REVIEWER IN TAXATION LAW

Atty. Richard M. Fulleros, CPA, MBA

Part I

GENERAL PRINCIPLES OF TAXATION

FUNDAMENTAL PRINCIPLES IN TAXATION

Taxation

Taxation is the inherent power of the sovereign, exercised through the legislature, to
impose burdens upon subjects and objects within its jurisdiction for the purpose of raising
revenues to carry out the legitimate objects of government.

It is also defined as the act of levying a tax, i.e. the process or means by which the
sovereign, through its law-making body, raises income to defray the necessary expenses
of government. It is a method of apportioning the cost of government among those who,
in some measure, are privileged to enjoy its benefits and must therefore bear its burdens.
It is a mode of raising revenue for public purposes, [Cooley]

Taxes

Taxes are the enforced proportional contributions from persons and property levied by
the law-making body of the State by virtue of its sovereignty for the support of the
government and all public needs, [Cooley]

They are not arbitrary exactions but contributions levied by authority of law, and by some
rule of proportion which is intended to ensure uniformity of contribution and a just
apportionment of the burdens of government.

Thus:
a. Taxes are enforced contributions
Taxes are obligations created by law. [Vera v. Fernandez, 1]. Taxes are never
founded on contract or agreement, and are not dependent for their validity upon
the individual consent of the person taxed.
b. Taxes are proportional in character, since taxes are based on one’s ability to pay.
c. Taxes are levied by authority of law.
     The power to impose taxes is a legislative power; it cannot be imposed by the
executive department nor by the courts.
d.   Taxes are for the support of the government and all its public needs.

1
L-31364, March 30, 1979
ESSENTIAL ELEMENTS OF A TAX

1. It is an enforced contribution.
2.  It is generally payable in money.
3.  It is proportionate in character.
4.  It is levied on persons, property, or the exercise of a right or privilege
(Excise tax).
5.  It is levied by the State which has jurisdiction over the subject or object of
taxation.
6.  It is levied by the law-making body of the State.
7.  It is levied for public purpose or purposes.

PURPOSES OF TAXATION

1.  Revenue or fiscal: The primary purpose of taxation on the part of the government

is to provide funds or property with which to promote the general welfare and the
protection of its citizens and to enable it to finance its multifarious activities.

2.             Non-revenue or regulatory: Taxation may also be employed for purposes

of regulation or control. e.g.:

a)    Imposition of tariffs on imported goods to protect local industries.

b)    The adoption of progressively higher tax rates to reduce inequalities in wealth

and income.

c)     The increase or decrease of taxes to prevent inflation or ward off depression.

PAL v. Edu, 2     

The legislative intent and purpose behind the law requiring owners of vehicles to pay for
their registration is mainly to raise funds for the construction and maintenance of
highways and, to a much lesser degree, pay for the operating expenses of the
administering agency. It is possible for an exaction to be both a tax and a regulation.
License fees are charges, looked to as a source of revenues as well as means of
regulation. The fees may properly be 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.

2
164 SCRA 320
Tio v. Videogram,3

PD 1987 which created the Videogram Regulatory Board also imposed a 30% tax on the
gross receipts payable to the local government. SC upheld the validity of the law ruling
that the tax imposed is not only a regulatory but also a revenue measure prompted by the
realizations that earnings of videogram establishments of around P600 million annually
have not been subject to tax, thereby depriving the government of an additional source of
revenue. It is a user tax imposed on retailers for every video they make available for
public viewing. The 30% tax also served a regulatory purpose: to answer the need for
regulating the video industry, particularly the rampant film piracy, the flagrant violation
of intellectual property rights, and the proliferation of pornographic video tapes.

Caltex v. Commissioner,4

P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF
is taxation. No amount of semantical juggleries could dim this fact.

It is settled that a taxpayer may not offset taxes due from the claims that he may have
against the government. Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other and a claim
for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.

Taxation is no longer a measure merely to raise revenue to support the existence of

government. Taxes may be levied with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry which is affected with public
interest as to be within the police power of the State. The oil industry is greatly imbued
with public interest as it vitally affects the general welfare.

SUMPTUARY PURPOSE OF TAXATION

More popularly known as the non-revenue or regulatory purpose of taxation. While the
primary purpose of taxation is to raise revenue for the support of the government,
taxation is often employed as a devise for regulation by means of which certain effects or
conditions envisioned by the government may be achieved.

For example, government may provide tax incentives to protect and promote new and
pioneer industries. The imposition of special duties, like dumping duty, marking duty,
retaliatory duty, and countervailing duty, promote the non-revenue or sumptuary purpose
of taxation.

3
151 SCRA 208
4
208 SCRA 755
THEORY AND BASIS OF TAXATION

The power of taxation proceeds upon the theory that the existence of government is a
necessity; that it cannot continue without means to pay its expenses; and that for these
means, it has a right to compel all its citizens’ property within its limits to contribute.

The basis of taxation is found in the reciprocal duties of protection and support between
the State and its inhabitants. In return for his contribution, the taxpayer received benefits
and protection from the government. This is the so called “Benefits received principle”.

Taxation has been defined as the power by which the sovereign raises revenue to defray
the necessary expenses of government. It is a way of apportioning the cost of government
among those who in some measure are privileged to enjoy the benefits and must therefore
bear its burden, [51 Am. Jur. 34].

The power of taxation is essential because the government can neither exist nor endure
without taxation. “Taxes are the lifeblood of the government and their prompt and certain
availability is an imperious need”, [Bull v. United States,5]. The collection of taxes must
be made without any hindrance if the state is to maintain its orderly existence.

Government projects and infrastructures are made possible through the availability of
funds provided through taxation. The government’s ability to serve and protect the people
depends largely upon taxes. Taxes are what we pay for a civilized
society, [Commissioner v. Algue,6].

LIFEBLOOD DOCTRINCE

The lifeblood theory constitutes the theory of taxation, which provides that the existence
of government is a necessity; that government cannot continue without means to pay its
expenses; and that for these means it has a right to compel its citizens and property within
its limits to contribute.

In Commissioner v. Algue,7 the Supreme Court said that taxes are the lifeblood of the
government and should be collected without necessary hindrance. They are what we pay
for a civilized society. Without taxes, the government would be paralyzed for lack of
motive power to activate and operate it. 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.

5
295 US. 247, 15 APTR 1069, 1073
6
158 SCRA 9
7
supra
By enforcing the tax lien, the BIR availed itself of the most expeditious way to collect the
tax. Taxes are the lifeblood of the government and their prompt and certain availability is
an imperious need, [CIR v. Pineda,8 ].

The government is not bound by the errors committed by its agents. In the performance
of its governmental functions, the State cannot be estopped by the neglect of its agents
and officers. Taxes are the lifeblood of the nation through which the government agencies
continue to operate and with which the state effects its functions for the welfare of its
constituents. The errors of certain administrative officers should never be allowed to
jeopardize the government’s financial position, [CIR v. CTA,9 ].

The BIR is authorized to collect estate tax deficiency through the summary remedy of
levying upon the sale of real properties of a decision without the cognition and authority
of the court sitting in probate over the supposed will of the decedent, because the
collection of the estate tax is executive in character. As such, the estate tax is exempted
from the application of the statute on non-claims, and this is justified by the necessity of
government funding, immortalized in the maxim “Taxes are the lifeblood of the
government and should be made in accordance with law, as any arbitrariness will negate
the very reason for government itself, [Marcos II v. CA,10 ].

Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. Philex’s claim that it had no obligation to pay the excise tax
liabilities within the prescribed period since it still has pending claims for VAT input
credit/refund with the BIR is untenable, [Philex Mining Corporation v. CIR,11 ]

Illustrations of Lifeblood theory

1.             Collection of taxes cannot be enjoined by injunction.

2.             Taxes could not be the subject of compensation or set off.

3.             A valid tax may result in the destruction of the taxpayer’s property.

4.             Taxation is an unlimited and plenary power.

8
21 SCRA 105
9
234 SCRA 348
10
273 SCRA 47
11
294 SCRA 687
NECESSITY THEORY

Taxation as stated in the case of Phil. Guaranty Co., Inc. v. Commissioner,12 is a power
predicated upon necessity. It is a necessary burden to preserve the State’s sovereignty and
a means to give the citizenry an army to resist aggression, a navy to defend its shores
from invasion, a corps of civil servants to serve, public improvements for the enjoyment
of the citizenry, and those which come within the State’s territory and facilities and
protection which a government is supposed to provide.

BENEFITS RECEIVED PRINCIPLE

This theory bases the power of the State to demand and receive taxes on the reciprocal
duties of support and protection. The citizen supports the State by paying the portion
from his property that is demanded in order that he may, by means thereof, be secured in
the enjoyment of the benefits of an organized society. Thus, the taxpayer cannot question
the validity of the tax law on the ground that payment of such tax will render him
impoverished, or lessen his financial or social standing, because the obligation to pay
taxes is involuntary and compulsory, in exchange for the protection and benefits one
receives from the government.

In return for his contribution, the taxpayer receives the general advantages and protection
which the government affords the taxpayer and his property. One is compensation or
consideration for the other; protection and support.

However, it does not mean that only those who are able to and do pay taxes can enjoy the
privileges and protection given to a citizen by the government.

In fact, from the contribution received, the government renders no special or

commensurate benefit to any particular property or person. The only benefit to which the
taxpayer is entitled is that derived from the enjoyment of the privilege of living in an
organized society established and safeguarded by the devotion of taxes to public purpose.
The government promises nothing to the person taxed beyond what may be anticipated
from an administration of the laws for the general good, [Lorenzo v. Posadas].

Taxes are essential to the existence of the government. The obligation to pay taxes rests
not upon the privileges enjoyed by or the protection afforded to the citizen by the
government, but upon the necessity of money for the support of the State. For this reason,
no one is allowed to object to or resist payment of taxes solely because no personal
benefit to him can be pointed out as arising from the tax, [Lorenzo v. Posadas].

12
13 SCRA 775
DOCTRINE OF SYMBIOTIC RELATIONSHIP

This doctrine is enunciated in CIR v. Algue, Inc.,13 which states that “Taxes are what we
pay for civilized society. Without taxes, the government would be paralyzed for lack of
the motive power to activate and operate it. Hence, despite the natural reluctance to
surrender part of one’s hard-earned income to the taxing authorities, every person who is
able must contribute his share in the burden of running 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 material and moral values.”

What is the scope of the power to tax?

            The power of taxation is the most absolute of all powers of the government [Sison
v. Ancheta14]. It has the broadest scope of all the powers of government because in the
absence of limitations, it is considered as unlimited, plenary, comprehensive and
supreme.
           
However, the power of taxation should be exercised with caution to minimize
injury to the proprietary rights of the taxpayer. It must be exercised fairly, equally, and
uniformly, lest the tax collector kill “the hen that lays the golden egg” [Roxas v. CTA,15].

When is taxation considered as an implement of police power?

            In Walter Lutz v. J. Antonio Araneta,16 the SC upheld the validity of the tax law
increasing the existing tax on the manufacture of sugar. “The protection and promotion of
the sugar industry is a matter of public concern; the legislature may determine within
reasonable bounds what is necessary for its protection and expedient for its promotion. If
objective and methods alike are constitutionally valid, there is no reason why the state
may not levy taxes to raise funds for their prosecution and attainment. Taxation may be
made the implement of the state’s police power.”
           
In Tio v. Videogram Regulatory Board,17 the levy of a 30% tax under PD1987,
was imposed primarily for answering the need for regulating the video industry,
particularly the rampant film piracy, the flagrant violation of intellectual property rights,
and the proliferation of pornographic videotapes, and is therefore valid. While the direct
beneficiaries of the said decree is the movie industry, the citizens are held to be its
indirect beneficiaries.

13
supra
14
130 SCRA 654
15
23 SCRA 276
16
98 Phils. 148
17
supra
What is the concept of fiscal adequacy?

            That the sources of revenues must be adequate to meet government

expenditures,             [Chavez v. Ongpin,18].

Does the collection of tax subject to prescription?

Assessment and collection of taxes is imprescriptible without exception, taxes being the
lifeblood of the government – assessment and collection which is the act of
administration and implementation of the tax law by the executive through its
administrative agencies. It means notice and demand for payment of a tax liability.

THE POWER TO TAX DISTINGUISHED FROM POLICE POWER AND

EMINENT DOMAIN

Taxation distinguished from police power.  Taxation is distinguishable from

police power as to the means employed to implement these public goals.  Those doctrines
that are unique to taxation arose from peculiar considerations such as those especially
punitive effects (Southern Cross Cement Corporation v. Cement Manufacturers
Association of the Philippines, et al.,19) as the power to tax involves the power to destroy
and the belief that taxes are lifeblood of the state. 
         
          How the power of taxation may be used to implement power  of eminent
domain.  Tax measures are but ”enforced contributions exacted on pain of penal sanctions”
and “clearly imposed for public purpose.”  In most recent years, the power to tax has
indeed become a most effective tool to realize social justice, public welfare, and the
equitable distribution of wealth.  (Commissioner of Internal Revenue v. Central Luzon
Drug Corporation,20)

         Establishments granting the 20% senior citizens discount  may claim the discounts
granted to senior citizens as tax deduction based on the net cost of the goods sold or
services rendered: Provided, That the cost of the discount shall be allowed as deduction
from gross income for the same taxable year that the discount is granted. Provided,
further, That the total amount of the claimed tax deduction net of value added tax if
applicable, shall be included in their gross sales receipts for tax purposes and shall be

18
186 SCRA 331
19
GR 158540, August 3, 2005
20
GR 159647, April 16, 2005
subject to proper documentation and to the provisions of the National Internal Revenue
Code, as amended. [M.E. Holding Corporation  v. Court of Appeals, et al.,  21]

Tax Distinguished From Other Fees

1. From  TOLL. Toll is a sum of money for the use of something, generally
applied to the consideration which is paid for the use of a road, bridge or the like,
of a public nature.
A toll is a demand of proprietorship, is paid for the use of another’s property and
may be imposed by the government or private individuals or entities; while a tax
is a demand of sovereignty, is paid for the support of the government and may be
imposed only by the State.
2. From PENALTY. Penalty is any sanction imposed as a punishment for violation
of law or acts deemed injurious. Violation of tax laws may give rise to imposition
of penalty.
A penalty is designed to regulate conduct and may be imposed by the government
or private individuals or entities. Tax, on the other hand, is primarily aimed at
raising revenue and may be imposed only by the government.
3. From SPECIAL ASSESSMENT. Special Assessment is an enforced
proportional contribution from owners of lands for special benefits resulting from
public improvements.
Special Assessment is levied only on land, is not a personal liability of the person
assessed, is based wholly on benefits and is exceptional both as to time and place.
Tax is levied on persons, property, or exercise of privilege, which may be made a
personal liability of the person assessed, is based on necessity and is of general
application.
4. From PERMIT or LICENSE FEE. Permit or License Fee is a charge imposed
under the police power for purposes or regulation.
License fee is imposed for regulation and involves the exercise of police power
while tax is levied forrevenue and involves the exercise of the taxing power.
Failure to pay a license gee makes an act or a business illegal, while failure to
pay a tax does not necessarily make an act or a business illegal.

21
GR 160193, March 3, 2008
 5. From DEBT.  Debt is generally based on contract, is assignable and may be
paid in kind while a tax is based on law, cannot generally be assigned and is
generally payable in money. A person cannot be imprisoned for non-payment of
debt while he can be for non-payment of tax except poll tax.
A tax is considered a debt for purposes of remedies for its enforcement;
6. From REVENUE. Revenue is broader that tax since it refers to all funds or
income derived by the government taxes included. Other sources of revenues are
government services, income from public enterprises and foreign loans.
7. From CUSTOM DUTIES.  Custom duties are taxes imposed on goods
exported  from or imported to a country. Custom duties are actually taxes but the
latter is broader in scope.

DIFFERENT KINDS OF TAXES

a. National
b. Local

National Taxes in the Philippines

Capital Gains Tax – is a tax imposed on the gains presumed to have been realized by the
seller from the sale, exchange, or other disposition of capital assets located in the
Philippines, including pacto de retro sales and other forms of conditional sale.
Documentary Stamp Tax – is a tax on documents, instruments, loan agreements and
papers evidencing the acceptance, assignment, sale or transfer of an obligation, rights, or
property incident thereto. Examples of documentary stamp tax are those that are charged
on bank promissory notes, deed of sale, and deed of assignment on transfer of shares of
corporate stock ownership.
Donor’s Tax – is a tax on a donation or gift, and is imposed on the gratuitous transfer of
property between two or more persons who are living at the time of the transfer. Donor’s
tax is based on a graduated schedule of tax rate.
Estate Tax – is a tax on the right of the deceased person to transmit his/her estate to
his/her lawful heirs and beneficiaries at the time of death and on certain transfers which
are made by law as equivalent to testamentary disposition. Estate tax is also based on a
graduated schedule of tax rate.
Income Tax – is a tax on all yearly profits arising from property, profession, trades or
offices or as a tax on a person’s income, emoluments, profits and the like. Self-employed
individuals and corporate taxpayers pay quarterly income taxes from 1st quarter to 3rd
quarter. And instead of filing quarterly income tax on the fourth quarter, they file and pay
their annual income tax return for the taxable year. Individual income tax is based on
graduated schedule of tax rate, while corporate income tax in based on a fixed rate
prescribe by the tax law or special law.
Percentage Tax – is a business tax imposed on persons or entities who sell or lease
goods, properties or services in the course of trade or business whose gross annual sales
or receipts do not exceed the amount required to register as VAT-registered taxpayers.
Percentage taxes are usually based on a fixed rate. They are usually paid monthly by
businesses or professionals. However, some special industries and transactions pay
percentage tax on a quarterly basis.
Value Added Tax – is a business tax imposed and collected from the seller in the course
of trade or business on every sale of properties (real or personal) lease of goods or
properties (real or personal) or vendors of services. It is an indirect tax, thus, it can be
passed on to the buyer, causing this to increase the prices of most goods and services
bought and paid by consumers. VAT returns are usually filed and paid monthly and
quarterly.
Excise Tax – is a tax imposed on goods manufactured or produced in the Philippines for
domestic sale or consumption or any other disposition. It is also imposed on things that
are imported.
Withholding Tax on Compensation – is the tax withheld from individuals receiving
purely compensation income. This tax is what employers withheld in their employees’
compensation income and remit to the government through the BIR or authorized
accrediting agent.
Expanded Withholding Tax – is a kind of withholding tax which is prescribed only for
certain payors and is creditable against the income tax due of the payee for the taxable
quarter year. Examples of the expanded withholding taxes are those that are withheld on
rental income and professional income.
Final Withholding Tax – is a kind of withholding tax which is prescribed only for
certain payors and is not creditable against the income tax due of the payee for the
taxable year. Income Tax withheld constitutes the full and final payment of the Income
Tax due from the payee on the said income. An example of final withholding tax is the
tax withheld by banks on the interest income earned on bank deposits.
Withholding Tax on Government Money Payments – is the withholding tax withheld
by government offices and instrumentalities, including government-owned or -controlled
corporations and local government units, before making any payments to private
individuals, corporations, partnerships and/or associations.
 

Local Taxes in the Philippines (Based on RA 7160)

Tax on Transfer of Real Property Ownership – tax imposed on the sale, donation,
barter, or on any other mode of transferring ownership or title of real property.
Tax on Business of Printing and Publication – tax on the business of persons engaged
in the printing and/or publication of books, cards, posters, leaflets, handbills, certificates,
receipts, pamphlets, and others of similar nature.
Franchise Tax – tax on businesses enjoying a franchise, at the rate not exceeding fifty
percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar
year based on the incoming receipt, or realized, within its territorial jurisdiction.
Tax on Sand, Gravel and Other Quarry Resources – tax imposed on ordinary stones,
sand, gravel, earth, and other quarry resources, as defined under the National Internal
Revenue Code, as amended, extracted from public lands or from the beds of seas, lakes,
rivers, streams, creeks, and other public waters within its territorial jurisdiction.
Professional Tax – an annual professional tax on each person engaged in the exercise or
practice of his profession requiring government examination.
Amusement Tax – tax collected from the proprietors, lessees, or operators of theaters,
cinemas, concert halls, circuses, boxing stadia, and other places of amusement.
Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or
Producers, Wholesalers of, Dealers, or Retailers in, Certain Products – an annual
fixed tax for every truck, van or any vehicle used by manufacturers, producers,
wholesalers, dealers or retailers in the delivery or distribution of distilled spirits,
fermented liquors, soft drinks, cigars and cigarettes, and other products as may be
determined by the sangguniang panlalawigan, to sales outlets, or consumers, whether
directly or indirectly, within the province.
Tax on Business – taxes imposed by cities, municipalities on businesses before they will
be issued a business license or permit to start operations based on the schedule of rates
prescribed by the local government code, as amended. Take note that the rates may vary
among cities and municipalities. This is usually what businesses pay to get their Business
Mayor’s Permit.
Fees for Sealing and Licensing of Weights and Measures – fees for the sealing and
licensing of weights and measures at such reasonable rates as shall be prescribed by the
sangguniang bayan of the municipality or city.
Fishery Rentals, Fees and Charges – rentals, fees or charges imposed by the
municipality/city to grantees of fishery privileges in the municipal/city waters, e.g.,
fishery privileges to erect fish corrals, oysters, mussels or other aquatic beds or bangus
fry areas and others as mentioned in the local government code, as amended.
Community Tax – tax levied by cities or municipalities to every inhabitant of the
Philippines eighteen (18) years of age or over who has been regularly employed on a
wage or salary basis for at least thirty (30) consecutive working days during any calendar
year, or who is engaged in business or occupation, or who owns real property with an
aggregate assessed value of One thousand pesos (P1,000.00) or more, or who is required
by law to file an income tax return. Community tax is also imposed on every corporation
no matter how created or organized, whether domestic or resident foreign, engaged in or
doing business in the Philippines.
Taxes that may be levied by the barangays on stores or retailers with fixed business
establishments with gross sales of receipts of the preceding calendar year of Fifty
thousand pesos (P50,000.00) or less, in the case of cities and Thirty thousand pesos
(P30,000.00) or less, in the case of municipalities, at a rate not exceeding one percent
(1%) on such gross sales or receipts.
Service Fees or Charges – fees or charges that may be collected by the barangays for
services rendered in connection with the regulations or the use of barangay-owned
properties or service facilities, such as palay, copra, or tobacco dryers.
Barangay Clearance – a reasonable fee collected by barangays upon issuance of
barangay clearance – a document required for many government transactions, such as
when applying for business permit with the city or municipality.
 
New case doctrines on General Principles of Taxation

1. Without a franchise, a local government unit cannot impose franchise tax; power
generation companies no longer required to secure national franchise under RA
No. 9136

National Power Corporation vs. Provincial Government of Bataan,22

2. Tax laws are prospective unless retroactive application is expressly provided

Commissioner of Internal Revenue vs. Philippine National Bank23

3. Supreme Court has prerogative to act on direct actions assailing validity of various
revenue regulations and the like issued by the CIR; PAGCOR and its contractees
not subject to corporate income upon payment of the franchise tax.

Bloombery Resorts and Hotels Inc., vs. Bureau of Internal Revenue,24

4. NGCP liable to pay tax on real estate, buildings and personal property exclusive of
its franchise

National Grid Corporation of the Philippines vs. Ofelia M. Oliva,25

5. Revenues and Income of Non-stock, non-profit educational institutions used

actually, directly and exclusively for educational purposes exempt from taxes and
duties

Commissioner of Internal Revenue vs. Dela Salle University, Inc.26

6. CIR cannot dispute correctness of SALN filed to claim tax amnesty under RA NO.
9480

Commissioner of Internal Revenue vs. Apo Cement Corp.27

7. A charitable institution must be organized and operated exclusively for charitable

or social welfare purposes to be exempt from income tax.
22
GR No. 180654, April 21, 2014
23
GR No. 195147, July 11, 2016
24
GR No. 212530, August 10, 2016
25
GR No. 213157, August 10, 2016
26
GR 196596, November 9, 2016
27
GR 193381, February 8, 2017
 Commissioner of Internal Revenue vs. St. Luke’s Medical Center, Inc.28

8. The tax privilege of PAL provided in Sec. 13 of PD No. 1590 has not been
revoked by section 131 of the 1997 NIRC ad amended by Sec. 6 of RA No. 9334

Commissioner of Internal Revenue and Commissioner of Customs vs.

Philippine Airlines, Inc.29

9. Exemption granted by a special law not repealed by a later general law unless
expressly provided in the latter or when an implied repeal is warranted.

CIR vs. Semirara Mining Corp.30

Tax Administration
1. Written recommendation from the Regional Director of the BIR in lieu of the
Commissioner to file criminal action does not warrant its dismissal

People of the Philippines vs. Tess S. Valeriano,31

2. Reclassification of a fermented liquor and introduced between January 1997 and

December 2003 must be by act of congress

CIR vs. San Miguel Corporation,32

3. The absence of a letter of authority violates the right to due process.

Medicard Philippines Inc., vs. CIR,33

Part 2

28
GR 203514, February 13, 2017
29
GR 215705-07, February 22, 2017
30
GR 202922, June 19, 2017
31
GR 199480, October 12, 2016
32
GR 205045, January 25, 2017
33
GR 222743, April 5, 2017
LIMITATIONS OR RESTRICTIONS ON THE POWER
         
1. Purpose for the limitations on the power of taxation.

The inherent and constitutional limitations to the power of taxation are safeguards which
would prevent abuse in the exercise of this otherwise unlimited and plenary
power.          The limitations also serve as a standard to measure the validity of a tax law or
the act of a taxing authority.  A violation of the limitations serves to invalidate a tax law or
act in the exercise of the power to tax.

INHERENT LIMITATIONS

          a.            Public purpose.  The revenues collected from taxation should be devoted to

a public purpose.
          b.            No improper delegation of legislative authority to tax.  Only the legislature
can exercise the power of taxes unless the same is delegated to some other governmental
body by the constitution or through a law which does not violate any provision of the
constitution.
          c.            Territoriality.  The taxing power should be exercised only within territorial
boundaries of the taxing authority.
          d.            Recognition of government exemptions; and
          e.            Observance of the principle of comity.  Comity is the respect accorded by
nations to each other because they are equals.  On the other hand taxation is an act of
sovereign. Thus, the power should be imposed upon equals out of respect.
          Some authorities include no double taxation.

    2.      What are the principles to consider in the determination of whether tax

revenues are devoted for a public purpose ?
         
a. The tax revenues are for a public purpose if utilized for the benefit of
the community in general.  An alternative meaning is  that tax proceeds
should be utilized only to attain the objectives of government.
b. Inequalities resulting from the singling out of one particular class for
taxation or exemption infringe no constitutional limitation. 
           REASON:  It is inherent in the power to tax that the legislature is free
to select the subjects of taxation.
           BASIS:   The lifeblood theory.
c.   An individual taxpayer need not derive direct benefits from the
tax. 
           REASON:  The paramount consideration is the welfare of the
greater portion of the population.
        d.  A tax may be imposed, not so much for revenue purposes, but
under police power for the general welfare of the community. This
would still be for a public purpose.
       e. Public purpose continually expanding.  Areas formerly left to
private initiative now lose their boundaries and may be undertaken
by the government if it is to meet the increasing social challenges of
the times.
       f.   Tax revenue must not be used for purely private purposes or for
the exclusive benefit of private persons.
 g.  Private persons may be benefited but such benefit should be merely
incidental as its main object is the benefit of the community in
general.
h.    Determined at the time of enactment of tax law and not at the  time
of implementation.
i.    There is a presumption of public purpose even if the tax law does
not specifically provide for its purpose.  (Santos & Co., v.
Municipality of Meycauayan, et al.,34)
 j.   Public use is no longer confined to the traditional notion of use by
the public but held synonymous with public interest, public benefit,
public welfare, and public convenience. (Commissioner of Internal
Revenue v. Central Luzon Drug Corporation,35 )

3.  A law was enacted imposing a tax on manufacturers of coconut oil, the proceeds
of which are to be used exclusively for the protection and promotion of the coconut
industry, namely, to improve the working conditions in coconut  mills and to
conduct research on the use of coconut oil for motor fuel.  Some of the
manufacturers of coconut oil challenge the validity of the law, contending that the
tax is to be used for a private purpose, and therefore, the law violates the rule that
public revenues shall not be appropriated for anything but a public
purpose.   Decide with reason.  
 
            SUGGESTED ANSWER: The levy is for a public purpose.  It cannot be denied
that the coconut industry is one of the major industries supporting the national
economy.   It is, therefore, the state’s concern to make it a strong and secure source not
only of the livelihood of the significant segment of the population, but also
of  export  earnings,  the  sustained growth of which is one of the imperatives of
economic  growth.  (Philippine Coconut Producers Federation, Inc. v. Presidential
Commission on Good Government,36)
           

34
94 Phils. 1047
35
GR 159647, April 16, 2005
36
178 SCRA 236, 252
4.      Requisites for taxpayers, concerned citizens, voters or legislators to have locus
standi to sue.
     a.            In general, the case should involve constitutional issues. David, et al.,
v. President Gloria Macapagal-Arroyo, etc., et al.,37)
     b.         For taxpayers, there must be a showing:
         1)         That tax money is “being extracted and spent in   violation
of specific constitutional protections against
abuses of         legislative power.”   (Flast v. Cohen, 392
U.S.       83)
         2)         That public money is being deflected to
any          improper           purpose (Pascual v. Secretary of Public
Works,38)  or a     claim of illegal disbursement of public
funds          or that the tax    measure is unconstitutional.  (David,
supra)
         3)         A taxpayer is allowed to sue where there is
a       claim     that public funds are illegally disbursed, or that
public         money is being deflected to any improper purpose, or
that          there is a wastage of      public funds through the
enforcement of         an invalid or      unconstitutional law.  (Abaya
v. Ebdane,39; Garcia v. Enriquez, Jr. 40)
                        A taxpayer’s suit is properly brought only when
there        is          an exercise of the spending or taxing power
of             Congress.          (Automotive Industry Workers
Alliance    (AIWA),etc., et al., v. Romulo,     etc. ,et al.,  )
41

            c.          For voters, there must be a showing of obvious interest in the

validity of the election law in question.
            d.         For concerned citizens, there must be a showing that the issues raised
are of transcendental importance which must be settled early.
            e.         For legislators, there must be a claim that the official action
complained of infringes upon their prerogatives as legislators.  (David, et al.,
v. President Gloria Macapagal-Arroyo, etc., et al.,42)
           
            5.         Only those directly affected have locus standi to impugn the alleged
encroachment by the executive department into the legislative domain of Congress.
            a.         Only those who shall be directly affected by such executive encroachment,
such as for example employees who would find themselves subject to disciplinary powers
that may be imposed under the questioned Executive Order as they have a direct and
specific interest in raising the substantive issue therein (Automotive Industry Workers
37
GR 171396, May 3, 2006
38
110 Phils.33
39
GR 167919, February 14, 2007
40
GR 112655, December 9, 1993
41
GR 157509, January 18, 2005
42
GR 171396, May 3, 2006
Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al., 43) or employees who are going to be
demoted, transferred or otherwise affected by any personnel action subject o the rule on
exhaustion of administrative remedies.
            b.   Moreover, and if at all, only Congress, can claim any injury from the alleged
executive encroachment of the legislative function to amend, modify and/or repeal laws.
         
         6.            Locus standi being merely a matter of procedure, have been waived in
certain instances where a party who is not personally injured may be allowed to bring
suit.  The following are examples of instances where suits have been brought by parties
who have not have been personally injured by the operation of a law or any other
government act but by concerned citizens, taxpayers or voters who actually sue in the
public interest:
          a.            Taxpayer’s suits to question contracts entered into by the national
government or government-owned or controlled corporations allegedly in contravention of
the law.
b.            A taxpayer is allowed to sue where there is a claim that public funds are
illegally disbursed, or that public money is being deflected to any improper purpose, or that
there is a wastage of public funds through the enforcement of an invalid or unconstitutional
law.  (Abaya v. Ebdane,44)

        7.  The VAT law provides that, the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added
tax to twelve percent (12%) after any of the following conditions have been satisfied.
“(i)  value-added tax collection as a percentage of Gross Domestic Product (GDP) of
the previous year exceeds two and four-fifth percent (2 4/5%) or (ii)  national
government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 ½%).”

            Was there an invalid delegation of legislative power ?

            SUGGESTED ANSWER:  No.  There is no undue delegation of legislative

power but only of the discretion as to the execution of the law.  This is constitutionally
permissible.
          Congress does not abdicate its functions or unduly delegate power when it describes
what job must be done, who must do it, and what is the scope of his authority.  In the above
case the Secretary of Finance becomes merely the agent of the legislative department, to
determine and declare the even upon which its expressed will takes place.  The President
cannot set aside the findings of the Secretary of Finance, who is not under the conditions
acting as the execute alter ego or subordinate.  .  [Abakada Guro Party List (etc.) v. Ermita,
etc., et al.,45]
43
Supra, note 41
44
Supra, note 39
45
GR 168056, September 1, 2005
            8.  Instances of proper delegation: When taxing power could be
delegated:  Exceptions to the rule on non-delegation:

            a.   Delegation of tariff powers by Congress to the President under the flexible

tariff clause, Section 28 (2), Article VI of the Constitution.
            b.    Delegation of emergency powers to the President under Section 23 (2) of
Article VI of the Constitution.
            c.   The delegation to the President of the Philippines to enter into executive
agreements, and to ratify treaties which may contain tax exemption provisions subject to
the concurrence by the Senate in the ratification made by the President.
            d.     Delegation to the people at large.
            e.   Delegation to administrative bodies  [Abakada Guro Party List (Formerly
AASJS), etc., v, Ermita, et al.,46], which is referred to as subordinate legislation.
          In  this instance, there is a requirement that the law is complete in all aspects so
what is delegated is merely the implementation of the law or there exists sufficiently
determinate standards to guide the delegate and prevent a total transference of the taxing
power.

          9.            “Paradigm shift” from exclusive Congressional power to direct grant

of taxing power to local legislative bodies.  The power to tax is no longer vested
exclusively on Congress; local legislative bodies are now given direct authority to levy
taxes, fees and other charges pursuant to Article X, section 5 of the 1987
Constitution.  (Batangas Power Corporation v. Batangas City, et al.47) 
Local government legislation, “is not regarded as a transfer of general legislative
power, but rather as the grant of authority to prescribe local regulations, according to
immemorial practice, subject, of course, to the interposition of the superior in cases of
necessity.” 

          10.          Taxing power of the local government is limited.  The taxing power of

local governments is limited in the sense that Congress can enact legislation granting tax
exemptions.
          While the system of local government taxation has changed with the onset of the
1987 Constitution, the power of local government units to tax is still limited.
          While the power to tax by local governments may be exercised by local legislative
bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct
authority conferred by Section 5, Article X of the Constitution, the basic doctrine on local
taxation remains essentially the same, “the power to tax is [still] primarily vested in the
Congress.”  (Quezon City, et al., v. ABS-CBN Broadcasting Corporation,48 citing City

46
GR 168056, September 1, 2005
47
GR 152675, April 28, 2004
48
GR 166408, October 6, 2008
Government of Quezon City, et al. v.  Bayan Telecommunications, Inc.,49 in turn referring
to Mactan Cebu International Airport Authority, v. Marcos,50 )

          11.          Further amplification by Bernas of the local government’s power to

tax. “What is the effect of Section 5 on the fiscal position of municipal
corporations?  Section 5 does not change the doctrine that municipal corporations do not
possess inherent powers of taxation.  What it does is to confer municipal corporations a
general power to levy taxes and otherwise create sources of revenue.  They no longer
have to wait for a statutory grant of these powers.  The power of the legislative authority
relative to the fiscal powers of local governments has been reduced to the authority to
impose limitations on municipal powers.  Moreover, these limitations must be “consistent
with the basic policy of local autonomy.”  The important legal effect of Section 5 is thus
to reverse the principle that doubts are resolved against municipal
corporations.  Henceforth, in interpreting statutory provisions on municipal fiscal powers,
doubts will be resolved in favor of municipal corporations.  It is understood, however,
that taxes imposed by local government must be for a public purpose, uniform within a
locality, must not be confiscatory, and must be within the jurisdiction of the local unit to
pass.” (Quezon City, et al., v. ABS-CBN Broadcasting Corporation,51)

            12.       Reconciliation of the local government’s authority to tax and the

Congressional general taxing power.  Congress has the inherent power to tax, which
includes the power to grant tax exemptions.  On the other hand, the power of  local
governments, such as provinces and cities for example Quezon City,  to tax is prescribed
by Section 151 in relation to Section 137 of the LGC which expressly provides that
notwithstanding any exemption granted by any law or other special law, the City or a
province may impose a franchise tax.  It must be noted that Section 137 of the LGC does
not prohibit grant of future exemptions. 
            The Supreme Court in a series of cases has sustained the power of Congress to
grant tax exemptions over and above the power of the local government’s delegated
power to tax. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation,52
            “Indeed, the grant of taxing powers to local government units under the
Constitution and the LGC does not affect the power of Congress to grant exemptions to
certain persons, pursuant to a declared national policy.  The legal effect of the
constitutional grant to local governments simply means that in interpreting statutory
provisions on municipal taxing powers, doubts must be resolved in favor of municipal
corporations.”

49
GR 162015, March 6, 2006
50
GR 120082, September 11, 1996
51
Supra, note 48
52
Supra, note 48
       13.   General  principles  of  income  taxation  in  the Philippines or the source
rule of income taxation as provided in the NIRC of 1997.

       a.  A citizen of the Philippines residing therein is taxable on all income derived from

sources within and without the Philippines;
       b.              A nonresident citizen  is taxable only on income derived from
sources within the Philippines;
       c.  An individual citizen of the Philippines who is working and deriving income
abroad as anoverseas contract worker is taxable only on income from
sources within the Philippines: Provided, That a seaman who is a citizen of the
Philippines and who receives compensation for services rendered abroad as a member of
the complement of a vessel engaged exclusively in international trade shall be treated as
an overseas contract worker;
       d.              An alien individual, whether a resident or not of the Philippines, is
taxable only on income derived from sources within the Philippines;
      e.  A domestic corporation is taxable on all income derived from
sources within and without the Philippines; and
      f.  A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the
Philippines.  (Sec. 23, NIRC of 1997, emphasis supplied)

          14.     Juliane a non-resident alien appointed as a commission agent by a

domestic corporation with a sales commission of 10% all sales actually concluded and
collected through her efforts.  The local company withheld the amount of P107,000
from her sales commission and remitted the same to the BIR.

          She filed a claim for refund alleging that her sales commission is not taxable
because the same was a compensation for her services rendered in Germany and
therefore considered as income from sources outside the Philippines.

          Is her contention correct ?

          SUGGESTED ANSWER:  Yes.  The important factor which determines the

source of income of personal services is not the residence of the payor, or the place where
the contract for service is entered into, or the place of payment, but the place where the
services were actually performed.
          Since the activity of securing the sales were in Germany, then the income did not
originate from sources from within the Philippines.  (Commissioner of Internal Revenue v.
Baier-Nickel,53)

            15. Ensite, Ltd.. is a Canadian corporation not doing business in the

Philippines.  It holds 40% of the shares of Philippine Stamping Plant, Inc.,., a
53
GR 153793, August 29, 2006
Philippine company while the 60% is owned by Fred Corporation, a Filipino-owned
Philippine corporation.  Ensite Co. also owns 100% of the shares of Susanto Co., an
Indonesian company which has a duly licensed Philippine branch. Due to worldwide
restructuring of the Ensite Ltd.,. group, Ensite Ltd.,. decided to sell all its shares in
Philippine Stamping Plant, Inc. and Susanto Co.  The negotiations for the buy-out
and the signing of the Agreement of Sale were all done in the Philippines.  The
Agreement provides that the purchase price will be paid to Ensite Ltd’s bank
account in the U.S. and that title to the Philippine Stamping Plant, Inc.  and Susanto
Co. shall be transferred to General Co., in Toronto Canada where stock certificates
will be delivered. General Co. seeks your advice as to whether or not it will subject
the payments of the purchase price to withholding tax.  Explain your
advice.                         SUGGESTED ANSWER:  The payments of the purchase price
will be subject to withholding tax. Considering that all the activities (sales) occurred
within the Philippines, the income is considered as income from within, subject to
Philippine income taxation.  Ensite, Ltd. being a foreign corporation is to be taxed on its
income derived from sources within the
Philippines.                                                                                                                              
                                                                                                                            16.Ensi
te, Ltd. is a Canadian corporation, which has a duly licensed Philippine branch
engage in trading activities in the Philippines.  Ensite, Ltd.. also invested directly in
40% of the shares ofstock of Philippine Stamping Plant, Inc.., a Philippine
corporation.  These shares are booked in the Head Office of Ensite, Ltd.. and are
not reflected as assets of the Philippine branch.  In 2009, Philippine Stamping Plant,
Inc.. declared dividends to its stockholders.  Before remitting the dividends to Ensite
Ltd.,., Philippine Stamping Plant, Inc. Co. seeks your advice as to whether it will
subject the remittance to withholding tax.  There is no need to discuss WT rates, if
applicable.  Focus your discussion on what is the
issue.                                                                         

SUGGESTED ANSWER:  Philippine Stamping Plant, Inc.. should subject the remittance

to withholding tax..  Since Philippine Stamping Plant. is a Philippine corporation, its
shares of stock have obtained a business situs in the Philippines, hence the dividends are
considered as income from within.  Ensite. Ltd., being a foreign corporation, should be
subject to tax on its income from within.

            17. Philippine Stamping Plant, Inc., a Philippine corporation, has an

executive Larry who is a Filipino citizen.  Philippine Stamping Plant, Inc,. has a
subsidiary in Malaysia (Kuala Lumpur Manufacturing, Inc.) and will assign Larry
for an indefinite period to work full time for Kuala Lumpur Manufacturing,
Inc..  Larry will bring his family to reside in Malaysia and will lease out his
residence in the Philippines.  The salary of Larry will be shouldered 50% by
Philippine Stamping Plant, Inc.. while the other 50% plus housing, cost of living and
educational allowances of Larry’s dependents will be shouldered by Kuala Lumpur
Manufacturing, Inc..  Philippine Stamping Plant, Inc.. will credit the 50% of
Larry’s salary to his Philippine bank account.  Larry will sign the contract of
employment in the Philippines.  He will also be receiving rental income for the lease
of his Philippine residence.         

Are these salaries, allowances and rentals subject to Philippine income tax? Explain
briefly.                                                    

SUGGESTED ANSWER:  The salaries and allowances of Larry, being derived from

labor or personal services rendered outside of the Philippines is considered as income
from without.  Since Larry is an OCW, then he is to be taxed only on his income derived
from within the Philippines such as the rentals on his Philippine residence, and not on his
income from without.

18.     Obama Airlines, Inc., a foreign airline company which does not maintain
any flight to and from the Philippines sold air tickets in the Philippines, through a
general sales agent, relating to the carriage of passengers and cargo between two
points, both outside the Philippines.
          
a. Is Obama, Inc., subject to income taxes on the sale of the tickets ?

          SUGGESTED ANSWER:  Yes.  The source of income which is taxable is that

“activity” which produced the income.  The ”sale of tickets” in the Philippines is the
activity that determines whether such income is taxable in the Philippines.

          The tickets exchanged hands here and payments for fares were also made here in
Philippine currency.  The situs of the source of payments is the Philippines.  the flow of
wealth proceeded from and occurred, within the Philippine territory, enjoying the
protection accorded by the Philippine Government. In consideration of such protection, the
flow of wealth should share the burden of supporting the government. [Commissioner of
Internal Revenue v. British Overseas Airways Corporation (BOAC),54 ]

          Off-line air carriers having general sales agents in the Philippines are engaged in
or doing business in the Philippines and  their income from sales of passage documents
here is income from within the Philippines. Thus, the off-line air carrier liable for the
32% (now 30%) tax on its taxable income. [South African Airways v. Commissioner of
Internal Revenue,55 ]

b. Supposing that Obama, Inc., sells tickets outside of the Philippines

for passengers it carry from Gold City, South Africa to the
Philippines but returns to South Africa without any cargo or
54
149 SCRA 395
55
GR No. 180356, February 16, 2010
 passengers.  Would it then be subject to any Philippine tax on such
sales ?

          SUGGESTED ANSWER:  It would not be subject to any tax.  It is not subject to any
income tax because the activity which generated the income (the sale of the tickets)  was
performed outside of the Philippines.

It is not subject to the carrier’s tax based on gross Philippine billings because there
were no lifts that originated from the Philippines.  “Gross Philippine Billings” refers to the
amount of gross revenue derived from carriage of persons, excess baggage, cargo and
mail originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket or passage
document.56” 

c. Would your answer be the same if Obama, Inc. sold tickets outside of
the Philippines for travelers who are going to picked up by Obama,
Inc., planes from the Diosdado Macapagal Intl. Airport at Clark,
Angeles, Pampanga, bound for Nairobi, Kenya ?  Reason out your
answer.

          SUGGESTED ANSWER:  No more.  This time Obama, Inc., would be subject to

the carrier’s tax based on Gross Philippine  Billings. (GPB).

          “Gross Philippine Billings” refers to the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or issue and the place
of payment of the ticket or passage document.” [NIRC of 1997, Sec. 28(A)(3)(a)]
The place of sale  is irrelevant; as long as the uplifts of passengers and cargo occur
from the Philippines, income is included in GPB. (South African Airways v.
Commissioner of Internal Revenue,57 )

          19.          No improper delegation of legislative authority to tax.   The power to

tax is inherent in the State, such power being inherently legislative, based on the principle
that taxes are a grant of the people who are taxed, and the grant must be made by the
immediate representatives of the people; and where the people have laid the power, there
it must remain and be exercised. (Commissioner of Internal Revenue v. Fortune Tobacco
Corporation,58)  

CONSTITUTIONAL LIMITATIONS

56
Section 28 of 1997 NIRC
57
supra
58
GR No. 167274-75
          1.            Constitutional limitations on the power of taxation . The general or
indirect constitutional limitations as well as the specific or direct constitutional limitations.

          2.   The general or indirect constitutional limitations on the power of taxation

are:
          a.            Due process clause;
          b.            Equal protection clause;
          c.            Freedom of the press;
          d.            Religious freedom;
          e.            No taking of private property without just compensation;
          f.             Non-impairment clause;
          g.            Law-making process:
            1)         Bill should embrace only one subject        expressed         in the title
thereof;
            2)         Three (3) readings on three separate days;
            3)         Printed copies in final form distributed three         (3) days before passage.
          h.            Presidential power to grant reprieves, commutations and pardons and
remittal of fines and forfeiture after conviction by final judgment.

          3.            The specific or direct constitutional limitation.

          a.            No imprisonment for non-payment of a poll tax;
          b.            Taxation shall be uniform and equitable;
          c.            Congress shall evolve a progressive system of taxation;
          d.            All appropriation, revenue or tariff bills shall originate exclusively in the
House of Representatives, but the Senate may propose and concur with amendments;
          e.  The President shall have the power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which
he does not object;
          f.             Delegated power of the President to impose tariff rates, import and export
quotas, tonnage and wharfage dues:
            1)         Delegation by Congress
            2)         through a law
            3)         subject to Congressional limits and          restrictions
            4)         within the framework of national development program.
          g.            Tax exemption of charitable institutions, churches, parsonages and
convents appurtenant thereto, mosques, and all lands, buildings and improvements of all
kinds actually, directly and exclusively used for religious, charitable or educational
purposes;
          h.            No tax exemption without the concurrence of majority vote of all members
of Congress;
          i.             No use of public money or property for religious purposes except if priest
is assigned to the armed forces, penal institutions, government orphanage or leprosarium;
          j.             Money collected on tax levied for a special purpose to be used only for
such purpose, balance if any, to general funds;
          k.            The Supreme Court's power to review judgments or orders of lower courts
in all cases involving the legality of any tax, impose, assessment or toll or the legality of
any penalty imposed in relation to the above;
          l.             Authority of local government units to create their own sources of revenue,
to levy taxes, fees and other charges subject to guidelines and limitations imposed by
Congress consistent with the basic policy of local autonomy;
          m.           Automatic release of local government's just share in national taxes;
          n.            Tax exemption of all revenues and assets of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational purposes;
          o.  Tax exemption of all revenues and assets of proprietary or cooperative
educational institutions subject to limitations provided by law including restrictions on
dividends and provisions for reinvestment of profits;
          p.            Tax exemption of grants, endowments, donations or contributions used
actually, directly and exclusively for educational purposes subject to conditions prescribed
by law.

          5.            Equal protection of the law clause is subject to reasonable

classification.   If the groupings are characterized by substantial distinctions that make real
differences, one class may be treated and regulated differently from another.  The
classification must also be germane to the purpose of the law and must apply to all those
belonging to the same  class. (Tiu, et al., v. Court of Appeals, et al.,59)

           6.      Requisites for valid classification.  All that is required of a valid

classification is that it be reasonable, which means that        
a.         the classification should be based on substantial distinctions which make
for real differences,
          b.            that it must be germane to the purpose of the law;
          c.            that it must not be limited to existing conditions only; and
          d.            that it must apply equally to each member of the class.
          The standard is satisfied if the classification or distinction is based on a reasonable
foundation or rational basis and is not palpably arbitrary.  [ABAKADA Guro Party List,
etc., v. Purisima, etc., et al., 60]

          7.            Equal protection does not demand absolute equality.  It merely

requires that all persons shall be treated alike, under like circumstances and conditions,
both as to the privileges conferred and liabilities enforced. (Santos v. People, et al,61 )

59
GR No. 127410, January 20, 1999
60
GR No. 166715, August 14, 2008
61
GR No. 173176, August 26, 2008
             It is imperative to duly establish that the one invoking equal protection and the
person to which she is being compared 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.  (Santos, supra)
  
            8.     Tests to determine validity of classification.       The United States
Supreme Court has established different tests to determine the validity of a classification
and compliance with the equal protection clause.  The recognized tests are:
            a.         The traditional (or rational basis) test.
            b.         The strict scrutiny (or compelling interest) test.
            c.    The intermediate level of scrutiny (or quasi-suspect class) test.            
            9.         The traditional (or rational basis) test used in order to determine the
validity of classification.  The classification is valid if it is rationally related to a
constitutionally permissible state interest.
            The complainant must prove that the classification is “invidous,” “wholly
arbitrary,” or ”capricious,” otherwise the classification is presumed to be valid.  (Lindsley
v. Natural Carboinic Gas Co.,62220 U.S. 61)
“’
            10.       The strict scrutiny (or compelling interest) test used in order to
determine the validity of the classification.  Government regulation that intentionally
discriminates against a “suspect class” such as racial or ethnic minorities, is subject to
strict scrutiny and considered to violate the equal protection clause unless found
necessary to promote a compelling state interest. 
            A classification is necessary when it is narrowly drawn so that no alternative, less
burdensome means is available to accomplish the state interest. 
            Thus, it was held that denial of free public education to the children of illegal
aliens imposes an enormous and lasting burden based on a status over which the children
have no control is violative of equal protection because there is no showing that such
denial furthers a “substantial” state goal.  (Plyler v. Doe,63)

            11.       The intermediate level of scrutiny (or quasi-suspect class) test used in

order to determine the validity of he classification.  Classification based on gender or
legitimacy are not “suspect,” but neither are they judged by the traditional or rational
basis test. 
            Intentional discriminations against members of a quasi-suspect class violate equal
protection unless they are substantially related to important government
objectives.  (Craig v. Boren,64) 
            Thus, a state law granting a property tax exemption to widows, but not widowers,
has been held valid for it furthers the state policy of cushioning the financial impact of
62
220 US 61
63
457 US 202
64
429 US 190
spousal loss upon the sex for whom that loss usually imposes a heavier burden.  (Kahn v.
Shevin,65)
         
          12.          Equality and uniformity of taxation may mean the same as equal
protection.  In such a case, the terms would mean that all subjects and objects of taxation
which are similarly situated shall be subject to the same burdens and granted the same
privileges without any discrimination whatsoever.

          13.          It is inherent in the power to tax that the 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 of taxation, or exemption, infringe no constitutional
limitation."  (Commissioner of Internal Revenue, et al., v. Santos, et al.,  66)

         Benjie is a law-abiding citizen who pays his real estate taxes promptly.  Due
to a series of typhoons and adverse economic conditions, an ordinance is passed by
Soliman City granting a 50% discount for payment of unpaid real estate taxes for
the preceding year and the condonation of all penalties on fines resulting from the
late payment.

            Arguing that the ordinance rewards delinquent tax payers and discriminates
against prompt ones, Benjie demands that he be refunded an amount equivalent to
one-half of the real property taxes he paid. The municipal attorney rendered an
opinion that Benjie cannot be reimbursed because the ordinance did not provide for
such reimbursement. Benjie files suit to declare the ordinance void on the ground
that it is a class legislation. Will his suit prosper ? Explain your answer briefly. 

            SUGGESTED ANSWER:  No.  There is no class legislation because there is no

violation of the equal protection suit. There is a valid classification between those who
already paid their taxes and those who have not.  Furthermore, the taxing authority has
the prerogative to select the subjects and objects of taxation, including granting a 50%
discount in the  payment of unpaid  real estate taxes, and the condonation of all penalties
on fines resulting from  late payment.

          10.          The rewards law to tax collectors  does not violate equal

protection.  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, it’s 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
65
416 US 351
66
277 SCRA 617
common distinct primary function of generating revenues for the national government
through the collection of taxes, customs duties, fees and charges.

          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.  (ABAKADA Guro
Party List, etc., v. Purisima, etc., et al.,67)

            11.       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. 
(Santos v. People, et al,68 )

            12.       Equal protection should not be used to protect commission of

crime.  While all persons accused of crime are to be treated on a basis of equality before
the law, it does not follow that they are to be protected in the commission of crime.  It
would be unconscionable, for instance, to excuse a defendant guilty of murder because
others have murdered with impunity. 

            Likewise, if the failure of prosecutors to enforce the criminal laws as to some

persons should be converted into a defense for others charged with crime, the result
would be that the trial of the district attorney for nonfeasance would become an issue in
the trial of many persons charged with heinous crimes and the enforcement of law would
suffer a complete breakdown. (Santos v. People, et al,69)

          13.      Illustration of double taxation in local taxation.  there is indeed double

taxation if Coca-Cola 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 –  City of Manila; (4) within the same taxing jurisdiction –
within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods –
67
supra
68
supra
69
supra
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 City of Manila, et al., v. Coca-Cola Bottlers
Philippines, Inc.,70)

          14.          A lawful tax on a new subject, or an increased tax on an old one, does
not interfere with a contract or impairs its obligation, within the meaning of the
constitution. (Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA
630)

          15.          The withdrawal of a tax exemption should not be construed as

prohibiting future grants of exemption from all taxes.  (Philippine Long Distance
Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22,
2001)

            16.       Tax exemptions in franchises are always subject to withdrawal.  A

legislative franchise is granted with the express condition that it is subject to amendment,
alteration, or repeal. (1987 Constitution,  Art. XII, Sec. 11)
            It is enough to say that the parties to a contract cannot, through the exercise of
prophetic discernment, fetter the exercise of the taxing power of the State. For not only
are existing laws read into contracts in order to fix obligations as between parties, but 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. (Smart Communications, Inc. v. The City of Davao,
etc., et al., G. R. No. 155491, September 16, 2008)
            
            17.    When withdrawal of a tax exemption impairs the obligation of
contracts.  The Contract Clause has never been thought 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. (Smart Communications, Inc. v. The City of Davao, etc., et al., G. R.
No. 155491, September 16, 2008) citing Tolentino v. Secretary of Finance, G. R. No.
115455, August 25, 1994, 235 SCRA 630, 685)  The author opines that since practically
all franchises granted to telecommunications companies are similarly worded that the
above doctrine finds application to the others)

          18.   The primary reason for the withdrawal of tax exemption privileges

granted to government owned and controlled corporations and all other units of
government was that such privilege resulted to serious tax base erosion and distortions in
the tax treatment of similarly situated enterprises, hence resulting in the need for these
entities to share in the requirements of development, fiscal or otherwise, by paying the
taxes and other charges due them. (Philippine Ports Authority v.  City of Iloilo, G. R. No.
109791, July 14, 2003)
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GR No. 181645, August 4, 2009
          19.          National Power Corporation (NPC) is of the insistence that it is not
subject to the payment of franchises taxes imposed by the Province of Isabela because
all of its shares are owned by the Republic of the Philippines.  It is thus, an
instrumentality of the National Government which is exempt from local taxation. As
such it is not a private corporation engaged in “business enjoying franchise”
          Is such contention meritorious ?

          SUGGESTED ANSWER:  No.   Philippine Long Distance Telephone Company,

Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001,  upheld the authority
of the City of Davao, a local government unit, to impose and collect a local franchise tax
because the Local Government Code has withdrawn all tax exemptions previously enjoyed
by all persons and authorized local government units to impose a tax on business enjoying
a franchise tax notwithstanding the grant of tax exemption to them.

          20.          “In lieu of all taxes” in the franchise of ABS-CBN does not exempt it
from local franchise taxes. It does not expressly provide what kind of taxes ABS-
CBN is exempted from.  It is not clear whether the exemption would include both local,
whether municipal, city or provincial, and national tax. Whether the “in lieu of all taxes
provision” would include exemption from local tax is not unequivocal.

          The right to exemption from local franchise tax must be clearly established and
cannot be made out of inference or implications but must be laid beyond reasonable
doubt.  Verily, the uncertainty in the “in lieu of all taxes” provision should be construed
against ABS-CBN.  ABS-CBN has the burden to prove that it is in fact covered by the
exemption so claimed but has failed to do so.  (Quezon City, et al., v. ABS-CBN
Broadcasting Corporation,71

            21.    “In lieu of all taxes” refers to national internal revenue taxes and not to
local taxes.  The “in lieu of all taxes” clause applies only to national internal revenue
taxes and not to local taxes. As appropriately pointed out in the separate opinion of
Justice Antonio T. Carpio in a similar case involving a demand for exemption from local
franchise taxes:
            [T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other
than income tax, imposed under the National Internal Revenue Code. The "in lieu of all
taxes" clause does not apply to local taxes. The proviso in the first paragraph of Section 9
of Smart's franchise states that the grantee shall "continue to be liable for income taxes
payable under Title II of the National Internal Revenue Code." Also, the second
paragraph of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of
Internal Revenue or his duly authorized representative in accordance with the National
Internal Revenue Code." Moreover, the same paragraph declares that the tax returns
"shall be subject to audit by the Bureau of Internal Revenue." Nothing is mentioned in
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GR 166408, October 6, 2008
Section 9 about local taxes. The clear intent is for the "in lieu of all taxes" clause to apply
only to taxes under the National Internal Revenue Code and not to local taxes. Even with
respect to national internal revenue taxes, the "in lieu of all taxes" clause does not apply
to income tax.
            If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also
apply to local taxes, Congress would have expressly mentioned the exemption from
municipal and provincial taxes. Congress could have used the language in Section 9(b) of
Clavecilla's old franchise, as follows:

            x x x in lieu of any and all taxes of any kind, nature or description levied,
established or collected by any authority whatsoever, municipal, provincial or national,
from which the grantee is hereby expressly exempted, x x x. (Emphasis supplied).

            However, Congress did not expressly exempt Smart from local taxes. Congress
used the "in lieu of all taxes" clause only in reference to national internal revenue taxes.
The only interpretation, under the rule on strict construction of tax exemptions, is that the
"in lieu of all taxes" clause in Smart's franchise refers only to national and not to local
taxes.    

            22.       The “in lieu of all taxes” clause in the franchise of ABS-CBN has

become functus officio with the abolition of the franchise tax on broadcasting
companies with yearly gross receipts exceeding Ten Million Pesos.  The clause  “in
lieu of all taxes” does not pertain to VAT or any other tax.  It cannot apply when what is
paid is a tax other than a franchise tax.  Since the franchise tax on the broadcasting
companies with yearly gross receipts exceeding ten million pesos has been abolished, the
“in lieu of all taxes” clause has now become functus officio, rendered inoperative.
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, 72) 

          23.    Double taxation in its generic sense, this means taxing the same subject or
object twice during the same taxable period.  In its particular sense, it may mean direct
duplicate taxation, which is prohibited under the constitution because it violates the
concept of equal protection, uniformity and equitableness of taxation.  Indirect duplicate
taxation is not anathematized by the above constitutional limitations.

          24.    Elements of direct duplicate taxation:

          a.            Same
            1)         Subject or object is taxed twice
            2)         by the same taxing authority
            3)         for the same taxing purpose
            4)         during the same taxable period
b.         Taxing all of the subjects or objects for the first time without taxing all of
them for the second time.
72
supra
 If any of the elements are absent then there is indirect duplicate taxation which is
not prohibited by the constitution.
          
NOTES AND COMMENTS:

          a.            Presence of the 2nd element violates the equal protection clause.  If only

the 1stelement is present, taxing the same subject or object twice, by the same taxing
authority, etc., there is no violation of the equal protection clause because all subjects and
objects that are similarly situated are subject to the same burdens and granted the same
privileges without any discrimination whatsoever,
          The presence of the 2nd element, taxing all of the subjects and objects for the first
time, without taxing all for the second time, results to discrimination among subjects and
objects that are similarly situated, hence violative of the equal protection clause.

          25.  Double taxation a valid defense against the legality of a tax measure if the
double taxation is direct duplicate taxation, because it would violate the equal protection
clause of the constitution.

          26.          When an item of income is taxed in the Philippines and the same

income is taxed in another country, this would be known as international juridical
double taxation which is the imposition of comparable taxes in two or more states on the
same taxpayer in respect of the same subject matter and for identical
grounds. (Commissioner of Internal Revenue v. S.C. Johnson and Johnson, Inc., et al.,73 

          27.  Methods for avoiding double taxation (indirect duplicate taxation).

          a.            Tax treaties which exempts foreign nationals from local taxation and local
nationals from foreign taxation under the principle of reciprocity.
          b.            Tax credits where foreign taxes are allowed as deductions from local taxes
that are due to be paid.
          c.            Allowing foreign taxes as a deduction from gross income.

          28.          Tax credit generally refers to an amount that is subtracted directly from

one’s total tax liability, an allowance against the tax itself, or a deduction from what is
owned.
          A tax credit reduces the tax due, including –whenever applicable – the income tax
that is determined after applying the corresponding tax rates to taxable
income.  (Commissioner of Internal Revenue v. Central Luzon Drug Corporation,74 )

          29.          A tax deduction is defined as a subtraction fro income for tax purposes, or
an amount that is allowed by law to reduce income prior to the application of the tax rate to
compute the amount of tax which is due.
73
GR No. 127105, June 25, 1999
74
GR No. 159647, April 15, 2005
          A tax deduction reduces the income that is subject to tax in order to arrive at taxable
income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation,  75)

         30.      The petitioners allege that the R-VAT law is constitutional because the
Bicameral Conference Committed has exceeded its authority in including provisions
which were never included in the versions of both the House and Senate such as
inserting the stand-by authority to the President to increase the VAT from 10% to
12%; deleting entirely the no pass-on provisions found in both the House and Senate
Bills; inserting the provision imposing a 70% limit on the amount of input tax to be
credited against the output tax; and including the amendments introduced only by
Senate Bill No. 1950 regarding other kinds of taxes in addition to the value-added
tax.  Thus, there was a violation of the constitutional mandate that revenue bills shall
originate exclusively from the House of Representatives.

          Are the contentions of such weight as to constitute grave abuse of discretion

which may invalidate the law ?  Explain briefly.

          SUGGESTED ANSWER:  No.  There was no grave abuse of discretion because  all

the changes and modifications made by the Bicameral Conference Committee were
germane to subjects of the provisions referred to it for reconciliation.
          The Bicameral Conference Committee merely exercised the judicially recognized
long-standing legislative practice of giving said conference committee ample latitude for
compromising differences between the Senate and the House.  [Abakada Guro Party List
(etc.) v. Ermita, etc., et al.,76 ]
         
          31.    The VAT while regressive is NOT violative of the mandate to evolve a
progressive system of taxation.  Do you agree ?  The mandate to Congress is not to
prescribe but to evolve a progressive system of taxation.  Otherwise, sales taxes which
perhaps are the oldest form of indirect taxes, would have been prohibited with the
proclamation of the constitutional provision.  Sales taxes are also regressive. .  [Abakada
Guro Party List (etc.) v. Ermita, etc., et al.,77 

          32.          All revenues and assets of non-stock, non-profit educational

institutions that are actually, directly and exclusively used for educational purposes
shall be exempt from taxation.

          33.          Revenues and assets of proprietary educational institutions, including

those which are cooperatively owned, may be entitled to exemptions subject to
limitations provided by law including restrictions on dividends and provisions for
75
supra
76
GR No. 168056, September 1, 2005
77
supra
reinvestments.  There is no law at the present which grants exemptions, other the
exemptions granted to cooperatives.