General Principles of Taxation

General Principles of Taxation
September 7, 2021
1) Explain the power of taxation. (5%)
Answer: Power of taxation is the inherent power of the
state to levy taxes, through its legislature, in order to
raise revenue to defray the expenses of the government.
The primary purpose of taxation power is to raise
revenue in order to cover the projected expenses of the
government. The power of taxation may also be used as
an implement of police power in order to promote
general welfare such as but not limited to promotion of
public health, development of economy, protection of
local industry and promotion of social justice.
Based on jurisprudence, the Honorable Supreme Court
enunciated that the power of taxation is supreme, plenary,
comprehensive and unlimited. However, it does not mean
that it absolute because it is subject to inherent and
constitutional limitations in order to prevent possible
abuses by the government. The two-fold nature of the
power of taxation means that it is inherent to the state and
it is essentially legislative in nature. It is inherent to the
state because it exists the moment the state is born. It is
essentially legislative in nature because imposition of tax
involves law-making power.
2) Differentiate tax and debt. (5%)
Answer. The following are the differences between tax and debt:
1) As to source of civil obligation, tax is based on law while debt is
based on contract.
2) As to being subjected to legal compensation, tax is not allowed to
be legally compensated while debt may be legally compensated.
3) As to imprisonment for non-payment, a person may be imprisoned
for tax evasion or non-payment of tax except in case of poll tax
while no person shall be imprisoned for non-payment of debt.
4) As to mode of payment, tax is generally payable in money while
debt is payable on prestation agreed upon.
5) As to assignability, tax is not assignable while debit is capable of
assignment.
3) Differentiate tax and license fee. (5%)
Answer. The following are the differences between tax and license fee:
1) As to inherent power of the state exercised, tax is levied by virtue of
power of taxation while license fee is levied by virtue of police power.
2) As to purpose, tax is levied to raise revenue in order to defray the
expenses of government while license fee is levied to regulate a
particular activity for the promotion of general welfare.
3) As to amount to be collected, tax is generally unlimited as to amount
as long as it does not violate substantive due process of law while
license fee is limited to the cost of regulation.
4) As to the effect on the legality of business for non-payment, non-
payment of tax does not generally make the business illegal while
non-payment of license fee makes the business illegal.
4) Differentiate power of taxation and police
power. (5%)
Answer. The following are the differences between power of taxation and
police power:
1) As to purpose, power of taxation is intended to raise revenues to defray
the expenses of government while police power is intended to promote
general welfare.
2) As to rights of the people affected, power of taxation affects right to
property while police power affects right to life, liberty or property.
3) As to non-impairment of obligations of contract, power of taxation
cannot impair the obligations of contract while police power may impair
the obligation of contract.
4) As to amount of exaction, the amount to be collected under power of
taxation is generally unlimited while the amount to be collected under
police power is limited to the cost of regulation.
5) Enumerate and define the theory and basis of
taxation. (5%)
Answer. The following are the theories and basis of taxation:
1) Lifeblood doctrine means that taxes are the lifeblood of the government.
The government will be paralyzed without taxes which serve as the moving
power of the government.
2) Necessity theory means that government is a necessity. A state cannot exist
without government because it is one of the essential elements of the
state.
3) Benefit-receipt theory or doctrine of symbiotic relationship means that
taxes are what we pay for a civilized society. It is based on equity and
fairness as the taxpayers shall not unjustly enrich themselves at the
expense of the government. Since the taxpayers receive benefit or
protection from the government, either directly or indirectly, it is just and
proper that they contribute to the expenses of the government through
payment of proper taxes.
6) Enumerate and define the principles of a
sound tax system. (5%)
Answer. The following are the principles of a sound tax
system:
1) Fiscal adequacy means the sources of revenue must be
sufficient to meet government expenditures and other
public needs.
2) Administrative feasibility means tax laws and
regulations must be capable of being effectively enforced
with the least inconvenience to the taxpayer.
3) Theoretical justice means that a sound tax system
must be based on the taxpayers’ ability to pay.
7) City of Lipa enacted a tax ordinance on the
leasing of real property. The taxes collected from
this ordinance will be used to finance the
celebration of City Fiesta in honor of San
Sebastian, the patron saint of Lipa City. The
lessors in the City of Lipa filed a petition before
the Justice Secretary questioning the
constitutionality of the tax ordinance. Is the tax
ordinance constitutional? Explain. (5%)
1st Paragraph – Conclusion Paragraph
2nd Paragraph – Legal Basis Paragraph
3rd Paragraph – Application of Relevant Law to
the Facts of the Case Paragraph
4th Paragraph – Fallo or Dispositive Portion
Paragraph
(1st Paragraph) Yes. The tax ordinance is constitutional because it is
enacted for public purpose.
(2nd Paragraph) Article III Section 1 of the 1987 Constitution of the

Philippines provides that no person shall be deprived of life, liberty or
property without due process of law. Right to due process includes
substantive aspect and procedural aspect. Substantive due process of
law requires tax laws to be enacted for public purpose and the means to
employ them to be reasonable and not confiscatory. Based on
jurisprudence, public purpose is a flexible concept incapable of exact
definition. It includes everything about promotion of general welfare
such as but not limited to public health, public morality, peace and
order and national economy.
(3rd Paragraph) Applying the relevant laws to the facts of the case,
it is respectfully submitted that financing the celebration of bario
fiesta is a public purpose because it involves promotion of Filipino
culture and preservation of Filipino tradition. As long as the direct
benefit is the general welfare of the people, the mere incidental
benefit to the private sector like the Roman Catholic Church or the
Catholics will not make the tax ordinance unconstitutional.
(4th Paragraph) Wherefore, based on the foregoing, the petition

questioning the constitutionality of the tax ordinance shall be
denied for lack of merit.
8) The Congress enacted a law imposing excise tax on
production of fertilizer. The excise taxes collected will be
used to finance the rehabilitation of Philippine Fertilizer
Incorporated, a private domestic corporation that leads
the fertilizer industry in the Philippines, as such, vital to
the economy. The manufactures of fertilizer filed a
petition before the Regional Trial Court questioning the
constitutionality of the said tax law. Is the excise tax on
production of fertilizer unconstitutional? Explain. (5%)
(1st Paragraph) Yes. The tax law is unconstitutional because it is enacted
for private purpose.

Philippines provides that no person shall be deprived of life, liberty or
property without due process of law. Right to due process includes
substantive aspect and procedural aspect. Substantive due process of
law requires tax laws to be enacted for public purpose and the means to
employ them to be reasonable and not confiscatory. Based on
jurisprudence, public purpose is a flexible concept incapable of exact
definition. It includes everything about promotion of general welfare
such as but not limited to public health, public morality, peace and
order and national economy.
(3rd Paragraph) Applying the relevant laws to the facts of the
case, it is respectfully submitted that financing the rehabilitation
of Philippine Fertilizer Incorporated, a private corporation, is a
private purpose that will not directly promote the general
welfare. As long as the direct benefit will go to the private
sector, the mere incidental benefit to the national economy of
the rehabilitation of a private corporation will not cure the
defect of this unconstitutional law.

questioning the constitutionality of the tax law shall be granted.
9) The Congress enacted a law imposing import
duties and value added tax on every importation
of head of state that is not considered official
visit such as personal vacation. The ambassador
of Timor Leste filed a petition before the
Supreme Court questioning the constitutionality
of the said tax law. Is the tax law constitutional?
Explain.
(1st Paragraph) No. The tax law is not constitutional because it is
violates the public international law principle of international comity.
(2nd Paragraph) Article II Section 2 of the 1987 Constitution of the

Philippines provides that the Philippines renounces war as an
instrument of national policy, adopts the generally accepted principles
of international law as part of the law of the land and adheres to the
policy of peace, equality, justice, freedom, cooperation, and amity with
all nations. This is based on the public international law principle of par
in parem non habet imperium which means that equals have no
sovereignty over each other. Because of this principle, a sovereign state
cannot exercise jurisdiction over another sovereign state, forming the
basis of state immunity.
(3rd Paragraph) Applying the relevant laws to the facts of the
case, it is respectfully submitted that imposing import duties and
value added tax on importation of heads of state, regardless of
purpose, negates the generally accepted public international
principles of international comity and state immunity. This law is
contrary to interstate comity and is the nature of interstate war.
This is definitely repugnant to constitutional provision that the
Philippines renounces war as an instrument of national policy.

10) The BIR Commissioner assessed the Bangko
Sentral ng Pilipinas of 25% corporate income tax for
its 2021 declared income. BSP filed a formal protest
before the BIR Commissioner contending that BSP is a
GOCC performing governmental function and
therefore exempted from taxation. BIR Commissioner
denied the formal protest contending that BSP is a
GOCC performing proprietary function. BSP filed an
appeal before the CTA division. Is the income of BSP
subject to income tax? Explain. (5%)
(1st Paragraph) The income of BSP from its governmental functions is not subject to income tax while
the other income of BSP coming from proprietary functions is subject to income tax.
(2nd Paragraph) The New Central Bank as amended provides that The Bangko Sentral shall be exempt
from all national, provincial, municipal and city taxes on income derived from its governmental
functions, specifically:
"(a) income from its activities or transactions in the exercise of its supervision over the operations of
banks and its regulatory and examination powers over non-bank financial institutions performing quasi-
banking functions, money service businesses, credit granting businesses and payment system operators;
and
"(b) income in pursuit of its primary objective to maintain price stability conducive to a balanced and
sustainable growth of the economy, and the promotion and maintenance of monetary and financial
stability and the convertibility of the peso.
"All other incomes not included in the above enumeration shall be considered as proprietary income
and shall be subject to all taxes, charges, fees and assessments."
(3rd Paragraph) Applying the relevant law to the facts of the case, it is
respectfully submitted that the income of BSP related to its governmental
functions such supervision of banks and other entities and maintenance of
price stability, fiscal and monetary stability shall be exempted from income
tax not only because of express provision of Central Bank Act but also due its
importance to national economic growth. However, with respect to its
income arising from proprietary or commercial functions, it shall be subject
to income tax by express provision of Central Bank Act. Since the charter of
Bangko Central is clear, verba legis shall be applied.
(4th Paragraph) Wherefore, based on the foregoing, the appeal filed by BSP
shall be partially granted. Its incomes arising from governmental functions
shall be exempted from income tax while its other incomes specially those
arising from proprietary functions shall be subjected to income tax.
11) The President of the Philippines imposed large
tariff rates and provided for import quotas on the
importation of Apple products coming from USA.
MAC, the authorized dealer of Apple products in the
Philippines, questioned the constitutionality of this
action of the President contending that power of
taxation is essentially legislative in nature by filing a
petition before the Supreme Court. Is the action of
the President Constitutional? Explain. (5%)
(1st Paragraph) Yes. The action of the President is constitutional
because the President may exceptionally exercise law-making
power when it comes to custom duties, tariff rates, import and
export quotas if properly authorized by the Congress.
(2nd Paragraph) Article VI Section 28 Paragraph 2 of the 1987

Constitution of the Philippines provides that the Congress may, by
law, authorize the President to fix within specified limits, and
subject to such limitations and restrictions as it may impose, tariff
rates, import and export quotas, tonnage and wharfage dues, and
other duties or imposts within the framework of the national
development program of the Government.
it is respectfully submitted that the action of President of imposing
tariff rates and providing import quotas is constitutional because
the Congress authorized the President to do so thru the Custom and
Tariff Code of the Philippines. As long as the limitations and
restrictions provided by the Custom and Tariff Code such as holding
of public hearing and recommendation by NEDA are complied with,
this exceptional legislative act of the President is justified.

questioning the constitutionality of the action of the President shall
be denied for lack of merit.
12) The Local Government Code of 1991 provides that a City or Province
may levy amusement tax on Cinema Operation equivalent to 10% of gross
receipts. In 2020, the Congress passed a law amending Local Government
Code of 1991 and transferring the amusement tax from local government
units to Film Development Council of the Philippines, a national
government agency entrusted with the development of Filipino films. The
City of Cebu filed a petition before the Supreme Court questioning the
constitutionality of the ordinance by contending that the taxation power of
local government units is a constitutionally delegated power and it is
exercised since time immemorial. The OSG, in behalf of the republic,
contended that the taxation power of LGU is merely a legislatively
delegated power by virtue of Local Government Code of 1991 that can be
amended by the Congress anytime. Decide. (5%)
(1st Paragraph) It is respectfully submitted that the law transferring the amusement tax from LGU to
Film Development Council is unconstitutional because it violates the fiscal autonomy of LGU which is
necessary for the maintenance of basic policy of local autonomy.
(2nd Paragraph) Article 10 Section 5 of the 1987 Constitution of the Philippines Each local government
unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges
subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy
of local autonomy. This provision confirms that although taxation power is not inherent to a local
government unit, it is a constitutionally delegated power and not a mere delegation by Congress.
Accordingly, under the present Constitution, where there is neither a grant nor a prohibition by statute,
the tax power of municipal corporations must be deemed to exist although Congress may provide
statutory limitations and guidelines. The basic rationale for the current rule on local fiscal autonomy is
the strengthening of LGUs and the safeguarding of their viability and self-sufficiency through a direct
grant of general and broad tax powers. In conformity to the dictate of the fundamental law for the
legislature to "enact a local government code which shall provide for a more responsive and accountable
local government structure instituted through a system of decentralization, consistent with the basic
policy of local autonomy, Congress enacted the LGC, Book II of which governs local taxation and fiscal
matters and sets forth the guidelines and limitations for the exercise of this power.
(3rd Paragraph) Applying the relevant laws to the facts of the case, it is respectfully submitted that transferring the
amusement tax from LGU to a national government agency will violate the fiscal autonomy of LGU. Based on the
provisions of law, covered LGUs still have the power to levy amusement taxes, albeit at the end of the day, they will
derive no revenue therefrom. The same, however, cannot be said for FDCP and the producers of graded films since the
amounts thus levied by the LGUs which should rightfully accrue to them, they being the taxing authority-will be going to
their coffers. As a matter of fact, it is only through the exercise by the LGU of said power that the funds to be used for the
amusement tax reward can be raised. Without said imposition, the producers of graded films will receive nothing from
the owners, proprietors and lessees of cinemas operating within the territory of the covered LGU. Taking the resulting
scheme into consideration, it is apparent that what Congress did in this instance was not to exclude the authority to levy
amusement taxes from the taxing power of the covered LGUs, but to earmark, if not altogether confiscate, the income to
be received by the LGU from the taxpayers in favor of and for transmittal to FDCP, instead of the taxing authority. This is
in clear contravention of the constitutional command that taxes levied by LGUs shall accrue exclusively to said LGU and is
repugnant to the power of LGUs to apportion their resources in line with their priorities.
It is a basic precept that the inherent legislative powers of Congress, broad as they may be, are limited and confined
within the four walls of the Constitution. Accordingly, whenever the legislature exercises its power to enact, amend, and
repeal laws, it should do so without going beyond the parameters wrought by the organic law. In the case at bar,
through the application and enforcement of the said, the income from the amusement taxes levied by the covered LGUs
did not and will under no circumstance accrue to them, not even partially, despite being the taxing authority therefor.
Congress, therefore, clearly overstepped its plenary legislative power, the amendment being violative of the fundamental
law's guarantee on local autonomy
(4th Paragraph) Wherefore, based on the foregoing, the petition questioning the constitutionality of the law shall be
granted.
13) Explain the share of local government units
in national taxes.
Answer. Article X Section 6 of the 1987 Constitution
of the Philippines provides that local government
units shall have a just share, as determined by law, in
the national taxes which shall be automatically
released to them. Since the 1987 Constitution does
not distinguish as to the basis of internal revenue
allotment, the local government units shall have a just
share in all national taxes levied by Congress whether
under the National Internal Revenue Code, Custom
and Tariff Code and other national taxes.
14) Tom Pitt is an american citizen residing in Manila City. He died intestate
leaving several properties including house and lot in Makati City; condominium
unit in Florida, USA; investment in shares of stocks of Apple USA Incorporated, a
nonresident foreign corporation; and investment in bond securities of Globe
Incorporated, a domestic corporation. The Commissioner of Internal Revenue of
the Philippines subjected to estate tax all the abovementioned properties of Mr.
Tom Pitt. However, the court appointed administrator of the estate of Tom Pitt
protested the assessment made by the Commissioner of Internal Revenue of the
Philippines with regard to the condominium unit located in Florida USA and
investment in shares of stocks of Apple USA Incorporated. The administrator
contended that questioned properties of the estate are exempted from estate
tax because they are located outside the Philippine territory and that the
corresponding estate tax on such properties have been paid in USA that will
result to double taxation. Decide on the contentions of the estate administrator.
(5 points)
Answer. It is respectfully submitted that the contentions of the estate
administrator are untenable because a resident of the Philippines are
taxable for his estate regardless of location. The National Internal
Revenue Code of the Philippines provides that the the value of the
gross estate of the decedent shall be determined by including the
value at the time of his death of all property, real or personal,
tangible or intangible, wherever situated: Provided, however, that in
the case of a nonresident decedent who at the time of his death was
not a citizen of the Philippines, only that part of the entire gross
estate which is situated in the Philippines shall be included in his
taxable estate. Based on this provision, the basis for taxability of the
estate of the decedent is either his citizenship or his residency.
As to the first contention of the administrator, it is devoid of merit because the
decedent Mr. Tom Pitt was a resident of the Philippines. As such, all his
properties, regardless of location, are subject to estate tax in the Philippines.
As to the second contention of the administrator, it is also without legal basis

because double taxation, whether direct or indirect, is not absolutely prohibited
by the 1987 Constitution. Assuming direct double taxation is contrary to
substantive due process of law for being oppressive and confiscatory, the case at
bar does not involve a direct double taxation but instead indirect double
taxation because there are different taxing states involved. In order to reduce
the impact of this indirect double taxation, the Tax Code allows the claiming of
tax credit on the estate tax paid in other countries for properties located outside
Philippine Territory subject to limitations and substantiation requirement under
the implementing rules and regulations of the Tax Code.
Recommend Type of Question:
15) Universe Robin Incorporated (URC) is a domestic corporation
engaged in the manufacturing of food products. One of its best selling
beverage juice drinks is Smart C3. The Commissioner of Internal
Revenue assessed URC for the following taxes: (1) excise tax on
production of Smart C3; (2) value added tax on the sale of Smart C3;
and (3) corporate income tax on gross profit from sale Smart C3. On the
other hand, the City of Sta. Rosa assessed URC for the following local
taxes: (1) real property tax on its manufacturing plant of Smart C3 and
(2) business tax on the sales of Smart C3 made in Sta. Rosa. If you are
the legal counsel of URC, what legal advice will you recommend to
minimize the impact of the above mentioned multiple taxation?
Answer:
If I am the legal counsel of URC, I will recommend the
availment of the following tax avoidance schemes legally
permitted under the National Internal Revenue Code of the
Philippines:
1) As regards the excise tax, real property tax and local tax,
URC may claim them as allowable deductions from gross
income in order to reduce the taxable income that will be
subjected to 30% corporate income subject to
substantiation requirements of the implementing rules
and regulations of the Tax Code.
2) As regards the value added tax, URC may shift the
output value added tax to its buyers since it is an
indirect tax. Afterwards, upon the filing of value
added tax return, URC may claim the applicable
input value added tax as tax credit from the
related output value added to arrive at the net
value added tax due subject to substantiation
requirements of the implementing rules and
regulations of the Tax Code.
3) As regards the corporate income tax, URC may legally minimize its
income tax by reducing its taxable income through proper claiming of
allowable deductions from its gross income. URC may either avail of
optional standard deduction equivalent to 40% of its gross income or
itemized deductions as enumerated in the Tax Code. In case URC availed
of the 40% optional standard deduction, it can still claim the cost of sales
as allowable deduction from its gross income because the 40% optional
standard deduction for a corporation is only in lieu of other itemized
deductions but not of cost of sales. The advantage of the said option is
that the corporation is no longer required to substantiate the 40%
optional standard deduction although it must keep records pertaining to
its gross income. On the other hand, in case URC availed of the itemized
deductions option, it is required to substantiate and justify every
deduction reported in its corporate income tax return.
Case Type Question (Two or More Issues Type of
Question)
16) During 2020, Saint Michael Corporation (SMC), a dometic corporation
operating as a conglomerate, donated P500M cash to University of San Pedro
Calungsod (USPC), a nonstock nonprofit educational institution. USPC used the
P500M cash for construction of a 10-storey building. The 1st floor and 2nd floor
of the said building are being leased out to commercial establishments while the
3rd floor is being used as administration offices of USPC. The remaining seven
floors are being used as library, study area, class rooms, audio-visual rooms and
sport gymanium of USPC. For the taxable year ended December 31, 2020, USPC
reported tuition fee revenues from students and rental income from commercial
establishments. The tuition fee revenues from students are used to support the
operating expenses of the educational institution while the rental income is used
to finance scholarship of students.
The Commissioner of Internal Revenue assessed USPC for unpaid
income tax on its revenues and unpaid value added tax on its
services. The City Assessor also assessed USPC for unpaid real
property tax on the newly constructed building. USPC filed a
formal protest on the final assessment notices issued by BIR
Commissioner and City Assessor. The Commissioner of Internal
Revenue assessed SMC for unpaid donor's tax on the P500M
donation to USPC and disclaimed the allowable deduction from
gross income claimed by SMC on donation for charitable
purposes. SMC filed a formal protest on the final assessment
notice issued by BIR Commissioner.
Based on the facts of the case, answer the following
questions:
1) Is the newly-constructed 10-storey building of USPC subject to real
property tax? (1-2%)
2) Are the tuition fee revenues and rental income of USPC subject to
income tax? (1-2%)
3) Are the tuition fee revenues and rental income of USPC subject to
value added tax? (1-2%)
4) Is the P500M cash donation by SMC to USPC subject to donor's tax?
(1-2%)
5) May SMC claim as allowable deduction from its gross income the
P500M cash donation to USPC? (1-2%)
Answer
1) Only the 1st and 2nd floors but not the 3rd to 10 floors of the 10-storey building of USPC
are subject to real property tax because Section 28, paragraph 3 of Article VI of the 1987
Constitution of the Republic of the Philippines provides that charitable institutions,
churches and personages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively
used for religious, charitable, or educational purposes shall be exempt from taxation. It is
very clear from the facts of the case that only the 3rd to 10th floors are actually, directly
and exclusively used for educational purposes by USPC because these floors are utilized as
library, study area, class rooms, audio-visual rooms and sport gymanium of the university.
The intended use of the rental income from 1st and 2nd floors of the building for
scholarship of students is irrelevant because the criteria of the 1987 Constitution for
exemption from real property tax are the actuality, directness and exclusivity of the land,
building and improvement for educational purposes. The leasing of 1st and 2nd floors to
commercial establishments is clearly a commercial aim but not educational purpose.
Therefore, the criteria for tax exemption from real property tax of 1st and 2nd floors of the
10-storey are not clearly met.
Answer
2) No. The tuition fee revenues and rental income of USPC are exempted from income
tax because Section 4 paragraph 3 Article XIV of the 1987 Constitution of the
Republic of the Philippines provides that all revenues and assets of non-stock, non-
profit educational institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. It is very clear from the facts of the
case that the tuition fee revenues and rental income of USPC, a nonstock nonprofit
educational institutions, are actually, directly and exclusively used for educational
purposes because they are utilized not only to support the operating expenses of
the educational institution but also to finance the scholarship of its students. It is
only incumbent upon the nonstock nonprofit educational institution to prove that
all its revenues, whether educational revenue or other income, are actually, directly
and exclusively used for educational purposes but it is no longer required to prove
that not more than 30% of its revenues are for administrative purposes because
that criterion is not required by the 1987 Constitution.
Answer
3) Only the rental income but not the tuition fee revenues of USPC is subject to value added
tax because the National Internal Revenue Code of the Philippines provides that value
added tax shall be levied, assessed and collected on gross receipts derived from the sale
or exchange of services, including the use or lease of properties in the ordinary course of
business but the said Tax Code exempts from value added tax educational services
rendered by private educational institutions, duly accredited by the Department of
Education (DEPED) and the Commission on Higher Education (CHED), and those
rendered by government educational institutions. It is very clear from the Tax Code that
only educational services revenues including tuition fees revenue of an educational
institution are exempted from value added tax but not the rental income in the ordinary
course of business of an educational institution. The 1987 Constitution only exempts all
the revenues of nonstock nonprofit educational institution from income tax but not
necessarily from value added tax. Therefore, although rental income of USPC, a nonstock
nonprofit educational institution is exempted from income tax, such rental income in the
ordinary course of business is still subject to value added tax.
Answer
4) No. The P500M cash donation by SMC to USPC is exempted from donor's tax because the
National Internal Revene Code of the Philippines provides that gifts in favor of an
educational and/or charitable, religious, cultural or social welfare corporation, institution,
accredited nongovernment organization, trust or philanthrophic organization or research
institution or organization are exempt from donor's tax: Provided, however, That not more
than thirty percent (30%) of said gifts shall be used by such donee for administration
purposes. Section 4 paragraph 4 of Article XIV of the 1987 Constitution of the Republic of
the Philippines provides that subject to conditions prescribed by law, all grants,
endowments, donations, or contributions used actually, directly, and exclusively for
educational purposes shall be exempt from tax. The conditions imposed by the Congress
under the Tax Code is that not more than 30% of gifts to educational institution shall be
used by such donee for administrative purposes. It is very clear from the facts of the case
that only 30% or 3 out of the 10 floors of the 10-storey building are used for administrative
purposes. Therefore, SMC may claim exemption from donor's tax for such P500M gift to
USPC subject to substantiation requirements under implementing rules and regulations of
the Tax Code.
Answering Different Types of Bar Questions
Answer
5) Yes. SMC may claim as allowable deduction from its
gross income the P500M cash donation to USPC
because the National Internal Revenue Code of the
Philippines provides that donations to accredited
nongovernment organizations subject to the
requirements of the Tax Code are deductible in full
from the gross income to arrive at the taxable
income.
Answering Different Types of Bar Questions
The Tax Code enumerated the following requirements to be

considered an accredited nongovernment organizations:
(1) Organized and operated exclusively for scientific, research, educational, character-building and youth and
sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of
the net income of which inures to the benefit of any private individual;
(2) Which, not later than the 15th day of the third month after the close of the accredited nongovernment
organizations taxable year in which contributions are received, makes utilization directly for the active conduct
of the activities constituting the purpose or function for which it is organized and operated, unless an extended
period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated,
upon recommendation of the Commissioner;
(3) The level of administrative expense of which shall, on an annual basis, conform with the rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no
case to exceed thirty percent (30%) of the total expenses; and
(4) The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic
corporation organized for similar purpose or purposes, or to the state for public purpose, or would be
distributed by a court to another organization to be used in such manner as in the judgment of said court shall
best accomplish the general purpose for which the dissolved organization was organized.
Assuming all the requirements enumerated by the Tax
Code are complied with by USPC for accreditation, SMC
may fully claim as allowable deduction from its gross
income the said P500M donation to USPC. Assuming
USPC is not properly accredited by BIR, SMC may still
claim the said P500M donation to USPC as allowable
deduction from gross income but subject to limitation
or ceiling of not exceeding five percent (5%) of SMC's
taxable income derived from trade or business before
the deduction of the said P500M donation.
17) The Congress passed a law exempting from
income tax the income of Miss Pia Wurtzback in
the 2015 Miss Universe Pageant. Mr. Whamo
Cruz filed a petition before the Supreme Court
questioning the constitutionality of the said law
on the ground of violation of equal protection of
the laws. Is the law violative of equal protection
clause? Explain. (5%)
(1st Paragraph) Yes. The tax law is violative of equal protection of the laws for
being discriminatory.
(2nd Paragraph) Article III Section 1 of the 1987 Constitution of the Philippines
provides that no person shall be denied equal protections of the laws. The
fundamental law of the land does not require absolute equality. It only requires
equality among equals. As such, reasonable discrimination is constitutionally
allowed as long as it is based on valid classification. Based on jurisprudence, the
following are the requisites of reasonable classification in compliance with equal
protection clause:
1) It must be based on substantial distinction.
2) It must be germane to the purpose of the law.
3) It must apply not only to present conditions but also future ones.
4) It must apply equally to all persons of the same class.
it is respectfully submitted that the tax law exempting the income in
Miss Universe Pagent of Pia Wurtzback is unconstitutional for being
discriminatory. Two of the requirements of valid classification are
not complied with. The law does not show substantial distinctions
between the winners of Miss Universe and other international
pageants. Furthermore, it only applies to the income of Miss Pia
Wurtzback but not to income of future winners in the Miss Universe
Pageant. For being discriminatory, it is constitutionally infirmed.

17) The Congress enacted a law imposing 12% value
added tax on the privilege to sell newspaper, books,
religious articles and bible in the ordinary course of
business. American Bible Society, a NGO engaging in
the sale of bible, filed a petition before the Supreme
Court questioning the constitutionality of the said
tax law contending that it violates constitutional
rights of freedom of expression and right to religious
freedom. Is the tax law constitutional? Explain. (5%)
(1st Paragraph) Yes. The tax law is constitutional
because it does not violate constitutional rights to
freedom of expression and right to religious freedom.
(2nd Paragraph) Article III Section 4 of the 1987

Constitution of the Philippines provides that no law
shall be passed abridging the freedom of speech, of
expression, or of the press. The fundamental law also
guarantees the right to religious freedom.
(3rd Paragraph) Applying the relevant laws to the facts of the case, it is
respectfully submitted that the tax law imposing value added tax on the sale
of newspaper, religious articles or bible in the ordinary course of business
does not violate the constitutional right of freedom of expression and right
to religious freedom because it does not create prior restraint. The law
neither punishes the expression of ideas nor the profession of religious
belief. It will not create chilling effect to the people because what is being
taxed is the privilege of selling goods in the ordinary course of business but
neither the mere expression of ideas nor the mere profession of religious
beliefs.
(4th Paragraph) Wherefore, based on the foregoing, the petition questioning

the constitutionality of the tax law shall be denied for lack of merit.
18) The Congress enacted a law imposing excise
tax on the privilege to grind tobacco leaves into
raw material and another excise tax on the
privilege to manufacture the raw material into
finished goods called cigarette. Fortune Tobacco
questioned the constitutionality of this tax law
being oppressive. Is the tax law
unconstitutional? Explain. (5%)
(1st Paragraph) No. The tax law is not unconstitutional because double
taxation, direct or indirect, is not constitutionally prohibited but merely
discouraged.

Philippines provides that no person shall be deprived of right to
property without due process of law. Article III Section 1 of the 1987
Constitution of the Philippines provides that no person shall be deprived
of life, liberty or property without due process of law. Right to due
process includes substantive aspect and procedural aspect. Substantive
due process of law requires tax laws to be enacted for public purpose
and the means to employ them to be reasonable and not confiscatory.
(3rd Paragraph) Applying the relevant laws to the facts of the case, it is respectfully
submitted that the imposition of separate excise tax on the processing of raw materials
and conversion of finished goods is not oppressive to violate the substantive due process of
law. First, double taxation, direct or indirect, is not constitutionally prohibited but merely
discouraged. Second, if double taxation is unfair, the tax law is an indirect type of double
taxation because the excise tax is imposed on two different subject matters which are
processing of raw materials and conversion of finished goods. Third, the law provides for
tax mechanism to minimize the impact of this double taxation to the manufacturer. Both
excise taxes on the processing of raw materials and conversion of finished goods can be
capitalized as part of production cost of the finished product. Eventually, these excise taxes
can be claimed as allowable deductions from the gross income which will eventually result
to income tax savings on the part of the manufactures. Thus, it is not oppressive to be
tantamount to deprivation of property without due process of law.
(4th Paragraph) Wherefore, based on the foregoing, the petition questioning the
constitutionality of the tax law shall be denied for lack of merit.
The rule of taxation shall be uniform and
equitable. The Congress shall evolve a
progressive system of taxation. (Article VI
Section 28)
No law granting any tax exemption shall be
passed without the concurrence of a majority of
all the Members of the Congress. (Article VI
Section 28)
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. (Article VI Section 27)
All appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local
application, and private bills, shall originate
exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
(Article VI Section 24)
Injunction To Enjoin Collection of Tax
• Local Tax
– Regional Trial Court
– Court of Tax Appeals
– Supreme Court
• National Tax
– Court of Tax Appeals
– Supreme Court
• Prospectivity of Tax Laws
– Retroactive Application of Tax Laws
• Favorable to taxpayer
• Interpretative in nature but not prejudicial to taxpayer
• Curative or remedial in nature
• Internal circular of BIR
• Imprescriptibility of taxes
– Exceptions
• Prescriptive period of assessment of tax
• Prescriptive period of collection of tax
• Situs of Taxation
– Exception
• Income Tax
– Resident Citizen
– Domestic Corporation
• Donor’s Tax and Estate Tax
– Citizen
– Resident
– Domestic
• Tax avoidance (Tax Minimization) vs. Tax
Evasion (Tax Dodging)
• Tax exemption vs. Deduction vs. Tax Amnesty
• Doctrine of Equitable Recoupment
• Prohibition on compensation and set-off
– Requisites of Legal Compensation
– Budgetary process
• Compromise of Taxes
– Grounds
• Reasonable doubt as to validity of assessment (40%)
• Financial incapacity
– Not subject to compromise
• Civil Case
– Withholding tax cases
– Estate tax on the ground of financial incapacity
– Tax Cases with final decision of SC on the ground of reasonable doubt as to validity of
assessment
– Tax Cases with scheduled payment by installments requested by taxpayer and granted by
BIR
• Criminal Case
– Case already filed in court
– Case involving fraud
• Construction and Interpretation of Tax Laws
vs. Construction and Interpretation of Tax
Exemptions and Deductions
• Valid Delegation of Rule-Making Power
– Completeness Test
– Sufficient Standard Test
• Legal Standing/Locus Standi
• Taxpayer’s Suit
• Issue of Transcendental Importance
• The Supreme Court shall have the power to Review, revise, reverse, modify, or affirm
on appeal or certiorari, as the law or the Rules of Court may provide, final judgments
and orders of lower courts in all cases involving the legality of any tax, impost,
assessment, or toll, or any penalty imposed in relation thereto. (Article VIII Section 5)
• The Supreme Court shall promulgate rules concerning the protection and
enforcement of constitutional rights, pleading, practice, and procedure in all courts,
the admission to the practice of law, the integrated bar, and legal assistance to the
under-privileged. (Article VIII Section 5)
• The salary of the Chief Justice and of the Associate Justices of the Supreme Court,
and of judges of lower courts shall be fixed by law. During the continuance in office,
their salary shall not be decreased. (Article VIII Section 10)
• The National Internal Revenue Code of 1997 imposes separate excise
taxes on the (1st) production/processing of tobacco leaves into raw
materials (tobacco) of cigarettes and on the (2nd) manufacturing of such
raw materials (tobacco) into finished product commonly known as
cigarette. Fortune Tobacco, a domestic corporation, questioned the
imposition of the two excise taxes for being (1) direct double taxation
and (2) for being oppressive and confiscatory, therefore, violative of right
to substantive due process of law.
– Is the imposition of the two excise taxes considered direct double taxation?
Explain.
– Is double taxation (direct or indirect) prohibited by the Constitution? Explain.
– Is the imposition of the separate excise taxes violative of substantive due process
of law? Explain the legal mechanism provided by the NIRC to minimize the
impact of the above mentioned double taxation.
• SM Prime Incorporated, a VAT-Registered taxpayer, is the
cinema operator of SM Cinema is SM Lipa City. The City of
Lipa, through the Sangguniang Panglungson, passed a tax
ordinance levying amusement tax amounting to 10% on
gross receipts of cinema operating in Lipa City including
receipts from sale of ticket and sale of goods from
moviegoers. SM Prime Incorporated questioned the validity
of the said ordinance before the proper court.
– Is the tax ordinance levying amusement tax valid? Explain.
– If it is valid, explain the tax mechanism that may be availed by SM
Prime Incorporated to minimize the impact of the possible double
taxation.
• On year 2018, the Congress passed the TRAIN Law to amend the NIRC of 1997. One
of the amendments provided in the TRAIN Law is the prospective removal of the 15%
preferential rate currently enjoyed by Filipinos occupying managerial positions in
Regional Headquarter of a multi-national company. It means the those Filipinos
enjoying the said tax privilege before the passage of TRAIN Law will continue to avail
it while those Filipinos who will be hired in the said position after the passage of
TRAIN Law will be subjected to 20-35% scheduler rate. President Rodrigo Duterte
exercised an item veto on this specific provision only and changed the wordings of
TRAIN Law by stating that 20-35% schedule rate will apply to all Filipinos occupying
managerial positions in Regional Headquarter of a multi-national company regardless
of year of hiring. Affected taxpayers questioned the validity of the item veto and the
removal of the tax privilege.
– Is the item veto done by the President on the TRAIN Law constitutional? Explain.
– May the state validly withdraw the tax privilege (preferential rate of 15%) granted to Filipinos
occupying managerial positions in Regional Headquarter of a multi-national company in the
NIRC of 1997 through TRAIN Law? Explain.
• The Local Government Code of 1991 enacted by Congress provides
that an annual professional tax not exceeding P300 may be levied
by a City or a Province to all professionals who have passed
government licensure examination in Professional Board Exam or
Philippine Bar Exam. In 2020, the Congress passed a law
transferring the annual professional tax proceeds from City or
Province to the Professional Regulation Commission and Supreme
Court but the tax will remain to be levied and collected by the LGU.
The League of Cities and the League of Provinces questioned the
constitutionality of the law before the appropriate court.
– What is the nature of taxing power of local government units? Explain.
– Is the 2020 law passed by the Congress constitutional? Explain.
• The Department of Budget and Management borrowed P3B
loan as approved by Congress from BDO Unibank on year 2001
which will be due at the end of 2002. On year 2002, BDO
Unibank reported income tax due amounting to P2B. The BDO
Unibank filed the income tax return for year 2002 but did not
pay the corresponding income tax due. The BIR Commissioner
assessed BDO Unibank for the unpaid income tax. The BDO
contended that it will not pay because since DBM’s loan
payable due BDO Unibank became due and demandable at the
end of 2002, its income tax liability on 2002 is legally
compensated with the said loan. Is the contention of BDO
tenable? Explain.
• The Congress enacted Sin Tax Law which increases the excise
tax on the manufacturing of cigarettes and liquor. The amount
to be collected from the said tax will be used to finance the
distribution of condoms for the implementation of
Reproductive Health Law. Fortune Tobacco Inc. questioned the
constitutionality of Sin Tax Law before the RTC of Makati and
prayed for the issuance of preliminary injunction and
temporary restraining order to enjoin the collection of said
excise taxes. The RTC judge issued the preliminary injunction
and TRO to enjoin the collection of excise tax. Is the Sin Tax
Law valid even if the proceeds will be used for the acquisition
of condoms? Explain.
• The Congress of the Philippines passed a law
increasing the corporate income tax to 60% of
gross income of all corporations in the
Philippines. The purpose is to raise revenue in
order to finance the 5P’s project of DSWD. Is
the tax law valid? Explain.
• The Philippine Congress increased the tax rate of individual income
tax to 35% intended to raise revenue for the national road expansion.
The expansion will improve the nearby land and will increase the
value of several private properties. A lawyer from the province
questioned the validity of the tax law based on the following
contentions:
– He did not give consent to the Philippine Congress to be taxed.
– The 1987 Constitution does not grant power of taxation to Congress.
– He will not receive direct benefits from such tax.
– It is not intended exclusively for public purpose because it will provide
benefits to private individuals near the road expansion.

• Are the grounds raised by the lawyer tenable? Explain
• The previous BIR Commissioner interpreted the NIRC and issued rules
and regulations stating that the tax basis for computation of 25% final tax
on Nonresident Foreign Corporation is the taxable income after
deduction instead of gross income. The successor BIR Commissioner
reversed the interpretation and made a ruling that the basis will be the
gross income. Based on the new ruling, the BIR Commissioner
retroactively assessed the corporations who paid income tax on the basis
of taxable income instead of gross income. The corporations refused to
pay based on three grounds: (1) The BIR ruling which will prejudice the
taxpayer shall not be given retroactive application (2) The corporations
relied in good faith to the ruling of the previous BIR Commissioner (3)
The government shall be estopped by the ruling made by its official. Are
the grounds raised by the corporations tenable? Explain.
• University of Santo Tomas, a nonstock nonprofit educational
institution, earned interest income on its tuition fee revenue. The BIR
Commissioner assessed income tax on the said interest income
contending that such income is merely incidental on the operation
the institution but not actually, directly and exclusively connected to
educational purposes. The BIR Commissioner also contended that tax
exemption shall be interpreted strictly against the taxpayer and
liberally in favor of the government on the basis of time honored
principle of life blood doctrine. University of Santo Tomas counter
argued that tax law shall be interpreted strictly against the
government and liberally in favor of the taxpayer based on the
concept that any act that infringes the constitutional rights of the
citizens are disfavored by the courts. Decide.
• TRAIN Law provides that self-employed taxpayers and
professionals are given the option to avail of 8% tax on
their gross sales or gross receipts in lieu of 5%-35% income
tax on taxable income. This privilege is not given to purely
compensation income earners who will be taxed on higher
5%-35% tax rates. National Union Congress of the
Philippines questions the constitutionality of the TRAIN
Law on the ground of violation of equal protection of the
law. The Solicitor General counter argued that the
Constitution does not require absolute equality. Is the
TRAIN Law violative of equal protection of the law? Explain.
• TRAIN Law was approved by the Congress despite
the absence of the required quorum as provided in
its internal rules and regulations. The minority bloc
of the Congress questions the constitutionality of
the law. The Solicitor General filed a motion to
dismiss contending that the petitioners have no
legal standing to question the law since they will
not suffer injury by the implementation of the tax
law. May the petition prosper? Explain.
• The Congress imposed road users' tax to every car
and the tax to be collected will be used for the
national road expansion which will result to
incidental benefits to taxpayers living near the
national road. The Congress also imposed excise tax
on production of sugars and the tax to be collected
will be used to rehabilitate financial distressed
Azucarera Company, the Sugar Industry's leading
company which is vital for the economy. Are the
two taxes valid? Explain.
• The BIR Commissioner issued rules and regulations to implement
the provision of National Internal Revenue Code regarding excise tax
on cigarettes. The law imposes tax on the production of pack of
cigarettes in soft or flip top containing 20 sticks. The rules and
regulations issued by BIR Commissioner provides that product of
pack containing 5 or 10 sticks are also subject to excise tax. Philip
Morris Co. questions the constitutionality of the rules and
regulations contending that the BIR Commissioner committed grave
abuse of discretion since it expands the provisions of the Tax Code.
The Solicitor General counter argued that the BIR Commission
merely implements the provisions of the Tax Code when he issued
the rules and regulations. Is the rules and regulations valid? Explain.
• The National Internal Revenue Code enacted by
Congress provides that the BIR Commissioner has
the power to promulgate rules and regulations to
provide the ceiling for de minimis benefits that will
be exempted from income tax subject to the
approval of Secretary of Finance. Association of
taxpayers questions the Constitutionality of the law
by contending that it constitutes an invalid
delegation of legislative power. Is the delegation to
BIR Commissioner valid? Explain.
• The BIR Commissioner issued rules and regulations requiring
nonstock nonprofit educational institutions to submit document
substantiating that not more than 30% of its revenues are used for
administrative purposes it order for such revenues to be exempted
from income tax. Ateneo De Manila University questions the
validity of such rules and regulations contending that it violates
the constitutional provision exempting the revenues of nonstock
nonprofit educational institutions from income tax. The Solicitor
General counter argued that such rules and regulations merely
implement the provisions of the Constitutions and are merely
intended for regulatory and reporting purposes only. Is the rules
and regulations valid? Explain.
• The Expanded Value Added Tax Act subjects to
value added tax the sale of newspaper and
sale of religious articles and bibles in the
ordinary course of business. The media people
and religious people question the
constitutionality of such law contending that it
is violative of free speech and religious
freedom. Is the tax law violative of those
constitutional rights? Explain
• Iglesia Ni Cristo Incorporated (INC), a religious corporation duly registered
before Securities and Exchange Commission (SEC) and Bureau of Internal
Revenue (BIR) constructed Philippine Arena in Bocaue City, Bulacan. The said
arena is normally used by INC for mass indoctrination of its new members.
However, in several occasions, it is also used as concert venue for some
artists. Moreover, it is also used by national government as a quarantine
facility for covid patients during the pandemic. The City of Bocaue subjected
the said Philippine Arena to real property tax. Moreover, the gross receipts of
INC for the use of the said arena are also subjected to business tax by City of
Bocaue. INC filed two formal protests to question the assessment of real
property tax on Philippine and to assail the assessment of business tax on
gross receipts of INC for the use of the said arena.
– Is the Philippine Arena of INC subject to real property tax? Explain.
– Are the gross receipts of INC for the use of Philippine Arena subject to business tax?
Explain.
• Bangko Sentral ng Pilipinas (BSP) leased the first floor of its
administrative building to a franchisee of Jollibee Food
Corporation for operation of a fast food chain. The City of Manila
subjected the said first floor of administrative building of BSP to
real property tax. BSP protested the assessment contending that it
is a governmental instrumentality performing essential
government function, therefore, exempted from real property tax.
The City of Manila denied the protest because it is devoid of merit.
– It the said first floor of administrative building of BSP subject to real
property tax? Explain.
– If the said floor is subject to real property tax, who shall be liable to pay
the tax to City of Manila? Explain.
• The City of Makati levied community tax to its residents. The
local ordinance provides that nonpayment of the said
community tax will not only create civil obligation on the part
of the resident but also possible imprisonment for tax
evasion. The City of Makati filed civil case and criminal case
against the Filipino employees and Diplomats of Austrian
Embassy located in Makati City for nonpayment of the said
community tax.
– Are the Filipino employees and Diplomats of Austrian Embassy liable
to pay community tax? Explain.
– May the Filipino employees and Diplomats of Austrian Embassy be
imprisoned for nonpayment of poll tax? Explain.

General Principles of Taxation

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General Principles of Taxation

(2nd Paragraph) Article III Section 1 of the 1987 Constitution of the

(4th Paragraph) Wherefore, based on the foregoing, the petition

(2nd Paragraph) Article III Section 1 of the 1987 Constitution of the

(4th Paragraph) Wherefore, based on the foregoing, the petition

(2nd Paragraph) Article II Section 2 of the 1987 Constitution of the

(4th Paragraph) Wherefore, based on the foregoing, the petition

(2nd Paragraph) Article VI Section 28 Paragraph 2 of the 1987

(4th Paragraph) Wherefore, based on the foregoing, the petition

As to the second contention of the administrator, it is also without legal basis

The Tax Code enumerated the following requirements to be

(4th Paragraph) Wherefore, based on the foregoing, the petition

(2nd Paragraph) Article III Section 4 of the 1987

(4th Paragraph) Wherefore, based on the foregoing, the petition questioning

(2nd Paragraph) Article III Section 1 of the 1987 Constitution of the

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