It was in the year 1999 when Manila Banking commenced business as a thrift bank. The reckoning period of the
4-year grace period imposed by law is from the date of the registration of the Corporation with the SEC or when
Certificate of Authority to Operate was issued by the Monetary Board, whichever comes later.

Hence Manila Banking cannot be imposed tax as early as 2002 because it is entitled to the 4-year grace period
imposed by law to a Corporation who just started its business.

What is the grace period in the imposition of MCIT?

Section 27 (E) of the National Internal Revenue Code states that “a minimum corporate income tax rate of 2% of
the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable
under this Title, beginning fourth taxable year immediately following the year in which such corporation commenced
its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this
Section for the taxable year.

What is the reckoning date of the grace period?

Is this applicable to Manila Banking? The reckoning date for the MCIT to apply would be from the date of
the registration of the Corporation with the SEC or when the Certificate of Authority to Operate was issued by the
Monetary Board, whichever comes later.

CIR v. PAL GR No. 180066; 7 July 2009

Is MCIT applicable? Explain.
It is not applicable. PAL, INC.’s franchise clearly refers to "basic corporate income tax" which refers to the
general rate of 35% (now 30%). In addition, there is an apparent distinction under the Tax Code between taxable
income, which is the basis for basic corporate income tax under Sec. 27 (A) and gross income, which is the basis for
the Minimum Corporate Income Tax under Section 27 (E). The two terms have their respective technical meanings and
cannot be used interchangeably. Not being covered by the Charter which makes PAL liable only for basic corporate
income tax, then Minimum Corporate Income Tax is included in "all other taxes" from which PAL. is exempted.

Cyanamid Phils. v. CA GR No. 108067; 20 January 2000

What is immediacy test?
A taxpayer can avoid imposition of Improperly Accumulated Easrnings Tax, “immediacy test” may be used to
determine the “reasonable needs” of the business. To determine the “reasonable needs” of the business in order to
justify an accumulation of earnings.

Immediacy Test which construed the words “reasonable needs of the business” to mean the immediate needs of
the business and it was generally held that if the corporation did not prove an immediate need for the accumulation of
the earnings and profits, the accumulation was not for the reasonable needs of the business and the penalty tax
would apply.

Should IAET be imposed against Cyanamid?

Yes. Cyanamid failed to prove by clear and convincing evidence that the accumulation was used for the
immediate needs of the business. Hence, when the accumulation was not used for the reasonable needs of the
business then Cyanamid should be liable for IAET.

CIR v. St. Luke’s Medical Center Inc., GR No. 195909, 195960 26 September 2012
Is St. Luke’s a tax-exempt entity? Why?
No. Section 30 of the National Internal Revenue Code provides that a non-stock corporation or association
organized and operated exclusively foe religious, charitable, scientific, athletic or cultural purposes, or for the
rehabilitation of veterans, no part if its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific.
 It is not disputed that although St. Lukes is a non-stock non-profit charitable institution it is not automatically
an exempted entity. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution
must be “organized and operated exclusively” for charitable purposes. Likewise, to be exempt from income taxes,
Section 30(G) of the NIRC requires that the institution be “operated exclusively” for social welfare.
Will its income be subject to tax? Why?
In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts “any”
activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt. This paragraph
qualifies the requirements in Section 30(E) that the “[n]on-stock corporation or association [must be] organized and
operated exclusively for x x x charitable x x x purposes x x x.” It likewise qualifies the requirement in Section 30(G)
that the civic organization must be “operated exclusively” for the promotion of social welfare.

Thus, even if the charitable institution must be “organized and operated exclusively” for charitable purposes, it
is nevertheless allowed to engage in “activities conducted for profit” without losing its tax exempt status for its not-for-
profit activities. The only consequence is that the “income of whatever kind and character” of a charitable institution
“from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to
tax.”

PAGCOR v. BIR G.R. No. 215427, December 10, 2014

Is PAGCOR a tax-exempt entity? Why?
No. The grant of tax exemption or the withdrawal thereof assumes that the person or entity involved is subject
to tax. This is the soundest and logical interpretation because petitioner could not have been exempted from paying
taxes which it was not liable to pay in the first place. This is clear from the wordings of P.D. 1869, as amended,
imposing a franchise tax of five percent (5%) on its gross revenue or earnings derived by petitioner from its operation
under the Franchise in lieu of all taxes of any kind or form, as well as fees, charges or levies of whatever nature, which
necessarily include corporate income tax.

Will its income be subject to tax? Why?

 Yes. The Court sustained petitioner’s contention that its income from gaming operations is subject only to five
percent (5%) franchise tax under P.D. 1869, as amended, while its income from other related services is subject to
corporate income tax pursuant to P.D. 1869, as amended, as well as R.A. No. 9337.

The enactment of RA 9337, which withdrew PAGCOR’s income tax exemption under R.A. No. 8424, only
reinstated their liability for such tax.

British Overseas Airways Corp. v. CIR 149 SCRA 395

Is BOAC subject to GPBT?
No. An offline airline having a branch office or sales agent in the Philippines which sells passage documents for
compensation or commission to cover offline flights of its principal or head office, or for other airline covering flights
originating from Philippine ports or offline flights, is not considered engaged in the business as an international air
carrier in the Philippines and is therefore not subject to Gross Philippine Billings Tax nor 3 % common carrier’s tax. It
is rather liable for corporate income tax as a resident foreign corporation.
Is it subject to income tax?
Yes. The source of an income is the property, activity, or service that produces the income. For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within
the Philippines.

BOAC, during the periods covered by the subject-assessments, maintained a general sales agent in the
Philippines. No doubt that BOAC was "engaged in" business in the Philippines through a local agent during the period
covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within the Philippines.

South African Airways v. CIR G.R. No. 180356, February 16, 2010
IS SAA subject to GPBT?
 No. The general rule is that resident foreign corporations shall be liable for a 32% income tax on their income
from within the Philippines, except for resident foreign corporations that are international carriers that derive income
from carriage of persons, excess baggage, cargo and mail originating from the Philippines which shall be taxed at 2
1/2% of their Gross Philippine Billings.

In this case, SAA does not maintain flights to and from the Philippines. Thus, the same shall not be subject to
Gross Philippine Billings Tax (GPBT).

Is it subject to income tax?

Yes. International air carriers that do not have flights to and from the Philippines but nonetheless earn income
from other activities in the country will be taxed at the rate of 32% of such income.

Will the imposition of income tax on SAA’s income violate the principle of territoriality?
No. An off-line air carriers having general sales agents in the Philippines are engaged in or doing business in the
Philippines and that their income from sales of passage documents here is income from within the Philippines. Thus,
in that case, the Court held the off-line air carrier liable for the 32% tax on its taxable income.
.
 MODULE X: Taxation of Estates and Trusts
Miguel J. Ossorio Pension Foundation, Inc. v. CA and CIR, GR No. 162175, 28 June 2010
Is the sale of the lot subject to trust?
Yes. The sale of the lot subject to is subject to trust. Petitioner has proven that the income from the sale of the
MBP lot came from an investment by the Employees' Trust Fund

What are the requisites for the non-taxability of the income earned by an employees’ trust?
New Internal Revenue Code Sec. 60 (B) The tax imposed by this Title shall not apply to employee's trust which
forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his
employees:

(1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing
to such employees the earnings and principal of the fund accumulated by the trust in accordance with such
plan; and

(2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect
to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used
for, or diverted to, purposes other than for the exclusive benefit of his employees: Provided, That any amount actually
distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that
it exceeds the amount contributed by such employee or distributee.
 MODULE XI: Administrative Requirements
Banas vs CA
Is the sale and installment sale?
Yes. The sale was an installment sale as the initial payment did not exceed 25% of the gross selling price during
the taxable period in which the sale or disposition is made. Initial payment means the payment received in cash or
property excluding evidences of indebtedness due and payable in subsequent years, like promissory notes or
mortgages, given of the purchaser during the taxable year.

In this case, the amount received by the vendor from a third person as a proceed of discounting is not
considered part of the initial payment which makes the total amount received during the taxable year be less than
25% qualifying said sale as an installment sale

When will the income be recognized?

The discounted promissory note is a taxable income for the year it was converted into cash.

Paseo Realty and Development Corp. Vs. CA

State the rule under Section 76 of the NIRC
“In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid,
the excess amount shown on its final adjustment return may be carried over and credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over
and apply the excess quarterly income tax against the income tax due for the taxable quarters of the succeeding
taxable years has been made, such option shall be considered irrevocable for the taxable period and no application for
cash refund or issuance of a tax credit certificate shall be allowed.”

How does it apply in this case?

Section 76 of the NIRC is not applicable in this case as this law was passed after the taxable period which is the
issue in this case. If this was in effect, then excess credits could have been properly applied to its 1990 tax liabilities.
 Taxes are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. A
claim of refund or exemption from tax payments must be clearly shown and be based on language in the law too plain
to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exemption.

Commissioner of Internal Revenue vs. La Flor Dela Isabela

What are withholding taxes?
It is a method of collecting tax in advance.

Portion of the amount received by the income earner which is withheld by the designated withholding agents
and is subsequently credited to the total income tax payable in transactions covered by the EWT. On the other hand,
in cases of income payments subject to WTC and Final Withholding Tax, the amount withheld is already the entire tax
to be paid for the particular source of income. The payee/income earner is the taxpayer while the payor, a separate
entity, acts as the government’s agent for the collection of the tax in order to ensure its payment. He is merely a payee
by fiction of law.