Chapter I state whose social contract with its citizens obliges it to
promote public interest and common good. The theory
GENERAL PRINCIPLES
Taxation is a mode of raising revenue for public
purposes.
Taxes, on the other hand, are enforced proportional
contributions from persons and property, levied by the state
by virtue of its sovereignty for the support of the government
and for all its public needs. ("Cooley's definition," 1 Cooley 62)
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
a just apportionment of the burdens of government.
Thus:
a. Taxes are enforced contributions.
b. Taxes are proportional in character, since taxes are
based on one's ability to pay.
c. Taxes are levied by authority of the law.
The power to impose taxes is a legislative
power; it cannot be imposed by the executive
department nor by the courts.1
d. Taxes are for the support of the government and
all its public needs.
A. Taxation and the Lifeblood Doctrine4
Taxation has been defined as the power by which
the sovereign raises revenue to defray the necessary
expenses of government. It is a way of apportioning
the cost of government among those who in some
measure are privileged to enjoy the benefits and must
therefore bear its burdens.
The power of taxation is essential because the
government can neither exist nor endure without
taxation. Taxes are the lifeblood of the government and
their prompt and certain availability is an imperious
need.
The collection of taxes must be made without
hindrance if the state is to maintain its orderly existence.
CIR v. BPI
521 SCRA 373,387-388
xxx (T)he public will suffer if taxpayers will not be
held liable for the proper taxes assessed against them:
"Taxes are the lifeblood of the government, for without
taxes, the government can neither exist nor endure." A
principal attribute of sovereignty, t h e exercise of taxing
power derives its source from t h e very existence of the
behind the exercise of the power to tax emanates from
necessity; without taxes, government cannot fulfill its
mandate of promoting the general welfare and wellbeing
of the people.
CIR v. CTA"
234 SCRA 348
It is a long and firmly settled rule of law that the
Government is not bound by the errors committed
by its agents. In the performance of its government
functions, the State cannot be estopped by the neglect
of its agents and officers. Although the Government
may generally be estopped through the affirmative acts
of public officers acting within their authority, their
neglect or omission of public duties as exemplified in
this case will not and should not produce that effect.
COMMISSIONER v. ALGUE, INC.
158 SCRA 9
Taxes are the 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. (See also 'The
Doctrine of Symbiotic Relationship')
YMCA v. CIR'
298 SCRA 83
Since taxes are the lifeblood of the nation, a claim of statutory
exemption from taxation should be manifest and
unmistakable from the language of the law on which it is
based. The claimed exemption must expressly be granted in a
statute stated in a language too clear to be mistaken.
DAVAO GULF LUMBER CORP. v. CIR
293 SCRA 77
Because taxes are the lifeblood of the nation,
statutes that allow exemptions are construed strictly
against the grantee and liberally in favor of the
government. Otherwise stated, any exemption from the
payment of a tax must be clearly stated in the language
of the law; it cannot be merely implied therefrom.
FERDINAND R. MARCOS II v. CA, et al
273 SCRA 47"
The enforcement of tax laws and the collection of
taxes are of paramount importance for the sustenance
of government. Taxes are the lifeblood of the government
and should be collected without unnecessary
hindrance. However, 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 common
good, may be achieved.
JOSE REYES v. PEDRO ALMANZOR
196 SCRA 322
Verily, taxes are the lifeblood of the government
and so should be collected without unnecessary
hindrance. However, 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. (CIR v. Algue, Inc.,
158 SCRA 9 [1988])
Consequently, it stands to reason that petitioners
who are burdened by the government by its Rental
Freezing Laws (R.A. No. 6359 and P.D. No. 20) under
the same principle of social justice should not now be
penalized by the same government by the imposition of
excessive taxes petitioners can ill afford and eventually
result in the forfeiture of their properties.
PHILIPPINE GUARANTY CO., INC. v. CIR
13 SCRA 775
The defense of reliance in good faith on rulings
of the CIR requiring no withholding of the tax due
on reinsurance premiums may free the taxpayer from
the payment of surcharge or penalties imposed for
failure to pay the corresponding withholding tax, but
it certainly would not exculpate it from liability to pay
such withholding tax. The Government is not estopped
from collecting taxes by the mistakes or errors of its
agents.
B. Theories on Taxation
Taxation, as stated in the case of Phil. Guaranty
Co., Inc. v. Commissioner,11 is a power predicated upon
necessity (Necessity Theory). It is a necessary burden
to preserve the State's sovereignty and a means to
give the citizenry an army to resist aggression, a
navy to defend its shores from invasion, a corps of
civil servants to serve, public improvements for the
Manol R. Sala
SWU College of Law
enjoyment of the citizenry, and those which come
within the State's territory and facilities and protection
which a government is supposed to provide.
The Benefits-Protection Theory, on the other
hand, bases the power of the State to demand and
receive taxes on the reciprocal duties of support and
protection. The citizen supports the State by paying
the portion from his property that is demanded in
order that he may, by means thereof, be secured in the
enjoyment of the benefits of an organized society. Thus,
the taxpayer cannot question the validity of the tax law
on the ground that payment of such tax will render him
impoverished, or lessen his financial or social standing,
because the obligation to pay taxes is involuntary and
compulsory, in exchange for the protection and benefits
one receives from the government.
DOCTRINE OF SYMBIOTIC RELATIONSHIP
Taxes are what we pay for civilized society.
Without taxes, the government would be paralyzed for
lack of the motive power to activate and operate it.
Hence, despite the natural reluctance to surrender part
of one's hard-earned income to the taxing authorities,
every person who is able to must contribute his
share in the burden of running the government. The
government, for its part, is expected to respond in
the form of tangible and intangible benefits intended
to improve the lives of the people and enhance their
material and moral values."
C. Liabilities Involved
TAXES ARE PERSONAL TO THE TAXPAYER.
A corporation's tax delinquency cannot, for instance,
be enforced against its stockholders because not only
would this run counter to the principle that taxes are
personal, but it would also not be in accord with the rule
that a corporation is vested by law with a personality
that is separate and distinct from those of the persons
composing it as well as from that of any other legal
entity to which it may be related.13
Nevertheless, stockholders may be held liable for
the unpaid taxes of a dissolved corporation if it appears
that the corporate assets have passed into their hands.
(Doctrine of Piercing the Corporate Veil)'*
A tax creates CIVIL LIABILITY on the part of the
delinquent taxpayer although the non-payment thereof
(due to failure or refusal to pay) creates a CRIMINAL
LIABILITY which could be the subject of criminal
prosecution under existing laws. To sum, in taxation, it
2
is one's failure to comply with the civil liability to pay
taxes which gives rise to the criminal liability.
III. NATURE OF THE TAXING POWER
A. Taxation as an Inherent Attribute of Sovereignty
The power of taxation is an incident of sovereignty
as it is inherent in the State, belonging as a matter of right
to every independent government. It does not need of
constitutional conferment. Constitutional provisions
do not give rise to the power to tax but merely impose
limitations on what would otherwise be an invincible
power. No attribute of sovereignty is more pervading
and at no point does the power of government affect
more constantly and intimately all the relations of life
than through the exactions made under it.
It is considered inherent in a sovereign State because
it is a necessary attribute of sovereignty. Without
this power, no sovereign State can exist nor endure.
The power to tax proceeds upon the theory that the
existence of a government is a necessity and this power
is an essential and inherent attribute of sovereignty.
belonging as a matter of right to every independent
State or government. No sovereign State can continue
to exist without the means to pay its expenses; and that
for those means, it has the right to compel all citizens
and property within its limits to contribute, hence, the
emergence of the power to tax."
B. Taxation as Legislative in Character
The power to tax is inherent in the State, and the
State is free to select the object of taxation, such power
being exclusively vested in the legislature, EXCEPT where
the Constitution provides otherwise. (Art. VI, Sec. 28[2];
Art. X, Sec. 5) This is based upon 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."
ASPECTS, PROCESSES, PHASES OF TAXATION"
A. Levy/Imposition
The term "levy" or "imposition" refers to the
enactment of tax laws or statutes.
In the case of Tolentino, et al. v. Secretary of Finance,22
the Supreme Court emphasized that:
Courts have no power to inquire into or interfere in
the wisdom, objective, motive or expediency in the passage
of a tax law, as this is purely legislative in character. To
do so would be tantamount to a violation of both the letter
and the spirit of the organic laws by which the Philippine
Government was brought into existence to invade a
Manol R. Sala
SWU College of Law
coordinate and independent department of the Government,
and to interfere with the legitimate powers and functions of
the Legislature.
Scope of the legislative power to tax
(1) Discretion as to purposes for which taxes shall be levied
The sole arbiter of the purposes for which
taxes shall be levied is the legislature, provided the
purposes are public. The courts may review the
levy of the tax to determine whether the purpose
is a public one but once that is determined, the
courts can make no other inquiry as to the purpose
of the tax, as it affects the power to impose it
WALTER LUTZ v. J. ANTONIO ARANETA
98 Phil. 148
As the protection and promotion of the sugar
industry is a matter of public concern, the Legislature
may determine within reasonable bounds what is necessary
for its protection and expedient for its promotion. Here,
the legislative discretion must be allowed full play, subject
only to the test of reasonableness; and it is not contended
that the means provided in Section 6 of C.A. 567 bear
no relation to the objective pursued or are oppressive
in character. If objective and methods are alike
constitutionally valid, no reason is seen why the state
may not levy taxes to raise funds for their prosecution
and attainment. Taxation may be made the implement
of the State's police power.
(2) Discretion as to subjects of taxation
The legislature has unlimited scope as to
the persons, property or occupation to be taxed,
where there are no constitutional restrictions,
provided the property is within the territorial
jurisdiction of the taxing state.
The Supreme Court ruled that: "It is
inherent in the power to tax that a state be free
to select the subjects of taxation, and it has been
repeatedly held that 'inequalities which result
from a singling out of one particular class for
taxation or exemption infringe no constitutional
limitation.'"
BENJAMIN GOMEZ v. ENRICOPALOMAR, et al. 25 SCRA 827
It is settled that the legislature has the inherent
power to select the subject of taxation and to grant
exemptions. The classification of mail users is based
on the ability to pay, the enjoyment of a privilege and
on administrative convenience. Tax exemptions have
never been thought of as raising issues under the equal
protection clause.
3

SILVESTRE PUNSALAN v. THE MUN.
BOARD OF THE CITY OF MANILA 95 Phil. 46
Board of said city to impose a municipal occupation
tax, not to exceed P50 per annum, on persons engaged
in various professions
HELD:
It is not for the courts to judge what particular
cities or municipalities should be empowered to
impose occupation taxes in addition to those imposed
by the National Government. That matter is peculiarly
within the domain of the political departments and the
courts would do well not to encroach upon it.
(3) Discretion as to amount or rate of tax
The legislature has the right to finally determine
the amount or rate of a tax, in the absence
of constitutional prohibitions. It may levy a tax of
any amount it sees fit. Not only is the power to
tax unlimited in its reach as to subjects, but in its
very nature, it acknowledges no limits and may
be carried even to the extent of exhaustion and
destruction, thus becoming in its exercise a power
to destroy.
(4) Discretion as to the manner, means and agencies of
collection of taxes
The discretion of the legislature in imposing
taxes extends to the mode, method or kind of tax.
As to the kind of taxes which may be imposed,
the legislature has power to levy one or more
of the following: Property tax, excise, license or
occupation tax, a poll or capitation tax, franchise
tax, income tax, inheritance tax, stock transfer tax,
etc.
Is the Power to Tax the Power to Destroy?
"The powerto tax involves the power to destroy." This might
well be construed to mean that the power to tax includes
the power to regulate even to the extent of prohibition
or destruction, (1 Cooley on Taxation, 4th Ed., p. 67) since
the inherent power to tax vested in the legislature
includes the power to determine who to tax, what to
tax and how much tax is to be imposed."
However, instead of being regarded as a blanket
authorization of the unrestrained use of the taxing
power for any and all purposes, it is more reasonable
to say that the maxim "the power to tax is the power to
destroy" is to describe not the purposes for which the
taxing power may be used but the degree of vigor with
which the taxing power may be employed in order to
Manol R. Sala
SWU College of Law
raise revenue.
The power to tax includes the power to destroy if
it is used validly as an implement of the police power
in discouraging and in effect, ultimately prohibiting
certain things or enterprises inimical to the public
welfare, x x x But where the power to tax is used solely
for the purpose of raising revenues, the modem view
is that it cannot be allowed to confiscate or destroy. If
this is sought to be done, the tax may be successfully
attacked as an inordinate and unconstitutional exercise
of the discretion that is usually vested exclusively in
the legislature in ascertaining the amount of the tax.
Judicial Review of Taxation
If so great an abuse is manifested as to
destroy natural and fundamental rights which no free
government could consistently violate, it is the duty
of the judiciary to hold such an act unconstitutional.
(Ibid.) Hence, the modification: "The power to tax is not
the power to destroy while the Supreme Court sits." So
it is in the Philippines.
B. Assessment and Collection
The act of assessing and collecting taxes is administrative
in character, and therefore can be delegated.
Nonetheless, the legislative body has laid down certain
rules governing the assessment and collection of
taxes in order to prevent its abuse.
First, the tax law must designate which agency
will collect the taxes. Usually, the Bureau of Internal
Revenue and/or the Secretary of Finance wield this
power.
Second, the circulars or regulations issued by the
Secretary of Finance or the Commissioner of the Internal
Revenue must be in accordance with the tax measures
imposed by Congress.
Note that the power of taxation should be exercised
with caution to minimize injury to the proprietary
rights of a taxpayer. It must be exercised fairly,
equally and uniformly, lest the tax collector kill the
"hen that lays the golden egg."
C. Payment
This signifies an act of compliance by the taxpayer.
PURPOSES OF TAXATION
A. The primary purpose of taxation is to raise revenues.
"For the support of government and for all public needs,"
B. Secondary or non-revenue purposes
But, must an imposition, in order to be a tax, be
4
levied solely for the purposes of revenue? The answer
is a resounding NO.
Other than to answer the ever-present need
for revenues, taxation also seeks to: (1) reduce
social inequality, (2) encourage the growth of local
industries, (3) protect our local industries against
unfair competition, (4) implement the police power of
the state (regulatory purpose).
(1) Reduction of Social Inequality
Our present tax system has adopted the
progressive system of taxation, i.e., the tax rate
increases as the tax base increases. This system
aims at reducing the inequality in the distribution
of wealth by preventing its undue concentration
in the hands of a few individuals.
To illustrate: An estate tax is imposed upon
the property left by the decedent. The proceeds of
that tax will be used to finance the projects of the
government such as building low-cost houses for
the less privileged.
(2) Encourage the Growth of Local Industries
It is a settled rule that the power to tax carries
with it the power to grant tax exemptions. Tax
exemptions and tax reliefs serve as incentives to
encourage investment in our local industry and
thereby promote economic growth.
(3) Protect our Local Industry Against Unfair
Competition
The Tariff and Customs Code allows the
imposition of certain taxes (countervailing and
dumping duties) upon imported goods or articles
to further protect our local industry. R.A. 8752
(Anti-Dumping Act) imposes stricter conditions.
(4) As an Implement of the Police Power of the State
(Regulatory Measure)
The power of taxation may be used as
an implement of the police rJbwer of the State
through the imposition of taxes with the end in
view of regulating a particular activity.
EXTENT OF THE TAXING POWER*
The power of taxation reaches to every trade or occupation;
to every object of industry, use, enjoyment; to every
species of possession, and it imposes a burden which in case
of failure to discharge the same may be followed by seizure,
confiscation or forfeiture of the property.
Taxation is said to be
Manol R. Sala
SWU College of Law
COMPREHENSIVE, as it covers persons, businesses,
activities, professions, rights and privileges.
UNLIMITED.
The taxing power's reign is illustrated in the case of
Tio v. Videogram Regulatory Board,39 where the Supreme
Court
upheld the constitutionality of a law, ruling that a tax does
not cease to be valid merely because it regulates, discourages,
or even definitely deters the activities taxed. The power to
impose taxes is one so unlimited in force and so searching
in extent that the courts scarcely venture to declare that it is
subject to any restrictions whatever, except such as rest in
the discretion of the authority which exercises it.
PLENARY, as it is complete. Under the NIRC, the BIR
may avail of certain remedies to ensure the collection
of taxes. (This shall be discussed in a separate chapter
on Remedies.)
SUPREME.
Taxation, although referred to as the strongest of all
the powers of the government, cannot be interpreted to
mean that it is superior to the other inherent powers of the
government. It is supreme insofar as the selection of the
subject of taxation is concerned.
VII. PRINCIPLES OF A SOUND TAX SYSTEM"
1. Fiscal Adequacy
Sources of revenues must be adequate to meet
government expenditures (Chavez v. Ongpin, 186 SCRA
331), and other public needs. This is in consonance
with the doctrine that taxes are the lifeblood of the
government.
2. Theoretical Justice
A sound tax system must take into consideration
the taxpayers' ability to pay. Our laws mandate that
taxes must be reasonable, just, fair, conscionable.
Under Art. VI, Section 28(1) of the Constitution, the
rule of taxation must be uniform and equitable. The
State must evolve a progressive system of taxation.
Taxation is said to be equitable when its burden
falls on those better able to pay; taxation is progressive
when its rate goes up depending on the resources of
the person affected.
3. Administrative Feasibility
Tax laws must be capable of effective and efficient
enforcement. They must not obstruct business growth
and economic development.
Q. Will a violation of these principles invalidate a
tax law?
5
IT DEPENDS. 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 a tax law runs contrary to the
principle of theoretical justice, such violation will
render the law unconstitutional considering that under
the Constitution, the rule of taxation should be uniform
and equitable. (Sec. 28[1], Art. VI, 1987 Constitution)
VIII. TAXATION DISTINGUISHED FROM OTHER INHERENT
POWERS AND IMPOSITIONS
A. Taxation distinguished from Police Power
(1) As to PURPOSE
Taxation is levied for the purpose of raising
revenues; Police power is exercised to promote
public welfare through regulation.
(2) As to AMOUNT OF EXACTION
The amount gathered in the exercise of
Taxation contemplates of no limits; in Police
power, the exaction is limited to the cost of
regulation, issuance of the license, or surveillance.
(3) As to the BENEFITS RECEIVED BY THE
TAXPAYER
In Taxation, no special or direct benefit is
received by the taxpayer other than the fact that
the government secures to the citizen that general
benefit resulting from the protection of his person
and property and the welfare of all. (51 Am. Jur.
42-43)
(4) As to SUPERIORITY OF CONTRACTS
Taxation recognizes the obligations imposed
by contracts. (Art. Ill, Sec. 10, Constitution) This
limitation does not apply to Police power.
(5) As to TRANSFER OF PROPERTY RIGHTS
In Taxation, the taxes paid form part of the
public funds, whereas Police power allows merely
the restraint on the exercise of property rights.
B. Taxation and the Power of Eminent Domain
(1) As to PURPOSE
Taxation is exercised in order to raise public
revenue; Eminent domain or expropriation is the
taking of property for public use.
(2) As to COMPENSATION
Payment of taxes accrue to the general benefit
of the citizens of the taxing state; in Eminent
domain, just compensation is given the owner of
the expropriated property.
(3) As to PERSONS AFFECTED
Taxation applies to all persons, property
Manol R. Sala
SWU College of Law
and excises that may be subject thereto; in
Eminent domain, only particular property is
comprehended.
C. Taxes Distinguished from Other Impositions
1. Tax and Special Assessment
A special assessment is in the nature of a
tax upon property levied according to benefits
conferred on the property. The whole theory of a
special assessment is based on the doctrine that
the property against which it is levied derives
some special benefit from the improvement.`
The distinctions between a special assessment
and a tax are:
a) a special assessment can be levied only on
land;
b) a special assessment cannot, as a rule, be
made a personal liability of the persons
assessed;
c) a special assessment is based wholly on benefits;
and
d) a special assessment is exceptional both
as to time and locality. The imposition of a
charge on all property, real and personal, in
a prescribed area, is a tax, not an assessment,
although the purpose is to make a local improvement
on a street or highway. A charge
imposed only on property owners benefited
is a special assessment rather than a tax.
The power to levy such assessments is
undoubtedly an exercise of the taxing power,
but the exercise of the taxing power in imposing
an assessment does not necessarily
make the assessment a tax.
Tax and License
a) A Tax is levied in the exercise of the taxing
power; License fees emanate from the police
power of the state;
b) The purpose of the tax is to generate revenues;
License fees are imposed for regulatory
purposes.
c) The amount of the exaction or charge if it is
to be a license fee must only be of sufficient
amount to include expenses of issuing a license;
cost of necessary inspection or police
surveillance.
d) The imposition is a tax, if its primary purpose
is to generate revenue, and regulation
is merely incidental; but if regulation is the
6
primary purpose, the fact that incidental
revenue is also obtained does not make the
imposition a tax.
e) In Gerochi v. Department of Energy [527 SCRA
696, 715-717], the Supreme Court held that
in exacting the Universal Charge through
Section 34 of the Electric Power Industry Reform
Act of 2001 (EPIRA), the State's police
power, particularly its regulatory dimension
is invoked. Such can be deduced from Section
34 which enumerates the purposes for
which the Universal Charge is imposed and
which can be amply discerned as regulatory
in character. From the said purposes, it can be
gleaned that the assailed Universal Charge is
not a tax, but an exaction
3. Tax and Toll
Toll is a demand of proprietorship, an
amount charged for the cost and maintenance of
the property used; Tax is a demand of sovereignty
for the purpose of raising public revenues.
4. Tax and Penalty
Tax is a civil liability. A person is criminally
liable in taxation only when he fails to satisfy his
civil obligation to pay taxes.
A Penalty is a punishment for the commission
of a crime.
5. Tax and Debt
A tax is not a debt for the reason that a tax
does not depend upon the consent of the taxpayer
and there is no express or implied contract to pay
taxes.
FRANCIA v. INTERMEDIATE
APPELLATE COURT, et al
162 SCRA 753"
We have consistently ruled that there can be no off-setting
of taxes against the claims that the taxpayer may have
against the government. A person cannot 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 cannot await the results of a
lawsuit against the government.
Republic v. Mambulao Lumber Co.(4 SCRA 622)
"A claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude
Manol R. Sala
SWU College of Law
the remedy in an action or any indebtedness of
the state or municipality to one who is liable to
the state or municipality for taxes. Neither are
they a proper subject of recoupment since they do
not arise t of the contract or transaction sued on
...(80 C.J.S. 73-74).
"The general rule based on grounds of public
policy is well-settled that no set-off is admissible
against demands for taxes levied for general
or local governmental purposes. The reason on
which the general rule is based, is that taxes are
not in the nature of contracts between the party
but grow out of duty to, and are the positive acts
of the government to the making and enforcing
of which, the personal consent of individual
taxpayers is not required..."'
This rule was reiterated in the case of Cordero v.
Gonda (18 SCRA 331) where we stated that: "... internal
revenue taxes can not be the subject of compensation."
REASON:
Government and taxpayer 'are not mutually
creditors and debtors of each other' under Article 1278
of the Civil Code and a "claim for taxes is not such a
debt, demand, contract or judgment as is allowed to be
set-off."
MELECIO R. DOMINGO v.
LORENZO C. GARLITOS 8 SCRA 443
Under the above circumstances, both the claim of the
Government for inheritance taxes and the claim of the
intestate for services rendered have already become
overdue and demandable as well as fully liquidated.
Compensation, therefore, takes place by operation
of law, in accordance with the provisions of Articles
1279 and 1290 of the Civil Code, and both debts are
extinguished to the concurrent amount.
PHILEX MINING CORP. v. CIR
294 SCRA 687"
There is a material distinction between a tax and a
debt. Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in its
sovereign capacity.
DC. LIMITATIONS ON THE TAXING POWER
As the areas which "used to be left to private enterprise
and initiative and which the government was called upon to
enter optionally, and only 'because it was better equipped to
administer for the public welfare than any private individual
or group of individuals' continue to lose their well-defined
7
boundaries and to be absorbed within activities that the
government must undertake in its sovereign capacity if it is
to meet the increasing social challenges of the times,"48 there
arises a need for more revenues in order to meet the needs
of an ever-widening scope of state activity.
And with this pervasive power comes the realization
that taxation may mean the ruin or the prosperity of a nation,
if no limitation for its use is exercised. Thus the power of
taxation, for all its plenitude, is not without restrictions.
These limitations are classified as Inherent Limitations and
Constitutional Limitations.
A. Inherent Limitations on the Power to Tax
These limitations proceed from the very nature of the
taxing power itself. These are: public purpose, international
comity, territoriality, non-delegation of the power to tax, and
the various tax exemptions granted government agencies or
instrumentalities.
1. PUBLIC PURPOSE
The power to tax exists for the general welfare; hence,
implicit in its power is the limitation that it should
be used only for a public purpose.
Purpose when deemed 'public'
It is the purpose which determines the public
character of the tax law, not the number of persons
benefited. As long as the ultimate result favors the
welfare of the public in general, the appropriation of a
public revenue is deemed done for a public purpose.
HON. RAMON BAGATSING, et al. v.
HON. PEDRO RAMIREZ, et al. 74 SCRA 306
The entrusting of the collection of the fees does not
destroy the public purpose of the ordinance. So long
as the purpose is public, it does not matter whether
the agency through which the money is dispensed is
public or private.
PASCUAL v. SECRETARY OF PUBLIC WORKS
110 Phil. 331
Nevertheless, in the case of Pascual v. Secretary of
Public Works which challenges the law appropriating a
certain amount for the construction of a feeder road on
a land owned by a private individual, the Court held
the law to be an invalid imposition since it results in
the promotion of a private enterprise, it benefits the
property of a particular individual. The provision that
the land shall thereafter be donated to the government
does not cure this defect. The rule is that, if the public
advantage or benefit is merely incidental in the
promotion of a particular enterprise, such defect shall
Manol R. Sala
SWU College of Law
render the law invalid. On the other hand, if what is
incidental is the promotion of a private enterprise, the
tax law shall be deemed "for a public purpose."
2. INTERNATIONAL COMITY
The rights of each one do not
depend upon the power which it possesses to assure
its exercise, but upon the simple fact of its existence
as a person under international law."50 This principle,
in turn, finds its roots in the rule of par in parem non
habet imperium, where even the strongest state cannot
assume jurisdiction over another state, no matter how
weak, or question the validity of its acts in so far as
they are made to take effect within its own territory. All
states, including the smallest and least influential, are
also entitled to their dignity and the protection of their
honor and reputation.
To illustrate: If a tax law is passed imposing taxes
on the income of foreign ambassadors or imposing
real property tax upon foreign embassies, this is NOT
a valid law because the imposition is in violation of
the universal principles of international law. Under
international laws, foreign embassies are considered
extensions of the territoriality of the foreign states; to
impose taxes upon them would be tantamount to an
exercise of jurisdiction over these foreign states.
3. TERRITORIALITY
Since laws cease to operate beyond a country's
jurisdictional limits, the taxing power of a country is
likewise limited to person and property within and
subject to its jurisdiction. This same rule applies to the
taxing power of a territory.
Rules Observed in Fixing Tax Situs
1. POLL/CAPITATION/COMMUNITY TAX
Poll or 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 TAX
Real Property, where taxable
Real estate is subject to taxation in the state or
country where it is located, regardless of whether
the owner is a resident or a non-resident.
On the other hand, the situs of personal property,
wherever it was actually kept or located, was
held to be at the domicile of its owner, following
the age-old doctrine of mobilia sequuntur personam.
Domicile
The domicile of a person is the place which
constitutes the principal seat of his residence,
8
his business, his pursuits, his connections, his
attachments and his political relations. It embraces
the fact of residence at a place with the intent to
regard it and make it a home and live there for
an indefinite time. To establish a domicile, the act
and the intent must concur. There must be the fact
of living in a place with the intent to make it one's
home.
Mobilia Sequuntur Personam"
Movables follow the person. Although a mere
fiction of law, without any constitutional foundation,
it is nevertheless applied when convenient, provided
it is not inconsistent with express provisions of the
law, or when its application would result in injustice,
or unless such property has acquired an actual situs
elsewhere. To acquire a situs in a state other than the
domicile of the owner, tangible property must have a
definite location there, accompanied by some degree of
permanency; mere temporary or transient presence in
the state is not sufficient
Thus, in cases of shares of stock, its situs for
the purposes of taxation is the state in which they
are permanently kept regardless of the domicile of
the owner or the state in which the corporation was
organized.
EXCISE TAX
Excise taxes are taxes imposed on the exercise of
a right or privilege.
A. Income Tax (Section 23, R.A. 8424)
(CRITERIA: PLACE, NATIONALITY, RESIDENCE)
Place applied to
a. Non-resident alien
b. Non-resident foreign corporations
c. Non-resident citizen
taxed upon sources of income derived from
within the Philippines.
Nationality applied to
a. Resident citizen
b. Domestic corporation
taxed upon sources of income derived from
within and without the Philippines
Residence applied to
a. Resident alien
b. Resident Foreign Corporation
taxed upon income derived from sources
within the Philippines
B. Donor's Tax (Sections 98,104, RA.. 8424)
(CRITERIA: PLACE, NATIONALITY, RESIDENCE)
Place
Manol R. Sala
SWU College of Law
a. Non-resident alien tax based upon
properties situated within the Philippines
Nationality
a. Resident and non-resident citizen tax
based upon properties wherever situated
Residence
a. Resident alien tax based upon properties
wherever situated
C. Estate tax (Sections 85,104, RA. 8424)
(CRITERIA: PLACE, NATIONALITY, RESIDENCE)
Place
a. Non-resident aliens are taxed on
properties situated within the Philippines
Nationality
a. Resident and non-resident citizen are
taxed upon their properties wherever
situated
Residence
a. Resident alien taxes imposed upon
properties wherever situated
D. Value Added Tax (Section 105, R J \ . 8424)
Its tax situs is the place where the transaction
is made. If the transaction is made (perfected and
consummated) outside of the Philippines, we can
no longer tax such a transaction.
ATLAS CONSOLIDATED MINING AND
DEVELOPMENT CORPORATION v.
COMMISSIONER OF INTERNAL REVENUE
524 SCRA 73,103 (2007)
According to the Destination Principle,
goods and services are taxed only in the country
where these are consumed. In connection with the said
principle, the Cross Border Doctrine mandates that no
VAT shall be imposed to form part of the cost of the
goods destined for consumption outside the territorial
border of the taxing authority. Hence, actual export of
goods and services from the Philippines to a foreign
country must be free of VAT while those destined for
use or consumption within the Philippines shall be
imposed with 10% VAT (Now 12% under R.A. No.
9337). Export processing zones are to be managed
as a separate customs territory from the rest of the
Philippines and, thus, for tax purposes, are effectively
considered as foreign territory. For this reason, sales by
persons from the Philippine customs territory to those
inside the export processing zones are already taxed as
exports.
NON-DELEGATION OF THE POWER TO TAX
9
The power to tax is exclusively vested in the
legislative body. Exceptions
A. Article VI, Section 28(2) of the Constitution
The Congress may, by law, authorize the
President to impose tariff rates, import and
export quotas, etc. [custom duties], subject to the
limitations and guidelines as the Congress may
impose, consistent with the national development
program of the government.
B. Article X, Section 5 of the Constitution
Each local government unit shall have the
power to create its own sources of revenue, fees,
charges, subject to such guidelines and limitations
as the Congress may provide consistent with the
basic policy of local autonomy. Such taxes, fees
and other charges shall accrue exclusively to the
local government. (See Sec. 133, R.A. 7160)
BOARD OF ASSESSMENT APPEALS
OF LAGUNA v. CTA 8 SCRA 224
In the absence of constitutional provision, the
power to tax may be delegated to local government
units in accordance with the well-settled doctrine
that the power to create local government units by
implication confers upon it the power to tax. So even
if no constitutional provision exists, local government
units still possess the power to tax.
PEPSI-COLA BOTTLING CO. OF THE PHILS,
v. CITY OF BUTUAN 24 SCRA 789
Petitioners assail the constitutionality of Municipal
Ordinance No. 110, as amended by Mun. Ord. No.
122, on the ground that Sec. 2 of R.A. 2264, upon the
authority of which it is delegated, is an unconstitutional
delegation of legislative powers.
HELD:
The general principle against delegation of
legislative powers, in consequence of the theory of
separation of powers (U.S. v. Bull, 15 Phil. 7,27; Kilbourn
v. Thompson, 103 U.S. 168, 26 I. ed. 377) is subject to one
well-established exception, namely: legislative powers
may be delegated to local governments.
JOHN H. OSMENA v. OSCAR ORBOS 220 SCRA 703
For a valid delegation of power, it is essential that
the law delegating the power must be
(1) complete in itself, that is, it must set forth the policy to be
executed by the delegate and,
(2) it must fix a standard limits of which are sufficiently
determinate or determinable
to which the delegate must conform.
Manol R. Sala
SWU College of Law
MAYOR ANTONIO J. VILLEGAS v. HIU
CHIONG TSAl PAO HO and JUDGE ARCA
86 SCRA 270 (1978)
It has been held that where an ordinance of a municipality
fails to state any policy or to set up any standard to guide or
limit the mayor's action, expresses no purpose to be attained
by requiring a permit, enumerates no conditions for its grant
or refusal, and entirely lacks standard, thus conferring
upon the Mayor arbitrary and unrestricted power to
grant or deny the issuance of building permits, such
ordinance is invalid, being an undefined and unlimited
delegation of power to allow or prevent an activity per
se lawful.
EXEMPTION FROM TAXATION OF GOVERNMENT
AGENCIES/INSTRUMENTALITIES
Properties of the national government as well as
those of the local government units are not subject to
tax, otherwise it will result in the absurd situation of
the government "taking money from one pocket and
putting it in another."
May the government tax itself?
The Constitution is silent on whether Congress is
prohibited from taxing the properties of the agencies
of the government. However, Chief Justice Hilario G.
Davide, Jr. has stated that "nothing can prevent Congress
from decreeing that even instrumentalities or agencies of
the government performing governmental functions may be
subject to tax."'*
Agencies performing governmental functions and
proprietary functions distinguished
A distinction has been made between agencies
performing governmental functions and those
performing proprietary functions. As a rule, agencies
performing governmental functions are tax-exempt unless
expressly taxed. On the other hand, agencies performing
proprietary functions are subject to tax unless expressly
exempted.
Government-owned and -controlled corporations
perform proprietary functions; hence, they are subject
to taxation. However, certain corporations have been
granted exemption under Section 27(C) of R.A. 8424 as
amended by R.A. 9337 which took effect on 1 July 2005,
to wit:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Philippine Charity Sweepstakes Office (PCSO)
10
Instrumentality of the National Government is
exempt from local taxation
In Manila International Airport Authority v. Court of
Appeals [495 SCRA 591, 615], the Supreme Court held
that the real properties of MIAA are owned by the
Republic of the Philippines and thus exempt from real
estate tax. A government instrumentality like MIAA
falls under Section 133(o) of the Local Government
Code, which states xxx, the exercise of the taxing
powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:
xxx (o) Taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities and
local government units.
Exemption from taxation is not favored and
exemptions in tax statutes are never presumed.
Exemptions from taxation are construed in strictissimi
juris against the taxpayer and liberally in favor of the
taxing authority. Where the State has granted in express
terms certain exemptions, those are the exemptions to
be considered, and no more.
B. Constitutional Limitations on the Power to Tax
The Constitution provides for certain restrictions
on the power of taxation, among them:
(1) due process of law;
(2) equal protection of laws;
(3) uniformity;
(4) progressive system of taxation;
(5) non-impairment of contracts;
(6) non-imprisonment for non-payment of poll tax;
(7) appropriation, revenue and tariff bills must originate
exclusively in the House of Representatives;
(8) presidential veto;
(9) presidential power to fix tariff rates;
(10) freedom of the press;
(11) freedom of religion;
(12) exemption from property tax of properties of
religious, educational, charitable institutions;
(13) tax exemptions granted to non-stock, non-profit
educational institutions;
(14) no public money or property used for a particular
sect, priest, religious minister, etc.;
(15) grant of tax exemptions;
(16) grant of power of taxation to local government
units;
(17) money collected for a special purpose shall be
considered a special fund;
(18) exclusive appellate jurisdiction of the Supreme
Court over judgments of lower courts involving
the legality of taxes, imports, assessment, fees,
Manol R. Sala
SWU College of Law
penalty.
The following situations are illustrative 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;
e. Where the law is in violation of inherent limitations.
MCIT Is Not Violative of Due Process
CREBA contends that the MCIT under Section
27(E) of R.A. 8424 is unconstitutional because it is
highly oppressive, arbitrary and confiscatory which
amounts to deprivation of property without due process
of law. It explains that gross income as defined
under said provision only considers the cost of goods
sold and other direct expenses; other major expenditures,
such as administrative and interest expenses
which are equally necessary to produce gross income,
were not taken into account
Income means all the wealth which flows
into the taxpayer other than a mere return of capital.
Capital is a fund or property existing at one distinct
point in time while income denotes a flow of wealth
during a definite period of time. Income is gain derived
and severed from capital. For income to be taxable, the
following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received; and
(3) the gain must not be excluded by law or
treaty from taxation.
CARLOS SUPERDRUG CORP.
v. DEPARTMENT OF SOCIAL WELFARE
AND DEVELOPMENT (DSWD)
526 SCRA 130,140,143-145 (2007)
Petitioners assert that Section 4(a) of the Expanded
Senior Citizens Act (R.A. 9257) is unconstitutional
because it constitutes deprivation of private property.
Compelling drugstore owners and establishments to
grant the discount will result in a loss of profit and
capital because (1) drugstores impose mark up only
5% to 10% on branded medicines; and (2) the law failed
to provide a scheme whereby drugstores will be justly
compensated for the discount
HELD:
R.A. 9257 is constitutional.
11
The law is a legitimate exercise of police power
which, similar to the power of eminent domain,
has general welfare for its object. Police power is
not capable of an exact definition, but has been
purposely veiled in general terms to underscore its
comprehensiveness to meet all exigencies and provide
enough room for an efficient and flexible response
to conditions and circumstances, thus assuring the
greatest benefits. Accordingly, it has been described
as "the most essential, insistent and the least limitable
of powers, extending as it does to all the great public
needs." It is "[t]he power vested in the legislature
by the constitution to make, ordain, and establish all
manner of wholesome and reasonable laws, statutes,
and ordinances, either with penalties or without, not
repugnant to the constitution, as they shall judge to be
for the good and welfare of the commonwealth, and of
the subjects of the same."
For this reason, when the conditions so demand
as determined by the legislature, property rights must
bow to the primacy of police power because property
rights, though sheltered by due process, must yield to
general welfare.
2. EQUAL PROTECTION OF THE LAW
" . . . nor shall any person be denied the equal
protection of the law." (Art. Ill, Section 1)
Our Constitution requires uniformity, not equality,
in taxation.
Equality of taxation is accomplished when the
burden of the tax falls equally and impartially upon
all persons and property subject to it, so that no higher
rate or greater levy in proportion to value is imposed
upon one person or species or property than upon
others similarly situated or of like character.Whereas,
uniformity requires that all taxable property subjected
to the tax, shall be alike and this requirement is violated
if particular kinds, species, or items of property are
selected to bear the whole burden of the tax, while
others, which should be equally subject to it, are left
untaxed. Further, it is implied that each tax shall be
uniform throughout the taxing district involved. A
state tax must be apportioned uniformly throughout a
state, a country tax throughout the country, and a city
tax throughout the city.
"EQUAL PROTECTION OF THE LAW" CLAUSE,
as applied to Taxation.
"Equal protection" does not require equal
rates of taxation on different classes of property, nor
prohibit unequal taxation so long as the inequality is
not based upon arbitrary classification. Legislation
Manol R. Sala
SWU College of Law
which, in carrying out a public purpose, is limited
in its application, does not violate the provisions if,
within the sphere of its operation, it affects alike all
persons similarly situated. It does not prohibit special
legislation or legislation that is limited either in the
objects to which it is directed, or by the territory within
which it is to operate. It merely requires that all persons
subjected to such legislation shall be treated alike, under
like circumstances and conditions, both in the privileges
conferred and in the liabilities imposed*
ABSOLUTE EQUALITY IMPOSSIBLE
Inequality of taxes means substantial differences.
Practical equality is constitutional equality. There is no
imperative requirement that taxation shall be absolutely
equal, only that tax laws be framed with a view to
apportioning the burdens of government so that each
person enjoying government protection shall be required to
contribute so much as is his reasonable proportion, and no
more.
"Perfect equality in taxation," it has been said, "will
remain an unattainable goal as long as laws and government
and man are imperfect."
UNIVERSAL APPLICATION IS NOT REQUIRED
The equal protection clause does not require the
universal application of the laws on all persons or
things without distinction. This might in fact sometimes
result in unequal protection. What the clause requires is
equality among equals as determined according to a valid
classification. By classification is meant the grouping of
persons or things similar to each other in certain particulars
and different from all others in these same particulars.
CLASSIFICATION, WHEN PROPER
The power to select the subjects of taxation and
apportion the public burden among them includes the
power to make classifications. The inequalities which result
from the singling out of one particular class for taxation or
exemption infringe no constitutional limitation.
However, for classification to be valid, the following
requisites must concur:
a. it must be based on substantial distinction;
b. it must apply both to present and future conditions;
c. it must be germane to the purposes of the law;
d. it must apply equally to all members of the same
class.
Classification freeze provision under R.A. 9334 does not
violate the equal protection and uniformity of taxation clauses
under the Constitution
A legislative classification that is reasonable does not
12
offend the constitutional guaranty of the equal protection of
the laws. The classification is considered valid and reasonable
provided that:
(1) it rests on substantial distinctions;
(2) it is germane to the purpose of the law;
(3) it applies, all things being equal, to both present and
future conditions; and
(4) it applies equally to all those belonging to the same class.
EASTERN THEATRICAL CO. v.
VICTOR ALFONSO 83 Phil. 852
Equality and uniformity means that all taxable articles or kinds
of property of the same class shall be taxed at the same rate.
The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation; and the
appellants cannot point out what places of amusement
taxed by the ordinance do not constitute a class by
themselves and which can be confused with those not
included in the ordinance.
CITY OF BAGUIO v. FORTUNATO DE LEON
25 SCRA 938 (1968)
A tax is considered uniform when it operates with
the same force and effect in every place where the
subject may be found. Where the statute or ordinance
in question applies equally to all persons, firms and
corporations placed in similar situation, there is no
infringement of the rule on equality. Inequalities which
result from the singling out of one particular class
for taxation or exemption infringe no constitutional
limitation.
JUAN LUNA SUBDIVISION, INC. v.
SARMIENTO, et al. 91 Phil. 371
The remission of taxes due and payable to the
exclusion of taxes already collected does not constitute
unfair discrimination. Each set of taxes is a class by
itself, and the law would be open to attack as class
legislation only if all taxpayers belonging to one class
were not treated alike. They are not.
ASSOCIATION OF CUSTOM BROKERS, INC. v.
MUN. BOARD, CITY OF MANILA, et al. 93 Phil. 107
confers upon the municipal board the power to tax motor and
other vehicles operating within the City of Manila on
the ground that said ordinance offends against the rule
of uniformity of taxation.
HELD:
The ordinance infringes upon the rule of uniformity.
The ordinance exacts the tax upon all motor
vehicles operating within the City of Manila. It does
not distinguish between a motor vehicle for hire and
Manol R. Sala
SWU College of Law
one which is purely for private use. Neither does it
distinguish between a motor vehicle registered in the
City of Manila and one registered in another place
but occasionally comes to Manila and uses its streets
and public highways. There is no pretense that the
ordinance equally applies to motor vehicles which
come to Manila for a temporary stay or for short
errands, and it cannot be denied that they contribute in
no small degree to the deterioration of the streets and
public highways. As they are benefited by their use
they should also be made to share the corresponding
burden. This inequality renders the ordinance in
question offensive to the Constitution.
JOSE REYES v. PEDRO ALMANZOR 196 SCRA 322
Petitioners question the method used in the assessment
of the properties.
HELD:
Under Art. VIII, Sec. 17(1) of the 1973 Constitution,
then enforced, the Rule of Taxation must not only be
uniform but must also be equitable and progressive.
Uniformity has been defined as that principle by
which all taxable articles or kinds of property of the
same class shall be taxed at the same rate.
Taxation is said to be equitable when its burden
falls on those better able to pay; taxation is progressive
when its rate goes up depending on the resources of
the person affected.
3. UNIFORMITY OF TAXATION"
The rule of taxation shall be uniform and equitable.
(Art. VI, Sec. 28[1] of the Constitution)
Uniformity in taxation says Black on Constitutional
Law means that all taxable articles or kinds
of property of the same class shall be taxed at the same
rate.
A tax is uniform when it operates with the same
form and effect in every place where the subject of it
is found.
UNIFORMITY, NOT EQUALITY
The Constitution requires uniformity, not equality in
taxation. The reason is obvious. The imposition of a single
tax upon all persons, properties or transactions would
result in inequality. It is manifestly impractical. It was held
that "a system which imposes the same taxation upon every
species of property, irrespective of its nature or condition
or class," is well said to be "destructive of the principle of
uniformity and equality of taxation, and of a just adaptation
of property to its burdens."
EQUALITY AND UNIFORMITY DISTINGUISHED
13
Equality in taxation is accomplished when the burden
of the tax falls equally and impartially upon all the persons
and property subject to it, so that no higher rate or greater
levy in proportion to value is imposed upon one person or
species or property than upon others similarly situated or of
like character.
Uniformity requires that all taxable property shall be
alike subjected to the tax, and this requirement is violated
if particular kinds, species or items of property are selected
to bear the whole burden of the tax, while others, which
should be equally subject to it, are left untaxed.
4. PROGRESSIVE TAXATION
Congress shall evolve a progressive system of
taxation. (Art. VI, Sec. 2811])
Taxation is said to be equitable when its burden
falls on those better able to pay; taxation is progressive
when its rate goes up depending on the resources of
the person affected.
5. NON-IMPAIRMENT CLAUSE
No law shall be passed impairing the obligations
of contracts. (Art. Ill, Section 10, Constitution)
The constitutional prohibition against the impairment
of the obligation of contracts only applies,
however, where it is claimed that the obligation of a
contract is impaired by a law of the state a statute or
constitutional provision of the state. It does not apply
to mere decisions of courts construing a contract.
IS A TAX EXEMPTION REVOCABLE?"
A state may, at its pleasure, withdraw an exemption which is
a mere gratuity possessing no element of a contract, even
though the corporation may have incurred expense on the
faith thereof.
An exemption from taxation does not confer
a vested right, and hence, it may be modified or repealed
by the legislature unless such modification or repeal would
impair the obligation of a contract
6. NON-IMPRISONMENT FOR NON-PAYMENT OF
POLL TAX
No person shall be imprisoned for non-payment
of a debt or poll tax. (Art. Ill, Section 20, Constitution)
While a person may not be imprisoned for nonpayment
of a cedula or poll tax (People v. Linsangan,
62 Phil. 646), he may be imprisoned for non-payment
of other kinds of taxes where the law so expressly
provides.
7. BILLS TO ORIGINATE FROM THE HOUSE OF
REPRESENTATIVES
All appropriation, revenue or tariff bills, bills
Manol R. Sala
SWU College of Law
authorizing the increase of the public debt, bills of local
application and private bills, shall originate exclusively
in the House of Representatives, but the Senate may
propose or concur with amendments.
Both Houses of Congress may initiate bills, but
only the Lower House may propose tax measures.
8. VETO POWER OF THE PRESIDENT
The President shall have the power to veto any
particular item or items in an appropriation, revenue
or tariff bill but the veto shall not affect the item or
items to which he did not objects.
9. PRESIDENT'S POWER TO TAX
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. (Article VIII, Section 2812], Constitution)
The President is vested with authority by law to
increase tariff rates, even for revenue purposes only.
Article VI, Section 8(2) of the Constitution expressly
grants permission to Congress to authorize the
President "to fix within specified limits and subject to such
limitations and restrictions as it may impose, tariff rates xxx
and other duties and imposts xxx." Custom duties which
are assessed at the prescribed tariff rates are very much
like taxes which are imposed for both revenue raising
and regulatory purpose.
10. TAXATION AND THE FREEDOM OF THE PRESS
No law shall be passed abridging the freedom
of speech, of expression, or of the press... (Article III,
Section 4, Constitution)
11. TAXATION AND FREEDOM OF RELIGION
No law shall be made respecting an establishment
of religion or prohibiting the free exercise thereof. The
free exercise and enjoyment of religious profession and
worship without discrimination or preference shall
forever be allowed. No religious test shall be required
for the exercise of civil or political rights. (Article III,
Section 5, Constitution)
12. TAX EXEMPTION OF PROPERTIES ACTUALLY,
DIRECTLY AND EXCLUSIVELY USED FOR RELIGIOUS,
CHARITABLE AND EDUCATIONAL PURPOSES
Charitable institutions, churches and parsonages
or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings and improvements
14
actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt
from taxation. (Article VI, Section 28[3], Constitution)
"ACTUALLY, DIRECTLY AND EXCLUSIVELY USED"
It would seem, however, that to be entitled to
the exemption, lands, buildings and improvements
of religious and charitable institutions should be
"actually, directly and exclusively used" for religious
and charitable purposes.
The test of exemption from taxation is the use
of the property for the purposes mentioned in the
Constitution.
EXCLUSIVE BUT NOT ABSOLUTE USE
The term "exclusively used" does not necessarily
mean total or absolute use for religious, charitable and
educational purposes. Even if the property is incidentally
used for said purposes, the tax exemption will apply.
Corollarily, if a property, although actually owned
by a religious, charitable and educational institution is
used for a non-exempt purpose, the exemption from
tax shall not attach.
Citing the case of St. Louis Young Men's Christian
Association v. Gehner, 47 S.W.2d 776 which held that
if real property is used for one or more commercial
purposes, it is not exclusively used for the exempted
purposes but is subject to taxation, the Supreme Court
concluded that "What is meant by actual, direct
and exclusive use of the property for charitable
institutions is the direct and immediate and actual
application of the property itself to the purposes for
which the charitable institution is organized. It is not
the use of the income from the real property that is
determinative of whether the property is used for
tax-exempt purposes."
Meaning of actually, directly and exclusively
"Actually is opposed to seemingly, pretendedly, or
feignedly, as actually engaged in farming means, truly in
fact."
"Directly. In a direct way without anything intervening;
not by secondary, but by direct means."
"Exclusively. Apart from all others; without admission
of others to participation; in a manner to exclude."
REV. FR. CASIMIRO LLADOC v.
The CIR and The CTA14 Phil. 292
The exemption is only from the payment
of taxes assessed on such properties enumerated, as
property taxes, as contra-distinguished from excise
Manol R. Sala
SWU College of Law
taxes. In the present case, what the Collector assessed
was a donee's gift tax; the assessment was not on the
properties themselves.
A gift tax is not a property tax, but an excise tax
imposed on the transfer of the property by way of gift
inter vivos, the imposition of which on property used
exclusively for religious purposes does not constitute
an impairment of the Constitution.
13. TAX EXEMPTIONS GRANTED TO NON-STOCK,
NON-PROFIT EDUCATIONAL INSTITUTIONS"
Section 4. (3) All revenues and assets of nonstock,
non-profit educational institutions used actually,
directly and exclusively for educational purposes shall
be exempt from taxes and duties. Upon the dissolution
and cessation of the corporate existence of such
institutions, their assets shall be disposed of in the
manner provided by law.
"ACTUALLY, DIRECTLY AND EXCLUSIVELY USED"
The use of the term "actually, directly and exclusively
used" referring to religious institutions cannot be applied
to this above article. The provision of Article VI, Section
28(3) applies to three institutions religious, charitable
and educational institutions while Article XIV applies
solely to non-stock, non-profit educational institutions.
Hence, in this case, we should apply its literal interpretation
"solely" in consonance with the principle of
strictissimi juris. The word "exclusively" is an "exclusive
word," which is indicative of an intent that the provision is
mandatory.
DONOR'S TAX
Article XIV, Section 4(4) provides:
Subject to conditions prescribed by law, all grants,
endowments, donations or contributions used actually,
directly and exclusively for educational purposes shall be
exempt from tax.
The foregoing Constitutional provision is not
self-executing as it requires a legislative enactment
providing certain conditions for exemption. However,
Section 101(a)[3] of R.A. 8424, has declared these
donations TAX EXEMPT.
ESTATE TAX
Non-stock, non-profit educational institutions
are not included under the coverage of Section 87 of
R.A. 8424; hence, they are NOT TAX EXEMPT. Only
transfers to social welfare, cultural and charitable
institutions are exempt from estate tax.
VALUE ADDED TAX
15
Under Rev. Reg. No. 6-97, once non-stock, nonprofit
educational institutions engage in business, they
are subject to value added tax.
Pursuant to Section 109(m) of the Tax Code of
1987, private educational institutions shall be exempt
from value-added tax provided they are accredited as
such either by the Department of Education, Culture
and Sports or by the Commission on Higher Education.
However, this exemption does not extend to their other
activities involving the sale of goods and services.
However, they shall be subject to internal revenue
taxes on income from trade, business or other
activity, the conduct of which is not related to the
exercise or performance by such educational institutions
of their educational purposes or functions (Sec.
2, Finance Department Order No. 137-87 as amended
by Finance Department Order No. 92-88) i.e., rental
payment from their building/premises.
14. APPROPRIATION OF PUBLIC MONEY
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. (Article VI, Section 29[l]
Constitution)
This is in consonance with the inviolable principle
of separation of the Church and State.
The rule is subject to an exception. A particular
money may be set aside for a particular sect, priest or
religious minister or dignitaries if they are assigned
to the following institutions: leprosarium, orphanage,
penal institution and the armed forces.
15. GRANT OF TAX EXEMPTIONS
The inherent power of the state to impose
taxes naturally carries with it the power to grant tax
exemptions. The power to exempt from taxation, as
well as the power to tax, is an essential attribute of
sovereignty, and may be exercised in the constitution,
or in a statute, unless the Constitution expressly or by
implication prohibits action by the legislature on the
subject.
Exemptions from taxation may be created
directly by the Constitution, e.g., Art. VI, Sec. 28(3) of
the Constitution granting tax exemptions to properties
actually, directly and exclusively used for religious,
Manol R. Sala
SWU College of Law
charitable and educational purposes, or by an act
of the legislature, subject to the limitations as the
constitution may place, expressly or by implication,
upon the power of the legislature.
LEGAL BASIS OF THE GRANT OF EXEMPTIONS
Art. VI, Section 28(4) of the Constitution provides that:
No law granting any tax exemption shall be passed
without the concurrence of a.majority of all the members of
Congress.
Note that in granting tax exemptions, an absolute
majority vote of the Members of Congress is required,
while in cases of withdrawal of such tax exemption, a
relative majority vote is sufficient.
Tax amnesties, tax condonations, and tax refunds
are in the nature of tax exemptions. Such being the case,
a law granting tax amnesties, tax condonations, and
tax refunds requires the vote of an absolute majority of
the Members of Congress.
GENERAL RULE: NO EXEMPTION
A constitutional grant of exemption may be selfexecuting
or may require an act of Congress for its
operation. Where a constitutional provision granting
tax exemption is self-executing, the legislature can
neither add nor detract from it; it may, however,
prescribe a procedure to determine whether a claimant
is entitled to the constitutional exemption.
The intent to grant tax exemption must be
clear, otherwise the rule of construction applies that
exemption from taxation are to be strictly construed
against exemption and in favor of the right to tax.
STATUTORY EXEMPTIONS, WHEN VALID
Where the Constitution confers upon the legislature
authority to grant exemptions within certain
limits, statutes granting such exemptions shall be
VALID if they do not exceed the constitutional limits,
and VOID if they do.
THE RULE ON CONSTRUCTION OF EXEMPTIONS
The intention of the legislature to grant tax
exemptions must be expressed in clear and unmistakable
terms, it can never be implied from language
that will admit of any other reasonable construction.
Exemptions are never presumed, the burden is upon
the claimant to establish his right to exemption beyond
reasonable doubt.
MEANING OF STRICT CONSTRUCTION RULE
When it is said that exemptions must be strictly
16
construed in favor of the taxing power, this does not mean
that if there is a possibility of a doubt it is to be at once
resolved against the exemption. It simply means that if,
after the application of all rules of interpretation for the
purpose of ascertaining the intention of the legislature, a
well founded doubt exists, then the ambiguity occurs which
may be settled by the rule of strict construction.
Tax exemption and tax amnesty distinguished:
Tax amnesty is an immunity from all criminal and
civil obligations arising from non-payment of taxes. It is
a general pardon given to all taxpayers. It applies only to
past tax periods, hence of retroactive application. (People v.
Castarieda, G.R. No. L-46881, 1988) On the other hand, tax
exemption is an immunity from the civil liability only. It
is an immunity or privilege, a freedom from a charge or
burden of which others are subjected. (Florer v. Sheridan, 137
Ind. 28, 36 NE 365) It is generally prospective in application.
16. LOCAL TAXATION
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. (Article X, Section 5, Constitution)
The general principle against the delegation of
legislative powers as a consequence of the principle of
separation of powers is subject to one well-established
exception: legislative powers may be delegated to local
government units. Included in this grant of legislative
power is the grant of local taxing power.
R.A. 7160 (Local Government Code) gives flesh to
the guidelines and limitations mentioned in the aforesaid
constitutional provision as follows:
SECTION 130. Fundamental Principles. The
following fundamental principles shall govern the
exercise of the taxing and other revenue-raising powers
of local government units:
(a) Taxation shall be uniform in each local
government unit;
(b) Taxes, fees, charges and other impositions
shall:
(1) be equitable and based as far as practicable
on the taxpayer's ability to pay;
(2) be levied and collected only for public
purposes;
(3) not be unjust, excessive, oppressive, or
confiscatory;
Manol R. Sala
SWU College of Law
(4) not be contrary to law, public policy,
national economic policy, or in restraint of trade;
(c) The collection of local taxes, fees, charges
and other impositions shall in no case be let to any
private person;
(d) The revenue collected pursuant to the provisions
of this Code shall inure solely to the benefit of,
and be subject to the disposition by, the local government
unit levying the tax, fee, charge or other imposition
unless otherwise specifically provided herein; and
(e) Each local government unit shall, as far as
practicable, evolve a progressive system of taxation.
SECTION 133. Common Limitations on the
Taxing Powers of Local Government Units. Unless
otherwise provided herein, the exercise of the taxing
powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:
(a) Income tax, except when levied on banks
and other financial institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts, legacies
and other acquisitions mortis causa, except as otherwise
provided herein;
(d) Customs duties, registration fees of vessel
and wharfage on wharves, tonnage dues, and all
other kinds of customs fees, charges and dues except
wharfage on wharves constructed and maintained by
the local government unit concerned;
(e) Taxes, fees, and charges and other impositions
upon goods carried into or out of, or passing through,
the territorial jurisdictions of local government units
in the guise of charges of wharfage, tolls for bridges or
otherwise, or other taxes, fees, or charges in any form
whatsoever upon such goods or merchandise;
(f) Taxes, fees or charges on agricultural and
aquatic products when sold by marginal farmers or
fishermen;
(g) Taxes on business enterprises certified to by
the Board of Investments as pioneer or non-pioneer
for a period of six (6) months and four (4) years,
respectively from the date of registration;
(h) Excise taxes on articles enumerated under
the National Internal Revenue Code, as amended, and
taxes, fees or charges on petroleum products;
(i) Percentage or value-added tax (VAT) on
sales, barters or exchanges or similar transactions on
goods or services except as otherwise provided herein;
(j) Taxes on the gross receipts of transportation
contractors and persons engaged in the transportation
of passengers or freight by hire and common carriers
by air, land or water, except as provided in this Code;
17
(k) Taxes on premiums paid by way of reinsurance
or retrocession;
(I) Taxes, fees or charges for the registration
of motor vehicles and for the issuance of all kinds
of licenses or permits for the driving thereof, except
tricycles;
(m) Taxes, fees, or other charges on Philippine
products actually exported, except as otherwise
provided herein;
(n) Taxes, fees, or charges, on Countryside and
Barangay Business Enterprises and cooperatives duly
registered under R.A. No. 6810 and R.A. No. 6938
otherwise known as the "Cooperatives Code of the
Philippines" respectively; and
(o) Taxes, fees, or charges of any kind on the National
Government, its agencies and instrumentalities,
and local government units
SECTION 198. Fundamental Principles. The
appraisal, assessment, levy and collection of real property
tax shall be guided by the following fundamental
principles:
(a) Real property shall be appraised at its current
and fair market value;
(b) Real property shall be classified for assessment
purposes on the basis of its actual use;
(c) Real property shall be assessed on the basis of
a uniform classification within each local government
unit;
(d) The appraisal, assessment, levy and collection
of real property tax shall not be let to any private
person; and
(e) The appraisal and assessment of real property
shall be equitable.
PEPSI-COLA BOTTLING CO. OF THE PHILS,
v. CITY OF BUTUAN 24 SCRA 789
double taxation, in general, is not forbidden
by our fundamental law. We have not adopted, as part
thereof, the injunction against double taxation found
in the US Constitution and of some states of the Union.
Then again, the general principle against delegation
of legislative powers, in consequence of the theory of
separation of powers is subject to one
well-established exception, namely: legislative powers
may be delegated to local governments.
SPECIAL FUND
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 or abandoned, the
Manol R. Sala
SWU College of Law
balance, if any, shall be transferred to the general funds
of the government.
SUPREME COURTS JURISDICTION OVER TAX
CASES
ART. VIII, SEC. 2:
The Congress shall have the power to define,
prescribe, and apportion the jurisdiction of the
various courts but may not deprive the Supreme
Court of its jurisdiction over cases enumerated in
Section 5 hereof.
ART. VIII, SEC. 5:
The Supreme Court shall have the following
powers:
Review, revise, reverse, modify or affirm on
appeal or certiorari as the law or the Rules of Court
may provide, final judgments or orders of lower
courts in:
(b) All cases involving the legality of any
tax, impost, assessment or toll, or any penalty
imposed in relation thereto.
The Supreme Court exercises exclusive appellate
jurisdiction over certain judgments or orders of the
lower courts involving the legality of a tax impost,
assessment, fee, or penalty imposed in relation thereto.
Decisions of the Bureau of Internal Revenue are
appealable to the Court of Tax Appeals. The decisions
of the Court of Tax Appeals may be appealed to the
Court of Appeals. (DBP v. CA, 180 SCRA 609) Decisions
rendered by the Court of Appeals may be elevated to
the Supreme Court.
KINDS OF TAXES DIFFERENTIATED
(1) Direct and Indirect A direct tax is a tax for which a
taxpayer is directly liable on the transaction or business
it engages in. Examples are the custom duties and ad
valorem taxes paid by the oil companies to the Bureau
of Customs for their importation of crude oil, and the
specific and ad valorem taxes they pay to the Bureau
of Internal Revenue after converting the crude oil into
petroleum products. On the other hand, indirect tax
is a tax primarily paid by persons who can shift the
burden upon someone else. For example, the excise and
ad valorem taxes that oil companies pay to the Bureau of
Internal Revenue upon removal of petroleum products
from its refinery can be shifted to its buyer like the
NPC, by adding them to the "cash" and/or "selling
price."
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 either direct tax
or indirect tax. In context, direct taxes are those that
18
are exacted from the very person who, it is intended or
desired, should pay them.
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 someone else.
(2) Specific and ad valorem A specific tax is imposed
and based on weight or volume capacity or any other
physical unit of measurement, whereas ad valorem
tax is based on selling price or other specified value
of the goods. (Sec. 129, NIRC) Examples of specific tax
are excise taxes on distilled spirits, tobacco products
and petroleum products. Examples of ad valorem tax
include excise tax on automobiles and non-essential
goods.
(3) General and special A general tax is imposed solely
to raise revenue for the government, such as: income
tax, donor's tax, estate tax and value-added tax. On
the other hand, special tax is imposed and collected to
achieve a particular legitimate object of government.
An example of special tax is oil price stabilization fund
(4) National and local A national tax is imposed by
the national government (e.g., revenue taxes under the
NIRC and custom duties), while local tax is levied and
collected by the local government (e.g., real property
tax and business tax).
(5) Personal and property A personal tax is of fixed
amount imposed on individuals, whether citizens or not,
residing within a specified territory, without regard to
their property or occupation (e.g., community tax), while
property tax is imposed on property, real or personal, in
proportion to its value (e.g., real estate tax).
A tax on the exercise of right or privilege or
performance of an act is generally regarded as excise
tax (e.g., income tax, estate tax, donor's tax and valueadded
tax).
(6) Progressive and regressive A progressive tax is one
whereby the rate increases as the tax base (amount)
increases. Examples are income tax, estate and donor's
tax under the NIRC. On the other hand, regressive
tax is one where the tax rate decreases as the tax base
increases.
In Tolentino, et al. v. Secretary of Finance, EVAT En
Banc Resolution, October 30, 1995, the Supreme Court
ruled that value-added tax is a form of regressive tax.
Manol R. Sala
SWU College of Law
CONCEPT OF DOUBLE TAXATION"
There is double taxation where one tax is imposed by
the State and the other is imposed by the city; it being widely
recognized that there is nothing inherently obnoxious in
the requirement that license fees or taxes be enacted with
respect to the same occupation, calling or activity by both
the state and the political subdivision thereof.
1) Kinds of Double Taxation
a) DIRECT constitutes double taxation in the
objectionable or prohibited sense. This occurs
when the same property is taxed twice when
it should be taxed but once; both taxes must
be imposed on the same property or subject
matter, for the same purpose, by the same State,
Government, or taxing authority, within the same
jurisdiction or taxing district, during the same
taxing period, and they must be of the same kind
or character of tax.
Local Business Tax Based on Gross Revenues amounts to
direct double taxation
The imposition of local business tax based on gross
revenue will inevitably result in the constitutionally pros-
cribed double taxation taxing of the same person twice
by the same jurisdiction for the same thing inasmuch as
petitioner's gross revenue or income for a taxable year will
definitely include its gross receipts already reported during
the previous year and for which local business tax has already
been paid.
Gross revenue covers money or its equivalent actually
or constructively received, including the value of services
rendered or articles sold, exchanged or leased, the payment
of which is yet to be received. This is in consonance with the
International Financial Reporting Standards, which defines
revenue as the gross inflow of economic benefits (cash,
receivables, and other assets) arising from the ordinary
operating activities of an enterprise (such as sales of goods,
sales of services, interest, royalties, and dividends), which is
measured at the fair value of the consideration or receivable.
b) INDIRECT is permissible double taxation.
This is allowed if the taxes are of different
nature or character, imposed by different taxing
authorities. It has been held that a real estate tax
and the tenement tax imposed by local ordinance
although imposed by the same taxing authority,
are not of the same kind or character. (Villanueva
v. Upilo City, 26 SCRA 578)
c) DOMESTIC this arises when the taxes are
imposed by the local or national government
19
(within the same state).
d) INTERNATIONAL refers to 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.
Double taxation becomes
obnoxious only where the taxpayer is taxed twice for the
benefit of the same governmental entity or by the same
jurisdiction for the same purpose, but not in a case where
one tax is imposed by the State and the other by the city
or municipality.
TAX TREATY AS A MODE OF ELIMINATING DOUBLE
TAXATION
In order to eliminate double taxation, a tax treaty
resorts to two methods of relief, to wit:
1) EXEMPTION METHOD the income or capital
which is taxable in the state of source or situs is
exempted in the state of residence, although in some
instances it may be taken into account in determining
the rate of tax applicable to the taxpayer's remaining
income or capital.
2) CREDIT METHOD the tax paid in the state of
source is credited against the tax levied in the state of
residence.
The basic difference between the two methods,
is that in the exemption method, the focus is on the
income or capital itself, whereas the credit method
focuses upon the tax.
XII. TAX EVASION AND TAX AVOIDANCE DISTINGUISHED"
Tax evasion connotes fraud through the use of pretenses
and forbidden devices to lessen or defeat taxes. On
the other hand, tax avoidance is a legal means used by the
taxpayer to reduce taxes.
The intention to minimize taxes, when used in the
context of fraud, must be proven by clear and convincing
evidence amounting to more than mere preponderance.
Mere understatement of tax in itself does not prove fraud.
Tax evasion connotes the integration of three factors:
(1) the end to be achieved, i.e., the payment of less than
that known by taxpayer to be legally due, or the nonpayment
of tax when it is shown that a tax is due;
(2) an
accompanying state of mind which is described as being
"evil," in "bad faith," "willful," or "deliberate and not
accidental"; and
(3) a course of action or failure of action
which is unlawful
Manol R. Sala
SWU College of Law
XIII. DOCTRINE OF IMPRESCRIPTIBILITY"
As a rule, taxes are imprescriptible as they are the
lifeblood of the government. However, tax statutes may
provide for statute of limitations.
The rules that have been adopted are as follows:
a) National Internal Revenue Code The statute of
limitation for assessment of tax if a return is filed is within
three (3) years from the last day prescribed by law for
the filing of the return or if filed after the last day, within
three years from date of actual filing. If no return is
filed or the return filed is false or fraudulent, the period
to assess is within ten years from discovery of the
omission, fraud or falsity.
Any internal revenue tax which has been assessed
within the period of limitation as prescribed in
paragraph (a) of Sec. 222 may be collected by distraint
or levy or by a proceeding in court within five (5) years
following the assessment of the tax.
b) Tariff and Customs Code It does not express any
general statute of limitation; it provides, however,
that "when articles have been entered and passed
free of duty of final adjustments of duties made, with
subsequent delivery, such entry and passage free of
duty or settlements of duties will, after the expiration
of three (3) years from the date of the final payment of
duties, in the absence of fraud or protest or compliance
audit pursuant to the provisions of this Code, be final
and conclusive upon all parties, unless the liquidation
of the import entry was merely tentative." (Sec. 4, R.A.
9135)
c) Local Government Code Local taxes, fees, or charges
shall be assessed within five (5) years from the date
they became due. In case of fraud or intent to evade
the payment of taxes, fees or charges the same may be
assessed within ten (10) years from discovery of the fraud
or intent to evade payment. They shall also be collected
either by administrative or judicial action within five (5)
years from date of assessment. (Sec. 194, LGC)
XIV. NATURE AND PROSPECTTVITY OF TAX LAWS
Tax laws are civil in nature. Under Article 5 of the
Civil Code, acts executed against the mandatory provisions
of law are void, except when the law itself authorizes
the validity of those acts. In CIR v. Reyes [480 SCRA 382,
397], the Supreme Court ruled that failure to comply
with Section 228 (of the NIRC, as amended by R.A. 8424,
requiring that "The taxpayers shall be informed in writing
of the laws and the facts on which the assessment is made;
otherwise, the assessment shall be void") does not only
render the assessment void, but also finds no validation in
any provision in the Tax Code. The Court cannot condone
errant or enterprising tax officials, as they are expected to be
20
vigilant and law-abiding.

The general rule under the Civil Code that laws shall
have prospective application applies to tax laws. Retroactive
application of revenue laws may be allowed 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.
It has been held that the retroactive application of
War Profits Tax Law may not be considered harsh and
oppressive because the force of its impact fell on those who
had amassed wealth or increased their wealth during the
war, but did not touch the less fortunate.

Strict construction of tax laws

Statutes levying taxes or duties are to be construed
strongly against the Government and in favor of the subject
or citizens, because burdens are not to be imposed or
presumed to be imposed beyond what statutes expressly
and clearly declare. No person or property is subject to
taxation unless they fall within the terms or plain import of
a taxing statute.

In the recent case of Abaya v. Ebdane, Jr. [515 SCRA 720,

757-758], the Supreme Court stressed that the prevailing
doctrine in the taxpayer's suits is to allow taxpayers to
question contracts entered into by the national government
or government-owned and controlled corporations
allegedly in contravention of law. 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. Significantly, a taxpayer need not be a party to the
contract to challenge its validity.

Chapter II
Manol R. Sala 21
SWU College of Law
 TAX REMEDIES determine his remedies thereon, due process requires that it
must be served on and received by taxpayer.
I. REMEDIES OF THE GOVERNMENT
The recommendation letter of the Commissioner
A. Assessment and Collection
cannot be considered a formal assessment. Even
Assessment precedes collection except when
a cursory perusal of the said letter would reveal three
the unpaid tax is a tax due per return as in the case
key points:
of a self-assessed income tax under the pay-as-youfile
1. It was not addressed to the taxpayers.
system in which case collection may be instituted
2. There was no demand made on the taxpayers to pay
without need of assessment pursuant to Section 56 of
the tax liability, nor a period for payment set therein.
the NIRC.
3. The letter was never mailed or sent to the taxpayers by
the Commissioner.
Sec. 56. Payment and Assessment of Income Tax for
In fine, the said recommendation
Individuals and Corporations.
letter served merely as the prima facie basis for filing
(A) Payment of Tax.
criminal informations that the taxpayers had violated
(1) In General. The total amount of tax imposed
Section 45 (a) and (d), and 110, in relation to Section
by this Title shall be paid by the person
100, as penalized under Section 255, and for violation
subject thereto at the time the return is filed.
of Section 253, in relation to Section 252 9(b) and (d) of
In the case of tramp vessels, the shipping
the Tax Code.
agents and/or the husbanding agents, and
in their absence, the captains thereof are
ATLAS CONSOLIDATED MINING AND
required to file the return herein provided
DEVELOPMENT CORPORATION v. CA,CIR AND CTA
and pay the tax due thereon before their
242 SCRA 289
departure. Upon failure of the said agents or
Assessments are prima facie presumed correct
captains to file the return and pay the tax, the
and made in good faith.
Bureau of Customs is hereby authorized to
It is an elementary rule
hold vessel and prevent its departure until
that in the absence of proof of any irregularities in the
proof of payment of the tax is presented or a
performance of official duties, an assessment will not
sufficient bond is filed to answer for the tax
be disturbed.
due.
(2) Installment Payment When the tax due is in
excess of Two Thousand Pesos (P2,000.00), the
Under Section 7 of R.A. 1125, the assessment is
taxpayer other than a corporation may elect
appealable to the Court of Tax Appeals within thirty
to pay the tax in two (2) equal installments
(30) days from receipt of the letter. The taxpayer's
in which case, the first installment shall be
failure to appeal in due time, as in the case at bar,
paid at the time the return is filed and the
makes the assessment in question final, executory and
second installment, on or before July 15
demandable.
following the close of the calendar year. If
any installment is not paid on or before the
Assessment Deemed Made
date fixed for its payment, the whole amount
An assessment is deemed made only when the collector
of the tax unpaid becomes due and payable,
of internal revenue releases, mails or sends such notice to
together with the delinquency penalties.
the taxpayer
In cases where assessment is necessary, the
Existing Revenue Procedures and Jurisprudence Governing
primordial consideration is its final and unappealable
Assessment Based on the Best Evidence Obtainable
nature. Collectibility of the tax liability attaches only
In the absence of proof of any irregularities in the
when the assessment becomes final and unappealable.
performance of official duties, an assessment will not be
disturbed. Even an assessment based on estimates is prima
An assessment contains not only a computation
facie valid and lawful where it does not appear to have been
of tax liabilities but also a demand for payment
arrived at arbitrarily or capriciously. The burden of proof
within a prescribed period.
is upon the complaining party to show clearly that the
It also signals the time when penalties and interests begin to
assessment is erroneous. Failure to present proof of error
accrue against the taxpayer. To enable the taxpayer to

Manol R. Sala 22
SWU College of Law
in the assessment will justify the judicial affirmance of said
assessment.
Assessment Based on Estimate: 50% Rule, In the Absence
of Receipts to Prove Actual Amount of Expense Deduction
If there is showing that expenses have been incurred
but the exact amount thereof cannot be ascertained due to
absence of documentary evidence, it is the duty of the BIR
to make an estimate of deduction that may be allowable in
computing the taxpayer's taxable income bearing heavily
against the taxpayer whose inexactitude is of his own
making. That disallowance of 50% of the taxpayer's claimed
deduction is valid
Networth Method of Investigation
Determination of the taxpayer's taxable income
through the networth method of investigation is valid.
The taxable income shall be computed upon the basis
of the taxpayer's annual accounting period
B. Remedies for Collection of Delinquent Taxes
Some of the important remedies of the government
in collecting taxes under the National Internal Revenue
Code are the following:
1. Distraint of personal property such as
goods, chattels, or effects, including stocks
and other securities, debts, credits, bank ac-
counts and interest in and rights to personal
property, and levy upon real property and
interest in or rights to real property (Sec. 205);
2. Civil or criminal action (Sec. 205);
3. Compromise (Sec. 204);
4. Tax lien (Sec. 219);
5. Forfeiture (Sec. 224);
6. Civil penalties (Sec. 248).
1. Distraint and Levy
Distraint is a remedy whereby the collection of
the tax is enforced on the goods, chattels, or effects
of the taxpayer including other personal property
of whatever character as well as stocks and other
securities, debts, credits, bank accounts, and interest in
and rights to personal property.
On the other hand, levy refers to the seizure of real
properties and interest in or rights to such properties
for the satisfaction of taxes due from the delinquent
taxpayer. Levy can be made before, simultaneously, or
after the distraint of personal property.
Both remedies are summary in nature and either
may be pursued in the discretion of the authorities
charged with the collection of tax independently, or
Manol R. Sala
SWU College of Law
simultaneously with civil and criminal action once the
assessment becomes final and demandable
It bears to stress, however, that the remedy
of distraint and levy shall not be availed of where
the amount of the tax involved is not more than one
hundred pesos (P100).
(a) Actual and Constructive Distraint.
Under Section 206, the Commissioner, to safeguard
the interest of the Government, may place under
constructive distraint the property of a delinquent
taxpayer or any taxpayer who, in his opinion, is:
1. retiring from any business subject to the tax;
2. intending to leave the Philippines or to remove
his property therefrom or to hide or conceal his
property;
3. intending to perform any act tending to obstruct
the proceedings for collecting the tax due or which
may be due from him.
The constructive distraint of personal property
shall be effected by requiring the taxpayer or any person
having possession or control of such property to
sign a receipt covering the property distrained and
obligate himself to preserve the same intact and unaltered
and not to dispose of the same in any manner
whatever without the express authority of the Commissioner.
Actual distraint, upon the other hand, is resorted
to upon the failure of the person owing any delinquent
tax or delinquent revenue to pay the same at the time
required.
Distraint shall be instituted by the Commissioner
or his duly authorized representative if the amount
involved is in excess of one million pesos (PI ,000,000.00),
or the Revenue District Officer if the amount involved
is one million pesos (PI,000,000.00) or less.
A report on the distraint shall, within ten (10)
days from receipt of the warrant, be submitted by the
distraining officer to the Revenue District Officer, and
to the Revenue Regional Director:
SOME PRINCIPLES GOVERNING DISTRAINT AND
LEVY
(a) The distraint and levy shall be effected anytime
the situation so demands but only after reasonable
efforts have been exerted to collect the tax by
ordinary methods of collection.
(b) Distraint and levy should be resorted to before
23
court action although it may be done simultaneously.
(c) If there is already a court action, a warrant of
distraint and levy should be issued simultaneously
with such filing.
(d) Warrant of distraint and levy shall not be issued
for the collection only of a compromise penalty
for the violation of internal revenue laws and
regulations.
(e) A notice of tax lien should be filed with the Office
of the Register of Deeds before or simultaneously
with the issuance of a warrant of distraint and
levy.
(See Revenue Memo. Order No. 20-68 dated
Feb. 18,1966)
(f) Any taxpayer whose property has been placed
under constructive distraint, who sells, transfers,
encumbers or in any way disposes of said property,
or any part thereof, without the knowledge
and consent of the Commissioner, shall, upon
conviction for each act or omission, be punished
by a fine not less than twice the value of the property
so sold, encumbered, or disposed of, but not
less than five thousand pesos (P5,000.00), or suffer
imprisonment of not less than two (2) years and
one (1) day but not more than four (4) years or
both. (Sec. 276)
(g) Any person who fails or refuses to surrender
property placed under distraint and levy shall
be liable in his own person and estate to the
Government in a sum equal to the value of the
property or rights not so surrendered but not
exceeding the amount of the taxes (including
penalties and interest) for the collection of which
such warrant had been issued, together with the
costs and interest if any, from the date of such
warrant. In addition, such person shall, upon
conviction for each act or omission, be punished
by a fine of not less than five thousand pesos
(P5,000.00), or suffer imprisonment of not less
than six (6) months and one (1) day but not more
than two (2) years, or both. (Sec. 277)
(h) The remedy by distraint of personal property and
levy on realty may be repeated if necessary until
the full amount due, including all expenses, is
collected. (Sec. 217)
PROCEDURE FOR ACTUAL DISTRAINT
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SWU College of Law
The steps or procedure for actual distraint are
outlined under Sections 208 to 212 of the NIRC, viz.:
Sec. 208. Procedure for Distraint and Garnishment.
The officer serving the warrant of distraint
shall make or cause to be made an account of the goods,
chattels, effects or other personal property distrained,
a copy of which, signed by himself, shall be left either
with the owner or person from whose possession such
goods, chattels, or effects or other personal property
were taken, or at the dwelling or place of business of
such person and with someone of suitable age and discretion,
to which list shall be added a statement of the
sum demanded and note of the time and place of sale.
Stocks and other securities shall be distrained by serving
a copy of the warrant of distraint upon the taxpayer and
upon the president, manager, treasurer or other responsible
officer of the corporation, company or association, which
issued
the said stocks or securities.
Debts and credits shall be distrained by leaving with
the person owing the debts or having in his possession or
under his control such credits, or with his agent, a copy of
the warrant of distraint. The warrant of distraint shall be
sufficient authority to the person owning the debts or having
in his possession or under his control any credits belonging
to the taxpayer to pay to the Commissioner the amount of
such debts or credits.
Bank accounts shall be garnished by serving a warrant
of garnishment upon the taxpayer and upon the president,
manager, treasurer or other responsible officer of the bank.
Upon receipt of the warrant of garnishment, the bank shall
turn over to the Commissioner so much of the bank accounts
as may be sufficient to satisfy the claim of the Government.
(208)
Sec. 209. Sale of Property Distrained and Disposition
of Proceeds. The Revenue District Officer or his duly
authorized representative, other than the officer referred to
in Section 208 of this Code shall, according to rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, forthwith cause a
notification to be exhibited in not less than two (2) public
places in the municipality or city where the distraint is
made, specifying the time and place of sale and the articles
distrained. The time of sale shall not be less than twenty (20)
days after notice to the owner or possessor of the property
as above specified and the publication or posting of such
notice. One place for the posting of such notice shall be at
the Office of the Mayor of the city or municipality in which
the property is distrained.
At the time and place fixed in such notice the said
revenue officer shall sell all the goods, chattels, or effects, or
24
other personal property, including stocks and other securities
so distrained, at public auction, to the highest bidder for
cash, or with the approval of the commissioner, through duly
licensed commodity or stock exchanges.
In the case of stocks and other securities, the officer
making the sale shall execute a bill of sale which he shall
deliver to the buyer, and the copy thereof furnished the
corporation, company or association which issued the stocks
or other securities. Upon receipt of the copy of the bill of
sale, the corporation, company or association shall make
the corresponding entry in its books, transfer the stocks or
other securities sold in the name of the buyer, and issue, if
required to do so, the corresponding certificates of stock or
other securities.
Any residue over and above what is required to pay
the entire claim, including expenses, shall be returned to the
owner of the property sold. The expenses chargeable upon
each seizure and sale shall embrace only the actual expenses
of seizure and preservation of the property pending the sale,
and no charge shall be imposed for the services of the local
internal revenue officer or his deputy.
Sec. 210. Release of Distrained Propety Upon Payment
Prior to Sale. If at any time prior to the consummation of
the sale all proper charges are paid to the officer conducting
the sale, the goods or effects distrained shall be restored to
the
owner.
Sec. 211. Report of Sale to Bureau of Internal Revenue.
Within two (2) days after the sale, the officer making the
same shall make a report of his proceedings in writing to
the Commissioner and shall himself preserve a copy of such
report as an official record.
Sec. 212. Purchase by Government at Sale Upon
Distraint. When the amount bid for the property under
distraint is not equal to the amount of the tax or is very
much less than the actual market value of the articles offered
for sale, the Commissioner or his deputy may purchase the
same in behalf of the National Government for the amount
of taxes, penalties and costs due thereon.
Property so purchased may be resold by the Commissioner
or his deputy, subject to the rules and regulations
prescribed by the Secretary of Finance, the net proceeds
therefrom shall be remitted to the National Treasury and
accounted for as internal revenue.
PROCEDURE ON LEVY OF REAL PROPERTY
Sec. 207(B). Levy on Real Property. After the
expiration of the time required to pay the delinquent tax
or delinquent revenue as prescribed in this Section, real
Manol R. Sala
SWU College of Law
property may be levied upon, before, simultaneously, or after
the distraint of personal property belonging to the delinquent.
To his end, any internal revenue officer designated by the
Commissioner or his duly authorized representative shall
prepare a duly authenticated certificate showing the name
of the taxpayer and the amounts of the tax and penalty due
from him. Said certificate shall operate with the force of a
legal execution throughout the Philippines.
Levy shall be effected by writing upon said certificate
a description of the property upon which levy is made. At
the same time, written notice of the levy shall be mailed to
or served upon the Register of Deeds of the province or the
city where the property is located and upon the delinquent
taxpayer, or if he be absent from the Philippines, to his agent
or the manager of the business in respect to which the liability
arose, or if there be none, to the occupant of the property in
question.
Sec. 213. Advertisement and Sale. Within twenty
(20) days after the levy, the officer conducting the
proceedings
shall proceed to advertise the property or a usable portion
thereof as may be necessary to satisfy the claim and cost of
sale; and such advertisement shall cover a period of at least
thirty (30) days. It shall be effectuated by posting a notice at
the main entrance of the municipal building or city hall and
in a public and conspicuous place in the barrio or district
in which the real estate lies and by publication once a week
for three (3) consecutive weeks in a newspaper of general
circulation in the municipality or city where the property is
located. The advertisement shall contain a statement of
the amount of taxes and penalties so due and the time and
place of sale, the name of the taxpayer against whom taxes
are levied, and a short description of the property to be sold.
At any time before the day fixed for the sale, the taxpayer
may discontinue all the proceedings by paying the taxes,
penalties and interest. If he does not do so, the sale shall
proceed and shall be held either at the main entrance of the
municipal building or city hall, or on the premises to be sold,
as the officer conducting the proceedings shall determine and
as the notice of sale shall specify.
Within five (5) days after the sale, a return by the distraining
or levying officer shall be entered upon the records of
the Revenue Collection Officer, the Revenue District Officer
and the Regional Director. The Revenue Collection Officer,
in consultation with the Revenue District Officer, shall then
make out and deliver to the purchaser a certificate from his
records, showing the proceedings of the sale, describing the
property sold, stating the name of the purchaser and setting
out the exact amount of all taxes, penalties and interest:
Provided, however, That in case the proceeds of the sale
25
exceeds the claim and cost of sale, the excess shall be turned
over to the owner of the property.
The Revenue Collection Officer, upon approval by the
Revenue District Officer may, out of his collection advance
an amount sufficient to defray the costs of collection by
means of the summary remedies provided for in this Code,
including the preservation or transportation in case of
personal property, and the advertisement and subsequent
sale, both in cases of personal and real property including the
improvements found on the latter. In his monthly collection
reports, such advances shall be reflected and supported by
receipts
Sec. 214. Redemption of Property Sold. Within one
(1) year from the date of sale, the delinquent taxpayer, or any
one for him, shall have the right of paying to the Revenue
District Officer the amount of the public taxes, penalties and
interest thereon from the date of delinquency to the date of
sale, together with interest on said purchase price at the rate
of fifteen percent (15%) per annum from the date of purchase
to the date of redemption, and such payment shall entitle
the person paying to the delivery of the certificate issued
to the purchaser and a certificate from the said Revenue
District Officer that he has thus redeemed the property, and
the Revenue District Officer shall forthwith pay over to the
purchaser the amount by which such property has thus been
redeemed, and said property thereafter shall be free from the
lien of such taxes and penalties.
The owner shall not, however, be deprived of the possession
of the said property and shall be entitled to the rents
and other income thereof until the expiration of the time
allowed for its redemption.
Sec. 215. Forfeiture to Government for want of Bidder.
In case there is no bidder for real property exposed for sale
as hereinabove provided or if the highest bid is for an amount
insufficient to pay the taxes, penalties and costs, the Internal
Revenue Officer conducting the sale shall declare the property
forfeited to the Government in satisfaction of the claim in
question and within two (2) days thereafter, shall make a
return of his proceedings and the forfeiture which shall be
spread upon the record of his office. It shall be the duty of
the Register of Deeds concerned, upon registration with his
office of any such declaration of forfeiture, to transfer the
title of the property forfeited to the Government without the
necessity of an order from a competent court.
Within one (1) year from the date of such forfeiture,
the taxpayer, or any one for him, may redeem said property
by paying to the Commissioner or the latter's Revenue
Collection Officer the full amount of the taxes and penalties,
Manol R. Sala
SWU College of Law
together with interest thereon and the costs of sale, but if the
property be not thus redeemed, the forfeiture shall become
absolute.
It must be noted that in one case, it was held that
as an improvement attached to the land, by express
provision of law (Section 9, Act 4166), though not
physically so united, sugar quotas are inseparable
therefrom, just like servitudes and other real rights
over an immovable, and should be considered as
immovable or real property. (Presbitero v. Fernandez,
7 SCRA 627) By implication, the procedure for levy,
not distraint, must be followed.
In the case of notices of levy issued to satisfy
the delinquent estate tax, the delinquent taxpayer is
the Estate of the decedent, and not necessarily, and
exclusively, the heir of the decedent. Thus, it follows
that the services of the notices of levy in satisfaction of
the tax delinquencies upon the heir is not required by
law.
2. Civil Action
A civil action is resorted to when a tax liability
becomes collectible, that is, the assessment
becomes final and unappealable, or the decision
of the Commissioner has become final, executory,
and demandable.
This occurs when:
1. A tax is assessed and the taxpayer fails to file
an administrative protest by filing a request
for reconsideration or reinvestigation within
thirty (30) days from receipt of the assessment
(Sec. 228, NIRC);
2. A protest against the assessment is filed
by the taxpayer but the Commissioner's
decision denying in whole or in part the said
protest, was not appealed to the Court of Tax
Appeals within thirty (30) days from receipt
of such decision.
It must be stressed that within sixty (60) days
from filing of the protest, all relevant supporting
documents should be submitted, otherwise, the
assessment shall become final. Failure on the
part of the Commissioner to act upon a protest
within one hundred eighty (180) days from the
submission of the documents shall be considered
a denial of the protest; the taxpayer must appeal
to the Court of Tax Appeals within thirty (30)
days from the lapse of the 180 days; otherwise, the
assessment shall become final and demandable
In this connection, the ruling of the Supreme Court
in Republic v. Lim Tian Feng Sons, Inc., L-21731, March
26
31, 1966, 16 SCRA 584, bears significance. In that case,
the High Court held that when the Commissioner did
not reply to the taxpayer's request for reconsideration
and instead referred the case to the Solicitor General for
judicial collection, this was indicative of his decision
against reinvestigation. This is therefore another
instance where the Commissioner's action is in effect
a decision of denial which is appealable to the Court of
Tax Appeals. Also, in a similar case, it was ruled that
the filing of a civil action in court to collect a tax which
was the subject of a pending protest in the BIR was a
justifiable basis for the taxpayer to appeal to the Court
of Tax Appeals and to move for the dismissal in the
trial court of the Government's action to collect the tax
under dispute. (Yabes v. Flop, 115 SCRA 278>
But once an action for collection is filed with
the regular court, the taxpayer can no longer assail
the legality or validity of the assessment. A disputed
assessment falls within the exclusive jurisdiction of
the Court of Tax Appeals. (Commissioner v. Lilia Yusay
Gonzales, L-19495, November 24, 1966) Likewise, the
prescription of the Government's right to assess is
no longer available as a defense in a civil action for
collection; the same should have been ventilated
before the Court of Tax Appeals. (Augusto Basa v.
Republic, L-45277, August 5, 1985) But the right of the
Government to object to the defense of prescription
may be waived if it litigated the issue of prescription
and submitted said issue for the resolution of the court.
(Republic v. Ker & Co., 1-21609, September 29,1966)
A proceeding in court after the collection of tax may
be begun without assessment
The law is clear. When fraudulent tax returns are
involved a proceeding in court after the collection of such tax
may be begun without assessment. In the case
of Adamson v. Court of Appeals, 588 SCRA 27 (2009), the
private respondents filed the capital gains tax return
and the VAT returns, and paid the taxes they have
declared due therefrom. Upon investigation of the
examiners of the BIR, there was a preliminary finding
of gross discrepancy in the computation of the capital
gains taxes due from the sale of two lots of AAI shares,
first to APAC and then to APAC Philippines, Limited.
The examiners also found that the VAT had not been
paid for VAT-liable sale of services for the third and
fourth quarters of 1990. Arguably, the gross disparity
in the taxes due and the amounts actually declared by
the private respondents constitutes badges of fraud.
Thus, the applicability of Ungab v. Cusi (97 SCRA 877
[1980]) is evident to the cases at bar. In this seminal
case, this Court ruled that there was no need for precise
computation and formal assessment in order for
Manol R. Sala
SWU College of Law
criminal complaints to be filed against him. It quoted
Merten's Law of Federal Income Taxation, Vol. 10, Sec.
55A.05, p. 21, thus: An assessment of a deficiency is not
necessary to a criminal prosecution for willful attempt
to defeat and evade the income tax. A crime is complete
when the violator has knowingly and willfully filed
a fraudulent return, with intent to evade and defeat
the tax. The perpetration of the crime is grounded
upon knowledge on the part of the taxpayer that he
has made an inaccurate return, and the government's
failure to discover the error and promptly to assess has
no connections with the commission of the crime.
It should be noted that a civil action for tax
collection filed with the regular courts cannot be
instituted without the approval of the Commissioner.
(Sec. 220, NIRC) But in one case, it was held that the
approval by the Commissioner of Internal Revenue
of a civil action for the collection of taxes is not
jurisdictional, but one relating to capacity to sue or
affecting the cause of action only. The High Court
went on saying further that there was no grave abuse
of discretion on the part of the municipal court in
ruling that the express approval of the Revenue
Commissioner himself was not necessary. The court
relied upon Memorandum Order No. V-634 of the
Revenue Commissioner, approved by the Finance
Secretary, wherein the former's functions regarding
the administration and enforcement of revenue laws
and regulations' powers broad enough to cover the
approval of court actions were expressly delegated
to the Regional Directors. (Arches v. Bellosillo, 20 SCRA
33)
As amended by R.A. 8424, the NIRC is now
even more categorical. Section 7 of the present Code
authorizes the BIR Commissioner to delegate the
powers vested in him under the pertinent provisions
of the Code to any subordinate official with the rank
equivalent to a division chief or higher, except the
following:
a. The power to recommend the promulgation
of rules and regulations by the Secretary of
Finance;
b. The power to issue rulings of first impression
or to reverse, revoke or modify any existing
ruling of the Bureau;
c. The power to compromise or abate under
Section 204 (A) and (B) of this Code, any
tax deficiency: Provided, however, that assessments
issued by the Regional Offices involving
basic deficiency taxes of five hundred
27
thousand pesos (P500,000.00) or less, and
minor criminal violations as may be determined
by rules and regulations to be promulgated
by the Secretary of Finance, upon
the recommendation of the Commissioner,
discovered by regional and district officials,
may be compromised by a regional evalua
tion board which shall be composed of the
Regional Director as Chairman, the Assistant
Regional Director, heads of the Legal, Assessment
and Collection Divisions and the
Revenue District Officer having jurisdiction
over the taxpayer, as members; and
d. The power to assign or re-assign internal
revenue officers to establishments where
articles subject to excise tax are produced or
kept.
None of the exceptions relates to the Commissioner's
power to approve the filing of tax collection
cases. (Republic of the Philippines v. Salud Hizon, 320
SCRA 574)
In the recent case of Oceanic Wireless Network, Inc.
v. CIR [477 SCRA 205, 214], the Supreme Court upheld
the validity of the demand letter dated January 24,
1991 signed and issued by the Chief of the Accounts
Receivable and Billing Division ratiocinating that
the issuance thereof does not fall under any of the
exceptions that have been mentioned as non-delegable.
3. Criminal Action
Like in the institution of civil action for collection,
a criminal action cannot be instituted without the
approval of the Commissioner of Internal Revenue.
The remedy of criminal action is resorted to not
only for collection of taxes but also for enforcement
of statutory penalties of all sorts. (Sec. 221, NIRC) The
judgment in the criminal case shall not only impose the
penalty but shall also order the payment of the taxes
subject of the criminal case as finally decided by the
Commissioner. (Sec. 205, ibid.) This civil liability arises
not as a consequence of a felonious act but because of
the taxpayer's failure to pay taxes. Hence, the extinction
of one's criminal liability does not necessarily result in
the extinguishment of his civil liability, thus:
"In applying the principle underlying the
civil liability of an offender under the Penal Code to
a case involving the collection of taxes, the court a
quo fell into error. The two cases are circumscribed
by factual premises which are diametrically
opposed to each other, and are founded on
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SWU College of Law
entirely different philosophies. Under the Penal
Code, the civil liability is incurred by reason of
the offender's criminal act, stated differently, the
criminal liability gives birth to the civil obligation
such that generally, if one is not criminally liable
under the Penal Code, he cannot become civilly
liable thereunder. The situation under x x x the
tax law is the exact opposite. Civil liability to pay
taxes arises from the fact, for instance, that one has
engaged himself in business, and not because of
any criminal act committed by him. The criminal
liability arises upon failure of the debtor to satisfy
his civil obligation. The incongruity of the factual
premises and foundation principles of the two
cases is one of the reasons for not imposing civil
indemnity on the criminal infraction of the tax
law. (Republic v. Patanao, 20 SCRA 712)
Criminal Complaint for Tax Evasion Distinguished
from Assessment
The issuance of an assessment must be distinguished
from the filing of a complaint. Before an
assessment is issued, there is, by practice, a pre-assess
ment notice sent to the taxpayer. The taxpayer is then
given a chance to submit position papers and documents
to prove that the assessment is unwarranted. If
the commissioner is unsatisfied, an assessment signed
by him or her is then sent to the taxpayer informing the
latter specifically and clearly that an assessment has
been made against him or her. In contrast, the criminal
charge need not go through all these. The criminal
charge is filed directly with the DOJ. Thereafter, the
taxpayer is notified that a criminal case had been filed
against him, not that the commissioner has issued an
assessment. It must be stressed that a criminal complaint
is instituted not to demand payment but to penalize
the taxpayer for violation of the Tax Code.
4. Compromise
A compromise is an agreement between two or
more persons who, to avoid a lawsuit, amicably settle
their differences on such terms as they can agree on.
A compromise by its very nature implies mutual
agreement by the parties in regard to the thing or
subject matter which is to be compromised. An offer of
compromise does not, therefore, assume the category
of a compromise until it is voluntarily accepted by the
other party, and no obligation arises or is created by
a simple offer or suggestion coming from one of the
parties without acceptance by the other. (Ben L. Chuy,
et al. v. Collector of Internal Revenue, C.T.A. Case, July 16,
1958)
28

A compromise penalty, on the other hand, is a
certain amount of money which the taxpayer pays to
compromise a tax violation. Compromise penalties
are paid in lieu of criminal prosecution, and cannot be
imposed in the absence of a showing that the taxpayer
consented thereto. If an offer of compromise is rejected
by the taxpayer, the compromise penalty cannot be
enforced thru an action in court or by distraint and
levy. The Commissioner of Internal Revenue should
file a criminal action if he believes that the taxpayer is
criminally liable for violation of the tax law as the only
way to enforce a penalty.
Cases Which May Be Compromised
The following cases may, upon taxpayer's compliance
with the basis set forth under Section 3 of
Revenue Regulations No. 7-2001 (as amended by Rev.
Reg. No. 30-2002), be the subject matter of compromise
settlement, viz.:
1. Delinquent accounts;
2. Cases under administrative protest after
issuance of the final assessment notice to
the taxpayer which are still pending in the
Regional Offices, Revenue District Offices,
Legal Service, Large Taxpayer Service (LTS),
Collection Service, Enforcement Service and
other offices in the National Office;
3. Civil tax cases being disputed before the
courts, e.g., MTC, RTC, CTA, CA, SC;
4. Collection cases filed in courts;
5. Criminal violations other than those already
filed in court or those involving criminal tax
fraud; and
6. Cases covered by pre-assessment notices but
taxpayer is not agreeable to the findings of
the audit office as confirmed by the review
office.
The Commissioner may compromise any internal
revenue tax when:
1. A reasonable doubt as to the validity of the claim
against the taxpayer exists; or
2. The financial position of the taxpayer demonstrates
a clear inability to pay the assessed tax. (Sec. 204,
NIRC)'
Basis for Acceptance of Compromise Settlement
The Commissioner may compromise the payment of
any internal revenue tax on the following grounds:
1. Doubtful validity of the assessment. The offer to
compromise a delinquent account of disputed
Manol R. Sala
SWU College of Law
assessment under these Regulations on the
ground of reasonable doubt as to the validity of
the assessment may be accepted when it is shown
that:
(a) The delinquent account or disputed assessment
is one resulting from a jeopardy assessment.
(For this purpose, "jeopardy assessment"
shall refer to a tax assessment which
was assessed without the benefit of complete
or partial audit by an authorized revenue
officer, who has reason to believe that the
assessment and collection of a deficiency tax
will be jeopardized by delay because of the
taxpayer's failure to comply with the audit
and investigation requirements to present
his books of accounts and/or pertinent records,
or to substantiate all or any of the deductions,
exemptions, or credits claimed in
his return); or
(b) The assessment seems to be arbitrary in nature
appearing to be based on presumptions and
there is reason to believe that it is lacking in
legal and/or factual basis; or
(c) The taxpayer failed to file an administrative
protest on account of the alleged failure to
receive notice of assessment or preliminary
assessment and there is reason to believe
that the assessment is lacking in legal and/
or factual basis; or
(d) The taxpayer failed to file a request for reinvestigation/
reconsideration within 30 days from receipt of final
assessment notice and there is reason to believe that the
assessment is lacking in legal and/or factual basis; or
(e) The taxpayer failed to elevate to the Court
of Tax Appeals (CTA) an adverse decision
of the Commissioner, or his authorized
representative, in some cases, within 30 days
from receipt thereof and there is reason to
believe that the assessment is lacking in legal
and / or factual basis; or
(f) The assessment were issued on or after January
1, 1998, where the demand notice allegedly
failed to comply with the formalities
prescribed under Sec. 228 of the Tax Code of
1997; or
(g) Assessments made based on the "Best Evidence
Obtainable Rule" and there is reason
to believe that the same can be disputed by
sufficient and competent evidence,"
(h) The assessment was issued within the prescriptive
period for assessment as extended
by the tax-payer's execution of Waiver of the
29
Statute of Limitations the validity or authenticity
of which is being questioned or at issue
and there is strong reason to believe and evidence
to prove that it is not authentic;10
(i) The assessment is based on an issue where
a court of competent jurisdiction made an
adverse decision against the bureau, but for
which the Supreme Court has not decided
upon with finality.11
2. Financial incapacity. The offer to compromise
based on financial incapacity may be accepted
upon showing that:
(a) The corporation ceased operation or is
already dissolved; or
(b) The taxpayer is suffering from surplus or
earnings deficit resulting to impairment in
the original capital by at least 50%; or
(c) The taxpayer is suffering from a networth
deficit computed by deducting total liabilities
(net of deferred credits) from total assets
(net of pre-paid expenses, deferred charges,
pre-operating expenses, as well as appraisal
increases in fixed assets), taken from the
latest audited financial statements; or
(d) The taxpayer is a compensation income
earner with no other source of income and
the family's gross monthly compensation
income does not exceed the levels of
compensation income provided for under
Sec. 4.1.1 of Revenue Regulations 7-2001 and
it appears that the taxpayer possesses no
other leviable/distrainable assets, other than
his family home; or
(e) The taxpayer has been granted by the
Securities and Exchange Commission (SEC)
or by any competent tribunal a moratorium
or suspension of payments to creditors, or
otherwise declared bankrupt or insolvent.
The Commissioner shall not consider any offer
for compromise settlement by reason of financial
incapacity unless and until the taxpayer waives in
writing his privilege of the secrecy of bank deposits
under R.A. 1405 or under other general or special laws,
and such waiver shall constitute as the authority of the
Commissioner to inquire into the bank deposits of the
taxpayer.
The compromise settlement is subject to the
following minimum amounts:
1. For cases of financial incapacity, a minimum
compromise rate of ten percent (10%) of the
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SWU College of Law
basic assessed tax;
2. For other cases, a minimum compromise rate
equivalent to forty percent (40%) of the basic
tax assessed.
Where the basic tax involved exceeds P1,000,000 or the
settlement offered is less than the prescribed minimum rates,
the compromise shall be subject to the approval of the
Evaluation Board composed of the Commissioner and the four
(4) Deputy Commissioners.
The power to compromise is vested in the
Commissioner of Internal Revenue. This power is
discretionary, and once exercised by the Commissioner
cannot be reviewed or interfered with by
the courts. In other words, it is an exclusive power
of the Commissioner. He cannot be compelled
to exercise such discretion in one way or another.
(See People v. Ignacio Desiderio, L-20805, November
29, 1965) But the Commissioner may delegate
his power to the Deputy Commissioners and the
Regional Directors subject to such restrictions as
may be imposed under rules and regulations to
be promulgated for the purpose. (Revenue Regulations
7-2001)
A compromise validly entered into between
the Commissioner and the taxpayer prior to the
institution of the corresponding criminal action
arising out of a violation of the provisions of the
Tax Code is a bar to such criminal action.
Abatement. Compromise is different from
abatement which is a cancellation of the entire
tax liability. Abatement is authorized when:
1) the tax or any portion thereof appears to be unjustly
or excessively assessed;
2) the administration and collection costs involved do not
justify the collection of the amount due.
When may violations of tax laws/cases be compromised.
In criminal violations, the compromise
must be made prior to the filing of the information
in court. Under Section 204, NIRC, criminal
violations already filed in court or those involving
fraud cannot be compromised.
In civil cases, compromise may be entered
into before litigation or at any stage of the litigation,
even during appeal, although legal propriety
demands that prior leave of court should be
obtained. But a compromise can never be entered
into after final judgment, because by virtue of
30
such final judgment, the Government had already
acquired a vested right.
Cases Which Cannot Be Compromised
1. Withholding tax cases, unless the applicanttaxpayer
invokes provisions of law that
cast doubt on the taxpayer's obligation to
withhold;
2. Criminal tax fraud cases confirmed as such
by the Commissioner of Internal Revenue
or his duly authorized representative;
3. Criminal violation already filed in court;
4. Delinquent accounts with duly approved
schedule of installment payments;
5. Cases where final reports of reinvestigation
or reconsideration have been issued resulting
to reduction in the original assessment
and the taxpayer is agreeable to such decision
by signing the required agreement
form for the purpose. On the other hand,
other protested cases shall be handled by the
Regional Evaluation Board (REB) or the National
Evaluation Board (NEB) on a case to
case basis;
6. Cases which become final and executory after
final judgment of a court, where compromise
is requested on the ground of doubtful
validity of the assessment; and
7. Estate tax cases where compromise is
requested on the ground of financial inca
parity of the taxpayer. (Rev. Regs. No. 30-
2002)
5. Tax Liens
"Sec. 219. If any person, corporation, partnership,
joint account (cuentas en participation), association or
insurance company liable to pay any internal revenue
tax, neglects or refuses to pay the same after demand,
the amount shall be a lien in favor of the Government of
the Philippines from the time when the assessment was
made by the Commissioner until paid, with interests,
penalties, and costs that may accrue in addition thereto
upon all property and rights to property belonging
to the taxpayer: Provided, That his lien shall not be
valid against any mortgagee, purchaser or judgment
creditor until notice of such lien shall be filed by the
Commissioner in the office of the Register of Deeds of
the province or city where the property of the taxpayer
is situated or located."
A tax lien is a legal claim or charge on property
(whether real or personal) established by law as a
sort of security for the payment of tax obligations.
Manol R. Sala
SWU College of Law
6. Forfeiture
The forfeiture of chattels and removable fixtures
of any sort shall be enforced by the seizure and sale,
or destruction, of the specific forfeited property. The
forfeiture of real property shall be enforced by a
judgment of condemnation and sale in a legal action or
proceeding, civil or criminal, as the case may require.
The forfeiture need not be for the whole tax
liability which could merely be for the amount
equivalent to the fair market value of the property.
(Castro v. Collector, 4 SCRA 1193)
Forfeiture and seizure distinguished." In seizure
for the enforcement of tax lien, the residue, after
deducting the tax liability and expenses, will go to
the taxpayer. (Bank of P.I. v. Trinidad, 42 Phil. 220) In
forfeiture, all the proceeds of the sale will go to the
coffers of the government. (U.S. v. Suria, 20 Phil. 163)
A taxpayer in forfeiture or seizure cases to enforce
tax lien may still be subject to criminal action even if
his property has been forfeited.
7. Civil Penalties
"Sec. 248. Civil Penalties. -
(A) There shall be imposed, in addition to the tax
required to be paid, a penalty equivalent to twenty-five
percent (25%) of the amount due in the following cases:
(1) Failure to file any return and pay the tax
due thereon as required under the provisions of this
Code or rules and regulations on the date prescribed; or
(2) Unless otherwise authorized by the Commissioner,
filing a return with an internal revenue officer
other than those with whom the return is required
to be filed; or
(3) Failure to pay the deficiency tax within
the time prescribed for its payment in the notice of
assessment; or (4) Failure to pay the full or part of the amount
of tax shown on any return required to be filed under
the provisions of this Code or rules and regulations,
or the full amount of tax due for which no return is
required to be filed, on or before the date prescribed for
its payment.
(B) In case of willful neglect to file the return within
the period prescribed by this Code or by rules and regulations,
or in case a false or fraudulent return is willfully made, the
penalty to be imposed shall be fifty percent (50%) of the tax
or of the deficiency tax, in case any payment has been made
on the basis of such return before the discovery of the falsity
or fraud; Provided, That a substantial underdeclaration of
31
taxable sales, receipt or income, or a substantial
overstatement of deductions as determined by the
Commissioner pursuant to the rules and regulations to be
promulgated by the Secretary of Finance, shall constitute
prima facie evidence of a false or fraudulent return; Provided
further, that failure to report sales, receipts or income in an
amount exceeding thirty percent (30%) of thaT declared per
return, and a claim of deductions in an amount exceeding
thirty percent (30%) of actual deductions, shall render the
taxpayer liable for substantial underdeclaration of sales,
receipts or income or for overstatement of deductions, as
mentioned herein."
C. No Injunction to Restrain Tax Collection16
An injunction is not available to restrain collection
of tax. No court shall have the authority to grant an
injunction to restrain the collection of any national
internal revenue tax, fee, or charge imposed by the
NIRC. (Sec. 218)
Rationale of the no injunction rule
It is a wise and reasonable precaution for the
security of the government. No government could
exist that permitted its collection to be delayed by
every litigious man or very embarrassed man, to
whom delay was more important than the payment of
taxes."
This general rule admits one exception, i.e., when
the decision of the Commissioner is pending appeal
before the Court of Tax Appeals,17 the said court may
enjoin the collection of taxes if such collection will
jeopardize the interest of the government and/or
the taxpayer. In such case, the Court at any stage of
the proceeding may suspend the collection of the tax
and require the taxpayer either to deposit the amount
claimed or to file a surety bond for not more than
double the amount with the Court. The posting of a
bond is not an absolute requirement, its imposition lies
within the sound discretion of the Tax Court.
II. STATUTE OF LIMITATIONS"
The right of the government to assess and collect
internal revenue taxes is subject to the statute of limitation
provided under the Tax Code, as follows:
Sec. 203. Period of Limitation Upon Assessment and
Collection. Except as provided in Section 222, internal
revenue taxes shall be assessed within three (3) years after
the last day prescribed by law for the filing of the return,
and no proceeding in court without assessment for the
collection of such taxes shall be begun after the expiration
of such period: Provided, That in a case where a return is
Manol R. Sala
SWU College of Law
filed beyond the period prescribed by law, the three (3)-year
period shall be counted from the day the return was filed.
For purposes of this Section, a return filed before the last day
prescribed by law for the filing thereof shall be considered
as filed on such last day.
Sec. 222. Exceptions as to Period of Limitation of Assessment
and Collection of Taxes.
(a) In the case of a false or fraudulent return with
intent to evade tax or of failure to file a return,
the tax may be assessed or a proceeding in court
for the collection of such tax may be filed without
assessment, at any time within ten (10) years after
the discovery of the falsity, fraud or omission:
Provided, That in a fraud assessment which has
become final and executory, the fact of fraud shall
be judicially taken cognizance of in the civil or
criminal action for the collection thereof.
(b) If before the expiration of the time prescribed in
Section 203 for the assessment of the tax, both the
Commissioner and the taxpayer have agreed in
writing to its assessment after such time, the tax
may be assessed within the period agreed upon.
The period so agreed upon may be extended by
subsequent written agreement made before the
expiration of the period previously agreed upon.
(c) Any internal revenue tax which has been assessed
within the period of limitation as prescribed in
paragraph (a) hereof above, may be collected
by distraint or levy or by a proceeding in court
within five (5) years following the assessment of
the tax.
(d) Any internal revenue tax, which has been assessed
within the period agreed upon, as provided in
paragraph (b) hereinabove, may be collected by
distraint or levy or by a proceeding in court within
the period agreed upon in writing before the
expiration of the five (5) year period. The period
so agreed upon may be extended by subsequent
written agreement made before the expiration of
the period previously agreed upon.
(e) Provided, however, That nothing in the immediately
preceding Section and paragraph (a) hereof shall
be construed to authorize the examination and
investigation or inquiry into any tax return filed
in accordance with the provisions of any tax
amnesty law or decree.
The defense of prescription is not jurisdictional and
must be raised seasonably, otherwise it is deemed waived.
The prescriptive periods for assessment and collection
may be outlined as follows:
A. Assessment of the tax liability
32
a) Three (3) years commences to run after the
last day prescribed by law for the filing of the
return. This means that if the return is filed before
the due date, the prescriptive period begins to
run only after said due date, but if the return is
filed beyond the period fixed by law or beyond
the due date, the three (3)-year period shall be
counted from the day the return was filed.
But if the return was amended substantially,
the period starts from the filing of the amended
return.
b) Ten (10) years when 1) no return is filed, or 2)
the return is false or fraudulent with intent to
evade the tax, the prescriptive period commences
from the date of discovery.
When the assessment notice or the demand letter
of the BIR is sent by mail, the date when the demand
letter or notice of assessment is mailed, released or sent
to the taxpayer is considered the date of actual assessment
(Basilan Estates v. Commissioner, 21 SCRA 17), and
as long as the same is released within the prescriptive
period, assessment is deemed made on time even
though the same is actually received by the taxpayer
after the expiration of the prescriptive period.
It was held in one case that since prescription is an
affirmative defense, it is incumbent upon the taxpayer
to prove that a return had been filed by him, otherwise,
there is a basis for the BIR to assess the tax within the
ten (lO)-year period on the ground that no return was
filed by him.
Fraudulent or False Return. The difference between a
"false" return and a "fraudulent" return is that a false return
merely implies a deviation from the truth or fact whether
intentional or not, whereas a fraudulent return is intentional
and deceitful with the aim of evading the correct tax due.
(Aznar v. Commissioner, L-20569, 58 SCRA 529)*'
As earlier discussed, when what was filed was a false or
fraudulent return, the ten (lO)-year prescriptive period
applies.
The ten (10-year period is counted from the discovery of fraud
or falsity, not from the filing of the return. Within this
prescriptive period, the Government has two options: either
to assess the correct tax liability, and later on collect the same
within the period of five (5) years by distraint, levy, or by a
proceeding in court (Section 222[c]), or to file a proceeding in
court for the collection of such tax without assessment.
(Section 222[a\)
What constitutes fraud. Fraud is a question of fact that
cannot be presumed but must be sufficiently established.
Mere understatement of the income in itself does not
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SWU College of Law
constitute fraud. (Gomez v. Domingo, CTA Case No. 1168,
February 15, 1964)
It must be proven as a fact that there was intentional and
substantial understatement of tax liability.
Fraud was likewise found to exist in a case where there
was substantial and intentional overstatement of deductions
or exemptions, like the presence of fictitious expenses which
were claimed by the taxpayer as deductions from gross
income. (Tan Guan v. CTA, L-23676, April 27,1967)
C. Criminal Liability
a) Five (5) years from commission or discovery
of the violation, whichever is later. (Section 281,
NIRC)
The cause of action for willful failure to pay
deficiency tax occurs when the final notice and demand
for the payment thereof is served on the taxpayer.
The five (5)-year prescriptive period commences to
run only after receipt of the final notice and demand
and the taxpayer refuses to pay. In case of a protested
assessment, the five (5)-year period starts from the
receipt of the final notice and demand disposing of the
protest.
SUSPENSION OF PRESCRIPTIVE PERIODS
a) If before the expiration of the time prescribed for the
assessment of the tax, both the Commisssioner and
the taxpayer have agreed in writing to its assessment
after such time, the tax maybe assessed within the
period agreed upon. The period so agreed upon may
be extended by subsequent written agreement made
before the expiration of the period previously agreed
upon. (Section 222[b]) Note that the waiver must be
executed within the three (3)-year prescriptive period
prescribed under Section 203, otherwise said waiver
shall be ineffectual. (Republic v. Felix Acebedo, L-204207,
March 29,1968)
A taxpayer's renunciation of the right to invoke prescription
as a defense, although executed beyond the prescriptive
period, is binding upon the taxpayer.
b) The running of the prescriptive period on the making
of an assessment and collection of taxes is likewise
suspended:
i) when the Commissioner of Internal Revenue
is prohibited from making the assessment or
beginning distraint or levy or a proceeding in court
and for sixty (60) days thereafter, such as when
there is a pending petition for review in the CTA
from the decision on the protested assessment,
the filing of such petition interrupts the running
of the prescriptive period for collection. (Republic
v. Ker & Co., 25 SCRA 208)
33
But the filing of a criminal case against
the taxpayer does not suspend the prescriptive
period; the criminal actions for the tax violation is
entirely separate and distinct from the civil action.
ii) when the taxpayer requests for a reinvestigation
which is granted by the Commissioner. (Collector
v. Suyoc Consolidated Mining Co., 104 Phil. 819
Generally, the prayer for reinvestigation must be favorably
acted upon (Republic v. Acebedo, supra), but in one case, the
Court's ruling was to the effect that the prescriptive period is
interrupted once a taxpayer requests for reinvestigation or
reconsideration of the assessment. (Commissioner v. Wyeth
Suaco Laboratories, Inc., 202 SCRA 125)
iii) when the taxpayer cannot be located in the
address given by him in the return.
iv) when the warrant of distraint and levy is duly
served and no property could be located.
v) when the taxpayer is out of the Philippines.
III. TAXPAYER'S REMEDIES
There are two remedies accorded to the taxpayer under
the Tax Code:
1) administrative protest which is a protest
against the assessment and is filed before payment; and
2)claim for refund filed with the Commissioner of Internal
Revenue after payment.
A. Protest Against Assessment
"Sec. 228. Protesting of Assessment. When the
Commissioner or his duly authorized representative finds
that proper taxes should be assessed, he shall first notify
the taxpayer of his findings: Provided, however, That a
preassessment
notice shall not be required in the following cases:
(a) When the finding for any deficiency tax is the
result of mathematical error in the computation
of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between
the tax withheld and the amount actually remitted
by the withholding agent; or
(c) When the taxpayer who opted to claim a refund or
tax credit of excess creditable withholding tax for
a taxable period was determined to have carried
over and automatically applied the same amount
claimed against the estimated tax liabilities for
the taxable quarter or quarters of the succeeding
Manol R. Sala
SWU College of Law
taxable year; or
id) When the excise tax due on excisable articles has
not been paid; or
(e) When an article locally purchased or imported
by an exempt person, such as, but not limited
to, vehicles, capital equipment, machineries and
spare parts, has been sold, traded or transferred
to non-exempt persons.
The taxpayers shall be informed in writing of the law
and the facts on which the assessment is made; otherwise the
assessment shall be void.
Within a period to be prescribed by implementing rules
and regulations, the taxpayer shall be required to respond
to said notice. If the taxpayer fails to respond, the
Commissioner or his duly authorized representative shall issue
an assessment based on his findings.
Such assessment may be protested administratively by
filing a request for reconsideration or reinvestigation within
thirty (30) days from receipt of the assessment in such form
and manner as may be prescribed by implementing rules
and regulations. Within sixty (60) days from filing of the
protest, all relevant supporting documents shall have been
submitted; otherwise, the assessment shall become final.
If the protest is denied in whole or in part, or is not acted
upon within one hundred eighty (180) days from submission
of documents, the taxpayer adversely affected by the decision
or inaction may appeal to the Court of Tax Appeals within
thirty (30) days from receipt of the said decision, or from the
lapse of the one hundred eighty (180)-day period; otherwise,
the decision shall become final, executory and demandable."
Request for reconsideration distinguished from request
for reinvestigation
The main difference between these two types of
protests lies in the records or evidence to be examined by
internal revenue officers, whether these are existing records
or newly discovered or additional evidence. A re-evaluation
of existing records which results from a request for
reconsideration does not toll the running of the prescriptive
period for the collection of an assessed tax.
Section 271 (now Section 223) distinctly limits the suspension
of the running of the statute of limitations to instances when
reinvestigation is requested by a taxpayer and is granted by
the CIR. x x x
The distinction between a request for reconsideration and a
request for reinvestigation is significant. It bears repetition
that a request for reconsideration, unlike a request for
34
reinvestigation, cannot suspend the statute of limitations
on the collection of an assessed tax. If both types of protest
can effectively interrupt the running of the statute of
limitations, an erroneous assessment may never prescribe.
If the taxpayer fails to file a protest, then the erroneous
assessment would become final and unappealable. On the
other hand, if the taxpayer does file the protest on a patently
erroneous assessment, the statute of limitations would
automatically be suspended and the tax thereon may be
collected long after it was assessed. (CIR v. Philippine Global
Communication, Inc., 506 SCRA 427, 442, 446-447 [2006])
The procedural steps in protesting an assessment may
be outlined as follows:
1. Issuance of a pre-assessment notice by the BIR
informing the taxpayer that taxes ought to be assessed
against him, except under the circumstances
enumerated in paragraphs [a] to [e] of Section
228. The taxpayer is given fifteen (15) days from
receipt of the pre-assessment notice, extendible
for not more than ten (10) days, within which to
respond to the pre-assessment notice.
2. If the taxpayer fails to respond, or despite the
response, the BIR still opines that the taxpayer
ought to be assessed for deficiency taxes, the BIR
will issue the assessment notice.
3. The taxpayer may file an administrative protest
against the assessment within thirty (30) days
from receipt of the assessment. Within sixty
(60) days from filing the protest, all the relevant
documents should be submitted; otherwise, the
assessment shall become final and unappealable.
4. From the receipt of the adverse decision of the
Commissioner, or from the lapse of the one
hundred eighty (180) days from the submission
of the documents, the taxpayer may appeal to
the Court of Tax Appeals within thirty (30) days;
otherwise, the decision or the assessment shall
become final.
What may be the subject of a judicial review is the decision
of the Commissioner on the protest against assessment,
not the assessment itself
Presumption of correctness in case of taxpayer's failure to
protest the assessments
Tax assessments by tax examiners are presumed correct
and made in good faith. The taxpayer has the duty to prove
otherwise. In the absence of proof of any irregularities in
the performance of duties, an assessment duly made by a
Bureau of Internal Revenue examiner and approved by his
superior officers will not be disturbed. All presumptions are
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SWU College of Law
in favor of the correctness of tax assessments. (CIR v. BPI,
521 SCRA 373, 386)
B. Claim for Refund
"Sec. 229. Recovery of Tax Erroneously or Illegally
Collected. No suit or proceeding shall be maintained
in any court for the recovery of any national revenue tax
hereafter alleged to have been erroneously or illegally
assessed or collected, or of a penalty claimed to have been
collected without authority, or of any sum alleged to have
been excessively or in any manner wrongfully collected,
until a claim for refund or credit has been duly filed with
the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has
been paid under protest or duress.
In any case, no such suit or proceeding shall be filed
after the expiration of two (2) years from the date of payment
of the tax or penalty, regardless of an supervening cause
that may arise after payment: Provided, however, That the
Commissioner may, even without a written claim therefor,
refund or credit any tax, where on the face of the return upon
which payment was made, such payment appears clearly to
have been erroneously paid."
Two-fold purpose of tax refund
The law clearly stipulates that after paying the tax, the
taxpayer must submit a claim for refund before resorting to
the courts. The idea probably, is first, to afford the collector
an opportunity to correct the action of subordinate officers;
and second, to notify the Government that such taxes have
been questioned, and the notice should then be borne in
mind in estimating the revenue available for expenditure.
Previous objections to the tax may not take the place of
that claim for refund, because there may be some reason
to believe that, in paying, the taxpayer has finally come
to realize the validity of the assessment. Anyway, strict
compliance with the conditions imposed for the return of
revenue collected is a doctrine consistently applied here and
in the United States. [Bermejo v. Collector of Internal
Revenue, 87 Phil. 96, 97 (1950)]
Tax Refund and Tax Credit Distinguished. In tax
refund, there is actual reimbursement of the tax while in tax
credit, the reimbursable amount is applied against the sum
that may be due or collectible from the taxpayer.
Under the aforecited provision, tax refund covers:
1)erroneously or illegally assessed or collected internal
revenue taxes;
2) penalties imposed without authority; and
3) any sum alleged to have been excessive or in any manner
wrongfully collected.
A. Requirements for Refund Claims. A claim for refund
35
partakes of the nature of an exemption which cannot
be allowed unless granted in the most categorical
language. This being so, a claim for refund must
be strictly construed against the claimant and such
claimant has the burden of proving that the following
requirements were met:
1. There must be a written claim for refund filed by
the taxpayer with the Commissioner. This is
a mandatory requirement; in the absence of this
requirement, the Commissioner is without any
authority to refund. (AndreaVda. de Aguinaldo v.
Commissioner, 13 SCRA 269)
The claim for refund must be a categorical demand
for reimbursement. While payment under
protest is not necessary, the claim for refund must
categorically demand for the reimbursement of
the overpaid amount.
The claim for refund must be filed within two (2)
years from date of payment of the tax or penalty
regardless of any supervening cause.
Computation of the two-year period
When a tax is paid in installments, the prescriptive
period of two (2) years should be counted from the date of
the final payment. (Collector of Internal Revenue v. Prieto, No.
L-11976, August 29,1961)
In case of payments effected through the withholding
tax system, the tax liability is deemed paid when the
same falls due at the end of the tax year. This is because
a taxpayer, resident or non-resident, who contributes to
the withholding tax system, does not really deposit an
amount to the Commissioner of Internal Revenue, but, in
truth, performs and extinguishes his tax obligation for the
year concerned. It is from the end of the taxable year then,
or when the tax liability falls due, that the two (2)-year
prescriptive period starts to run. (Gibbs v. Commissioner of
Internal Revenue, No. L-17406, November 29,1965)
Corporate taxpayer has two alternative options
Section 76 offers two options:
(1) filing for tax refund And
(2) availing of tax credit. The two options are alternative
and the choice of one precludes the other. However, in
Philam Asset Management, Inc. v. Commissioner of Internal
Revenue, 447 SCRA 772 (2005), the Court ruled that failure
to indicate a choice, however, will not bar a valid request
for a refund, should this option be chosen by the taxpayer
later on. The requirement is only for the purpose of
Manol R. Sala
SWU College of Law
easing tax administration particularly the self-assessment
and collection aspects. "Section 76 remains clear and
unequivocal. Once the carry-over option is taken, actually
or constructively, it becomes irrevocable." It mentioned no
exception or qualification to the irrevocability rule.
Chapter III
THE NEW COURT OF TAX APPEALS
Created under Republic Act 1125, the Court of Tax Appeals
is a highly specialized body which reviews tax cases. The
proceedings therein are judicial in nature although it is not
bound by the technical rules of evidence. (Perez v. Araneta,
103 Phil. 1167) SALIENT FEATURES OF R.A. 9282 ["AN ACT
EXPANDING THE JURISDICTION OF THE COURT OF TAX
APPEALS (CTA), ELEVATING ITS RANK TO THE LEVEL OF A
COLLEGIATE COURT WITH SPECIAL JURISDICTION AND
ENLARGING ITS MEMBERSHIP, AMENDING FOR THE PURPOSE
CERTAIN SECTIONS OF R.A. 1125, AS AMENDED,
OTHERWISE KNOWN AS THE LAW CREATING THE COURT
OF TAX APPEALS, AND FOR OTHER PURPOSES"]:
EXPANDED JURISDICTION OF THE CTA
1. Exclusive original jurisdiction over criminal cases
arising from violations of the NIRC or the Tariff and
Customs Code and other laws administered by the
BIR and the BOC where the principal amount of taxes
and penalties involved is PI million or more and
appellate jurisdiction in lieu of the Court of Appeals
over decisions of the Regional Trial Court where the
amount is less than PI million;
2. Exclusive original Jurisdiction over tax collection cases
where the principal amount of taxes and penalties
involved is PI million or more and the appellate
jurisdiction over decisions of the Regional Trial Court
where the amount is less than PI million;
3. Appellate jurisdiction over decisions of the Regional
Trial Courts in local tax cases; and
4. Appellate jurisdiction over decisions of the Central
Board of Assessment Appeals over cases involving the
assessment of taxation of real property.
COMPOSITION
To complement its expanded jurisdiction, the CTA's
membership is increased from one (1) division of three (3)
Judges comprised of the Presiding Judge and Associate Judges
to three (3) divisions of nine (9) Justices composed of a
Presiding Justice and eight (8) Associate Justices (R.A. 9503)
The law expanded the organization and, most importantly, its
level is raised to that of the Court of Appeals.
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APPEALS
Another significant feature of R.A. 9282 is that decisions of
the Court of Tax Appeals are no longer appealable to the
Court of Appeals. Under the modified appeal procedure, the
decision of a division of the CTA may be appealed to the CTA
en banc. The decision of the CTA en banc may in turn be
directly appealed to the Supreme Court only on a question of
law. This is expected to facilitate court proceedings in tax
cases since the CTA has the necessary expertise in tax
matters. In addition, there will be less divisive rulings on tax
matters since the appeal shall be made only to the CTA en
banc instead of the Court of Appeals with its many divisions.
CTA PROCEEDINGS
The CTA may sit en banc or in three (3) Divisions, each
Division consisting of three (3) Justices.
"Five (5) Justices shall constitute a quorum for sessions en
banc and two (2) Justices for sessions of a Division. When the
required quorum cannot be constituted due to any vacancy,
disqualification, inhibition, disability, or any other lawful
cause, the Presiding Justice shall designate any Justice of
other Divisions of the Court to sit temporarily therein."
"The affirmative votes of five (5) members of the Court en
banc shall be necessary to reverse a decision of a Division but
a simple majority of the Justices present necessary to
promulgate a resolution or decision in all other cases or two
(2) members of a Division, as the case may be, shall be
necessary for the rendition of a decision or resolution in the
Division Level." (R.A. 9503)
JURISDICTION OVER BOTH CIVIL AND
CRIMINAL ASPECTS
The vesting of jurisdiction over both the civil and criminal
aspects of a tax case in one court will likewise effectively
enhance and maximize the development of jurisprudence and
judicial precedence on tax matters which is of vital
importance to revenue administration. The concentration of
tax cases in one court will enhance the disposition of these
cases since it will take them out of the jurisdiction of regular
courts which, admittedly, do not have expertise in the field of
taxation.
CTA shall not be Governed by the Technical Rules of Evidence
Strict procedural rules generally frown upon the submission
of the Return after the trial. The law creating the Court of Tax
Appeals, however, specifically provides that proceedings
before it "shall not be governed strictly by the technical rules
of evidence."
OUTLINE OF JURISDICTION (Sec. 7, R.A. 9282)
I. Exclusive appellate jurisdiction to review by appeal
(1) Decisions of the Commissioner of Internal Revenue in
Manol R. Sala
SWU College of Law
cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the NIRC or other
laws administered by the BIR (via a petition for review
under Rule 42).
(2) Inaction by the Commissioner of Internal Revenue in
cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the NIRC or other
laws administered by the BIR, where the NIRC provides a
specific period for action, in which case the inaction shall
be deemed a denial (via a petition for review under
Rule 42).
(3) Decisions, orders or resolutions of the RTC in local
tax cases originally decided or resolved by them in the
exercise of their original or appellate jurisdiction (via a
petition for review under Rule 43).
4) Decisions of the Commissioner of Customs in cases
involving liability of custom duties, fees or other money
charges, seizure, detention or release of property affected,
fines, forfeitures or other penalties in relation thereto, or
other matters arising under the Customs Law or other
laws administered by the Bureau of Customs (via a
petition for review under Rule 42).
(5) Decisions of the Central Board of Assessment Appeals
in the exercise of its appellate jurisdiction over cases
involving the assessment and taxation of real property
originally decided by the provincial or city board of
assessment appeals (via a petition for review under
Rule 43).
(6) Decisions of the Secretary of Finance on customs cases
elevated to them automatically for review from decisions
of the Commissioner of Customs which are adverse to
the government under Section 2315 of the Tariff and
Customs Code (via a petition for review under Rule
42).
Purpose and rationale of the automatic review
in customs cases. The Commissioner of Customs in his
Customs Memorandum Order No. 20-87, enjoined all
collectors to follow strictly Section 12 of the Integrated
Reorganization Plan (P.D. No. 1) which is intended to
protect the interest of the Government in the collection
of taxes and customs duties in those seizure and protest
cases which, without the automatic review provided
therein, neither the Commissioner of Customs nor the
Secretary of Finance would probably ever know about.
Without the automatic review by the Commissioner
of Customs and the Secretary of Finance, a collector
in any of our country's far-flung ports, would have
absolute and unbridled discretion to determine
37
whether goods seized by him are locally produced,
hence, not dutiable, or of foreign origin, and therefore
subject to payment of customs duties and taxes. His
decision, unless appealed by the aggrieved party (the
owner of the goods), would become final with no one
the wiser except himself and the owner of the goods.
The owner of the goods cannot be expected to appeal
the collector's decision when it is favorable to him.
A decision that is favorable to the taxpayer would
correspondingly be unfavorable to the Government,
but who will appeal the collector's decision in that
case? Certainly not the collector.
Evidently, it was to cure this anomalous situation
(which may have already defrauded our government
of huge amounts of uncollected taxes), that the provision
for automatic review by the Commissioner of
Customs and the Secretary of Finance of unappealed
seizure and protest cases was conceived to protect the
government against corrupt and conniving customs
collectors. (Yaokasin v. Commissioner of Customs, 180
SCRA 591 [1989])
(7) Decisions of the Secretary of Trade and Industry, in
cases of nonagricultural product, commodity or article,
and the Secretary of Agriculture in cases of agricultural
product, commodity or article involving dumping and
countervailing duties under Sections 301 and 302,
respectively, of the Tariff and Customs Code, and
safeguard measures under R.A. 8808, where either party
may appeal the decision to impose or not to impose
said duties (via a petition for review under Rule 42).
II. Criminal and Civil cases
The criminal action and the corresponding civil action for
the recovery of civil liability for taxes and penalties shall at all
time be simultaneously instituted with and jointly detenriined
in the proceeding before the CTA. The filing of the criminal
action being deemed to necessarily carry with it the filing of
the civil action, no right to reserve the filing of such civil action
separately from the criminal action will be recognized.
(1) Exclusive ORIGINAL jurisdiction
(a) violations of NIRC, Tariff and Customs Code and
other laws administered by the BIR or the Bureau
of Customs, where the principal amount of taxes
and fees, exclusive of charges and penalties
claimed is PI million and above.
xxx
(2) Exclusive APPELLATE jurisdiction;
(a) violations of NIRC, Tariff and Customs Code
and other laws administered by the BIR and the
Bureau of Customs originally decided by the regular
court where the principal amount of taxes and fees
Manol R. Sala
SWU College of Law
is less than PI million or an. specified amount
claimed.
(b) judgments, resolutions or orders of the RTC in tax
cases originally decided by them.
(c) judgments, resolutions or orders of the RTC in
the exercise of their appellate jurisdiction over tax
cases originally decided by the MeTC, MTC and
MCTC via a petition for review.
(d) tax collection cases
a. from judgments, resolutions or orders of the RTC
originally decided by them, via an appeal.
b. from judgments, resolutions or orders of the RTC
in the exercise of its appellate jurisdiction in tax
collection cases originally decided by the MeTC,
MTC and MCTC, via a petition for review.
Who may appeal?
Any party adversely affected by a decision, ruling or inaction
of the Commissioner of Internal Revenue, the Commissioner
of Customs, the Secretary of Finance, the Secretary of Trade
and Industry or the Secretary of Agriculture or the Regional
Trial" Court, may file an appeal with the CTA:
a. within thirty (30) days after receipt of such decision or
ruling; OR
b. after the expiration of the period fixed by law for action
referred to in Section 7(a)[l\ of R.A. 9282, in which case
the inaction shall be deemed a denial.
What is the mode of appeal?
1. Appeal may be made by filing a petition for review
under a procedure analogous to that provided for
under Rule 42 of the 1997 Rules of Civil Procedure,
within thirty (30) days from the receipt of the decision
or ruling or from the expiration of the period fixed by
law for the official concerned to act, in cases of inaction,
before the CTA. A Division of the CTA shall hear the
appeal.
All other cases involving rulings, orders or
decisions filed with the CTA as provided for in Section
7 of R.A. 9282 shall be raffled to its Divisions. A party
adversely affected by a ruling, order or decision of a Division
of the CTA may file a motion for reconsideration or new trial
before the same Division.
2. Appeals with respect to decisions or rulings of the
Central Board of Assessment Appeals and the Regional
Trial Court in the exercise of its appellate jurisdiction,
may be made by filing a petition for review under a
procedure analogous to that provided for under Rule
43 of the 1997 Rules of Civil Procedure, with the CTA,
which shall hear the case en banc.
A party adversely affected by a resolution of a Division
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of the CTA on a motion for reconsideration or new trial, may cases involving disputed assessments, refunds of internal
file a petition for review with the CTA en banc. revenue taxes, fees or other charges, penalties imposed in
3. Petition for Review on Certiorari may be filed by a relation thereto, or other matters arising under the National
party adversely affected by a decision or ruling of the Internal Revenue Code or other law or part of law
CTA en banc, through a verified petition before the administered
Supreme Court, pursuant to Rule 45 of the 1997 Rules by the Bureau of Internal Revenue;. ..
of Civil Procedure.
CTA has jurisdiction to review rulings of the Commissioner of
When distraint of personal property/levy on real property Internal Revenue set forth in RMO
shall issue? The jurisdiction to review the rulings of the Commissioner
Upon the issuance of any ruling, order or decision by the of Internal Revenue pertains to the Court of Tax Appeals, not
CTA favorable to the national government, the CTA shall issue to the RTC.
an order authorizing the BIR, through the Commissioner to
seize and distraint any goods, chattels, or effects, and the
personal property, Including stocks and other securities,
debts, credits, bank accounts, and interests in and rights to
personal property and/ or levy the real property of such
persons in sufficient quantity to satisfy the tax or charge
together with any increment thereto incident to delinquency.
This remedy shall not be exclusive and shall not preclude the
Court from availing of other means under the Rules of Court.

Appeal to the CTA shall not suspend the payment, levy,

distraint and sale of taxpayer's property
No appeal taken to the CTA from the decision of the
Commissioner of Internal Revenue or the Commissioner of
Customs or the RTC, provincial, city or municipal treasurer or
the Secretary of Finance, the Secretary of Trade and Industry
or the Secretary of Agriculture, as the case may be, shall
suspend the payment, levy, distraint, and/or sale of any
property of the taxpayer for the satisfaction of his tax liability
as provided by existing law. When in the opinion of the Court,
the collection by the aforementioned government agencies
may jeopardize the interest of the Government and /or
taxpayer, the Court at any stage of the proceeding, may
suspend the said collection and require the taxpayer either to
deposit the amount claimed or to file a surety bond for not
more than double the amount with the court.

Final Notice Before Seizure constitutes as a decision on a

disputed or protested assessment, hence, appealable to the
CTA

The CTA assumed jurisdiction over the Petition for Review

filed by private respondent Savellano based on the following
provision of R.A. 1125, the Act Creating the Court of Tax
Appeals:
Section 7. Jurisdiction. The Court of Tax Appeals shall
exercise exclusive appellate jurisdiction to review by appeal,
as herein provided
(1) Decisions of the Collector of Internal Revenue in

Manol R. Sala 39
SWU College of Law