A.

Definition and concept of taxation

Define taxation.
Taxation is the power by which the sovereign, through its lawmaking body, raises revenue to defray the necessary expenses of
the government.
What are the two concepts of taxation?
1. Power to tax; and
2. The act or process by which the taxing power is exercised.
B. Nature of Taxation (as a Taxing Power)
What is the nature of taxation (as the power to tax)?
The nature of taxation (as the power to tax) is two-fold. (I L)
1. It is an inherent power.
The power to tax is a necessary attribute of sovereignty. The
moment the State exists, the power to tax ipso facto exists. It does not
need conferment.
Take note, however, that the taxing power is inherent in the National
Government but not in the Local Government Units (autonomous
regions, provinces, municipalities and cities) because the latter is
merely an agency of the State. As such, LGUs can only impose taxes
when expressly conferred to them by the Constitution or by laws
enacted by Congress.
2. It is legislative in character.
What is the nature of the taxing power of the provinces, municipalities and
cities?
As it stands, the taxing power of the provinces, municipalities and cities
is directly conferred by the Constitution by giving them the authority to
create their own sources of revenue (Article X, Section 5, Constitution).
With regard to the autonomous regions, their taxing power is conferred
by the Congress because the provision of the Constitution requires an
enabling law as it is non-self-executing [Art. X, Sec. 20 (par. 2),
Constitution].
If the taxing power of the autonomous regions is conferred to them by the
Congress, is it correct to say that in effect the Congress delegated the
power to tax to LGUs, specifically the autonomous regions?
No. The autonomous regions, also the provinces, cities and municipalities,
do not exercise the power to tax either as inherent power or by a valid
delegation of the power by Congress, but pursuant to a direct authority
conferred by the Constitution or by laws enacted by Congress (Mactan
1

Cebu International Authority vs. Marcos, 261 SCRA 667 [1996]); NPC vs.
City Cabanatuan, 401 SCRA 259 [2003]).
C. Characteristics of Taxation (CUPS)
What are the characteristics of taxation?
Comprehensive, Unlimited, Plenary and Supreme
D. Power of Taxation Compared with Other Powers (Police Power and Power of
Eminent Domain)
For the purpose of raising taxes, may police power by itself alone be
exercised by the state?
Police power may not be exercised by itself alone for the
purpose of raising taxes. However, police power may be
exercised jointly with the power of taxation for the purpose
of raising revenues (Lutz vs. Araneta).
E. Purpose of Taxation
What are the purposes of taxation?
1. Revenue-raising
2
2. Non-revenue/ Special or regulatory purposes (PR EP)
Promotion of general welfare; Regulation; Reduction of social inequality/
compensatory purpose; Encourage economic growth; and
Protectionism.
F. Principles of Sound Tax System (FAT)
What are the principles of sound tax system?
1. Fiscal adequacy sources of government revenue must be sufficient
to meet government expenditures and other public needs
2. Administrative feasibility tax laws must be capable of being
effectively enforced with the least inconvenience to the taxpayer
3. Theoretical justice a sound tax system must be based on the
taxpayers ability to pay conformably with the Constitutional provision
that Taxation must be uniform and equitable [Article VI, Section
28(1)].
What is the effect of violation of the above principles?
A tax law will retain its validity even if it is not in consonance with
the principles of fiscal adequacy and administrative feasibility because the
Constitution does not expressly require so. These principles are only
designed to make our tax system sound. However, if the tax law runs
contrary to the principle of theoretical justice, such violation will render
the law unconstitutional as it violates the constitutional provision that rule
of taxation should be uniform and equitable.
2

G. Theory and Bases of Taxation (LiNeBenJ)

What are the theory and bases of taxation? Why is there a need for
taxation?
The theory and bases of taxation are:
1. Life-blood theory Taxes are the lifeblood of government.
Without revenue raised from taxation, the government will not
survive resulting in detriment to society.
2. Necessity theory The existence of the government is a
necessity.
3. Benefits-protection/ Reciprocity theory (Doctrine of Symbiotic
Relationships Taxes are paid for the enjoyment of the benefits
of organized society.
Can one object to or resist the payment of taxes solely because no
personal benefit to him can be pointed out arising from the tax?
No. A person cannot object to or resist the payment of taxes
solely because no personal benefit to him can be pointed out
arising from the tax. Special benefits to taxpayers are not
required. (Lorenzo vs. Posadas, etc.)
4. Jurisdiction over subjects and objects The power to tax can only be
exercised within the territorial jurisdiction of a taxing authority.
CASES:
1. Paseo Realty & Development Corporation vs. Court of Tax Appeals
Issue: Whether the alleged excess taxes paid by Paseo Realty and
Development Corporation in 1988 should be refunded or credited against
its tax liabilities for 1990.
Ruling: No. The alleged excess taxes paid by Paseo in 1988 should
not be refunded or credited against its tax liabilities for 1990.
1) It should not be refunded because in the first place there were no
excess taxes paid. The Court found that Paseo failed to prove that there
were excess taxes paid; it did not present its tax return for 1990.
2) It should not also be credited against its tax liabilities for 1990.
Because the applicable regulation at that time, Revenue Regulation No.
10-77, provides that the carrying forward of any excess or overpaid
income tax for a given taxable year is limited to the succeeding taxable
year only. Although the present law allows claim for refund, i.e. excess
3

credits for 1988 to be applied to 1990 tax liabilities, but this should not be
made applicable in the case; RR No. 10-77 applies. [The law frowns against
exemptions from taxation and statues granting tax exemptions are thus
construed strictissimi juris against the taxpayer and liberally in favor of the
taxing authority.]
Taxation is a destructive power which interferes with the personal
and property rights of the people and takes from them a portion of their
property for the support of the government. And since taxes are what we
pay for civilized society, or are the lifeblood of the nation, the law frowns
against exemptions from taxation and statutes granting tax exemptions
are thus construed strictissimi juris against the taxpayer and liberally in
favor of the taxing authority. A claim of refund or exemption from tax
payments must be clearly shown and be based on language in the
law too plain to be mistaken. Elsewise stated, taxation is the rule,
exemption therefrom is the exception.
2. CIR vs. Algue, Inc. and the CTA
In this case, the Supreme Court commenced with this elucidation: Taxes
are lifeblood of the government and so should be collected without
unnecessary hindrance. On the other hand, such collection should be
made in accordance with law as any arbitrariness will negate the very
reason for government itself. It is therefore necessary to reconcile the
apparently conflicting interests of the authorities and the taxpayers so that
the real purpose of taxation, which is the promotion of the common good,
may be achieved. [Sounds familiar: Life-blood theory]
And ended with this: It is said that taxes are what we pay for civilized
society. Without taxes, the government would be paralyzed for lack of the
motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of ones hard earned income to the taxing
authorities, every person who is able to must contribute his share in the
running of the government. The government for its part is expected to
respond in the form of tangible and intangible benefits intended to
improve the lives of the people and enhance their moral and material
values. This symbiotic relationship is the rationale of taxation and should
dispel the erroneous notion that it is an arbitrary method of exaction by
those in the seat of power. [Sounds familiar: First part, life-blood theory;
second part, benefits-protection/ Reciprocity theory (Doctrine of Symbiotic
Relationships)]
But even as we concede the inevitability and indispensability of taxation, it
is a requirement in all democratic regimes that it be exercised reasonably
and in accordance with the prescribed procedure. If it is not, then the
taxpayer has a right to complain and the courts will then come to his
4

succor. For all the awesomeness power of the tax collector, he may still be
stopped in his tracks if the taxpayer can demonstrate, as it has here, that
the law has not been observed.
What law has not been observed?
There are two laws. One, Section 30.a.1 of the NIRC which states that in
computing net income, all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business,
including a reasonable allowance for salaries or other compensation for
personal services actually rendered, shall be allowed as deductions.
Two, Section 70(1) of Revenue Regulations No. 2, which states, Among the
ordinary and necessary expenses paid or incurred in carrying on any trade
or business may be included a reasonable allowance for salaries or other
compensation for personal services actually rendered.
What are the pertinent issue and the ruling of the Court in this case?
The issue is whether the CIR correctly disallowed the Php75k deduction
claimed by Algue, Inc. as legitimate business expenses in its income tax
return (ITR)?
The ruling of the Court is that the CIR was not correct. The claimed
deduction by Algue, Inc. was permitted under the NIRC and should
therefore not have been disallowed by the CIR. It is true that the burden is
on the taxpayer to prove the validity of the claimed deduction. In this
case, Algue, Inc. had discharged satisfactorily the burden to prove the
validity of its claimed deduction. It has proved that the payment of the
fees was necessary and reasonable.
Answer to the Quiz:
A. Marshall said that, the power to tax involves the power to destroy. On the
other hand, Holmes stated that the power to tax is not the power to destroy
while this Court sits. Reconcile the above statements.
Marshalls view that the power tax involves the power to destroy, to be
binding, refers to a valid tax. The imposition of a valid tax could not be judicially
restrained merely because it would prejudice taxpayers property. On the other
hand, Holmes view that the power to tax is not the power to destroy while this
Court sits, to be binding, refers to an invalid tax. An illegal tax could be
judicially declared invalid and should not work to prejudice a taxpayers property.
Alternative answer: If the two statements were to be taken in relation vis-vis the police power, and treat the question under political law and not taxation,
then one may reconcile the above statements, in this manner:

Marshalls view that the power to tax involves the power to destroy, to
be binding, refers to the power to tax used validly as an implement of the police
power in discouraging and in effect, ultimately prohibiting certain things or
enterprise inimical to the public welfare. On the other hand, Holmes view that
the power to tax is not the power to destroy while this Court sits, to be
binding, refers to the power to tax used solely for the purpose of raising
revenues, for which the modern view is that the power to tax cannot be allowed
to confiscate or destroy.
1.1
The police power, the power to tax and the power of eminent
domain are inherent powers of government. May a tax be validly imposed
in the exercise of the police power and not of the power to tax? If your
answer is in the affirmative, give an example.
[Yes. A tax may be validly imposed in the exercise of the police
power and not of the power to tax. The purpose thereof must be for the
regulation of useful occupations or non-useful occupations, and not to
raise revenue. Police power may not be exercised by itself alone for the
purpose of raising taxes. However, police power may be exercised jointly
with the power of taxation for the purpose of raising revenues. (Lutz vs.
Araneta)]
The police power may be exercised for the purpose of requiring
licenses for which license fees may have to be paid. The amount of the
license fees for the regulation of useful occupations should only be
sufficient to pay for the cost of the license and the necessary expense of
police surveillance and regulation. For non-useful occupations, license fee
may be sufficiently high to discourage the particular activity sought to be
regulated. It is clear from the foregoing that police power may not be
exercised by itself alone for the purpose of raising taxes. However, police
power may be exercised jointly with the power of taxation for the purpose
of raising revenues. (Lutz vs. Araneta, 98 Phil. 148)
Alternative answer:
Taxation involves the power to raise revenue not only in order to
support the existence of government but likewise to carry out legitimate
objects of government. Among such legitimate objects are those that
police power itself can cover. As early as the case of Lutz vs. Araneta (98
Phil. 148), the Supreme Court has ruled that taxation may be used to
implement an object of police power. An illustration of such exercise would
be an imposition of taxes on gambling, the rates of which are made
somewhat onerous in order to discourage gambling instead of an outright
prohibition thereof by an exercise of a police power measure such as by
present provisions of the Revised Penal Code.
1.2

Discuss the meaning and implications of the following statement:

Taxes are the lifeblood of government and their prompt and certain
availability is an imperious need.
The phrase, taxes are the lifeblood of government, etc. expresses the
underlying basis of taxation which is governmental necessity, for indeed, without
taxation, a government can neither exists nor endure. Taxation is the
indispensable and inevitable price for civilized society; without taxes, the
government would be paralyzed. This phrase has been used, for instance, to
justify the validity of the laws providing for summary remedies in the collection
of taxes. As a consequence of the above rule, an injunction against the
assessment and collection of taxes is generally withheld by the laws imposing
such taxes. Even when it is not so, under procedural laws such an injunction may
not be obtained as held in the case of Valley Trading Co. vs. CFI (G.R. No. 49529,
March 31, 1989), where the Supreme Court ruled that the damages that may be
caused to the taxpayer by being made to pay the taxes cannot be said to be as
irreparable as it would be against the governments inability to collect taxes.
2.
To provide means for rehabilitation and stabilization of the sugar industry
so as to prepare it for the eventuality of the loss of the quota allocated to the
Philippines resulting from the lifting of U.S. sanctions against an African country,
Congress passes a law increasing the existing tax on the manufacture of sugar
on a graduated basis. All collections made under the law are to accrue to a
special fund to be spent only for the purposes enumerated therein, among which
are to place the sugar industry in a position to maintain itself and ultimately to
insure its continued existence despite the loss of that quota, and to afford
laborers employed in the industry a living wage and to improve their working
conditions. X, a sugar planter, files a suit questioning the constitutionality of the
law alleging that the tax is not for a public purpose as the same is being levied
exclusively for the aid and support of the sugar industry. Decide the case.
The suit filed by X, a sugar planter, questioning the constitutionality of the
sugar industry stabilization measure is untenable. Taxation is no longer merely
for raising revenue to support the existence of government but the power may
also be exercised to carry out legitimate objects of the government. It is a
legitimate object of government to protect its local industries on which the
national economy largely depends. Where the aim of the tax measure is to
achieve such a governmental objective, the tax imposition can be said to be for
a public purpose. (Gaston vs. Republic Bank, 158 SCRA 626)
Lutz vs. Araneta, G.R. No. L-7859, December 22, 1955
Facts: Plaintiff Walter Lutz, in his capacity as judicial administrator of the
intestate estate of Antonio Ledesma, sought to recover from the CIR the sum of
P14,666.40 paid by the estate as taxes, under Section 3 of the Commonwealth
Act No. 567 or the Sugar Adjustment Act thereby assailing its constitutionality,
for Section 2 thereof provided for an increase of the existing tax on the
manufacture of sugar and Section 3 levied on owners or persons in control of
lands devoted to the cultivation of sugar cane, alleging that such enactment is
not being levied for a public purpose but solely and exclusively for the aid and
7

support of the sugar industry thus making it void and unconstitutional. The
sugar industry situation at the time of the enactment was in an imminent threat
of loss and needed to be stabilized by imposition of emergency measures.
Issue: Is CA 567 constitutional, despite its being allegedly in violation of the
equal protection clause, the purpose of which is not for the benefit of the
general public but for the rehabilitation only of the sugar industry?
Ruling: Yes. The protection and promotion of the sugar industry is a matter of
public concern, it follows that the Legislature may determine within reasonable
bounds what is necessary for its protection and expedient for its promotion.
Here, the legislative discretion must be allowed to fully play, subject only to the
test of reasonableness, and it is not contended that the means provided in the
law bear no relation to the objective pursued or are oppressive in character. If
objective and methods are alike constitutionally valid, no reason is seen why the
state may not levy taxes to raise funds for their prosecution and attainment.
Taxation may be made the implement of the states police power.
The tax provided for in CA 567 is not a pure exercise of the taxing power.
Analysis of the Act will show that the tax is levied with a regulatory purpose, to
provide means for the rehabilitation and stabilization of the threatened sugar
industry. In other words, the act is primarily an exercise of the police power.
Gaston vs. Republic Planter Bank

The stabilization fees collected are in the nature of a tax, which is within
the power of the State to impose for the promotion of the sugar industry.
The tax collected is not a pure exercise of the taxing power; it is levied
with a regulatory purpose and is primarily in the exercise of the police
power of the State.
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.
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 states concern to make it 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. (Cocofed) vs. Presidential
Commission on Good Government, 178 SCRA 236, 252]

H. DOCTRINES IN TAXATION
1.

Prospectivity of Tax Laws

What is the rule on the application of tax laws?
Taxes must only be imposed prospectively (Hydro Resources
vs. CA, G.R. No. 80276, December 21, 1990). Tax laws are not
retroactive in nature.
Why tax laws are prospective in application?
Tax laws are prospective in application because they are civil
in nature and not penal in character; hence, not subject to ex post
facto law prohibitions.
Article 4 of Civil Code provides: Laws shall have no
retroactive effect, unless the contrary is provided.
[Criminal penalties arising from tax violations may not
be given retroactive effect.]
[Ex post facto law, defined. A law that makes illegal
an act that was legal when committed, increases the penalties
for an infraction after it has been committed, or changes the

rules of evidence to make conviction easier. The Constitution

prohibits the making of ex post facto law.]
Is the rule absolute? If not, what are the exceptions?
No, the rule is not absolute. Retroactive application of tax
laws may be allowed when the law so provides and if it will not
amount to denial of due process. There is violation of due process
when the tax law imposes harsh and oppressive tax (DIMAAMPAO,
supra at 146).
The legislative intent evincing that a tax statute should
operate retroactively should be explicit and perfectly clear. Thus,
as statute should be considered as prospective in its operation,
whether it enacts, amends or repeals, unless the language of the
statute clearly demands or expresses that it shall have a
retroactive effect (Lorenzo v. Posadas, G.R. No. L-43082, June 18,
1937).
Rulings promulgated by the CIR shall be retroactive in the
following cases:
a. Where the taxpayer deliberately misstates or omits
material facts from his return or any document required of
him by the BIR;
b. Where the facts subsequently gathered by the BIR are
materially different from the facts on which the ruling is
based; or
c. Where the taxpayer acted in bad faith.
Hydro Resources vs. CA, GR 80276; December 21, 1990
Facts: Hydro Resources Contractors Corporation (Hydro) entered
into an agreement with the National Irrigation Authority (NIA) for the
construction of the Magat River Multipurpose Project in Isabela in August
1978. Under the contract, Hydro was allowed, as agent of NIA, to procure
new construction equipment and tools from abroad, the payment for which
was advanced by NIA which also undertakes to pay all the import duties
and taxes incident to the importations deductible from the proceeds of the
contract price. The equipment and tools arrived in 1978 and 1979. NIA
reneged and failed in the compliance of its tax obligations. In the
meantime, Hydro had fully repaid the value of the construction equipment
so much so that on December 6, 1982 and March 24, 1983, NIA executed
deeds of sale covering the same and transferring the ownership thereof in
favor of Hydro.

10

Hydro was assessed 3% ad valorem duty in the amount of

Php281,591.00 prescribed in Executive Order 860. Hydro paid this amount
but under protest.
The Collector of Customs acted favorably on Hydros protest and
ordered the refund of the amount paid for the ad valorem duty in the form
of tax credit. The Acting Commissioner of Customs affirmed the ruling of
the Collector of Customs.
The findings of the Collector of Customs as well as the Acting
Customs Commissioner were reversed by the Deputy Minister of Finance.
Hydro appealed to CTA but the latter affirmed the ruling of the Deputy
Minister of Finance denying Hydros claim for refund on the ground that EO
No. 860 applies. MR, also denied.
Issue: Whether the Deputy Minister of Finance and the CTA correctly
denied the claim for refund of Hydro. Whether Executive Order No. 860
should have a retroactive effect.
Ruling: No. The Deputy Minister of Finance and the CTA erred in denying
Hydros claim for refund?
EO No. 860 which was the basis for the imposition of the 3% ad
valorem duty took effect on December 21, 1982. The importations were
effected in 1978 and 1979 by NIA.
It is a cardinal rule that laws shall have no retroactive effect, unless
the contrary is provided. (Art. 4, Civil Code) Except for a statement
providing for its immediate execution, Executive Order No. 860 does not
provide for its retroactivity. Consequently, the importations which arrived
in 1977 and 1978 are not subject to the 3% additional ad valorem duty,
the same being imposed only on those whose letter of credit were opened
after the promulgation of EO No. 860.
2.

Imprescriptibility of Taxes
Does the right to assess and collect taxes prescribe?
No. The right to assess and collect taxes are imprescriptible.

General Rule: The right to asses and collect are imprescriptible (CIR v. Ayala
Securities Corporation, G.R. No. L-29485, November 21, 1980).
Exception: When the laws otherwise provide.

11

Examples:
1. National Internal Revenue Code which provide for the prescriptive period
of making tax assessment and collection (NIRC, Sec. 203 and 222).
2. Tariff and Custom Code which provides a period within which the entry and
passage of goods free of duty or upon payment of duties shall become final
and conclusive (TCC, Sec. 1603, as amended by R.A. 9135, Sec. 4).
3. Local Government Code Which provides for the perspective period of
making assessment of local taxes, fees or charges (LGC, Secs. 194 and
270).
[Taxes are imprescriptible as they are the lifeblood of the government.
Exception: Tax statutes may provide for statute of limitations (a statute
prescribing a period of limitation for the bringing of certain kinds of legal
action).]
3.

Double taxation

What is double taxation?

Double taxation means taxing the same person (same subject or
object) twice, by the same jurisdiction over the same thing (Victorias
Milling v. Municipality of Victoria, Negros Occidental, G.R. No. L-21183,
September 27, 1968)
Thus, it can be said that plaintiff's payment of storage fees imposed by the
Ordinance in question does not amount to double taxation. For double taxation
to exist, the same property must be taxed twice, when it should be taxed but
once. Double taxation has also been defined as taxing the same person
twice by the same jurisdiction for the same thing. 9 Surely, a tax on
plaintiff's products is different from a tax on the privilege of storing copra in a
bodega situated within the territorial boundary of defendant municipality.
(Procter & Gamble vs. Municipality of Jagna, G.R. No. L-24265, December 28,
1979, citing Victorias Milling vs. Municipality of Victoria, Negros Occidental)
a)

Strict sense
What is double taxation in strict sense?

Double taxation, in the strict sense, refers to direct duplicate

taxation, which is the objectionable kind of double taxation and
prohibited under the Constitution because it violates the equal
protection clause of the Constitution, as well as the concept of
uniformity and equitableness of taxation.
What are the elements of direct duplicate taxation?
The elements of direct duplicate taxation are:
a) Same
12

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.
What is the effect if any of the elements are absent?
If any of the elements are absent then there is indirect duplicate
taxation which is not prohibited by the Constitution.
If only the 1st element 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.
The Elements of Direct Duplicate Taxation are the following:
a) The same property or subject matter is taxed twice when it
should be taxed only once;
b) Both taxes are levied for the same purpose;
c) Imposed by the same taxing authority;
i) Within the same jurisdiction;
ii) During the same taxing period; and
iii) Covering the same kind of character of tax (Villanueva vs.
City of Iloilo, G.R. No. L-26521, December 28, 1968)
Is double taxation a valid defense against the legality of a tax measure if
the double taxation is direct duplicate taxation?
Yes. Double taxation is 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.
2)

Broad Sense
What is double taxation in broad sense?

Double taxation, in the broad sense, refers to indirect duplicate

taxation, which is the permissible kind of double taxation. This arises in
the absence of one or more of the elements of direct double taxation.

13

In the broad sense, double taxation means indirect duplicate

taxation. It extends to all cases in which there are two or more
pecuniary impositions. The Constitution does not prohibit the
imposition of double taxation in the broad sense (Villanueva v. City of
Iloilo, G.R. No. L-265521, December 28, 1968). It is something not
favored, but is nevertheless permissible.
Give examples of indirect duplicate taxation.
a) A tax upon a corporation for its property and upon its
shareholders for their shares;
b) A tax upon the same property imposed by two different states;
and
c) A tax on a mortgage as personal property and upon the
mortgaged property as real estate.
c)

Constitutionality of double taxation

Is double taxation constitutional?

It depends. It is constitutional if the double taxation is in the

broad sense, or indirect duplicate taxation, that is if any of the
elements of direct duplicate taxation is absent, because the
Constitution does not prohibit the imposition of double taxation in the
broad sense (Villanueva vs. City of Iloilo). It is unconstitutional if it is in
the strict sense, or direct duplicate taxation, because it violates the
equal protection clause of the Constitution and the concept of
uniformity and equitableness of taxation.
Is there a double taxation if the tax is levied by the LGU and another by
the national government?
No. There is no double taxation if the tax is levied by the LGU and
another by the national government. The two (2) are different taxing
authorities. (Pepsi-Cola Bottling Co. vs. Municipality of Tanauan, Leyte,
G.R. No. L-31156,
February 27, 1976). This is called local
double taxation.
What is local double taxation?
Local double taxation is the imposition of taxes of similar nature
both by the national government and the local government unit where
the object of tax is located.
What about when an item of income is taxed in the Philippines and the
same is taxed in another country, is there a double taxation?

14

No. There is no double taxation because there are two (2)

different taxing authorities. This is called international juridical double
taxation.
What is international juridical double taxation?
International juridical double taxation 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 periods (CIR vs. SC
Johnson & Son, Inc., G.R. No. 127105,
June 25, 1999). [When an
item of income is taxed in the Philippines and the same income is taxed
in another country.]
This double taxation usually takes place when a person is a
resident of the first contracting State and derives income from, or owns
capital in the second contracting State and both States impose taxes
on such income or capital. In order to eliminate double taxation, a tax
treaty is entered into by the two contracting States.
International juridical double taxation only occurs when the State
of residence of the taxpayer imposes tax on the income of said
taxpayer from sources within and without their State.
d)

Modes of eliminating double taxation

The Philippine tax system provides for certain schemes in order to avoid or
minimize the harsh or burdensome effects of double taxation. The means,
however, depend on whether there is international double taxation or local
double taxation (RECALDE, p. 75)
What is the reason for avoiding international juridical taxation?
The reason for avoiding international juridical taxation is to
encourage the free flow of goods and services and the movement of
capital, technology and persons between countries, conditions deemed
vital in creating robust and dynamic economies (CIR vs. SC Johnson &
Son, Inc., G.R. No. 127105, June 25, 1999).
.
What are the modes of eliminating double taxation?
The modes of eliminating double taxation (methods of reducing
the rigors of double taxation) are: (CD-RET)
1. Tax Credits An amount is subtracted from an individuals or
entitys tax liability to arrive at the total tax liability. [Tax credits is
where foreign taxes are allowed as deductions from local taxes that are
due to be paid.]
What is tax credit?
15

Tax credit generally refers to an amount that is

subtracted directly from ones total tax liability, an
allowance against the tax itself, or a deduction from what is
owed.
A tax credit reduces the tax due, including whenever
applicable the income tax that is determined after applying
the corresponding tax rates to taxable. (CIR vs. Central
Luzon Drug Corporation, G.R. No. 159647, April 15, 2005)
2. Tax Deductions The amount of tax is written off or treated as
deduction from an individuals or entitys gross income on which the
resulting amount the tax liability is calculated. [Allowing foreign taxes
as a deduction from gross income.]
What is tax deduction?
Tax deduction is defined as a subtraction from 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.
A tax deduction reduces the income that is subject to
tax in order to arrive at taxable income. (CIR vs. Central
Luzon Drug Corporation, G.R. No. 159647, April 15, 2005)
3. Reduction of the Philippine Income Tax Rate An example is the
Tax Sparing Rule wherein the dividend earned by a non-resident foreign
corporation (NRFC) within the Philippines is reduced by imposing a
lower rate of 15% (in lieu of the 30%), on the condition that the country
to which the NRFC is domiciled shall allow a credit against the tax due
from the NRFC, which taxes are deemed to have been paid in the
Philippines. (NIRC, Sec. 28[B][5][b]; CIR vs. Procter & Gamble, G.R. No.
L-66838, December 2, 1991)
4. Tax Exemptions a grant of immunity to particular persons or
corporations form the obligation to pay taxes.
5. Tax Treaties Agreement between two countries specifying
what items of income will be taxed by the authorities of the country
where the income is earned. [Tax treaties which exempts foreign
nationals from local taxation and local nationals from foreign taxation
under the principle of reciprocity.]
What are the methods resorted to by a tax treaty in order to eliminate
double taxation?
16

There are two methods:

1. An exclusive right to tax is conferred in one of the contracting
states; however, for other items of income or capital, both states are
given the right to tax although the amount of tax that may be imposed
by the state of source is limited.
2. The state of source is given a full or limited right to tax
together with the state of residence. In this case, the treaty makes it
incumbent upon the state of residence to allow relief in order to avoid
double taxation.
What are the ways to apply the second method?
a) The Exemption Method The income or capital which is taxable
in the state of source or situs is exempt in the state of residence,
although is some instances it may be taken into account in determining
the rate of tax applicable to the taxpayers remaining income or capita.
(This may be done by using the tax deduction method which allows
foreign income taxes to be deducted from gross income, in effect,
exempting the payment from being further taxed). The focus here is on
the income or capital itself.
b) The Credit Method Although the income or capital which is
taxed in the state of source is still taxable in the state of residence, the
tax paid in the former is credited against the tax levied in the latter
(CIR vs. S.C. Johnson & Son Inc., G.R. No. 127105, June 25, 1999). The
focus is on the tax.
What is the Most Favored Nation Clause in Tax Treaties? Explain.
The purpose of the most favored nation clause is to grant to the
contracting party treatment not less favorable than that which has
been or may be granted to the most favored among other countries.
The most favored nation clause is intended to establish the principle of
equality of international treatment by providing that the citizens or
subjects of the contracting nations may enjoy the privileges accorded
by either party to those of the most favored nation (CIR vs. S.C.
Johnson & Son, Inc. and CA, G.R. No. 127105, June 25, 1999).
4. Escape from taxation
a. Shifting of the tax burden
What is shifting of the tax burden?

17

Shifting of the tax burden is the transfer of the burden of tax by

the original payer or the one on whom the tax was assessed (impact of
taxation/ statutory taxpayer) or imposed to another or someone else
(incidence of taxation).
i. Ways of shifting the tax burden
What are the ways (or kinds) of shifting the tax burden?
The ways of shifting the tax burden are:
a. Forward shifting When the burden of tax is transferred from a
factor of production through the factors of distribution unit until
finally settles on the ultimate purchaser or consumer.
b. Backward shifting When the burden is transferred from the
consumer through the factors of distribution to the factors of
production.
c. Onward shifting When the tax is shifted to two or more times
either forward or backward (Seligman, The Shifting and Incidence of
Taxation)
ii. Taxes that can be shifted
What taxes can be shifted?
The taxes than can be shifted are only indirect taxes; direct taxes
may not be shifted.
Differentiate indirect taxes from direct taxes.
Indirect taxes are those that are demanded in the first
instance from one person in the expectation and intention that he
can shift the burden to someone else, not as a tax but as part of
the purchase price (e.g. VAT, excise tax, other percentage tax,
documentary stamp tax). The liability for the payment of the tax
remains with the taxpayer, but the burden thereof is shifted or
passed on to the purchaser.
Direct taxes, on the other hand, which cannot be shifted, are
those that are exacted from the very person who, it is intended or
desired, should pay them (Dimaampao).
Nota bene
A tax cannot be shifted when it is purely personal or when it has no
relation to any business dealings of the taxpayer (Schultz & Harris,
American Public Finance).
iii. Meaning of impact and incidence of taxation
18

What does impact of taxation mean?

Impact of taxation is the point on which tax is originally imposed
or the one on whom the tax is formally assessed.
What does incidence of taxation mean?
Incidence of taxation is the point on which the tax burden finally
rests or settles down.
Illustrate.
VAT. The seller is required by law to pay tax, but the burden is
actually shifted or passed on to the buyer.
b. Tax avoidance
What is tax avoidance?
Tax avoidance, also called tax minimization, is the exploitation by
the taxpayer of legally permissible alternative tax rates or methods of
assessing taxable property or income, in order to avoid or reduce tax
liability.
Tax avoidance is the tax saving device within the means
sanctioned by law. This method should be used by the taxpayer in good
faith and at arms length [the condition or the fact that the parties to a
transaction are independent and on an equal footing, walang
lamangan] (CIR vs. Estate of Benigno Toda Jr., G.R. No. 147188,
September 14, 2004).
A taxpayer has legal right to decrease the amount of what would
otherwise be his taxes or altogether avoid them by means which the
law permits (Delpher Trades Co. v. IAC, G.R. No. L-69259, January 26,
1988)
Example: Availing of all deductions allowed by law or refraining from
engaging in activities subject to tax.

c. Tax evasion
What is tax evasion?
Tax evasion is an illegal means of escaping taxation. It connotes
fraud through the use of pretenses and forbidden devices to lessen or
19

defeat taxes (Yutivo Sons Hardware vs. CTA, G.R. No. L-13203, January
28, 1961). Hence, it subjects the taxpayer to further additional civil or
criminal liabilities. Tax evasion is sometimes referred to as tax dodging.
A scheme used outside of those lawful means and when availed
of, it usually subjects the taxpayer to (further or additional) civil or
criminal liabilities (CIR vs. Estate of Benigno Toda, Jr., G.R. No. 147188,
September 14, 2004).
What are the factors of tax evasion?
The factors of tax evasion are: (ESC)
a. The End to be achieved, i.e., payment of less than that known
by the taxpayer to be legally due, or paying no tax when it is
shown that the tax is due;
b. An accompanying State of mind which is described as being
evil, in bad faith, willful or deliberate and not coincidental; and
c. A Course of action which is unlawful (CIR vs. Estate of Benigno
Toda, Jr., G.R. No. 147188, September 14, 2004).
What are the proofs of tax evasion?
The proofs of tax evasion are:
a. Failure to declare for taxation purposes true and actual income
derived from business for two (2) consecutive years (Republic
vs. Gonzales, G.R. No. L-17962, April 30, 1965); or
b. Substantial under-declaration of income in the tax returns of
the taxpayer for four (4) consecutive years coupled with
intentional overstatement of deductions (CIR vs. Reyes, GR
Nos. L-11534 and L-11558,
November 25, 1958)
RA No. 8424, NIRC of 1997
SECTION 254. Attempt to Evade or Defeat Tax. - Any person who willfully
attempts in any manner to evade or defeat any tax imposed under this Code or
the payment thereof shall, in addition to other penalties provided by law, upon
conviction thereof, be punished by a fine of not less than Thirty thousand pesos
(P30,000) but not more than One hundred thousand pesos (P100,000) and suffer
imprisonment of not less than two (2) years but not more than four (4) years:
Provided, That the conviction or acquittal obtained under this Section shall not
be a bar to the filing of a civil suit for the collection of taxes.
CIR vs. Lincoln Philippine Life Insurance Company, Inc. and CA
Finally, it should be emphasized that while tax avoidance schemes and
arrangements are not prohibited,[10] tax laws cannot be circumvented in order to
evade the payment of just taxes. In the case at bar, to claim that the increase in
the amount insured (by virtue of the automatic increase clause incorporated into
20

the policy at the time of issuance) should not be included in the computation of
the documentary stamp taxes due on the policy would be a clear evasion of the
law requiring that the tax be computed on the basis of the amount insured by
the policy.
Differentiate tax avoidance from tax evasion.
Tax Avoidance
Legal and not subject to criminal
penalty
Minimization of taxes

Tax Evasion
Validity
Illegal and subject to criminal penalty
Effect
Almost always results in the absence
of tax payments

5. Exemption from taxation

a) Meaning of exemption from taxation
What is the meaning of exemption from taxation?
Tax exemption is the grant of immunity, express or implied (or contractual)
to particular persons or corporations or to persons or corporations of a particular
class from a tax which persons or corporations generally within the same state
or taxing district are obliged to pay (51 Am. Jur. 503)
Scope and Limitation of Taxation
1. Inherent Limitations
a) Public Purpose- the term public purpose is not defined. It is an elastic concept
that can be hammered to fit modern standards. Jurisprudence states that public
purpose should be given a broad interpretation. 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 (CIR v. Central Luzon Drug
Corporation) It also embraces indirect public benefit.
*The power to determine public purpose is a legislative prerogative.

PASCUAL vs. SECRETARY OF PUBLIC WORKS

"A law appropriating the public revenue is invalid if the public advantage or benefit, derived from
such expenditure, is merely incidental in the promotion of a particular enterprise."
FACTS: Governor Wenceslao Pascual of Rizal instituted this action for declaratory relief, with
injunction, upon the ground that RA No. 920, which apropriates funds for public works particularly
for the construction and improvement of Pasig feeder road terminals. Some of the feeder roads,
however, as alleged and as contained in the tracings attached to the petition, were nothing but
21

projected and planned subdivision roads, not yet constructed within the Antonio Subdivision,
belonging to private respondent Zulueta, situated at Pasig, Rizal; and which projected feeder roads do
not connect any government property or any important premises to the main highway. The
respondents' contention is that there is public purpose because people living in the subdivision will
directly be benefitted from the construction of the roads, and the government also gains from the
donation of the land supposed to be occupied by the streets, made by its owner to the government.
ISSUE: Should incidental gains by the public be considered "public purpose" for the purpose of
justifying an expenditure of the government?
HELD: No. It is a general rule that the legislature is without power to appropriate public revenue for
anything but a public purpose. It is the essential character of the direct object of the expenditure
which must determine its validity as justifying a tax, and not the magnitude of the interest to be
affected nor the degree to which the general advantage of the community, and thus the public welfare,
may be ultimately benefited by their promotion. Incidental to the public or to the state, which results
from the promotion of private interest and the prosperity of private enterprises or business, does not
justify
their
aid
by
the
use
public
money.
The test of the constitutionality of a statute requiring the use of public funds is whether the statute is
designed to promote the public interest, as opposed to the furtherance of the advantage of individuals,
although each advantage to individuals might incidentally serve the public.
b) Inherently Legislative
General Rule: Delegata Potestas non Delegari Potest- A delegated power cannot be further delegated.
Since the power of taxation is a power that is exercised by Congress as delegates of the people, then
as a general rule, Congress could not re-delegate this delegated power.
Exceptions:
1) Delegation to Local Governments- the Constitution grants each LGU the power to create its own
sources of revenue and levy taxes, fees and charges which shall accrue exclusively to the LGU (1987
Constitution, Article X, Section 5);
2) Delegation to the President- delegation of (TE)
a) Tariff powers by Congress under the flexible tariff clause (1987 Constitution, Article VI,
Sec. 28 [2])
b) Emergency powers to the President (1987 Constitution, Article VI, Sec. 23, paragraph 2) ;
3) Delegation to Administrative Agencies- also known as the power of subordinate legislation
subject to the following tests:
a) Completeness Test- the law must be complete in all its essential terms and conditions when
it leaves the legislature so that there will be nothing left for the delegate to do when it reaches him
except to enforce it (Cruz, Philippine Political Law, 2022)
b) Sufficient Standard Test- the law must offer a sufficient standard to specify the limits of the
delegates authority, announce legislative policy, and specify conditions under which it is to be
implemented.
c) Territoriality or Situs of Taxation
22

- It is also known as the place of taxation. It is the place of authority that has the right to impose and
collect taxes (CIR v Marubeni Corp)
General Rule: A State may not tax property lying outside its borders or lay an excise or privilege tax
upon the exercise or enjoyment of a right or privilege derived from the laws of another state and
therein exercised or enjoyed.
Situs or subjects of tax:
1) Persons- poll, capitation or community taxes are based upon the residence of the taxpayer
regardless of the source of income or location of the property of the taxpayer.
2) Property
a) Real property- Lex rei sitae or lex situs (where the property is located)
b) Tangible personal property- where the property is physically located although the owner
resides in another jurisdiction.
c) Intangible personal property
General rule: Mobilia sequuntur personam (movables follow the person). The situs is the domicile
of the owner.
Exceptions:
a) When the property has acquired a business situs in another jurisdiction; or
b) When the law provides for the situs of the subject of tax.
3) Income- Source of the income
a) From sources within the Philippines- all kinds of taxpayers are subject to income tax on
income derived from sources within the Philippines
b) From sources without the Philippines- only resident citizens and domestic corporations are
liable to income tax
c) Partly within and partly without the Philippines- taxable income attributable to sources
within the Philippines may be determined by processes or formulas of general apportionment
prescribed by the Secretary of Finance.
4) Excise or Privilege (upon the performance of an act or the engaging in an occupation)
-depends upon the place where the act is performed or occupation is engaged in.
Rule on situs of business tax:
a) Sale of real property- where the property is located
b) sale of personal property- where the sale is perfected or consummated
c) VAT- the place where the transaction was made
5) Gratuitious Transfer
-property from a donor to a donee, or from a decedent to his heirs may be subject to taxation in the
state where the transferor is (was) a citizen or resident, or where the property is located in case of a
non-resident.
D) International Comity- is the respect accorded by nations to each other because they are equals.
Bases of the rule:
23

1) In par parem non habet imperium- as between equals, there is no sovereign (Doctrine of
Sovereign Equality)
2) The rule of international law that a foreign government may not be sued without its
consent. Thus, it would be useless to impose a tax which could not be collected.
3) The concept that when a foreign sovereign enters the territorial jurisdiction of another, it
does not subject itself to the jurisdiction of the other.

2.Constitutional limitations
a)

Provisions directly affecting taxation

(i) Prohibition against imprisonment for non-payment of poll tax
-Tax imposed on persons without any qualification or on a per head
basis. The present poll tax is the community tax.
Reason: One cannot be imprisoned for non-payment of poll tax,
because payment thereof is not mandatory.
(ii) Uniformity and equality of taxation
-Uniformity: All taxable articles or properties of the same class
shall be taxed at the same rate. A tax is considered to be uniform
when it operates with the same force and effect in every place
where the subject may be found. When the tax law applies equally
well to all persons, firms, and corporations placed in a similar
situation, there is no infringement of the rule (City of Baguio v. De
Leon)
-Uniformity, not equality: The equal protection clause does not
require the universal application of the laws on all persons without
distinction. This might in fact result in unequal protection. What
the clause requires is equality among equals as determined
according to a valid classification (Abakada Guro Party List v.
Ermita)
Tolentino v. Secretary of Finance
FACTS: There are various suits challenging the constitutionality of RA 7716
24

on various grounds.
The value added tax (VAT) is levied on the sale, barter or exchange
of goods and properties as well as on the sale or exchange of services. It is
equivalent to 10% of the gross selling price or gross value in money of
goods or properties sold, bartered or exchanged or of the gross receipts
from the sale or exchange of goods and services. RA No. 7716 seeks to
widen the tax base of the existing VAT system and enhance its
administration by amending the NIRC.
Among the petitioners was the Philippine Press Institute (PPI) which
claimed that RA 7716 violates their press freedom and religious liberty,
having removed them from the exemption to pay Value Added Tax. It is
contended by the PPI that by removing the exemption of the press from the
VAT while maintaining those granted to others, the law discriminates against
the press. At any rate, it is averred, even nondiscriminatory taxation of
constitutionality guaranteed freedom is unconstitutional. PPI argued that
the VAT is in the nature of a license tax.
ISSUE: WON the purpose of the VAT is the same as that of a license tax?
HELD:
A license tax, which unlike an ordinary tax, is mainly for regulation. Its
imposition on the press is unconstitutional because it lays prior restraint on
the exercise of its right. Hence, although its application to others, such
those selling goods, is valid, its application to the press or to religious
groups, such as the Jehovahs witnesses, in connection with the latters sale
of religious books and pamphlets is unconstitutional. As the US Supreme
Court put it, it is one thing to impose tax on income or property of a
preacher. It is quite another thing to exact a tax on him for delivering a
sermon.
The VAT is however, different. It is not a license tax. It is not a tax on
the exercise of a privilege, much less constitutional right. It is imposed on
the sale, barter, lease or exchange of goods or properties or the sale or
exchange of services and the lease of properties purely for revenue
purposes. To subject the press to its payment is not to burden the exercise
of its right any more than to make the press pay income tax or subject it to
general regulation is not to violate its freedom under the Constitution.

(iii)Grant by Congress of authority to the president to impose tariff rates

-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.
(iv)
Prohibition against taxation of religious,
charitable entities, and educational entities
-Charitable institutions, churches and parsonages 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
25

taxation (1987
paragraph 3)

Constitution,

Article

VI,

Section

28,

American Bible Society v City of Manila GR No. L-9637, April 30, 1957
FACTS:
In the course of its ministry, the Philippine agency of American Bible Society (a foreign,
non-stock,
non-profit,
religious,
missionary corporation) has been distributing and selling bibles and/or gospel portions
thereof throughout the Philippines. The acting City Treasurer of Manila informed plaintiff
that it was conducting the business of general merchandise since November 1945,
without providing itself with the necessary Mayors permit and municipal license, in
violation of Ordinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and
3364. The society paid such under protest and filed suit questioning the legality of the
ordinances
under
which
the
fees
are
being
collected.
ISSUES:
1. Whether or not the ordinances of the City of Manila are constitutional and valid
2. Whether the provisions of said ordinances are applicable or not to the case at
bar
HELD:
1. Yes, they are constitutional. The ordinances do not deprive defendant of his
constitutional right of the free exercise and enjoyment of religious profession and
worship, even though it prohibits him from introducing and carrying out a scheme or
purpose which he sees fit to claim as part of his religious system. It seems clear,
therefore, that Ordinance No. 3000 cannot be considered unconstitutional, even if
applied
to
plaintiff
society.
2. The ordinance is inapplicable to said business, trade or occupation of the plaintiff.
Even if religious groups and the press are not altogether free from the burdens of the
government, the act of distributing and selling bibles is purely religious and does not fall
under Section 27e of the Tax Code (CA 466). The fact that the price of bibles, etc. are a
little higher than actual cost of the same does not necessarily mean it is already
engaged in business for profit. Thus, the Ordinances are not applicable to the Society
(v) Prohibition against taxation of non-stock, non-profit institutions
-Non-stock, non-profit educational institution. All revenues and
assets of non-stock and non-profit educational institutions used
actually, directly and exclusively for educational purposes shall be
exempt from taxes and duties (1987 Constitution, Article X, Sec. 5)
Coverage of exemption:
a) real property tax
b) income tax; and
c) donors tax (it is subject to exemption if the done is a non-stock,
nomn-profit, educational institution)
26

(vi)
Majority vote of Congress for grant of tax exemption
-No law granting any tax exemption shall be passed without the
concurrence of a majority of all the members of the Congress (1987
Constitution, Article VI, Sec. 28, par. 4)
Reason: to prevent indiscriminate grant of tax exemptions.
-The phrase majority of all the members of the Congress means
at least plus 1 of ALL the members voting separately.
In granting tax exemptions, an absolute majority of the members of
Congress is required, while in cases of withdrawal of such tax
exemption, a relative majority is sufficient.
Reason: Taxation is the rule and exemption is the exception. Thus,
the law makes it easier, by requiring a smaller number of votes, to
withdraw exemption compared to its grant.
- Tax amnesties, condonations and refunds are in the nature of
tax exemptions, such being the case, a law granting them
requires the vote of an absolute majority.
(vii)
Prohibition on use of tax levied for special purpose
-All money collected on any tax levied for a special purpose shall be
treated as a special fund and paid out for such purpose only. If the
purpose for which a special fund was created has been fulfilled and
abandoned, the balance, if any, shall be transferred to the general
funds of the Government (1987 Constitution, Article VI, Sec. 29 [3].
(viii)
Presidents veto power on appropriation, revenue, tariff bills
-The President may veto any particular item or items in an:
a) Appropriation bill
b) Revenue Bill; and
c) Tariff Bill (1987 Constitution, Article VI, Sec. 27, par 2)
(ix)
Non-impairment of jurisdiction of the Supreme Court
-The Supreme Court can review judgments or orders of lower courts
in all cases involving:
a) The legality of any tax, impost, assessment, or toll; and
b) The legality of any penalty imposed in relation thereto.
(x) Grant of power to the local government units to create its own sources of
revenue
-Each local government unit shall have the power to create its own
sources of revenues and to levy taxes, fees, and charges subject to
such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees
and charges shall accrue exclusively to the local governments
(1987 Constitution, Article X, Section 5)
(xi)
Flexible tariff clause
-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
27

wharfage dues, and other duties and imposts within the framework
of the national Government.
(xii)
Exemption from real property taxes
-Charitable institutions, churches, and parsonages, or convents
appurtenant thereto, mosques, non-profit cemeteries and all lands,
buildings, and improvements, actually, directly, and exclusively,
used for religious purposes shall be exempt from taxation (1987
Constitution, Article VI, Section 28, par 3)
- Test of Exemption: It is the use of the property and not ownership
(Abra Valley College, Inc. v Aquino)
- Nature of Use: The properties must be actually, directly, and
exclusively used for the religious, charitable, or educational
purposes)
-The exemption extends to facilities which are incidental to and
reasonably necessary for the accomplishment of said purposes,
such as school for training nurses, nurses' home, and recreational
facilities (Herrera vs. QC Board of Assesment Appeals, 3 SCRA 186)
(xiii)
No appropriation or use of public money for religious purposes
-No public money or property shall be appropriated, applied, paid,
or employed, directly or indirectly, for the use, benefit, or support
of any sect, church, denomination, sectarian institution, or system
of religion, or of any priest, preacher, minister, or other religious
teacher, or dignitary as such, except when such priest, preacher,
minister, or dignitary is assigned to the armed forces, or to any
penal institution, or government orphanage or leprosarium.(1987
Constitution, Section 29, [2].

b)

Provisions indirectly affecting taxation

(i) Due process
-No person shall be deprived of life, liberty or property without due
process of law (1987 Constitution, Article III, Section 1).
-Two (2) aspects of due process:
a) Substantive due process- The tax statute must be within the
constitutional authority of Congress and that it must be fair, just
and reasonable.
b) Procedural due process- requires notice and hearing, or at least
an opportunity to be heard
-Must the adverse party be always notified?
-No. As a rule, notice and hearing or the opportunity to be heard is
necessary only when expressly required by law. Where there is no
such requirement, notice and opportunity to be heard are
dispensable.
-While the Sanggunians are required to conduct public hearings
prior to the enactment of tax ordinances and revenue measures
(LGC Secs 186 & 187), the National Legislature, on the other hand,
has the discretion whether or not they would conduct public
hearings before the enactment of tax laws .

28

-Due Process in taxation requires:

a) Tax must be for a public purpose;
b) Imposed within territorial jurisdiction; and
c) No arbitrariness or oppression in assessment or collection.
Illustration of violations of the Due Process Clause:
a) If the tax amounts to a confiscation of property;
b) If the subject of confiscation is outside the jurisdiction of the
taxing authority;
c) If the law is imposed for a purpose other than a public purpose;
d) If the law which is applied retroactively imposes unjust and
oppressive taxes; and
e) Where the law is in violation of inherent limitations.
(ii) Equal protection
-Equal protection neither requires equal rates of taxation on
different classes of property, nor prohibits unequal taxation so long
as the inequality is not based upon arbitrary classification. It
merely requires that all persons (or property, of the same class)
subjected to such legislation shall be treated alike, under like
circumstances and conditions, both in the privileges conferred and
in the liabilities imposed (Cooley cited in Sison v. Ancheta)
-Practical equality is constitutional equality. There is no imperative
requirement that taxation shall be absolutely equal.
-The equal protection clause may be violated in two ways:
a) When classification is made where there should be none;
b) When classification is called for but no corresponding
classification is made on the basis thereof (Villegas v. Hiu Chong).
-Requities for valid classification:
a) It must be based on substantial distinctions;
b) It must apply both to present and future conditions;
c) It must be germane to the purpose of the law; and
d) It must apply equally to all members of the same class (Ormoc
Sugar Company v. Treasurer of Ormoc)
(iii)Religious freedom
-The Consitution provides for these two clauses:
a) No law shall be made respecting an establishment of religion,
or prohibiting the free exercise thereof.- Also called the nonestablishment clause, it covers the prohibition to establish a
national or official religion since in that case, there would be an
appropriation from the taxes by the people; and
b) The free exercise and enjoyment of religious profession and
worship, without discrimination or preference, shall forever be
allowed. Also called the free exercise clause, which is the basis of
tax exemptions granted to religious institutions.
-A municipal license tax on the sale of bibles and religious articles
by a non-stock, non-profit, missionary organization at minimal profit
constitutes curtailment of religious freedom and worship which is
guaranteed by the Constitution (American Bible Society v. City of
Manila)
-Not every imposition of tax, however, constitutes curtailment of
religious freedom. The free exercise of Religion Clause does not
29

prohibit imposing a generally applicable sales and use of religious

materials by a religious organization.
iv)Non-impairment of obligations of contracts
- No law impairing the obligations of contracts shall be passed.
(1987 Constitution, Article III, Section 10)
- To impair the obligation of contract is to alter or change the terms
or effect of the contract, and thus in contemplation of law, to weaken the
position or rights of one or all of the parties to it.
- Non-impairment clause as a limitation to the power to tax: The
non-impairment clause becomes a limitation to the power to tax when the
taxpayer enters into an agreement with the government.
-It applies only where one party is the Government and the other
party, a private individual.
Example: A tax exemption based on a contract cannot be revoked by
a later taxing statute (Cassanova v. Hord)
Reason: When the State grants an exemption on the basis of a
contract, consideration is presumed to be paid to the State, and the public is
supposed to receive the whole equivalent therefrom.
J. Stages of taxation
1. Levy-enactment of a law by Congress authorizing the imposition of tax on
person, property, or excises. It includes:
a) Determination of the subject of taxation;
b) Determination of the purposes for which taxes shall be
levied;
c) Fixing the rate of taxation; and
d) Rules of taxation in general (manner, means, and
agencies of collection)
2. Assessment and collection act of administration and implementation of the
tax law by executive through its administrative agencies.
3. Payment- act of compliance by the taxpayer, including such options,
schemes, or remedies as may be legally available to him.
4) Refund- the recovery of any tax alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessively,
or in any manner wrongfully collected.
*If what is delegated is tax legislation, the delegation is invalid. If what is
delegated is tax administration, the delegation is valid.

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K. Definition, nature, and characteristics of taxes

Taxes are 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 for public needs.
-They are not arbitrary exactions but contributions levied by authority of law,
and by some rule of proportion which is intended to insure uniformity of
contribution and just apportionment of the burdens of government.
Tan vs. Del Rosario
FACTS:
Petitioners challenge the constitutionality of RA 7496 or the simplified income
taxation scheme (SNIT) under Arts (26) and (28) and III (1). The SNIT contained changes
in the tax schedules and different treatment in the professionals which petitioners assail
as unconstitutional for being isolative of the equal protection clause in the constitution.
ISSUE: Is the contention meritorious?
HELD:
No. uniformity of taxation, like the hindered concept of equal protection,
merely require that all subjects or objects of taxation similarly situated are to be treated
alike both privileges and liabilities. Uniformity, does not offend classification as long as it
rest on substantial distinctions, it is germane to the purpose of the law. It is not limited to
existing only and must apply equally to all members of the same class.
The legislative intent is to increasingly shift the income tax system towards the
scheduled approach in taxation of individual taxpayers and maintain the present global
treatment on taxable corporations. This classification is neither arbitrary nor
inappropriate.
CIR vs. Santos, 277 SCRA 617 (1997)
FACTS:
Guild of Phil. Jewellers questions the constitutionality of certain provisions of the
NIRC and Tariff and Customs Code of the Philippines. It is their contention that present
Tariff and tax structure increases manufacturing costs and render local jewelry
manufacturers uncompetitive against other countries., in support of their position, they
submitted what they purported to be an exhaustive study of the tax rates on jewelry
prevailing in other Asian countries, in comparison to tax rates levied in the country.
Judge Santos of RTC Pasig, ruled that the laws in question are confiscatory and
oppressive and declared them INOPERATIVE and WITHOUR FORCE AND EFFECT insofar as
petitioners are concerned.

31

Petitioner CIR assailed decision rendered by respondent judge contending that the
latter has no authority to pass judgment upon the taxation policy of the government.
Petitioners also impugn the decision by asserting that there was no showing that the tax
laws on jewelry are confiscatory.
ISSUE: Whether or not the Regional Trial Court has authority to pass judgment upon
taxation policy of the government.
HELD:
The policy of the courts is to avoid ruling on constitutional questions and to
presume that the acts of the political departments are valid in the absence of a clear and
unmistakable showing to the contrary.
This is not to say that RTC has no power whatsoever to declare a law
unconstitutional. But this authority does not extend to deciding questions which pertain
to legislative policy.
RTC have the power to declare the law unconstitutional but this authority does not
extend to deciding questions which pertain to legislative policy. RTC can only look into
the validity of a provision, that is whether or not it has been passed according to the
provisions laid down by law, and thus cannot inquire as to the reasons for its existence.
RULING ON THE EXTENT OF LEGISLATIVE POWER TO TAX
SC held that it is within the power f the legislature whether to tax jewelry or not.
With the legislature primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subject) and situs (place) of taxation

Characteristics of taxes (SLEP5)

a) It is imposed by the State which has jurisdiction over the person,
property, or excises.
b) It is levied by the law-making body of the State;
c) It is an enforced contribution-not dependent on the will of the person
taxed, not a contract but a positive act of the government;
d) it is generally payable in money-generally, it is a pecuniary burden
payable in money, but back pay certificates may be used in payment of tax
(Borja v Gella)
e) It is proportionate in character-taxes must be based on the ability to
pay in accordance with the constitutional mandate to Congress to evolve a
progresseive system of taxation
f) It is levied on persons, property and excise;
g) It is levied for public purpose;
h) It is paid at regular periods or intervals; and
i) It is personal to the taxpayer.
K. Requisites of a valid tax (JAPUL)
32

a) That either the person or property taxed be within the jurisdiction of

the taxing authority
b) That the assessment and collection of certain
kinds of taxes
guarantee against injustice to individuals, especially by providing notice
and opportunity for hearing;
c) That it should be for public purpose;
d) The rule of taxation shall be uniform; and
e) The tax must not impinge on the inherent and Constitutional
Limitations on the power of taxation.
L. Tax as distinguished from other forms of exactions
1. Tariff
Tax
All embracing term to include various
kinds of enforced contributions upon
persons for the attainment of public
purpose
2. Toll
Tax
Enforced proportional contributions from
persons or property
A demand of sovereignty
Taxes are levied for the support of the
government
The amount of tax is determined by the
sovereign
May only be imposed by the State

3. License fee
Tax
Based on the power of taxation
Purpose is revenue
Amount is unlimited

Normally paid after the start of the

business
Taxes, being the lifeblood of the State,
cannot be surrendered except for lawful
consideration
Non-payment does not make the

Tariff
A kind of tax imposed on articles which
are traded internationally

Toll
A consideration which is paid for the use
of a property which is of a public nature
(e.g. road and bridges)
A demand of proprietorship
Tolls are compensation for the use of
anothers property
The amount of the toll is determined by
the cost of the property of the
improvement
Imposed by the government or private
individual

License Fee
Based on police power
Purpose is regulation
Amount is limited to the cost of:
1) Issuance of license
2) Inspection and surveillance except for
non-useful occupation
Normally
paid
before
the
commencement of business
License fee may be with or without
consideration
Non-payment makes the business illegal
33

business illegal but maybe ground for

criminal prosecution
ESSO STANDARD EASTERN, INC vs. COMMISSIONER OF INTERNAL REVENUE
FACTS: In CTA Case No. 1251, Esso Standard Eastern Inc. (Esso) deducted from its gross
income for 1959, as part of its o r d i n a r y a n d n e c e s s a r y b u s i n e s s e x p e n s e s ,
th e am ou n t i t h ad sp e n t f or d ri ll in g an d exp l orati on of i ts p e trol e u m
concessions. This claim was disallowed by the Commissioner of Internal Revenue (CIR) on
the ground that the expenses should be capitalized and might be written off as a loss
only when a "dry hole" should result. Esso then filed an amended return where it asked
for the refund of P323,279.00 by reason of its abandonment as dry holes of several of its
oil wells. Also claimed as ordinary and necessary expenses in the same return
was the amount of P340,822.04, representing margin fees it had paid to the Central
Bank on its profit remittances to its New York head office. On August 5, 1964, the CIR
granted a tax credit of P221,033.00 only, disallowing the claimed deduction for the
margin fees paid on the ground that the margin fees paid to the Central Bank could not
be considered taxes or allowed asdeductible business expenses.Esso appealed to the
Court of Tax Appeals (CTA) for the refund of the margin fees it had earlier paid
contending that the margin fees were deductible from gross income either as a
tax or as an ordinary and necessary business expense. However, Essos appeal was
denied.

ISSUE: (1) Whether or not the margin fees are taxes.(2) Whether or not the margin fees
are necessary and ordinary business expenses.

RULING: (1) No. A tax is levied to provide revenue for government operations, while the
proceeds of the margin fee are applied to strengthen our country's international reserves.
The margin fee was imposed by the State in the exercise of its police power and not the
power of taxation.(2) No. Ordinarily, an expense will be considered 'necessary' where the
expenditure is appropriate and helpful in the development of the taxpayer's business. It
is 'ordinary' when it connotes a payment which is normal in relation to the business of
the taxpayer and the surrounding circumstances. Since the margin fees in
question were incurred for the remittance of funds to Esso's Head Office in New York,
which is a separate and distinct income taxpayer from the branch in the Philippines, for
its disposal abroad, it can never be said therefore that the margin fees were appropriate
and helpfulin the development of Esso's business in the Philippines exclusively or were
incurred for purposes proper to the conduct of the affairs of Esso's branch in the
Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss in the
Philippines exclusively.

34

4. Special assessment
Tax
Enforced proportional contributions from
persons or property
Taxes are levied on land, persons,
property, income, business, etc.
Personal liability of the taxpayer
Based on necessity and partially on
benefits
General application

Special Assessment
Enforced proportional contributions from
owners of lands especially of peculiarly
benefited by public improvements
Levied on hand
Cannot be made a personal liability of
the person assessed
Based solely on benefits
Special application only as to a particular
time and place

Apostolic Prefect of Mountain Province vs. City Treasurer of Baguio

City
FACTS: The Apostolic Prefect is a corporation sole, of religious character,
organized under the Philippine laws, and with residence in Baguio, The City
imposed a special assessment against properties within its territorial
jurisdiction, including those of the Apostolic Prefect, which benefits from its
drainage and sewerage system. The Apostolic Prefect contends that its
properties should be free of tax.
ISSUE: Whether the Apostolic Prefect, as a religious entity, is exempt from the
payment of the special assessment.
HELD: In its broad meaning, tax includes both general taxes and special
assessment. Yet actually, there is a recognized distinction between them in
that assessment is confined to local impositions upon property for the payment
of the cost of public improvements in its immediate vicinity and levied with
reference to special benefits to the property assessed. A special assessment is
not, strictly speaking, a tax; and neither the decree nor the Constitution
exempt the Apostolic Prefect from payment of said special assessment.
Furthermore, arguendo that exemption may encompass such assessment, the
Apostolic Prefect cannot claim exemption as it has not proven the property in
question is used exclusively for religious purposes; but that it appears that the
same is being used to other non-religious purposes. Thus, the Apostolic Prefect
is required to pay the special assessment.
5. Debt
Tax
Based on law
Failure to pay tax (other than poll tax)
may result in imprisonment
Generally payable in money
Not assignable

Debt
Based on contract or judgment
No imprisonment for non-payment of
debt
Payable in money, property, or service
Assignable
35

Not subject to compensation or set-off

Tax does not draw interest
delinquent
Imposed by public authority
Determined by NIRC

unless

May be subject to compensation of setoff

Debt draws interest if stipulated or
delayed
Imposed by private individuals
Determined by Civil Code

Caltex Philippines vs. Commission on Audit (COA)

FACTS: In 1989, COA sent a letter to Caltex, directing it to remit its collection
to the Oil Price Stabilization Fund (OPSF), excluding that unremitted for 1986
and 188 of the additional tax on petroleum products authorized under Section
8 of PD 1956; and that pending such remittance, all its claims for
reimbursement from the OPSF shall be held in abeyance. Caltex requested
COA, notwithstanding an early release of its reimbursement certificates from
the OPSF, which COA denied. On 31 May 1989, Caltex submitted a proposal to
COA for the payment and the recovery of claims. COA approved the proposal
but prohibited Caltex from further offseting remittances and reimbursements
for the current and ensuing years. Caltex moved for reconsideration.
ISSUE: Whether the amounts due from Caltex to the OPSF may be offsetted
against Caltex outstanding claims from said funds.
HELD: Taxation is no longer envisioned as a measure merely to raise revenue
to support the existence of government; taxes may be levied with a regulatory
purpose to provide means for the rehabilitation and stabilization of a
threatened industry which is affected with public interest as to be within the
police power of the state. PD 1956, as amended by EO 137, explicitly provides
that the source of OPSF is taxation. 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.
Francia vs. Intermediate Appellate Court
FACTS: Engracio Francia was the registered owner of a house and lot located
in Pasay City. A portion of such property was expropriated by the Republic of
the Philippines in 1977. It appeared that Francia did not pay his real estate
taxes from 1963 to 1977. Thus, his property was sold in a public auction by the
City Treasurer of Pasay City.
ISSUE: Whether the expropriation payment may compensate for the real
estate taxes due.
HELD: There can be no off-setting of taxes against the claims that the
taxpayer may have against the government. A person canot refuse to pay a tax
on the ground that the government owes him an amount equal to or greater
than the tax being collected. The collection of a tax annot await the results of a
lawsuit agianst the government. Internal revenue taxes cannot be the subject
of compensation. The Government and the taxpayer are not mutually creditors
36

and debtors of each other under Article 1278 of the Civil Code and a claim of
taxes is not such a debt, demand, contract or judgment as is allowed to be setoff.

M. Kinds of taxes
1. As to object
a) Personal, capitation, or poll tax
-tax of a fixed amount imposed upon persons residing within a
specified authority, whether citizens or not, without regard to
their property, occupation, or business in which they may be
engaged (e.g. community tax)
b) Property tax
- Tax imposed on property, whether, real or personal, in proportion
either to its value or some other reasonable rule of
apportionment (e.g. real property tax)
c) Privilege tax /excise
1 -charge imposed upon the performance of an act, the enjoyment of
a privilege or engaging in an occupation, profession, or business
(e.g. donors tax, estate tax, VAT, income tax)
2. As to burden or incidence
a) Direct- taxes which are exacted from the very person who, it is
intended or desired, should pay them. The liability for the payment
of the tax (incidence), as well as the impact (burden) of the tax,
falls on the same person (e.g. income tax, estate tax, donors tax)
b) Indirect tax wherein the incidence or liability for the payment
falls on one person but the burden may be shifted or passed on to
another not as a tax but as a part of the purchase price (e.g. VAT,
excise tax, percentage tax)
3. As to tax rates
a) Specific
- tax of a fixed amount imposed by the head or number or by some
standard of weight or measurement. It requires no valuation other
than a listing or classification of the objects to be taxed (e.g. tax
on fermented liquors, cigars, distilled spirits)
b) Ad valorem
1 -tax of a fixed portion of the value of the property with respect to
which the tax is assessed; it requires the intervention of assessors
or appraisers to estimate the value of such property before the
amount due from each taxpayer can be determined (e.g. real
property tax)
c) Mixed
-tax having both the characteristics of specific tax and ad valorem
tax.
4. As to purposes
a) General or fiscal
tax imposed for the general or ordinary purposes of the
37

Government, to raise revenue for governmental needs (e.g.

income tax, estate tax, and value-added tax)
b) Special, regulatory, or sumptuary
-tax imposed for a special purpose, to achieve some social or
economic ends irrespective of whether revenue is actually raised
or not (e.g. customs duties)
5. As to scope or authority to impose
a) National internal revenue taxes
-levied by the National Government, through Congress, and
administered by the BIR or the BOC (e.g. NIRC taxes, customs,
duties)
b) Local real property tax, municipal tax
-levied by the LGUs, through their respective Sanggunians,and
administered by the local executive government through the local
treasurer (e.g. real property tax, business taxes imposed under
the LGC)
6. As to graduation
a) Progressive
-the tax rate increases as the tax base or bracket increases
(income tax on individuals, estate tax and donors tax)
b) Regressive
-the tax rate decreases as the tax rate increases
c) Proportionate
-tax rate is based on a fixed percentage of the amount of the
property receipts of other bases to be taxed (e.g. real property
tax, VAT and 3% percentage tax)
L. Taxpayers suit
-A taxpayer has the right to file an action to question the validity, or
constitutionality of a statute or law.
Basis: The right is based on the fact that expenditure of public funds by
an officer for the purpose of administering or implementing an invalid or
unconstitutional law is misapplication of such funds.
When available: It is only when an act complained of, which may include
a legislative enactment, directly involves the illegal disbursement of
public funds derived from tacation that the taxpayers suit may be
allowed (Pascual v Secretary of Public Works)
M. Doctrine of Equitable Recoupment
-where the refund of a tax illegally or erroneously collected or overpaid by a
taxpayer is barred by prescription, a tax presently being assessed against a
taxpayer may be recouped or set-off against the tax already barred by
prescription.
-The doctrine is pertinent only to taxes arising from the same transaction on which
an overpayment is made and underpayment is due.
N. Tax Laws
-Nature of tax laws38

a) not political ion character, effective even under belligerent

occupation (Hilado v CIR)
b) Civil in nature and not penal in character, hence, not subject to
ex-post facto law prohibitions.
Hilado vs. Collector
FACTS: Emilio Hilado filed his income tax return for 1951 with the treasurer of
Bacolod City, claiming a deductible item of P12,837.65 from his gross income
pursuant to General Circular V-123 issued by the Collector of Internal Revenue. The
Secretary of Finance, through the Collector, issued General Circular V- 139 which
revoked and declared void Circular V-123; and laid down the rule[s] that losses of
property which occurred in World War II from fires, storms, shipwreck or other
casualty, or from robbery, theft, or embezzlement are deductible in the year of
actual loss or destruction of said property. The deductions were disallowed.
ISSUE: Whether Internal Revenue Laws were enforced during the war and whether
Hilado can claim compensation for destruction of his property during the war.
HELD: Philippines Internal Revenue Laws are not political in nature and as such
were continued in force during the period of enemy occupation and in effect were
actually enforced by the occupation government. Such tax laws are deemed to be
laws of the occupied territory and not of the occupying enemy. As of the end of
1945, there was no law which Hilado could claim for the destruction of his
properties during the battle for the liberation of the Philippines. Under the
Philippine Rehabilitation Act of 1948, the payment of claims by the War Damage
Commission depended upon its discretions non-payment of which does not give
rise to any enforceable right. Assuming that the loss (deductible item) represents a
portion of the 75% of his war damage claim, the amount would be at most a
proper deduction of his 1950 gross income (not on his 1951 gross income) as the
last installment and notice of discontinuation of payment by the War Damage
Commission was made in 1950.

39