2010 Taxation Review by Domondon 1

PRIMUS PRE-BAR REVIEW DIVISION

BAR STAR NOTES

TAXATION
VER. 2010.08.12
copyrighted 2010

Prepared by Prof. Abelardo T. Domondon

(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.). Lawyer-CPA-Customs Broker, Management Consultant,
Professor of Law and Pre-Bar Reviewer)
How to use the BAR STAR NOTES. The BAR STAR NOTES in the form of questions and answers as well as
textual discussion were specially prepared by Prof. Domondon for the exclusive use of Bar Reviewees who
attended the 2010 Wrap-Up Lectures on TAXATION conducted by Primus Information, Center, Inc., and the Bar
Reviewees of various law schools and Review Centers where he was invited to lecture on Taxation. Included in the
presentation are doctrines contained in Supreme Court decisions up to April 2010.
The purpose of the BAR STAR NOTES is to provide the Bar Reviewee with a handy review material which serves
as memory-joggers for the September 12, 2010 Bar Examinations in Taxation. The author tries to second guess what
would be included in the Bar Exams using statistical analysis. The actual Bar questions may not be formulated in the same
manner as the BAR STAR NOTES. However, the doctrines tested in the Bar would in all probability be included in these
Notes.
If pressed for time, the author suggests that the reader should focus his attention on the following:

Nice to know

Should know

Must know and master

It is further suggested that the reader should merely browse those without stars.
The BAR STAR NOTES in TAXATION is the 4th in the series of Bar Star Notes the author has prepared
for all the eight Bar subjects. The other Bar Star Notes may be availed of by enrolling in the 2010 Wrap-Up
lectures conducted by PRIMUS INFORMATION CENTER, INC.Please feel free to call Baby, Tel. No. 816-07-68 or 81784-49; Leon, Mobile No. 0917-793-6169; Atty. Celia, Mobile No. 0917-790-8406, or Venny, Mobile No. 0917-337-6479.

WARNING:
These materials are copyrighted and/or based on the writers books on Taxation and future revisions. It is
prohibited to reproduce any part of these Notes in any form or any means, electronic or mechanical, including
photocopying without the written permission of the author. These materials are authorized for the use only of PRIMUS
Reviewees and others who attended the authors lectures on Taxation. Unauthorized users shall not be prosecuted
but SHALL BE SUBJECT TO THE LAW OF KARMASUCH THAT THEY WILL NEVER PASS THE BAR OR WOULD BE

UNHAPPY IN LIFE for stealing the intellectual property of the author.

THE BEST OF LUCK AND ADVANCE CONGRATULATIONS

TAXATION

GENERAL PRINCIPLES OF TAXATION

TAXATION, IN GENERAL
1.

State briefly and concisely the nature of taxation. Alternatively, define taxation.

SUGGESTED ANSWER: The inherent power of the sovereign exercised through the legislature to impose burdens upon
subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of
government.
2.

What is the nature of the States power to tax ? Explain briefly.

SUGGESTED ANSWER: The nature of the states power to tax is two-fold. It is both an inherent power and a

legislative power.

It is inherent in nature being an attribute of sovereignty. This is so, because without the

taxes, the states existence would be imperiled. There is thus, no need for a constitutional grant for the state to exercise
this power.

It is a legislative power

because it involves the promulgation of rules. Taxation is a set of rules, how much is the tax to be paid, who pays the tax,
to whom it should be paid, and when the tax should be paid.
3.

What is the underlying theory of taxation ? Explain briefly.

SUGGESTED ANSWER: Taxes are the lifeblood of the nation.

government will not survive, resulting in detriment to society.

of motive power to activate and operate it.
4.

Without revenue raised from taxation, the

Without taxes, the government would be paralyzed for lack

(Commissioner of Internal Revenue v. Algue, Inc. et al., 158 SCRA 8, 16-17)

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 the court sits.

Reconcile

the statements.

In the alternative, what are the implications

that flow from the above statements ?

SUGGESTED ANSWERS: Marshalls

view refers to a valid tax while the Holmes view refers to an invalid tax.
imposition of a

a.

The

valid tax could not be judicially restrained merely because it would prejudice taxpayers

property.

b.

An illegal tax could be judicially declared invalid

and should not work to prejudice a taxpayers property.

5.

Discuss briefly the basis/bases, or rationale of

taxation.

SUGGESTED ANSWER: a.

duties of protection and support between the state and its citizens and residents.
relation

Also called

symbiotic

between the state and its citizens.

b.

Jurisdiction

by

the

state

over

persons and property within its territory.

6.

Discuss briefly but comprehensively the objectives or purposes of taxation.

SUGGESTED ANSWER: The purposes or objectives of taxation are the

following:

a.

purpose:
purpose.

1)
b.

Revenue

The secondary

The primary

Reciprocal

purposes

1)

purpose.

2)

Compensatory

purpose.

3)
7.

distinctions:

To implement the power of eminent domain.

Distinguish a tax from a license fee.

a.

Sumptuary or regulatory

SUGGESTED ANSWER: The following are the

Purpose: Tax imposed for revenue while license fee for regulation.

Tax for general public

purposes while license fee for regulatory purposes

only.

b.

Basis:

Tax imposed under power of

taxation while license fee under police

power.

c.

Amount:

In taxation, no limit as to

amount while license fee limited to cost of the license and the expenses of police surveillance and
regulation.
payment:

d.

Time of

Taxes normally paid after commencement of business while license fee

before.

e.

Effect of payment:

failure to pay license fee makes business illegal.

Failure to pay a tax does not make the business illegal while
f.

Surrender:

Taxes, being the lifeblood of the state,

cannot be surrendered except for lawful consideration while a license fee may be surrendered with or without
consideration. (Cooley on Taxation, pp. 1137-1138; Pacific Commercial Company v. Romualdez, et al., 49 Phil. 924)
8.

How may the power to tax be utilized to carry out the social justice program of our

government ?

SUGGESTED ANSWER: The compensatory purpose of taxation is to implement the

social justice provisions of the constitution through the progressive system of taxation, which would result to equal
distribution of wealth, etc.
Progressive income taxes alleviate the margin between rich and poor. (Southern Cross Cement Corporation v.
Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)
In recent years, the increasing social challenges of the times expanded the scope of the state activity, and
taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the
protection of local industries as well as public welfare and similar objectives.

(Batangas Power Corporation v. Batangas

City, et al., G. R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City of
Cabanatuan, G. R. No. 149110, April 9, 2003)
9.

Explain the sumptuary purpose of taxation.

SUGGESTED ANSWER: The sumptuary purpose of taxation is to promote the general welfare and to protect the
health, safety or morals of the inhabitants. It is in the joint exercise of the power of taxation and police power where
regulatory taxes are collected.
Taxation may be made the implement of the states police power. The motivation behind many taxation measures is
the implementation of police power goals. [Southern Cross Cement Corporation v. Cement Manufacturers Association of the
Philippines, et al., G. R. No. 158540, August 3, 2005) The reader should note that the August 3, 2005 Southern Cross case is
the decision on the motion for reconsideration of the July 8, 2004 Southern Cross decision.
The so-called sin taxes on alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of
these potentially harmful products. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the
Philippines, et al., G. R. No. 158540, August 3, 2005)
10.

Taxation distinguished from police power. Taxation is distinguishable from police power as to the

means employed to implement these public goals. Those doctrines that are unique to taxation arose from peculiar
considerations such as those especially punitive effects (Southern Cross Cement Corporation v. Cement Manufacturers
Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) as the power to tax involves the power to destroy

and the belief that taxes are lifeblood of the state. (Ibid.) taxes being the lifeblood of the government, their prompt and
certain availability is of the essence.
These considerations necessitated the evolution of taxation as a distinct legal concept from police power. (Ibid.)

11.

How the power of taxation may be used to implement power of eminent domain. Tax measures

are but enforced contributions exacted on pain of penal sanctions and clearly imposed for public purpose. In most recent
years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable
distribution of wealth. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16,
2005)
Establishments granting the 20% senior citizens discount may claim the discounts granted to senior citizens as tax
deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be
allowed as deduction from gross income for the same taxable year that the discount is granted. Provided, further, That the
total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales
receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal
Revenue Code, as amended. [M.E. Holding Corporation v. Court of Appeals, et al., G.R. No. 160193, March 3, 2008 citing
Expanded Senior Citizens Act of 2003, Sec. 4 (a)]
12. What are the three basic principles of a sound tax system?
briefly.

Explain each

SUGGESTED ANSWER: The canons of a sound tax system, also known as

the characteristics or, principles of a sound tax system, are used as a criteria in order to determine whether a tax system is
able to meet the purposes or objectives of taxation. They are:
a.

Fiscal adequacy.

b.

Administrative feasibility.

c.

Theoretical justice.

13. What are the elements or characteristics of a tax ?

ANSWER:

a.

b.

Generally payable in money.

c.

Proportionate in character.

SUGGESTED
Enforced contribution.

d.

Levied on persons, property or exercise of a right or privilege.

e.

Levied by the state having jurisdiction.

f.

Levied by the legislature.

g.

Levied for a public purpose.

h.

Paid at regular periods or intervals.

14. State the requisites of a valid tax.

SUGGESTED

ANSWER:

a.

A valid tax should be within the jurisdiction of the

taxing authority.
b.

That the assessment and collection of certain kinds (The same as the inherent limitations of the power of

taxation) should be for a public purpose.

c.
d.

The rule of taxation should be uniform.

That

either

the

person or property of taxes guarantees against injustice to individuals, especially by

way or notice and opportunity for hearing be provided.

e.
taxation.

The tax must not impinge on the inherent and Constitutional limitations on the power of

15. What are the classes or kinds of taxes according to the subject matter or
object ?

SUGGESTED

ANSWER:

a.

Personal, poll or capitalization imposed on all

residents, whether citizen or not. Example Community Tax.

b.

Property -

Imposed on property.

Example Real property

tax.

c.

upon the performance

of

Excise imposed

an act, the enjoyment of a privilege or the engaging in an occupation. Example income tax,

estate tax.
16. What are the kinds of taxes classified as to who bears the burden ? Explain each
briefly.

SUGGESTED ANSWER: Based on the possibility of shifting the incidence of taxation, or as to

who shall bear the burden of taxation, taxes may be classified into:
a.

Direct taxes. Those that are extracted from the very person who, it is intended or desired, should pay them

(Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G. R. No. 140230, December 15,
2005); they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in,
(Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, supra)

which liability cannot be

shifted or transferred to another. Example income tax, estate tax, donors tax, etc.
b.

Indirect taxes are those that are demanded in the first instance, from, or are paid by, one person in the

expectation and intention that he can shift the burden to (Commissioner of Internal Revenue v. Philippine Long Distance
Telephone Company, supra) to someone else not as a tax but as part of the purchase price. (Commissioner, of Internal
Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005 citing various cases
and authorities) Example value added tax (VAT), documentary stamp tax, excise tax, percentage tax, etc.

17.

Silkair (Singapore) PTE, Ltd., an international carrier, purchased aviation gas from Petron Corporation,

which it uses for its operations. It now claims for refund or tax credit for the excise taxes it paid claiming that it
is exempt from the payment of excise taxes under the provisions of Sec. 135 of the NIRC of 1997 which provides
that petroleum products are exempt from excise taxes when sold to

Exempt entities or agencies covered by tax

treaties, conventions, and other international agreements for their use and consumption: Provided, however, That the
country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products
sold to Philippine carriers, entities or agencies
Silkair further anchors its claim on Article 4(2) of the Air Transport Agreement between the
Government of the Republic of the Philippines and the Government of the Republic of Singapore (Air Transport
Agreement between RP and Singapore) which reads: Fuel, lubricants, spare parts, regular equipment and aircraft
stores introduced into, or taken on board aircraft in the territory of one Contracting party by, or on behalf of, a designated
airline of the other Contracting Party and intended solely for use in the operation of the agreed services shall, with the
exception of charges corresponding to the service performed, be exempt from the same customs duties, inspection fees
and other duties or taxes imposed in the territories of the first Contracting Party , even when these supplies are to be used
on the parts of the journey performed over the territory of the Contracting Party in which they are introduced into or taken
on board. The materials referred to above may be required to be kept under customs supervision and control.
Silkair likewise argues that it is exempt from indirect taxes because the Air Transport Agreement
between RP and Singapore grants exemption from the same customs duties, inspection fees and other duties
or taxes imposed in the territory of the first Contracting Party. It invokes Maceda v. Macaraig, Jr., G.R. No.
88291, May 31, 1991, 197 SCRA 771.which upheld the claim for tax credit or refund by the National Power
Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect taxes.
Is Silkair entitled to the tax refund or credit it seeks ? Reason out your answer.
SUGGESTED ANSWER: Silkair is not entitled to tax refund or credit for the following reasons:

a.

The excise tax on aviation fuel is an indirect tax. The proper party to question, or seek a refund of, an

indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he
shifts the burden thereof to another. (Philippine Geothermal, Inc. v. Commissioner of Internal Revenue, G.R. No. 154028,
July 29, 2005, 465 SCRA 308, 317-318)

The NIRC provides that the excise tax should be paid by the manufacturer or

producer before removal of domestic products from place of production. Thus, Petron Corporation, not Silkair, is the
statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air
Transport Agreement between RP and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is
not a tax but part of the price which Silkair had to pay as a purchaser. [Philippine Acetylene Co., Inc. v. Commissioner of
Internal Revenue, 127 Phil. 461, 470 (1967)]
b.

Silkair could not seek refuge under Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771.which

upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt
even from the payment of indirect taxes.
In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G.R. No. 140230, December 15,
2005, 478 SCRA 61 the Supreme Court clarified the ruling in Maceda v. Macaraig, Jr., viz: It may be so that in Maceda vs.
Macaraig, Jr., the Court held that an exemption from all taxes granted to the National Power Corporation (NPC) under its
charter includes both direct and indirect taxes.
An exemption from all taxes excludes indirect taxes, unless the exempting statute, like NPCs charter, is so couched as to
include indirect tax from the exemption. The amendment under Republic Act No. 6395 enumerated the details covered by
NPCs exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of NPC to cover, among
others, both direct and indirect taxes on all petroleum products used in its operation. Presidential Decree No. 938 [NPCs
amended charter] amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC
from all forms of taxes, duties, fees The use of the phrase all forms of taxes demonstrates the intention of the law to
give NPC all the tax exemptions it has been enjoying before.
The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement
between RP and Singapore cannot, without a clear showing of legislative intent, be construed as including indirect
taxes. Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor
of the taxing authority, and if an exemption is found to exist, it must not be enlarged by construction. (Silkair (Singapore)
PTE, Ltd., v. Commissioner of Internal Revenue,G.R. No. 173594, February 6,
2008)
18.
different kinds of taxes classified as to purpose ?
ANSWER:

What are the

SUGGESTED

a.

General, fiscal or revenue imposed

purpose of raising public funds for the service of the government.

b.

for

the

Special or regulatory

imposed primarily for the regulation of useful or non-useful occupation or enterprises and secondarily only for the raising
of public funds.

LIMITATIONS OR RESTRICTIONS ON THE POWER

1.

Purpose for the limitations on the power of taxation.

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

INHERENT LIMITATIONS
1.

What are the inherent limitations on the power of taxation ?

SUGGESTED ANSWERS:
a.

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

b.

No improper delegation of legislative authority to tax. Only the legislature can exercise the power of taxes

unless the same is delegated to some other governmental body by the constitution or through a law which does not violate
any provision of the constitution.
c.

Territoriality. The taxing power should be exercised only within territorial boundaries of the taxing authority.

d.

Recognition of government exemptions; and

e.

Observance of the principle of comity. Comity is the respect accorded by nations to each other because

they are equals. On the other hand taxation is an act of sovereign. Thus, the power should be imposed upon equals out of
respect.
Some authorities include no double taxation.

2.

What are the principles to consider in the determination of whether tax revenues are devoted

for a public purpose ?

SUGGESTED ANSWER:
a.

The tax revenues are for a public purpose if utilized for the benefit of the community in general. An

alternative meaning is that tax proceeds should be utilized only to attain the objectives of government.
b.

Inequalities resulting from the singling out of one particular class for taxation or exemption infringe no

constitutional limitation.
REASON: It is inherent in the power to tax that the legislature is free to select the subjects of taxation.
BASIS:
c.

The lifeblood theory.

An individual taxpayer need not derive direct benefits from the tax.

REASON: The paramount consideration is the welfare of the greater portion of the population.
d.

A tax may be imposed, not so much for revenue purposes, but under police power for the general

welfare of the community. This would still be for a public purpose.

e.

Public purpose continually expanding. Areas formerly left to private initiative now lose their

boundaries and may be undertaken by the government if it is to meet the increasing social challenges of the times.
f.

Tax revenue must not be used for purely private purposes or for the exclusive benefit of private

persons.
g.

Private persons may be benefited but such benefit should be merely incidental as its main object is the

benefit of the community in general.

h.

Determined at the time of enactment of tax law and not at the time of implementation.

i.

There is a presumption of public purpose even if the tax law does not specifically provide for its

purpose. (Santos & Co., v. Municipality of Meycauayan, et al., 94 Phil. 1047)

j.

Public use is no longer confined to the traditional notion of use by the public but held synonymous with public

interest, public benefit, public welfare, and public convenience. (Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, G.R. No. 159647, April 16, 2005)
3. A law was enacted imposing a tax on manufacturers of coconut oil, the proceeds of which are to be
used exclusively for the protection and promotion of the coconut industry, namely, to improve the working
conditions in coconut mills and to conduct research on the use of coconut oil for motor fuel. Some of the
manufacturers of coconut oil challenge the validity of the law, contending that the tax is to be used for a

private purpose, and therefore, the law violates the rule that public revenues shall not be appropriated
for anything but a public purpose.

Decide with reason.

SUGGESTED ANSWER: The levy is for a public purpose. It cannot be denied that the coconut industry is one of
the major industries supporting the national economy.

It is, therefore, the states concern to make it a strong and secure

source not only of the livelihood of the significant segment of the population, but also of export earnings, the sustained
growth of which is one of the imperatives of economic growth. (Philippine Coconut Producers Federation, Inc. (Cocofed
v. Presidential Commission on Good Government, 178 SCRA 236, 252)
4.

Requisites for taxpayers, concerned citizens, voters or legislators to have locus standi to sue.

a.

In general, the case should involve constitutional issues. (David, et al., v. President Gloria Macapagal-

Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)

b.

For taxpayers, there must be a showing:

1)

against abuses of

That tax money is being extracted and spent in

legislative power.

2)

(Flast v. Cohen, 392 U.S.

violation of specific constitutional protections

83)

That public money is being deflected to any

of Public Works, 110

Phil. 33) or a

improper

purpose (Pascual v. Secretary

claim of illegal disbursement of public funds

or that the tax

measure

is unconstitutional. (David, supra)

3)
or that public

A taxpayer is allowed to sue where there is a

money is being deflected to any improper purpose, or that

through the enforcement of

February

an invalid or

that public funds are illegally disbursed,

there is a wastage of

unconstitutional law. (Abaya v. Ebdane, G. R.

14, 2007; Garcia v. Enriquez, Jr. G.R.

power of

claim

No. 112655 December 9,

public funds

No. 167919,

1993, Minute Resolution)

A taxpayers suit is properly brought only when there

is

Congress.

(AIWA),etc., et al., v. Romulo,

al., G. R. No.

(Automotive Industry Workers Alliance

157509,

14, 2000, 337 SCRA

January 18, 2005 citing

an exercise of the spending or taxing

Gonzales v. Narvasa, G.

R. No.

etc. ,et

140835, August

733, 741)

c.

For voters, there must be a showing of obvious interest in the validity of the election law in question.

d.

For concerned citizens, there must be a showing that the issues raised are of transcendental importance

which must be settled early.

e.

For legislators, there must be a claim that the official action complained of infringes upon their

prerogatives as legislators. (David, et al., v. President Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3,
2006)
5.

Only those directly affected have locus standi to impugn the alleged encroachment by the

executive department into the legislative domain of Congress.

a.

Only those who shall be directly affected by such executive encroachment, such as for example

employees who would find themselves subject to disciplinary powers that may be imposed under the questioned Executive
Order as they have a direct and specific interest in raising the substantive issue therein (Automotive Industry Workers
Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al., G. R. No. 157509, January 18, 2005) or employees who are going to be
demoted, transferred or otherwise affected by any personnel action subject o the rule on exhaustion of administrative
remedies.
b.

Moreover, and if at all, only Congress, can claim any injury from the alleged executive encroachment of the

legislative function to amend, modify and/or repeal laws. (Automotive Industry Workers Alliance (AIWA),etc., et al.,
supra, citing Gonzales v. Narvasa, G. R. No. 140835, August 14,2000, 337 SCRA 733, 741)
6.

Locus standi being merely a matter of procedure, have been waived in certain instances where a

party who is not personally injured may be allowed to bring suit. The following are examples of instances where suits
have been brought by parties who have not have been personally injured by the operation of a law or any other government
act but by concerned citizens, taxpayers or voters who actually sue in the public interest:
a.

Taxpayers suits to question contracts entered into by the national government or government-owned or

controlled corporations allegedly in contravention of the law.

b.

A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money is

being deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of an invalid or
unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)
7. The VAT law provides that, the President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) after any of the
following conditions have been satisfied. (i) value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or (ii) national government
deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).
Was there an invalid delegation of legislative power ?
SUGGESTED ANSWER: No. There is no undue delegation of legislative power but only of the discretion as to the
execution of the law. This is constitutionally permissible.
Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who
must do it, and what is the scope of his authority. In the above case the Secretary of Finance becomes merely the agent of
the legislative department, to determine and declare the even upon which its expressed will takes place. The President
cannot set aside the findings of the Secretary of Finance, who is not under the conditions acting as the execute alter ego or
subordinate. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion
cases citing various cases]]
8. Instances of proper delegation: When taxing power could be delegated: Exceptions to the rule on
non-delegation:
a.

Delegation of tariff powers by Congress to the President under the flexible tariff clause, Section 28 (2), Article

VI of the Constitution.
b.
c.

Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution.
The delegation to the President of the Philippines to enter into executive agreements, and to ratify treaties

which may contain tax exemption provisions subject to the concurrence by the Senate in the ratification made by the
President.
d.
e.

Delegation to the people at large.

Delegation to administrative bodies [Abakada Guro Party List (Formerly AASJS), etc., v, Ermita, et al., G. R.

No.168056, September 1, 2005], which is referred to as subordinate legislation.

In this instance, there is a requirement that the law is complete in all aspects so what is delegated is merely the
implementation of the law or there exists sufficiently determinate standards to guide the delegate and prevent a total
transference of the taxing power.
9.

Paradigm shift from exclusive Congressional power to direct grant of taxing power to local

legislative bodies. The power to tax is no longer vested exclusively on Congress; local legislative bodies are now given
direct authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution. (Batangas
Power Corporation v. Batangas City, et al. G. R. No. 152675, and companion case, April 28, 2004 citing National Power
Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)
Local government legislation, is not regarded as a transfer of general legislative power, but rather as the grant of

authority to prescribe local regulations, according to immemorial practice, subject, of course, to the interposition of the
superior in cases of necessity. (People v. Vera, 65 Phil. 56)
10.

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

in the sense that Congress can enact legislation granting tax exemptions.
While the system of local government taxation has changed with the onset of the 1987 Constitution, the power of
local government units to tax is still limited.
While the power to tax by local governments may be exercised by local legislative bodies, no longer merely by
virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution,
the basic doctrine on local taxation remains essentially the same, the power to tax is [still] primarily vested in the
Congress. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City
Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169 in
turn referring to Mactan Cebu International Airport Authority, v. Marcos, G.R. No. 120082, September 11, 1996, 261
SCRA 667, 680)
11.

Further amplification by Bernas of the local governments power to tax. What is the effect of

Section 5 on the fiscal position of municipal corporations? Section 5 does not change the doctrine that municipal
corporations do not possess inherent powers of taxation. What it does is to confer municipal corporations a general power
to levy taxes and otherwise create sources of revenue. They no longer have to wait for a statutory grant of these
powers. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the
authority to impose limitations on municipal powers. Moreover, these limitations must be consistent with the basic policy
of local autonomy. The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against
municipal corporations. Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved
in favor of municipal corporations. It is understood, however, that taxes imposed by local government must be for a public
purpose, uniform within a locality, must not be confiscatory, and must be within the jurisdiction of the local unit to pass.
(Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of
Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169)
12.

Reconciliation of the local governments authority to tax and the Congressional general taxing

power. Congress has the inherent power to tax, which includes the power to grant tax exemptions. On the other hand,
the power of local governments, such as provinces and cities for example Quezon City, to tax is prescribed by Section
151 in relation to Section 137 of the LGC which expressly provides that notwithstanding any exemption granted by any law
or other special law, the City or a province may impose a franchise tax. It must be noted that Section 137 of the LGC does
not prohibit grant of future exemptions.
The Supreme Court in a series of cases has sustained the power of Congress to grant tax exemptions over and
above the power of the local governments delegated power to tax. (Quezon City, et al., v. ABS-CBN Broadcasting
Corporation, G. R. No. 166408, October 6, 2008 citing City Government of Quezon City, et al. v. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 16)

Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect
the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of
the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing
powers, doubts must be resolved in favor of municipal corporations. [Ibid., referring to Philippine Long Distance
Telephone Company, Inc. (PLDT) vs. City of Davao]
13.

General principles of income taxation in the Philippines or the source rule of income taxation

as provided in the NIRC of 1997.

a. A citizen of the Philippines residing therein is taxable on all income derived from
sources withinand without the Philippines;
b.

A nonresident citizen is taxable only on income derived from sources within the Philippines;

c. An individual citizen of the Philippines who is working and deriving income abroad as anoverseas contract
worker is taxable only on income from sources within the Philippines: Provided, That a seaman who is a citizen of the
Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as an overseas contract worker;
d.

An alien individual, whether a resident or not of the Philippines, is taxable only onincome derived

from sources within the Philippines;

e. A domestic corporation is taxable on all income derived from sources within and without the Philippines; and
f. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only
on income derived from sources within the Philippines. (Sec. 23, NIRC of 1997, emphasis supplied)

14.

Juliane a non-resident alien appointed as a commission agent by a domestic corporation with a

sales commission of 10% all sales actually concluded and collected through her efforts. The local company
withheld the amount of P107,000 from her sales commission and remitted the same to the BIR.
She filed a claim for refund alleging that her sales commission is not taxable because the same was a
compensation for her services rendered in Germany and therefore considered as income from sources outside
the Philippines.
Is her contention correct ?
SUGGESTED ANSWER: Yes. The important factor which determines the source of income of personal services is not
the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place
where the services were actually performed.
Since the activity of securing the sales were in Germany, then the income did not originate from sources from within
the Philippines. (Commissioner of Internal Revenue v. Baier-Nickel, G. R. No. 153793, August 29, 2006)
15. Ensite, Ltd.. is a Canadian corporation not doing business in the Philippines. It holds 40% of
the shares of Philippine Stamping Plant, Inc.,., a Philippine company while the 60% is owned by Fred
Corporation, a Filipino-owned Philippine corporation. Ensite Co. also owns 100% of the shares of Susanto Co.,
an Indonesian company which has a duly licensed Philippine branch. Due to worldwide restructuring of the
Ensite Ltd.,. group, Ensite Ltd.,. decided to sell all its shares in Philippine Stamping Plant, Inc. and Susanto
Co. The negotiations for the buy-out and the signing of the Agreement of Sale were all done in the
Philippines. The Agreement provides that the purchase price will be paid to Ensite Ltds bank account in the
U.S. and that title to the Philippine Stamping Plant, Inc. and Susanto Co. shall be transferred to General Co.,
in Toronto Canada where stock certificates will be delivered. General Co. seeks your advice as to whether or
not it will subject the payments of the purchase price to withholding tax. Explain your
advice.

SUGGESTED ANSWER: The payments of the purchase price will be subject to withholding tax.

Considering that all the activities (sales) occurred within the Philippines, the income is considered as income from within,
subject to Philippine income taxation. Ensite, Ltd. being a foreign corporation is to be taxed on its income derived from
sources within the
Philippines.
16. Ensite, Ltd. is a Canadian corporation, which has
a duly licensed Philippine branch engage in trading activities in the Philippines. Ensite, Ltd.. also invested
directly in 40% of the shares of stock of Philippine Stamping Plant, Inc.., a Philippine corporation. These

shares are booked in the Head Office of Ensite, Ltd.. and are not reflected as assets of the Philippine
branch. In 2009, Philippine Stamping Plant, Inc.. declared dividends to its stockholders. Before remitting the
dividends to Ensite Ltd.,., Philippine Stamping Plant, Inc. Co. seeks your advice as to whether it will subject
the remittance to withholding tax. There is no need to discuss WT rates, if applicable. Focus your discussion
on what is the issue.

SUGGESTED ANSWER: Philippine Stamping

Plant, Inc.. should subject the remittance to withholding tax.. Since Philippine Stamping Plant. is a Philippine corporation,
its shares of stock have obtained a business situs in the Philippines, hence the dividends are considered as income from
within. Ensite. Ltd., being a foreign corporation, should be subject to tax on its income from within.
17. Philippine Stamping Plant, Inc., a Philippine corporation, has an executive Larry who is a
Filipino citizen. Philippine Stamping Plant, Inc,. has a subsidiary in Malaysia (Kuala Lumpur Manufacturing,
Inc.) and will assign Larry for an indefinite period to work full time for Kuala Lumpur Manufacturing,
Inc.. Larry will bring his family to reside in Malaysia and will lease out his residence in the Philippines. The
salary of Larry will be shouldered 50% by Philippine Stamping Plant, Inc.. while the other 50% plus housing,
cost of living and educational allowances of Larrys dependents will be shouldered by Kuala Lumpur
Manufacturing, Inc.. Philippine Stamping Plant, Inc.. will credit the 50% of Larrys salary to his Philippine
bank account. Larry will sign the contract of employment in the Philippines. He will also be receiving rental
income for the lease of his Philippine
residence.

Are these salaries,

allowances and rentals subject to Philippine income tax? Explain

briefly.

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

from labor or personal services rendered outside of the Philippines is considered as income from without. Since Larry is an
OCW, then he is to be taxed only on his income derived from within the Philippines such as the rentals on his Philippine
residence, and not on his income from without.
18.

Obama Airlines, Inc., a foreign airline company which does not maintain any flight to and from

the Philippines sold air tickets in the Philippines, through a general sales agent, relating to the carriage of
passengers and cargo between two points, both outside the Philippines.
a.

Is Obama, Inc., subject to income taxes on the sale of the tickets ?

SUGGESTED ANSWER: Yes. The source of income which is taxable is that activity which produced the income. The
sale of tickets in the Philippines is the activity that determines whether such income is taxable in the Philippines.
The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the
source of payments is the Philippines. the flow of wealth proceeded from and occurred, within the Philippine territory,
enjoying the protection accorded by the Philippine Government. In consideration of such protection, the flow of wealth should
share the burden of supporting the government. [Commissioner of Internal Revenue v. British Overseas Airways Corporation
(BOAC), 149 SCRA 395]
Off-line air carriers having general sales agents in the Philippines are engaged in or doing business in the
Philippines and their income from sales of passage documents here is income from within the Philippines. Thus, the offline air carrier liable for the 32% (now 30%) tax on its taxable income. [South African Airways v. Commissioner of
Internal Revenue, G.R. No. 180356, February 16, 2010 citingCommissioner of Internal Revenue v. British Overseas
Airways Corporation (British Overseas Airways), No. L-65773-74, April 30, 1987, 149 SCRA 395]
b.

Supposing that Obama, Inc., sells tickets outside of the Philippines for passengers it carry from

Gold City, South Africa to the Philippines but returns to South Africa without any cargo or passengers. Would it
then be subject to any Philippine tax on such sales ?
SUGGESTED ANSWER: It would not be subject to any tax. It is not subject to any income tax because the activity
which generated the income (the sale of the tickets) was performed outside of the Philippines.
It is not subject to the carriers tax based on gross Philippine billings because there were no lifts that originated from the

Philippines.

Gross Philippine Billings refers to the amount of gross revenue derived from carriage of persons, excess

baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place
of sale or issue and the place of payment of the ticket or passage document. [NIRC of 1997, Sec. 28(A)(3)(a)]
c.

Would your answer be the same if Obama, Inc. sold tickets outside of the Philippines for

travelers who are going to picked up by Obama, Inc., planes from the Diosdado Macapagal Intl. Airport at Clark,
Angeles, Pampanga, bound for Nairobi, Kenya ? Reason out your answer.
SUGGESTED ANSWER: No more. This time Obama, Inc., would be subject to the carriers tax based on Gross
Philippine Billings. (GPB).

Gross Philippine Billings refers to the amount of gross revenue derived from carriage of persons, excess baggage,
cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or
issue and the place of payment of the ticket or passage document. [NIRC of 1997, Sec. 28(A)(3)(a)]
The place of sale is irrelevant; as long as the uplifts of passengers and cargo occur from the Philippines, income is
included in GPB. (South African Airways v. Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010)
19.

No improper delegation of legislative authority to tax.

The power to tax is inherent in the State,

such power being inherently legislative, based on the principle that taxes are a grant of the people who are taxed, and the
grant must be made by the immediate representatives of the people; and where the people have laid the power, there it
must remain and be exercised. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75,
July 21, 2008)

CONSTITUTIONAL LIMITATIONS
1.

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

as well as the specific or direct constitutional limitations.

2.

The general or indirect constitutional limitations on the power of taxation are:

a.

Due process clause;

b.

Equal protection clause;

c.

Freedom of the press;

d.

Religious freedom;

e.

No taking of private property without just compensation;

f.

Non-impairment clause;

g.

Law-making process:

1)

Bill should embrace only one subject

2)

Three (3) readings on three separate days;

3)

Printed copies in final form distributed three

h.

expressed

in the title thereof;

(3) days before passage.

Presidential power to grant reprieves, commutations and pardons and remittal of fines and forfeiture after

conviction by final judgment.