TABLE OF CONTENTS

Page

EIC{:I (lhapter I. GENERAL PRINCIPLES

m ,'flilxation Defined
.'l'axes Defined
Irnportance of Taxes
'['axes, Personal to Taxpayer
Nature of the Taxing Power
..'.'....".....'. 3
1
1
3

4
Assoclation of Lnw Studenh of the Phlllppines lurposes and Objectives of Taxation 5
Itfuulr /'l'heory and Basis of Taxation 7

/lcope of the Legislative Taxing Power ............'.'...... 8

awardr this
ls the Power to Tax the Power to Destroy? 9
Constitutional Restraints Re: "Taxation is the
CERTIFICATE OF APPRECIATION Power to Destroy" 9
Power of Judicial Review in Taxation .:.............'.... 11
Aspects of Taxation L2
llasic Principles of a Sound Tax System
tu{rs, 9{ntwilnd A, 6 an d f affiiqy
12
Taxation Distinguished from Police Power and
Eminent Domain 13
Taxes Distinguished from Other Impositions 14

For thoir kind underctrnding and generooity in allowing the Association of Law Students of tlto Taxes Classified 23
Ptilippino to grart to thcir patriarch thc posthumous BENJAMIN B. ABAN t-AW PROFESSOR Taxpayer's Suit............ 28
OFTHEYEARAWARD; Cases 29

For such gesturo, thoy havc allowed thc Aesociation, in its very modcst wa5 to show apprcciation
Exercises 49
for thc contribution of Profoasor BENJAMIN B. ABAN in a vory domanding disciplinc which he
faithfully sorvod whilc rtill living, ths Award givon during the loth National Confercnce of Law
Students throughout thc couutry wherc Oe studoflts discussed the thems "The Rolc of law Stu-
C) hapter II. LIMITATIONS ON THE TAXING POWER
dents in tho Next Millotnium."
Inherent Limitations on the Taxing Power 53
Given thie 7th day of Novembcr 1999, at Oc Traders Hotel, Roxag Boulovard, Metro Mmila. 53
B. Non-Delegability of the Taxing Power 54
C. Tenitoriality or the Situs of Taxation 57
D. Exemption of the Government from Taxes 64
- kl,''"t.'-('t- E. International Comity 65
mnuofw meNcrscA A. caBIE Constitutional Limitations on the Taxing Power 66
National Ctairman Constitutional Limitations Explained ..'...'.......... o/
A. Due Process of Law 67
B. Equal Protection of the Law ............ 70
C. Freedom of Speech and of the Press 73
D. Non-Infringement of Religious Freedom 75
E. Non-Impairment of Contracts 77

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TABLE OF CONTENTS
LAW OF'BASIC TAXATION IN THIT P}IILIPPINES

Poge Page
Mandatory and Directory Provisions ................. ........ 145
F. Non-Imprisonment for Debt or Non-Payment
of PoIl Tax ........'... 80 Ilublication Requirement .................. ....... L47
Tariff BiIIs -80 Are Tax Laws Special Laws? ................... 148
G. Origin of Appropriation, Revenue and ".'"""'
'l'ax Regulations .......... .......... 148
H. Uniformity, Equitability and Progressivity of Taxation ' 81
I.DelegationofLegislativeAuthoritytoFixTariffRates, 1'ax Rulings.................. .......... 149
Import and Export Quotas, etc' ".'""""' 83 I'ower of the Commissioner to Interpret Tax Laws
Tax Exemption of Properties Actually, Directly and and to Decide Tax Cases ..................... 150
J.
Exclusively Used for Religious, Charitable and Non-Retroactivity of Rulings ................... 150
84 Legislative Adoption of Tax Rulings ...... L52
K. Voting Requirements in Connection with the Doctrine of Implications.............. ............. L52
Legislative Grant of Tax Exemption 87 'lax Treaties and International Agreements .......,.... 153
L. Non'Impairment of the Supreme Court's Jurisdiction Cases .........,.,....... 154
87
in Tax Cases Exercises ............ 168
M. Tax Exemption of Revenues and Assets, including
Grants, Endowments, Donations or Contributions
88 Chapter V. TAX ADMINISTRATION AND ENFORCEMENT
to Educational Institutions """"""'
Constitutional Provisions Related to Taxation 92
Other Agencies Involved in Tax Administration ............ ..... 170
94
Cases
110 Bureau of Internal Revenue .................... 170
Exercises Agents and Deputies for Collection of National Internal
Revenue Taxes .................. 172
ChapteTIII.DoUBLETAXATIoNANDTAxEXEMPTIoNS Powers and Duties of the Bureau of Internal Revenue ............... 172
Power and Duty of the Commissioner to Interpret
Double Taxation Defined ""' 113
Laws and to Decide Tax Cases ........... L72
No Prohibition Against Double Taxation """"""""" 113
Appellate Jurisdiction of the Court of Tax Appeals ..................... 173
Kinds of Double Taxation "" 113
RuIe of "No Estoppel Against the Government" ....... 173
Means Employed to Avoid Double Taxation """"".'""""""""""' 115
Is There Estoppel Against the Taxpayer? .............. ... L75
Tax Exemptions.....'...'. """"" 118
Nature and Kinds of Assessments.............. ................ 175
Kinds of Tax ExemPtions ""' 118
Principles Governing Tax Assessrnents............ ......... 176
Principles Governing Tax Exemptions """""' """""" 118
Investigative Powers of the Commissioner;
Illustrative Situations on Tax Exemptions "".'""""' 120
Factual Basis of Assessments................. ............... 178
Tax-Exempt Persons Required to Keep Books of Accounts """"' 124 Means Employed in the Assessment of Taxes .......... 779.
Tax Avoidance; Tax Evasion; Tax Fraud """""""""' L24 A. Examination of Returns; Confidentiality Rule ................... 179
cases ................... 128 B. Assessments Based on the Best Evidence Obtainable ......' 181
Exercises """""" 141
C. Inventory-Taking, Surveillance and Presumptive
Gross Sales and Receipts.................. ............ 182
Chapter IV. TAX LAWS AND REGULATIONS D. Termination of Taxable Period ..... 183
E. Fixing of Real Property Values ..... 183
Nature of Tax Laws .--'.'.... "" 143 F. Inquiry into Bank Deposits ........... 183
Interpretation of Tax Laws """"""""""" 144 G. Accreditation and Registration of Tax Agents.................... 184
Sources of Tax Laws ......'... "' 145

VIII ix
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H. Imposition of Additional Procedural or ()olk-rction Thru Filing of the BIR's Answer in the CTA.".........'. 248
Documentary Requirements.'..".'.... 188 l,inbility of Stockholders for Unpaid Taxes of
188 Dissolved or Defunct Corporation ..... 248
Enforcement of Forfeitures and Penalties... ......'....... t92 (lollcction Thru Application of a Disputed Tax
Supervisory and Police Powers of the BIR '...'......' 1.92 Against a Refundable Tax .......".'.....- 250
193 (lrirninal Action ........-'.....'...' 250
Authority of the Commissioner to Delegate Power
Powers and Duties of the Regional Director 794 (1lscs ...'..'...'....... 255
Duties of Revenue District Officers and l,lxorcises .,....'..-. 265
Other Internal Revenue Officers 195
Sources of Revenue 198 (ihlpter VII. TAX REMEDIES - BEMEDIES OF THE
Brief Survey of Compliance Requirements, GOVEBNMENT - STATUTE OF LIMITATIONS
Statutory Offenses and Penalties ........."..... 198
A. Compliance Requirements 198 l)rcscription of Government's Right to Assess Taxes ........'....-.-.- 267
B. Statutory Offenses and Penalties ... ".....'..... 207 Whon is a Tax Assessment Deemed Made? ".'..."..-... 268
L Additions to the Tax ............:.............i,'." 207 ll,Lrlease of Assessment Notice or Demand Before the
Lapse of the Prescriptive Period --.-.... 269
II. Statutory Offenses and Penalties ..............'. 21_3
I rnportant Considerations Re Prescription of
a. General Considerations .............. 2t3
(lovernment's Right to Assess Taxes ....................270
b. Survey of Some Specific Offenses and Penalties '.. 214
A. Date of Filing Tax Returns - A Material Factor
c. Forfeitures ............. 222
in Resolving Questions on Prescription..'.."'.. ". ............. 27 O
Cases 223
qqo B. Effect of Filing an Amended Return ...........-..'- 277
Exercises Return'.'...'. ......'.'.......272
C. Effect of Filing a Wrong
D. Period Applicable When the Law Does Not Require
Chapter VI. TAX REMEDIES - the Filing of Any Return ........... 272
REMEDIES OF THE GOVERNMENT E. Applicable Prescriptive Period if Taxpayer Fails
to File a Beturn.... ....'...........:..-. 273
Importance of Tax Remedies ...'.....:......-........ 23t F. Prescriptive Period of Assessment When There
Rule on "No Injunction to Restrain Tax Collection" 231 is Fraud ..................274
Collectibility of Tax as a Basis for Collection Enforcement ......' 232 llrescription of Government's Right to Collect Taxes .'.....'......'... 281
Remedies of the Government '.........'...... 233 I4quitable Recoupment and Preecription ...................287
Tax Liens 233 Interruption of the Prescriptive Period ...............'..'.. 287
Compromises................ 235 RuIe of Prescription in Criminal Cases .'.............'-'... 293
Collection by Distraint and Levy .........:.' 237 When Defense of Prescription May be Raised Even on Appeal .. 294
Civil Action 244 Prescriptive Period in Criminal Cases ' When Does It
Collection in Cases Where the Assessment is Final Start to Run? .......... ......-.- 294
and Unappealable 245
't

Collection in Ca'bes Where the BIR's Decision is Exercises ........... 311

Final, Executory and Demandable .........' '."""""" 246
Defenses Precluded by Final and Executory Assessments ......." 247
Prescription of Government's Right to Assess .".""" 248

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.1
'IAIILE ()l'(I0NTENTS
l,nw ()l' llAslc TAXA'I'ION lN'l't{ll l'tlll'lt')PlNLS
Page
Page
('hlptcr X. LOCAL TAXATION
Chapter VIII. TAXPAYER'S REMEDIES
Nrrture and Source of Local Taxing Power ...'.'....'....' 391
Administrative Protests """"""""" """" 313 ( lrant of Local Taxing Power under Existing Law .'....................' 393
Effect of Taxpayer's Failure to File an Administrative I)ower to Prescribe Penalties for Tax Violations
of
Protest o" to App"ul the BIR's Decision to the Court and Limitations Thereon....-.'.........' "' 394
Tax Appeals .,'........'..... "" 320 l'ower to Grant Local Tax Exemptions .............'....".' 394
Refund or Recovery of Erroneously or IIlegaIIy l'ower to Adjust Local Tax Rates....."... ..........'.."."."' 396
Collected Taxes """""""' 321 ll,osidual Taxing Powers of Local Governments........,.'.......'." "" " 396
Distinction Between Tax Refund and Tax Credit""""""""""""'
325
l'rcemption or Exclusionary Rule """""' 397
IsPaymentUnderProtestNecessaryinClaimsforRefund?....,326 lrundamental Principles of Local Taxing Power """' 399
Principle of Equitable Recoupment in Relation to lrr-rndamental Principles Briefly Explained ."."".""" 400
Tax Refunds....."...."""' "' 336
()ommon Limitations on Local Taxing Power """""' 401
Legal Capacity of Withholding Agents to Claim Refund """"""' 336 ()ommon Lirrritations Explained """""" 402
Interest on Tax Refunds""' """"""""""' 337 l,cvying of Local Taxes - Local Ordinances """""""' 406
Cases """"""""" 338
llrief Survey of Taxes and Other Impositions that
Exercises """""' 352
Local Governments May Levy - Enumerated Taxes """""""' 407
Situs of Local Taxation ........'...'. ........"."' 412
Chapter IX. COURT OF TAX APPEALS ()ommon Revenue-Raising Powers ......'.......'.. """""" 416
Oommunity Tax............. """' 4L7
Origin of the Court of Tax Appea1s""""""""" '""""" 354 (lollection of Local Taxes .... 418
Salient Features of the Court of Tax Appeais """"" 354 tlemedies of the Taxpayer in Local Taxation """""" 422
Cases
Organization,
"Brought Quorum; Disposition of (lases .................. 424
Before the Tax Court""""" """"""""""" 355 I,)xercises """"" 434
Powers of the Court of Tax Appeals """"""""" """"' 356
Jurisd.iction of the Court of Tax Appeals """""""""' 356
"""""" 359 ( llrapter XI. REAL PROPERTY TAXATION
"Compromise Penalties" and the CTA """""'
Whose Decisions Are Appealable? """""' """""""""' 359 A. Substantive Aspect of Real Property Taxation "" 436
What Decisions Are Appealable - The Question of Finality """' 360 Real Property Tax Defined """"""""' 436
Tax Collection Not Suspended During Appeal"""' "' 362
Nature and Scope of the Local Taxing Power in
Thirty-Dav Prescriptive Period of Appeal """"""""' 363 ReaI Property Taxation '.."""""" 437
AdministrrrtiveActionsTantamounttoAppealableDecisions'..366 Extent of Local Taxing Power """""" 438
Appeal from Decisions of the CTA """"' 369 Power to Prescribe Penalties for Tax Violations '."""""""""' 438
Interlocut,ory Orders """""" 374
Fundamental Principles Governing
Findings of Iract of the CTA, Not Reviewable """""' 375 ReaI Propertv Taxation """""""' 439'
Ancillary Jurisdiction of the CTA """"" 379 of Tax Exemptions - Properties Exempt from Tax 441
Question
Other Matters Bearing upon the CTA """""' """""" 380 Proof of Tax Exemption......'.""' """"" 442
Damages in C'l'A Proceedings """""""" 380 Brief Survey of Cases Involving Real Property
Cases """"""""" 381 Tax Exemptions......'.." """"""""" 443
Exercises """"" 388

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 't'A tll,u ol' (l( ) N'l'liN'l's
I,AW OTI I]ASIC TAXA'I'ION lN'I'IIIi PTIII'IPPINT)S

Page Page

Vrrlrration of Goods ........... 508

Real Properties Subject to Tax""""' """"""""""" 444
of Taxability Ilonro (lonsumption Va1ue (HCV) ...... 510
Some Court Rulings on the Question l,'lcxible Tariff ......... .......... 511
of Real ProPertY."' "" 445
"I]se" and "Ownership" In Real Property Taxation """""""" 447 It. Acl ministrative Aspect of Tariff and Customs Laws............... 513
is 'l'rrriff Commission ........... 513
Rule Applied Where the Person Assessed
Neither Owner Nor User - Concordiu Lim Case"""""""' lltrreau Customs
448 of .......... 515
450 lrrrnctions of the Bureau of Customs ................."".. 515
B. Administration of the Real Property Tax """"""""""""""""'
the Administration Ot,hcr Powers and Duties of the Bureau of Customs ........"..... 515
Basic Considerations Relating to
of the ReaI Estate Tax """"""' ""' 450 (' l'rricr.rdural Aspect of Tariff and Customs Laws ................"..'.. 515
I. Administrative Requirements """""""" """"' 450 Nirt,ure of Customs Protesb; Seizure and Forfeiture Cases.... 515
porfeiture Cases
II. Listing of Property for Assessment Purposes - .......... 515-
Assessment RoIl """""" """""' 452 I)rocedure in Customs Protest Cases .................... 516
tII. ReaI Property Tax Assessment in General "" 452 Atrl,omatic Review in Customs Proceedings ......... 518
IV. Mechanics of Assessment """""" 455 (ltrstoms Seizure and Forfeiture Cases - Basic Concepts......' 518
C. Remedies in ReaI Property Taxation """""""""" 458 Srrrne Court Rulings on Searches and Seizures ..................-.... 521
""' 458 (iustoms Forfeiture Actions ................ 523
I. Remedies of Local Governments """".'".'"
II. Remedies of the Taxpayer """""" 462 l'roperties Subject to Forfeiture................. ...........536
462 (lornmon Carriers; Forfeiture
(a) Remedy Against the Assessment """"""""""""""""" ............. 538
( i) The Local Board of Assessment Appeals """"""" 464 oLhcr Considerations Affecting Seizure and
(ii) The Central Board of Assessment Appeals """"" 464 lt'orfeiture Cases .......... 538
(iii) pffect of Appeal on the Payment of Sorne Illustrative Court Rulings on
RealProperty Tax """"' """"""""""" 464 Customs Forfeiture Cases '...'....'..' 539
(b) Administrative Protest """"" 465 ( )llrcr Considerations Relating to Tariff and Customs Cases .... 541

(c) Tax Refund or Credit .'"""""' 466 (lls(rs ................... 543

Special Levies on Real Property """""""" """"""""' 466 f,jx.rr:ises ............577
Condonation of ReaI Property Taxes """ 468
Cases """"""".'" 468
Exercises """""" 489

XII. TARIFF AND CUSTOMS LAWS

Chapter
492
A. Substantive Aspect of Tariff and Customs Laws """"""""""
492
Meaning and Scope of Tariff and Customs Laws """"""""""
493
Nature of Cusioms Duties and Tariff" """""""""
Duty Purposes """.'""""""""' 493
Concept of Goods for Customs
""""""""" 494
Kinds of Goods
""""" 506
Importation, Liability and Tax Liens """"'
Importations Vis-i-vis Powers and Jurisdiction
of the Bureau of Customs """' ""' 507
"""""""""' 507
Kinds of Customs Duties
 Chapter I

GENERAL PRINCIPLES

'I'AXATION DEFINED. Taxation is the power by which the

its law-making body, r35:'s revenue to defray
,r{,!(.r'ci[an, through
llrl rrccessary expenses of government. Ii is merely a way of
:rplrort,ioning the costs of government among those who in some
lll1,]ll.ittrearepriv@efitsandmustbearitsburdens
1;,1 tltrt" Jur. 34).
Irr one decided case, the Supreme Court of the Philippines
rl,'r;t:r'illcd it as a "syml:iotic" relationship whereby in exchange for
I lrr. lrrgtoction thaf lhe citizens gel from the Government, laxes are

;,,r rrl (( iLtn'rrnissioner of ll,ternal Reuenue u. Algue, Inc., et

al., L-28896,
I,','1,. 17, 1988).
'l'hc rationale of taxation is graphically described by the Supreme
('.lu't, in these words: "It is said that taxes are what we pay for
, rv rlized society. without taxes, the government would be paralyzed
1,,r. lltck of the motive power to activate and operate it. Hence, despite
tlrc rrirtural reluctance to surrender part of one's hard-earned income
Io l [rr taxing authorities, every person who is able must contribute
lr rs share in the running of the government. The government for its
1,rr|t, is expected to respond in the form of tangible and intangible
lrr,rrofits intended to improve the Iives of the people and enhance
llr('ir moral and material values. The symbiotic relationship is the
I rrl,ionale of taxation and should dispel the erroneous notion that it
r:r irn arbitrary method of exaction by those in the seat of power"
(:;tr.pra).
Moreover, fair-dealing on both sides of this symbiotic relationship
rs ()1'paramount importance in order to maintain its harmonious
r.lritracter. As stated by the supreme court, "taxpayers owe honesty
l.o government just as government owes fairness to taxpayers"
1(lommissioner of Interna.l Reuenue u. Tokyo Shipping Co., Ltd., etc.,
al., G.R. No. 68252, May 26, 1995). "If the State expects its
r't,
Laxpayers to observe fairness and honesty in paying their taxes, so
rnust it apply the same standards against itself x x x' No one' not
.ven the Siui", should enrich itselfat the expense ofanother' x x x"
(BPI-Family Sauings Baruk, Inc. u. Court of Appeals, et al., G.R-
No. 122480, Apr. 12, 2000)'
 Ln w olr ltnsl(:'l'n xA'l'loN tN,t'ilt, I,ilU,il't,lNI,tFi
'rAxES DEFINED. 'faxr:s arc trrc e.rbrcect pr.port,io,.r
contributions from persons and property leviecl by the law-making
body of the state by virtue of its sovereignty for the support of
government and for public needs (l Cooley 62_65).
From this definition, the foilowing may be said to be the
attributes or characteristics of taxes:
(a) A tax is a forced charge, imposition or contribution and as
such it operates in inuitum, which means that it is in no way
dependent on the will or contractual assent, express or implied, of
the person taxed. They are not contracts, either expressed or implied,
but positive acts of government (Rochester u. Bloss, lrs Ny 42, zr
NE 794, 61 LRA [NS] Ann T, Cas. 1S).
(b) It is a pecuniary burden payable in money, such that a tax is
not necessariiy confined to those payable in money (r cooley 6J), as
in the case, for instance, of backpay certificates which under
R.A. 304 could be used as payment of taxes (De Borja u. Geila,
L-18330, July 31, 196J).
In one case, the supreme court held that backpay certificates
under R.A' 304 may be used to pay real estate taxes (Tirona u. city
Treasurer of Manila, et al., L-24607, Jan. 2g, 196S).
(c) It is levied by the legislative body of the state because the
taxing power is peculiarly and exclusively legislative in character
(51 Am. Jur. 71). Taxes are obligations created by la* (Vera,
etc., et
al. u. Fernarudez, etc., et al., L-SlJ64, Mar. 50, lif il.
(d) It is assessed in accordance with some reasonable rule of
apportionment, which means that conformably with the
constitutional mandate on progressivity of a taxing system
(sec. 28[1J, Art. vI, 1g8T constitution), taxes must be based
on ability
to pay.
Do regressiue taxes go against the constitutional mond,ate in,
Sec. 28(1), Art. VI of the Constitution?
In the case of Philippi*e Airli*es, Inc. u. secretary of Fi*ance,
et al. (G.R. No. 115852, Oct. 30, 199b [Resolution]), and companion
cases' the supreme court, in upholding the validity of the Expanded
Value-Added Tax Law (R.A. 7716), said:
"The constitution does not realry prohibit the imposition
of indirect taxes which, Iike the VAT, are regresslve. What
it simply provides is that congress shaUeuotie a progressive
system of taxation.'x x x Resort to i,direct taxes should be
minimized but not ouoided entirely because it is difficult, if
( ; I,)NliltAl, I'Iil NCI l,l,l,:s
rr.l nulrossible, to avoid them by imposing such taxes
,,,,,,r'rling t<-r t.he taxpayers'ability to pay. x x x"
1,.) ll. is irnposed by the State on persons, property or services
,. rtlrrrr rl:r jrrrisdiction.
(l) lfirrally, a tax is levied for a public purpose as taxation in
rt,,,.ll rrrvolvcs a burden to provide revenue for public purposes of a
r,,.r{'r'rl ttrtt,ure (51 Am. Jur. 39).
,,\ I rrx r:reates a civil liability on the part of a delinquent taxpayer,
,r lt lr,rutrlr t,he non-payment thereof (whether it be on account of the
ri,{t,rr\,(.r's lailure or refusal to pay it) creates a criminal liability,
,. l,r, lr cotrld be the subject of criminal prosecution under existing
1,, r1 ,r lrr short, in taxation, it is one's civil liability to pay taxes that
r, r.,. r r rrir' (,u crirninal liability, not the other way around as in criminal
, J, ,,.,, wlrcre criminal liability gives rise to a civil liability (Republic
t. I'trlrutuo, L-22356, July 21, 1967).
I M I'|ORTANCE OF TAXES. Taxes are important because they
,,r! tlrr,-lj,fehlood of the Government and so should be ca]culated
,. r r Irrrrr necessary hindranc e (Co m mis sion er of Internal Reuenue
I I-r n
, ll1'ttt', et al., supra). The legislature, in adopting measures
1ruc.,
1,, inrt)l('nlent our tax laws, wants to be assured that taxes are paid
,rr,l crrllccted without delay (Philippine Guaranty, Co-, Inc. u.
I t,rnni:;sioner of Internal Reuenue, et al., L-22074, Sept. 6, 1965).
ll, rrrli l,hr: lifeblood of the Government, their prompt and certain
,',,rrl:rlrility is an imperious need (Collector of Internal Reuenue u.
t,,,,rrlr itlr, International Rubber Co., L-22265, Dec. 22, 1967, citing
!tr,ll r,. Il-5.,79 L. Ed. 1421-27). Further, "(t)he primary purpose is
r,, 1i.rrt.r'ate funds for the State to finance the needs of the citizenry
,rrrl lo ndvance the common weal. Due process of Iaw under the
t ',,rr:;l rt,ution does not require judicial proceedings in tax cases. This
,rrrr';1 necessarily be so because it is upon taxation that the
rl"\,(.r'nment chiefly relies to obtain the means to carry on its
't" r'rt,ions and it is of utmost importance that the modes adopted io
, rrl.r'(:e the collection of taxes levied should be summary and
rrrr,.rf'ered with as little as possible" (Philippine Bank of
r',,rtrrnunications u. Commissioner of Internal Reuenu.e, et al., G.R.
l'1,, I 19024, Jan. 28, 1999).
'I'AXES, PERSONAL TO TAXPAYER. Taxes are personal to
llrr. l,uxpayer. A corporatiori's tax delinquency cannot, for instance,
l,r'r'nlbrced against its stockholders because not only would this run
'(,unLcr to the principle that taxes are personal, but it would also
 t,Aw ot,' BASTC l'AxA',t'lON lN',l'll U t'ilil,lt,t,lNlts ( ll,lN l,llt^l, l'ltlNCll Pl,us

Guaranty Co" Inc' u'

not be in accord with the rule that a corporation is vested by law r.,,\, r rrrrt.ttl is sttplt,se tl t,o provide (Philippine
with a personality that is separate and distinct from those of the | \,rrtnt:;:;irtttt't'ttl lttl,arnul Reuenue, et al', supra)' As st'ated'in onc
u' CTA, et al'' L-30232' July 29' 1988)'
persons composing it, as well as from that of any other legal entity ' ,1 'r' ( l,tt:tttt Sle.otttloring Corp.
to which it may be related (Sunio, et al. u. Nationq.l Labor Relations I ,r c;rl rorr is a high p"eJogative of sovereignty
the relinquishment of
,r lrrr'lr rs ttLrver pr""rrrrrut, and any reduction or diminution
thereof
Commission, et al., G..8. No. 57767, Jan. 31, 1984 cited in Torres,
and the
Law of Business Organizations, p. 126). ,.,rt lr r.r,sperct t,o its mode or rate must be strictly construed
,,,,',,. ,',,,r1 bc couched in clear terms' [!e general-rulejslhat any
Be that as it may, however, stockholders may be held liable for
' Irrrrr lirr cxempfion from tax
statutesKhould be construed strictly
the unpaid taxes of a dissolved corporation if it appears that the
ril, t,htl_!g>rgaYer'
corporate assets have passed into their hands (Tan Tiong Bio u. ,r I I rr r r r

Commissioner of Internal Reuenue, L-15778, Apr. 23, 1962), or when lnr:itlentally, the power to tax is not granted in the Constitution'
t ',,rr;il rt.ulictnal provisions relating to the power of taxation
d6 not
stockholders have unpaid subscriptions to the capital of the
corporation. rr1,r'r;rlt its grants of the power oitaxation to the Government,,"Wrt
Similarly, estate taxes accruing upon transmission of the I rrr';l.ir(l rnerely .orrrtgrrgliA$gtions upon a power yhich would
,,1lr, r'wrst'be pr?[tically without limtt'
decedent's estate to his heirs are not liabilities which can be enforced
A:; trlready mentioned, the taxing power is- peculiarly
and
against his heirs, for estate taxes are supposed to be obligations that
, ,., lrr:rivcly Iegislati,re in character and remains undiminished in the
must be paid by the executor/administrator out of the net estate,
thereof'glear and
before delivery to any beneficiary ofhis distributive share. 1,,1.r:;l:rt,rtre in the absence of an express surrender
However, if prior to the payment of the estate tax due on the ..1,lrt.it,initsterms(sl,q,*Jur.il-zavIrbe_@9t
transfer of decedent's estate, the properties of the deceased are t,, ittlrorcnt and constitutional iimitationb'
distributed to any beneficiary, then such beneficiary shall be
subsidiarily liable for the payment of such portion of the estate tax I'I III I'OSES AND OBJECTIVES OF TAXATION
as his distributive share bears to the total value of the net estate
(Sec. 9 1 ICJ, National Internal Reuenue Code of 199 7 /hereafter , 1997
(ti Reuenue - Basically, the purpose of taxation is to provide
welfare
, ,,,,i,,i,,.'fr fo with which the State promotes the general
NrRCI). (51 Am' Jur' 71'73)'
,,,,1 1,r'ol,cct,ion of its cilizens
Repulation. - Taxation also has a regulatory purpose as
rltt,77..----
in
NATURE OF THE TA)ilNG POWER. The power to tax is an
r1,,.(:rse of taxes tevied on excises or privileges like thoseimposed
attribute of sovereignty. It is inherent in the State. As an incident like night
,,rr l,lraggo and alcoholic products, or amusement places
of sovereignty, the power to tax has been described as "unlimited in
1,, l,s. cockPit$ftc
its range, acknowledging in its very nature no limits, so that security "[bu""tr,
against its abuse is to be found only in the responsibility of the rnlely a power that is exercised in order to raise
,l,,,xation-is not
also be
legislature which imposes the tax on the constituency who are to r(,\'(.nue for the ,rppori of the Government' Taxes may
pay it" (Moctan Cebu International Airport Authority u. Marcos, etc., ,,,'t,osed for a regulatory purpose as' for instance'
in the
b ilitatio' urrd. itubitiruiio.r-gi
iqdg.ltry wXiEET
et al., G.R. No. 120082, Sept. 11, 1996).In one decided case, the ,, .
I rrr
",lhreatened Tte;Ffrlloi[ffi'
Supreme Court called it an awesome power. However, no matter ,,''i,.,'r; 8' 1992)'
how awesome it may be, it must not be exercised arbitrarily trrr' o. Commission o"=a-,"ait, et al', G'R' No' 92585' May
(Commissioner of Internol Reuenue u. Algue, Inc., supra). (t'.\ Prom.otion. of General Welfare - In one decided case' the
;1,,r,.J*1, be used as an imPlement of
Taxation is a power emanating from lneeessity; a necessary of the peopie.
burden to preserve the State's sovereignty,Strt a means to give the rl,,: police power in order to promote the general welfare
citizenry an army to resist an aggression,ydavy to defend its shores 'lhus, in the case of Lutz u' Araneta (98 Phil' 148)' the Supreme
from invasionr"aCorps of civil servants to'serve, public improvement ('orrrt upheld the validity of the Sugar Adjustment Act' which
designed for the enjoyment of the citizenry and those which come ,rrrposed a tax on milled sugar since the purpose of
the law was to
within the State's territory and facilities, and protection which a
r['
l,AW Ol,' l]ASIO'lAxATloN IN',l'll l'l l'}llll,lt'l'lNl'll-j
strengthen an industry that is so undeniably vital to the economy -
the sugar industrY.
How the police power is enhanced through taxation is further
illustrated in the existence of the oil Price stabilization Fund
(oPSF), a device designed to protect the public from the adverse
effects of fluctuations in the prices of imported crude oil'
As ruled in the case qf Osmefi,a u. Orbos, etc., et ol' (G'R'
No. 99886, Mar. 31, 1993), while the funds collected under the OPSF
may be referred to as taxes, they are exacted in the exercise of the
police power of the State. From such fund, amounts are drawn to
reimburse oil companies when appropriate situations arise for
increases in, as well as under-recovery of, the cost of crude oil
importation.
(d) Red.uction of social Inequality - This is made possible through
the proglessive system of taxation where the objective is to prevent
the undue concentration of wealth in the hands of a few individuals.
Progressivity is keystoned on the principle that those who are able
to pay should shoulder the bigger portion of the tax burden'
Incidentally, the present rates ofincome, estate and gift taxes present
a good example of progressivitY.
(e) Encourage Economic Growth - Taxation does not only raise
public r&enue, but in the realm of tax exemptions and tax reliefs,
ior instance, the purpose is to grant incentives or exemptions in order
to encourage investments and thereby promote the country's
economic growth.
It is worthwhile to note that since the power to tax is inherent
in the state, the power to exempt from tax is inherent in the state
also. This is not necessarily so in the domain of local taxation. Since
in local taxation, the taxing power is only delegated, i.e., either under
the constitution or by virtue of legislation or both, it follows that in
order to grant tax exemptions, Iocal governments must justify its
exercise under constitutional or statutory law or both, as the case
may be.
In the Locai Government code (sec. 192),local governments may
grant tax exemptions. It is, however, significant to note that with
respect to real property taxes, no such power exists, save in the case
of condonation of taxes which can be granted only for certain
justifiable reasons which are expressly stated in the law (see
Sec. 276, Local Gouernment Code).
(fl Protectionism - In some important sectors of the economy,
as in tlTe case of foreign importations, taxes sometimes provide
( I lr)N l,lItA[, PIiINC I PLHS
rr,,l.r'l.irrr t,o lrurl industries like protective tariffs and customs
,lrrlrr.tr
'l'll l'l()ltY AND BASIS oF TAXATION. There are two reasons
ir lr 1' I lr. r'xcrcisr,' by the state of its taxing power is justified. one
is
,, r':r:irl,.v, and the other is the grant of Brotection and benefits by
I lr,. I llrrl,r' 1,1;its citizens.
' (rr) ly'r,r'.:ssity Theory - Taxes proceed upon the theory that the
r''',lr'rrr:t'o['government is a qecessity; that it cannot continue
,: rr l,rr I I lre rneans to pay its exp?nse_-$ and that for those means, it
l,r , rlr. right, to compel all citizens and property within its limits to
,, r,lr rlrrrlt,(5/ Am. Jur.42).
\, , ,r'rli.g tpour supreme court, taxation is a power emanating
lr 'r, .,'(','s*i!rf It is a necessary burden to preserve the. state's
,,,\. r,.'sirrtydnYa means to give the citizenry an army [o resist
,,r,l,rt,,r,,r,,ni a navy to defend its shores from invasion, a corps ofqvil
,,r r r irrl. l. serve, public improvements designed for the enjoyme\t
,,t tlr,'r'rlrzcnry and those which come within the state's territor\
'rrr,l lrr.rlities, and protection which a government is supposed to.
I',,,\ r(li. Ql 'hilippine Guaranty Co., Inc. u. Commissioner of Internal
/i, ,,, ,rrriJ t'l ttL., supra).
rl,t 'l'lrr llenefits-Protection Theory - According to this theory,
r lr, I ll;r l. rlcrnands q]}d :eceives taxes from the subjects
of taxation
,, r r lr r r. r ,,lii-.iJai"tio" ro trruilt mayTe enabled to carry its mand.ate
irr I , r r'l l,'r'1, irnd perform the functions of governmentl/and the citizen
1',,1 , lr,,rrr his property the portion demanded in order that he may,
l,: rrrr':rrrs t,hereof, be secured in the enjoyment of the benefits of
., r. ,r rr r;,,'tl society. However, the foundation of the obligation
to pay
r ,r 'i,' ,
',,
rr,l, t,he privileges enjoyed or the protection given to a citizen
l,r tlr,.(lrv.rnment, although the payment of taxes gives a right to
ni't,', lr,r.; lroth are enjoyed as well by those members of a state
,, lr,, rlrr rrot, pay taxes because they are not able to do so (51 Am.
tttr l:: '1,'t).
l\lrrlr,rrver, as pointed out in the Algue, Inc. case, supra, in
r '., lrr,rit' lirr the protection that the state gives to its citizens, taxes
rrr,r ,t lrr.r:orrespondingly paid to it.
f, ll ,,lr,rrrlcl be noted that while taxes are intended for general
1,, 111.1,qr;, spccial benefits to taxpayers are not required. Thus, the
I',,rrr I lrt'lrl that from the contribution received, the Government
r, rrrl.r'ri r, special or commensurate benefit to any particular person
,,r i,r iltr'r'(..y. A tax is not imposed on the basis of a special or particular
1,, r,,.lrt rrt..ruing to each citizen in proportion to the tax paid.
ril
(; I.]N URAI, PITINCII}LES
t,AW ()t. I]ASIC TAXA'I'ION IN'I'II U I'IIILII'I'INI'S

According to the Supreme Court, a person cannot object to or resist IS'I'IIF]POWT]RTOTAXTHEPOWEBTODESTBOY?

\, r rrrrlrrrg t,o <-rne clecided case, the power to impose taxes,is one
so
the payment of taxes solely because no persc,nal benefit to him can
be pointed out as arising from the tax (Lorenzo u. Posadas, etc., 64 ,rr,lirrrrlt'tl itr fbrce and so searching in extent so that the courts
Phil.353). ,,r,rrr.1,! vcnture to declare that it is subject to any restrictions
.- l,rrtlvo., gx(:(]pt such as rest in th" d59"q!&"gllbg-Agryrity which
In the case of Gomez u. Palomar, etc., et al. (L-23645, Oct. 29, i.n!.r( rii(.r-r it,. No attribute of sovereifr-tffimore pervading'
and at
1988), the Supreme Court upheld the validity of the Anti-TB Stamp government affect more constantly and
r," r,rrrrt tltles bhe power of
Law (R.A. 1635) which required the affixture of a semi'postal stamp through the exactions made
i,,rr,,rrrl.ly all the relation.if Uf" than
on mail matter between Aug. 19 and Sept. 30 of each year. It was rrrrrl.r rt (Churchill, et al. u. Concepeion, etc',34 Phil' 969)'
held that although no special benefit accrues to mail users by such power' is
stamp, it is not necessary, to constitute a public purpose, that special Irr ltght of the foregoing description of the toxing
benefits accrue to a taxpayer; it is enough that he enjoys the benefits t,t\,tltt,n, Lherefore, the power to destroy?
of living in an organized society r
,lrrr,l'.lustice Marshail of the u.s. supreme court, in the notable
,,r,,, ,r1 Mt'Culloch u. Maryland (U'S' 4 Wheat' 316' 4 L' Ed' 579)'
gtr scoPE oF THE LEGISLATM TAXING POWER. r,, r, I, l,, w r I lr(' rule that the power to !q4-14yglye!
r
thelgggr to destrpy'
Legislative taxing power or discretion extends to the following: tl,, t,r rrrciple is pertinent 6nly when there it@ pory9to tax a
s,,,, L,:,rlrrr subject and has ,ro
to a case wffi6h right to
(g) the person, property, or occupation to be taxed (51 Am. Jur. "*l"tiot'
r!,q i'xr:rl,s" This oft'quoted maxim instead of being regarded as a
172f. Excises or privileges, provided they are within the taxing power
l,l,r rr li r,l u trthorization of the unrestrained use of the taxing
jurisdiction, are also included. As stated in the case of Gomez u.
l,,r ilry rrrrd all purposes, irrespective of revenue, is more reasonably
Palomar, etc., et ol., sttpra, the taxing authority can select the , ,,,, ,t ,l,r,,r[ as anepigrammatic statement of the political
and eeonomic
subjects of taxation. financial needs of a state or nation may outrun
,, n.!rn I lrrrt since the
by taxation
Ib) the amount or rate of the tax; ,, , r 1' lr r ruln calculation,
r r so the power to meet those needs
or
p) the purposes for which taxes shall be levied provided they ,ri'it rrrt. be limited even though the taxes become burdensome
are public purposes; ,,,r,lr:r('rt,ory. To say that "the power to tax is the power to destroy"
(*) the kind of tax to be collected; ,, q,,,l.scriteggt tle prrpo.", for which the taxing power may be
rr,,, rl l,ttl. the d&ree oili6or with which the taxing
power may be
(eN the apportionment of the tax, i'e., whether the tax shall be , ,,,1,1,,yr'1I i., o.f,6" to -raise rg-v-gUue (l Cooley 179'181)'
general or lirnited to a particular locality cr partly general and partly
Iocal; (.()NSTITUTIoNALRESTRAINTSRE:.TAXATI0NISTHE
(fl the situs of taxation; and l,t twl,llt To DESTROY." It is important to note, however, that
(g) the method of collection' ,r Irrl,. t,rrxation is said to be the power to destroy, it is by no means
'Going back to the purpose of taxation, as further elucidated by irrrlrrrrrt,trd. According to an authoritative opinion, when a legislative
an eminent authority, the purpose of the levy is exclusively within l,,,ily Irrrving the power to tax a certain subject matter actually
,ilrt,,,:;('s ou.I', u burdensome tax as effectually to destroy the right
to
the discretion of the legislature, but courts may determine whether tothe tax' the validity
the purpose is public or not. The legislature also has full discretion l,, i l,rrn the act or to use the property subject
,,t I lll' r,nuctment depends upon the nature and character of the right
as to the persons, property, occupation or business to be taxed
provided these are all within the state's territorial jurisdiction. It r,, rllril,roy. If so great un ubr,r" is manifested as to destroy natural
rr I I I r I rrtlamental rights which no free government
couid consistently
can also finally determine the amount or rate of tax, and lastly, I (

, r,,lrrtt', it is the duty of the judiciary to hold such an act

legislative discretion atrso extends to the mode, method or kind of
, r r,, rrrsl,itutional (Ibid').
tax like property, excise, license, occupation or income tax (1 Cooley r

176-184). 'l'lrut, is why it can rightfully be said that while the power to tax
r', llr. llower tl destroy,"it is equally correct to postulate that the
 LAW OF BASIC'I'AXATION IN'I'I I I.] PIIILIPPINh]S
"power to tax is not the power to destroy while the Supreme Court
sits," (1980 Bar question) because of the constitutional restraints
placed on a taxing power,that violates fundamental rights.
In any other case, however, since the taxing power knows no
limits except those expressly stated in the constitution, it must follow
that if a tax is within the State's lawful power, the exertion of the
power may not be judicially restrained because of the results that
may arise from its exercise. Thus, it has been held that a federal
excise tax upon artificially colored oleomargarine may be prohibited
entirely without any violation of fundamental rights (see 51 Am.
Jur. 80-81).
The Supreme Court, however, reminds us that although the
power of taxation is sometimes calied the power to destroy, in order
to maintain the general public's trust and confidence in the
Government, this power must be used justly and not treacherously
(Roxas, et aL. u. CTA, et al., L-25043, Apr. 26, t968).
Hence, where it appears that the taxpayers, in order to
accommodate the Government's program of providing land for the
landless tenants, took it upon themselves to pursue that program
by subdividing a large tract of land owned by them into smaller lots
and selling them to said tenants at cost, there was no Iegal basis for
the Bureau oflnternal Revenue to consider them as being actually
engaged in business and subjecting them to the real estate dealer's
tax. Furthermore, it was held that there was also no basis to assess
the income tax as though the land sold by them was a business or
ordinary asset. It was further ruled that since the taxpayers were
acting only in response to the Government's desire to ameliorate,
unable as it was to finance the purchase of the large tract of land
from the taxpayers, assessing them as ifthey were actually engaged
in the real estate business would run counter to the principle that
although taxation is the power to destroy, such power must not be
used treacherously.
Taxpayers owe honesty to the Government just as the
Government owes fairness to taxpayers (Cornmissioner of Internql
Reuenue u. Tokyo Shipping Co., Ltd., etc., et al., supra). In thrs
case involving a tax refund which, incidentally, is also a part of the
tax spectrum, the Court, in unmistakable language, said:
"x x x Fair deal is expected by our taxpayers from the
BIR and the duty demands that the BIR should refund
without any unreasonable delay what it has erroneously
collected. Our ruling in Boros, et al. u. CTA, et al., supra, rs
apropos to recall:
10
( I t,)N lqRn l, l,lil Nol l,l,hls
"l'lrr' powcr of taxation is sometimes called also
I 'fherefore it should be exercised
Irr, powt,r t,o dcstroy.
wrl,lr r:rrrtLion to minimize injury to the proprietary
lrlr,lrl,s of' a taxpayer. It must be exercised fairly,
r,r1rr:rlly irnd uniformly, lest the tax collector kill the
'lrt,rr t,hat lays the golden egg'. And, in order to
rrurirrl,itin the general public's trust and confidence in
{lrr. (lovernment this power must be used justly and
rrot, t rcilcherously."'
l'( )Wl,llt OIr JUDICIAL REVIEWIN TAXATION. In the case
,,1 ( ' rrrr rtt i:;:;ion,er of Internal Reuenue u. Lingayen Gulf Electric Power
r ,, lrtr' (l ,-2377L,Aug.4, 1968), the Supreme Court ruled that courts
' ,r r m,{ rrrrluire into the wisdom of a taxing act. As opined by Judge
| 'r,r,lr,r,' , r'orr rts cannot review the wisdom or advisability or expediency
,,1 ir I ir x 'l'lrc judicial tribunals of the State have no concern with the
t,,,lr, 1 ol lt'gislation. The judicial power cannot Iegitimately question
, r r r I u r;r' to strnction the provisions of any law not inconsistent with
,
llr, lrrn,lrrrrronl,al law of the State. Nor can the motives which have
rr,llrr,.ncltl t,he selection of objects for taxation or determined the
,rrr 1,,, rrrtluired into (/ Cooley 165-169).
'l'lr. lrot,l,om line as far as judicial non-interference is concerned
r , I lr r'. As long as the legislature, in imposing a tax, does not violate
,r s,;,1 r, r lr lt constitutional limitations or restrictions, the courts have
;
,,, , i,.('('r'n with the wisdom or policy of the exaction, the political or
,,tlr, r .,llirtcral motives behind it, the amount to be raised, or the
1,, , ,,rr:r) lrroperty or other privileges to be taxed (51 Am. Jur. 77-78).
lrr, rrltrrtally, the Court's power in taxation is limited only to the
,r 1, ;, r, ;r l rorr and interpretation of the law. Therefore, the petitioner's
1
,r r 1,, rrr.rrl. t.hat the affixture of the documentary stamp on freight
r
',i ,.rl)lr; is irnpracticable should not be entertained because according
t,, tlrr'(burt in a decided case, the impracticability and absurd
, ,,r' (^(lucr)ces of the law should be addressed to the legislature and
,r,lr rr rn rsl.rative authorities. Courts merely apply the law as they find
rt 1/lr;rr-yrr Land Transportation Co., Inc. u. Collector of Internal
lit r,,'ttttr. 105 Phil. 1338 [Unrep.]).
'l'lrc sirme principle was stressed in another case where the Court
,rrrl llr:rt it is not within its province to inquire into the wisdom of
I lr,. lr r w lirr indeed courts are bound by the words in the mouth of the
l,r\\'rurfrt'r- "A uerbo legis non est recedendum" (Commissioner of
t'n:;tt'nts u. Mqnila Star Ferry Inc., et al., L-31776'78, Oct. 21, 1993)'
( 'r,rr r.l r; lrirve no authority to pass judgment upon the taxation policy
11
T l,AW Olr IJASI(l'l'AXA'l'lON lN'l'll I,) l,l IIt,tt,l,tNt,)S
of the Government. It is inherent in the power to tax thaL the State
be free to select the subjects of taxation, and it has been repeatedly
held that 'inequalities which result from singling out of one particular
class for taxation, or exemption, infringe no constitutional limitation'
(Commissioner of Internql Reuenue u. Santos, etc., et al., G.R.
No. 119252, Aug. 18, 1997).
It is interesting to note that the principle of judicial
non-interference into questions of tax poiicy could probably extend
also into the administrative realm. In one case, the BIR in its
Revenue Memorandum Circular No. 47-91 reclassified copra as a
"non-food" agricultural product, the sale of which by the primary
producers are exempt under the value-added tax law.
The reclassification was assailed by the copra dealers contending
that the same was counterproductive. In resolving the issue, the Court
ruled that the question as to whether or not the BIR's reclassification
is counterproductive could be properly addressed to respondents
Secretary of Finance and Commissioner of Internal Revenue or
Congress (Misamis Oriental Associatioru of Coconut Traders, Inc. u.
Department of Finaruce Secretary, G.-R. No. 108524, Nou. 10, 1994).
ASPECTS OF TAXATION. Taxation embraces two aspects or
phases. One is the levy or imposition of the tax on persons, property
or excises; the other is the collection of the taxes already levied.
Levy, whch is a legislative power, includes the determination of the
persons, property or excises to be taxed, the sum or sums to be raised,
the due date thereof and the time and manner of levying and
collecting taxes.
Collection (including assessment) consists of the manner of
enforcement of the obligation on the part of those who are taxed
(51 Am. Jur. 35).
BASIC PRINCIPLES OF A SOUND TAX SYSTEM
,L. Fiscal adequacy - The sources of government revenue musl
be-sufficient to meet government expenditures and other public
needs]TEis:-is essential in ord.er to avoid budgetary deficits and to
minimize foreign and local borrowings.
A court ruling describes fiscal adequacy as one of the
characteristics of a sound tax system which requires that sources of
revenue must be adequate to meet government expenditures and
their varialions (Chouez us. Ongpin, etc., et ctl. G.R. No. 76778,
June 6, 1990).
t t2
(i t,lN l,lltAl, l'ltlNC I l')l,lrS
. li 'l'lt|or(Lit:ul ,Justice - A good tax system must be based on the
t{rrrr1,r,r"s rrtrtlity to pay. This suggests that taxation must be
1'r,,1'r r'rrsiv(| cclnformably with the constitutional
mandate that
,',,,,,,,,,rrr shall evolve a progressive system of taxation (Sec' 28[1]'
lrt |1, t9tl7 Constitution).
,t .,ltlrninistrq,tiue Feasibility - Taxes should be capable of being
i,ll,,r I rvcl.y cnfbrced.. Hence, it must not lay down obstacles to business
gr,,rlllr ,,,r.1 development. The value-added tax law ryAT)
"conomic
as an example of administrative simplicity. Speaking
r,,ulrl lx.r:il,ecl
r,l tlr,, VA'1. law, the supreme court said that the law "is principally
irtlu.rl I.o rirtionalize the system of taxes on goods and services,
,rlrrrl,lrly t,itx administration and make the system more equitable to
Frrrrlrlr. llre country to attain economic recovery" (Kapatiran Ng Mga
t\,rliltlttrllllteJ sa Pamahaloon rtg Pilipinas, Inc., et al' u' Tan', etc',
r; li /Vrr.,\131 1, June 30, 1988 and companion cases).
'l'rr xrrt,ion could also be enhanced through the exercise of police
Iu11,,.r ll' rrnder the police power, a local government can
classify
Iturrl.i ir:; rcsidentiai and commercial, then, since conversion of
tl,luirlr.rrrl Iands is usually aSSeSSed on a higher assessment level,
1,1 q r rrf lcr:fions are increased (see Patalinghug u. Court
of Appeals,
t.t ,rl . ( i /t. No. 104786, Jan. 27, 1994).
I ;\ x A'l'tON DISTINGUISHED FROM POLICE POWER
;1N I ) l,:M INENT DOMAIN
\ /ir tttlion u. Police Power
. L'l:; t,o Purpose - Taxation is levied for the purpose of raising
I r \.r,il il ( .; 1rt-rlice power is exercised to promote public welfare
, through
1, ;,,rlrrl tttlls.
7, ,'ls tct Amount of Exaction - In taxation there is no limit; in
gil,lrr.r. l)ower, the exaciion should only be such as to cover the cost of
1 r,grrr lrr(,iotr, issuance of the"license
or surveillance'
._ :t ils to Benefits Receiued, - In taxation, no special or
direct benefit
than the fact that the Government
t;r |,rr'('rV()d by the taxpayer other
,,il1y rrr,r:urer to th".itir"n that general benefit resulting from the
1,1,,1,', lirrn <rf his person and
property and welfare of all (51 Am'
Irtr l:l 4:l). As to police power, however, while no direct benefits
,itr. I.r.(.(,iv()d, a healthy economic standard of society known as
't!ttut nrt ttt ubsque injuria" is attained.
.l ,'l.s lo Non-Impairmen't of Con,tracts - In taxation, the
r,,i,, ,,,,1,,,irrnent of contracts rule subsislS: "h3"-tuxing ac[ cannot
i r ;, i r r I i l c obligation of contra itr ( 5"c. l O,, A,t IIL
r r r
Iy, Constitution)'
0?,rnf 13 l..
,f ..i.
it
[' l,AW Ol,' llAslC'|'AXA1'ION lN'l'lll, l)l lll,ltrl,t Nl,)S
In the exercise of police power, however, t,his limitation does not
applv.
5. As to Transfer of Property Rights - In taxatio.r, taxes paid
become part of the public funds; in police power, no transfer, but
only restraint on the exercise, of property rights exists.
B. Taxation, u. Eminent Domain
7. As to Nature of the Power Exercised - Taxation is exercised in
order to raise public revenue; eminent domain or expropriation is
the taking of private property for public use.
2. As to Compensation Receiued - In taxation, payment of taxes
results in the general benefit of all citizens and inhabitants of a
State;in eminent domain, a direct benefit results in the form of just
compensation to the property owner.
3. As to Noru-Impairment of Contracts - In taxation, a contract
may not be impaired; this is not so in eminent domain.
4. As to Persons Affected - Taxation applies to all persons,
property and excises that may be subject thereto; in eminent domain,
only a particular property is comprehended.
TAXES DISTINGUISHED FROM OTHER IMPOSITIONS
l. Toll - ToIl is a demand of ownership * an amount charged for
the cost and maintenance of the property used/tax is a demand of
sovereignty for the purpose of raising public .5u"n.,". f t should be
noted that the Local Government Code authorizes thd collection of
tolls by local government units for the use of any public road, pier or
wharf, waterway, bridge, ferry or telecommunication system funded
and constructed by them (Sec. 155, Local Gouernment Code).
2. Penalty - Tax is a civil liabiiity. A person is criminally liable
in taxation only because he fails to sptisfy his civil obligation to pay
taxes (Republic u. Patanao, supra)1On the other hand, penalty is a
punishment for the commission of a crime.
Incidentally, in the case of National Deuelopment Company u.
Commissioner of Internul Reuenue (G.R. No. 53961, June 30, 1987),
the Supreme Court ruled that if a withholding agent like NDC fails
to withhold the requisite withholding tax on the income received
from Philippine sources by a Japanese non-resident foreign
corporation, such withholding agent (NDC) is liable to pay the tax
that it did not withhold as a "penalty" for its failure to withhold the
tax of the foreign corporation (see also Sec. 251, 1997 NIRC).
L4
(I I,lN l')ltAL l'ltl N()l l.'l,lrs
I rr lrr xirt;ion, there are so-called civil or administrative penalties
Itl,,, llrr, 2l-r(Zr strrcharge for failure to pay the deficiency tax within
tll. lrrrrr' prescribed for its payment in the notice of assessment, or
l,rrlrrll l,o pay the fuII or part of the amount shown on any return
l,,tun'r'rl l,o be filed under the provisions of the Tax Code or rules
,rrrrl lr,lirrlations, or the full amount of tax due for which no return is
r ,,,1r r r rt,rl t.o be filed, on or before the date prescribed for its payment
f i.r :t.1,\l3l and [a], 1997 NIRC).
'.1 ('ornpromise or compromise penalty - This is neither an
inr;',rrrl,iou nor a penalty, but it is an amount that is collected as a
r,rrrpr,nrise in cases involving ylglglig-Os of the Tax Code, rules or
1,,11 rrlrrl.ions. A compromise penalty cannot be imposed by the
I ,,runrr:isioner (Collector of Interrual Reuenue v. Uniuersity of Sto.
l't,nttt:;, tl. al., 104 Phil. 1062 [Unrep.]).It a taxpayer refuses to pay
tli',,r,nrpromise, criminal action is the remedy.
,\lllrough compromise penalties cannot be IegaIIy imposed,
| illtrrr trr'l I'i.neda u. Collector, CTA Case No. 364, Nou. 19, 1963), they
lr,r\. lr()wever, be collected if the taxpayer has expressed his
,: r I I r li rt.ss to pay the same. Hence, in connection with the taxpayer's
rr r
rr g'1,r,rr I irr Lhe CTA, said court may sentence the taxpayer to pay the
,,,irt,r'i)urise penalties agreed to by him as part of the judgment
lr ,,rrurussioner of Internal Reuenue u. Guerrero, L-19074, Jan. 31,
I'll, t )
I '\1tct:ial Assessment - A special assessment (1) is levied only
nrr lrrrrrl, unlike a tax which is imposed on persons, property and
,: e, r,i,.: r, ( 2) cannot be made a personal liability of the person assessed;
r lt ru lrrrscd wholly on benefit; and, (4) is exceptional both as to time
arr,f 1.,'rrlity (1 Cooley 107-108).
llrrr,'r,special assessments are not taxes within the constitutional
,,r ,rlrrlrrl,ory provisions on tax exemptions, it follows that the
!.c,,urplion under Sec. 28(3), Art. VI of the Constitution does not
qlrIl 1' I r, sllecial assessments.
'l'1r,, r:onstitutional exemption granted under the aforecited
lr i \'r1r(,n oI the Constitution covers charitable institutions, churches,
,
,lr,l lrir rirollages or convents appurtenant thereto, mosques, non-profit
1,1rs111rl1r1i1ve, and all lands, buildings and improvements actually, directly
srrrl t,xt:ltrsively used for religious, charitable or educational purposes.
ll rrr important to note, however, that under the proviso to
!i.r li lO o1'the Local Government Code, special assessments (or
':1,,,, rr I lt,vics) do not apply to properties exempt from the basic real
lrrrrlrr,r'l.y t,rrx under Sec. 234, aLso of the Local Government Code.
\ 111,rrli ( lrc properties which are tax-exempt under Sec. 234 are the
t5
T
l,AW Ol,' ltASl()'l'AxA1'l0N IN'l',ll l,l l'llll,ll'l'lNI'ls
properties mentioned in the above-cited provision of the Constitutiol.
It would seem, therefore, that in view of the exempting proviso in
Sec. 240 of the Local Government Code, properties which are
actuaily, directly and exclusively used for religious, charitable and
educational purposes are not oniy exempt from real property taxes
but are exempt from the imposition of special assessments as well'
The nature of special assessments can be better understood in
light of Sec. 240 of the Local Government Code, the pertinent portion
of which reads as follows: "A province, city, or municipality may
impose a special levy on the lands comprised within its territorial
jurisdiction specially benefited by the public works projects or
improvements funded by the local government unit concerned;
Prouid.ed, howeuer, That the special levy shall not exceed sixty per
cent (60%) of the actual cost of such projects and improvements,
including the costs of acquiring land and such other real property in
connection therewith. x x x"
5. License Fee
(a) A tax is levied in the exercise of the taxing power; Iicense fee
emanates from the police power of the State. It has been ruled that
regulation and taxation aie two different things, the first being an
exercise of the police porvYer, whereas the latter is not (Serafica u.
Trecrsurer of Ormoc City, et al., L-24813, Apr.28, 1969).
(b) The purpose ofa tax is to generate revenue; whereas a license
fee is regulatory (Victorias Milline Co., Inc. u. Municipality of
Victorias, Negros Occidental, L'21183, Sept.27 1968).
(c) The amount of the exaction or charge, if it is to be a license
fee, must only be of a sufficient amount to include expenses of
(1) issuing the license; and, (2) cost ofnecessary inspection or police
surveillance (Cuunjieng u. Patstone,42 Phil.818; City of lloilo u.
Villanueua, et ql., 105 Phil' 337).
In this connection, it was ruled that where a permit collected
from alien job applicants is in excess of the cost of regulation, the
exaction is a tax (Yillegas u. Hiu Chiong Tsa.i Pao Ho, et al', L-29646,
Nou. 10, 1975).Incidentally, exemption from tax does not include
buiiding permit fee and special assessments (Apostolic Prefect of the
Mountain Prouince u. City Treasurer of Baguio, 71 Phil. 547) asthese
are not taxes but regulatory fees in the case of the license fee, and
Ievy on account ofbenefits to land for the special assessments.
In one case, the Supreme Court said that if the purpose is
primarily revenue or if revenue is at least one of the real and
substantial purposes, then the exaction is a tax#ence, the Court
I 16
( I I,lN l,lllAl, l'll,l N(ll t'l,FlSi
l,' l,l rlr,rl rrrol,or vclricle registration fees are taxes because the
li,pr.,lrrlrvr.rrrt,r'nt, is urainly to raise funds for the construction and
iri,,rrti urrrr:r,ol lrighways and, to a much lesser degree, to pay for
1lq, , r t,,.ilir(,ri ol't,he l,and Trasportation Office, a regulatory agency
.t rl,, ( l.vtrn tlt'nl, (Ph,ilippine Airl,ines, Inc. u. Edu, etc., et al.,
i I t ;', ;. .ltt1i. 15, 1988). It should he noted that the ruling in
t,.1 t,t,tr, r, I'ltilippin,e Rabbit Bus Lines, Inc. (L-26862, Mar. 30,
r,r,rr r,,llr,,t,l'lcr:t,t,hatmoLorvehicleregistrationfeesarenottaxes
l,rrr t, r lr:rr lrccn superseded by said decision.
ll,,rr,.r'r.r', it, should be noted that in the case of license fees for
,t.r, ,r ., lrrl or:r:rrpations," the exaction may be very large without
,, rlr lr.irr14 a tax. This is so because under the general welfare
1,,,, , rrrrrrrrt ilral corporations are authorized to enact ordinances
r, g,r, r,l,. lirr t,lre health and safel,y and to promote the rnorality,
1., ,', ,,rrrl llt,rrcrai welfare of its inhabitants (Physical Therapy
|'|,. , tt ,tttt)tt ol Lh.ePhilippines, Inc.u.MunicipalBoardaf theCity
tl.,'ril,t, l0l llh,il. 1142).
I l, r , , li rrrrls of licenses are recogrtized in the law: (1) Iicenses for
rtr, r,r,rrlrrlron of useful occr.tpations; (2) licenses for the regulation
.r |, Ltr r( lr)n of non-useful occupations or enterprises; and,
r ir lr,, rr r':; ltll'feVenUe Only.
I I r r r.i t,worthy that non-payment of a license fee for a business
:,r,r l, ' tlr;rl lrrrsiness illegal. Howevet:, non-payment of a tax for a
t,,r , ,, rl,r'si not necessarily make that business illegal although
r t, r ,,, ,1' lr I lrt' a ground for criminal prosecution against the person
i t., , !,r, , r,ioltrting the law.
I ,rr I lrr.r'urore, not only businesses rn'hich are lawfully conducted
i ,. rlrli l,lven -those businesses lvhich are carried on itr.legaliy
1,. rrl,1,,, t lo Lax. For exampie, the'value-added tax (VA?) may be
,l ,n t,he illicit production and sale of cassette tapes. Tax
i, , r,,( rls rnay even extend to the income that is realized from
rl,, ,,1,.,,1 llrcse tapes because income from illegal sources is also
r.,.,,1'1,,
it r rrrlr,r'r'sting bo note that under the Local Government Code,
,,,,r,,r, rt,;rlr(rt's (and cities) are authorized to impose regulatory fees'
I Ii ,rl r;rrid Code provides that municipaiities may impose and
,,11, , I ,rr, lr rcasonable fees and charges on business and occupation,
,irr,I rr ri r.pl irr the case of the professional tax) on the practice of any
t,,,,1, r,rn ()r' caliing commensurate wit]r the cost of regulation,
i,, r,,, tr'), ;rrrrl licensing before any person may enpia€ie in such
i,,r rr,, ,rr.()(rcllpation. or practice o{'such profession or calling
ir I l!,1. Lttr:ol, Gauerrumen.t Code).
1?
r t,n w olf liASlc,l'AxA,lloN lN,t'llH t,Illl,ll,l,lNl,)s
A long line of decisions has held that to be valid, an ordinance
must conform to the following substantive requirements: (1) It must
not contravene the constitution or any statute; (2) It must not be
unfair or oppressive; (3) It must not be partial or discriminatory;
(4) It must not prohibit, but may regulate, trade; (b) It must be
general and consistent with public policy; and, (6) It must not be
unreasonable (Magtajas, et al. u. Pryce Properties Corp., Inc., et al.,
G.ft. No. 111097, July 20, 1994).
6. Margin Fee - This is not a tax but a currency measure
designed to stabilize the currency such as the exailioEbr-a certEin
fee under R.A. 2069 on the remittance of profits earned. in this
country (Esso Stand,o,rd, Eastern, Inc. u. Commissioruer of Internal
Reueruu.e, L.28508-09, July 7, 1g8g).
7. Debt - A tax is not a debt because it is not an obligation that
is created by contract, express or implied. A tax is an obligation
imposed by law. It, therefore, follows that if a taxpayer fails or
refuses to pay a local tax on tenements or apartments, he is liable
for criminal prosecution. He cannot plead immunity from criminal
Iiability under the constitutional provision which states that "no
person shall be imprisoned for non-payment of a debt or poll tax',
(Sec. 2A, Art. III, 1987 Constitution.;see also Villanueua u. City of
Iloilo, L-26521, Dec. 28, 1965).
Inasmuch as taxes are not debts, it follows also that the two
obligations are not susceptible to set-off or compensation under
Art. 7279 of the Civil Code. In the case of Republic u. Mombulao
Lumber Company (L-17725, Feb. 28, 1962), the Supreme Court
categorically ruled that taxes are not subject to set-off or
compensation.
In another case (Francia u. Intermediate Appellate Court, G.R.
No. 67649,,{une 26, 1988), the Court also held that no compensation
is legally authorized where it appears that the parties involved are
not creditors and debtors of each other (see Art. l2Tg, Ciuil Cod.e).
In that case, what was sought to be set off against the taxpayer,s
real estate tax liability to the City of Pasay was the amount of money
that he (the taxpayer) was supposed to receive as payment for his
property that was expropriated by the National Government. The
Court applied the Mombuloo ruling.
A corporation's outstanding claims for reimbursement against
the oil Price stabilization Fund (oPSF) cannot be offset against
its contributions to said fund. P.D. 19b6, as amended by E.O. 1BZ,
explicitly provides that the source of the oPSF is taxation. A taxpayer
may not offset taxes due from claims that he may have against the
18
L
(I llN l,lltAL 1) ltl NC tI']l,ltlS
I {rrr.r rrrrrrrrrt, ((]oll cr Philippines, Inc' u' Commission on Audit'
nttt,ttt) 'l'ttxcs and debts cannot be the subject of compensation
1,,,, irill1t, l,he Oovernment and the taxpayer are not mutually
creditorS
,ilr, I, l,,l rl ors ol' cach other and a claim for taxes is not a debt, demand,
is allowable to be set oft (Ibid")'
r rrnlr
'('l rrr iudgment as
It l$ interesting to note in this connection that although taxes
.,,, vrrrl tlcbt.s, tlie ruling in one decided case holds that a tax may
debt. For a clearer understanding of taxes
lrir r I ir I r' ol' t,hc nature of a
,irIl ,l,.lr(.s rrncl the ruling itself, the following excerpt is quoted, thus:
,,,l,here is a material and fundamental distinction between
Debts
;r I rr x ir ttd a debt (Meriwhether u' Garret, 102 U'S' 427)'
in its corporate capacity' while
,rr,' rlttt' t,cr the Government
in its sovereign capacity'
Irrrt's rlre due to the Government
,\ rlobt, is a sum of money due upon contract, express or
rrrrpliotl, or one which is evidenced by judgment' Taxes are
rrrrlrost,s ievied by the Government for its support or some
',;r,'r'i:rl prrpo"", which the Government has recognized'
li,,*,'r.rr, tax in a broad sense may be a debt, so that interest
.rr cst,ute and inheritance taxes may be deducted as interest
,,rr irrtlcbtedness" (Commissioner of In'ternal Reuenue u'
I',tlrrrr,<:a, Jr., L'16626, Oct. 29, 1966 citing Camden u' Finch
( irrrlc and Coke Co', 61 ALR 584)'
'l'lr:rt, portion in the abovecited ruling which speaks of the
rlstlrr.trbiiity of interest on taxes should be carefully analyzed. This
r1r1r.,rlrrrn nray be asked: In, light of the existing law, can it be said'
tlt,rl rrr trLL cases, interest on, taxes may be deducted? The answer to
tlrr,, ,1rrt'sl,ion should be qualified. As regards interest on taxes that
,r r I r r0I tronnected with the taxpayer's profession, trade
or business'
rr ,t,,.nrsi that deduction is not allowed.
'l'lu,'r is so because Sec.29(b)(1) (now, Sec' ?a[B][1] of the Tax
t ,,,lt rtf' lggf),on the deduction of interest, speaks only of the "amount
,,1 rrrlr,rt'ct paid or incurred. within a taxal:Ie year on indebtedness
rirt ilr.r.(,(l in connection with the taxpayer's prOfession, trade Or
Irlt !tll{'S$ X X X."
ll, st:ems, however, that under existing law even in the case of
, rtr,,,r,1rj or resident aliens who are self-employed (persons who are
, rrgirrlit'tl in business and those who practice their profession in the
t,t,, t,1'f ines), the deductibility of interest on indebtedness is limited
,,rrly lo interest paid or incurred within a taxable year on loans
,,,rrirrrr:t.cd from accredited financial institutions which must be
lrrr,\,r,n t,o have been incurred in connection
with the conduct of a
I rr t ;rir.yoI''s profession, trade or business'
19
 l,AW Olr lJAtil()'lAXAl'lON lN'l'll l,) I'ltl l,l['l,lNl,]S
Considering the above observations, thcrclbre, iL would seern thut,
in the case of individuals, deductibility of interest on taxes is no
Ionger authorized if those taxes are not in any way connected witlr
profession, trade or business. Hence, if, for example an individual
taxpayer incurs a liability for the payment of, or actually pays,
interest on his personal income tax or on donor's gift tax, the
deduction is not authorized.
How about corporations and taxable partnershlps? Appiying the
aforecited Sec. 29(b)(1) (now, Sec. 3a[B][1], 1997 NIRC), it would
seem that deduction ofinterest on taxes is legallyjustified provided
that the taxes paid or incurred are in connection with the taxpayer's
trade or business.
.t It is significant to note that in the case of Domirugo, etc. u.
Gq,rlitos, etc. (L-18994, June 29, 1963), the ruling seems to deviate
from the principle that taxes and debts cannot be compensated
against each other. In that case, what appeared to be a due and
-i'F*i, lrr'r ,lu(,stion may be answered in the negative. In the case of
demandable debt of the Goyernment to the estate of the late Walter
{F ,,, ,',r,1,,:; Milling Co., Inc. u. Commissionei of Internal Reuenue,
Scott Price (as payment for the latter's services), was allowed as a
set-off against the transfer taxes due from the decedent's estate.
The Court opined that when two obligations are both due and
demandable and all the requisites for a valid compensation are
present, compensation of the two obligations takes effect by operation
of law (citing Arts. 1279 and 1290, Ciuil Code).
* May the taxpayer, howeuer, set off his pen.d.ing unapproued,
refund of a tax for a preceding year again.st his tctx liability for a
subsequent year? Formerly, under the oid provisions of Sec. 51(d) of
the Tax Code, the set-off was legally possible. As a matter of fact, in
the case of Comm.issioner of Internal Reuenue_u,JJSE9n.S.uyae Mines,
Inc., et al. 1L,ZSZO9, July Zg, tg6$;tEe ruling was to the efTect that
a pending claim for refund may be set off against an existing tax
liability even though the refund has not yet been approved by the
Commissioner.
In light of the present Tax Code, which contains no similar
provision upon which the ltogon-Suyoc ruling was based, it is
doubtful whether a pending claim for refund may still be appiied
against an existing tax liability.
,tq f The matter has now been settledin Philex Mini,ng Corporation
q,l. (G.R. No. 125704,
il,rrl u. Commissioner of Internal Reuen,ue, et
il Aug. 28, 1998) where the Supreme Court categorically held that -
"x x x Philex's reliance on our holding tn Comruissioner
of Internal. Reuenue u. Itogon,-Suyoc Mines, Irtc., wherein we
ruled that a pending refund may be set off against an existrng
I' on
( i IIN UITNI, PIiI NCI I'I,US
t,r, Irrrlrilit,y evon though the refund has not yet been approved
l,r llr,, (lornrnissioner, is no longer with any support in
.rlirlrtl,rry luw.
ll is irnportant to note that the premise of our ruling in
tlr,. rrlirretrrcntioned case was anchored on Section 51(d) of
tlr,, [r]rrl,ionill Internal Revenue Code of 1939. However, when
tlr' N;rlional Internal Revenue Code of 1977 was enacted,
t lri, rn n rr, llrovision upon which the ltogon'-Suyoc pronouncement
,r',r'' l,;uic([ was omitted. Accordingly, the doctrine enunciated
111 l1,,1ytrr.-Suyoc cannot be invoked by Philex."
fll,tt, rtn (xl:ess payment of quarterly corporate income tax for
tlr,y,r,.,','rli,rr.g taxq,ble year be automatically credited or applied
tt1t rtt'it lltc corporation's estimated quarterly income tax liobilities
!rt1 ,llt, t,t \ttl,le quarters of the succeeding taxq.ble year?
rl
et ,,1 rtl lt No. 103379, Nov. 23, 1993), the Supreme Court ruled as
lrill,,'r", 'll is difficult to see by what ratiocination petitioner insists
,rh llr,' lrl.r'rir.I interpretation of the word 'automatic.' Such literal
lrrtr r1rr,,1;rlion has been discussed and precluded by the respondent
,rrrrt 1" \s decision of 23 December 1991 where, as aforestated, it
+rrl, ,l ll',rL\'once a taxpayer opts for either a refund or the automatic
f ,1 a r lr.rlrl scheme and signified his option in accordance with the
*:.pr1f ,1lr,,rr, t,his does not ipso facto confer on him the right to avail
,rl i lr,,,rrnl immediately. xxx' Prior approvalbythe Commissioner
,rl lrrlr rrr;rl llevenue of the tax credit under then Section 86 x x x
cr.rlrl :rlrt)r,ar to be the more reasonable interpretation to be given
tr, ,,irrrl :r,,cl,ion. An opportunity must be given the internal revenue
l,i,rl, l, ,rl (,he government to investigate and confirm the veracity of
| 1r,,, I ir r nr ri of' the taxpayer.' x x x (I)nsofar as the option of tax credit
+- , ,tr ,.r'n(r(1, this right should not be construed as an absolute right
+ lrr, lr r,; rrvirilable to the taxpayer at his sole option. x x x" Automatic
r l.rIrI r:r nol trvailable, but this does not mean that petitioner cannot
s.:,.t ;r r,.lrrnd or credit of the excess quarterly payment.
ll ttl tlt,e "non-automatic crediting" rulin,g in the Sq.n Carlos
trltllttrsi,'ttsc, howeuer, apply to indiuiduals who, under Sec. 67 (now,
'rr r i I rtl t,h.e Tax Code of 1997), &re required to file quarterly returns
ttl titt t,ntt' l.ax on o cumulatiue bq,sis?
'l'lr,' rrnswer to this question would seem to be in the negative'
,\,, ,,r,lrrr1; t,o Revenue Regulations No. ?-93, any excess of the total
rlrrrrr l.r'ly payments and taxes withheld over the income tax computed
lt I lr, l'r rrrr I incomp tax return may be applied as a credit against the
27
 LAW OF BASIC TAXATION IN THII PHILIPPINEg
quarterly income tax liabilities for the taxable quarters of t
immediately succeeding year. This is available to individuars w
desire not to await anymore the processing of any tax refund. to whi
ihey are entitled.
In case the payments credited are not completely utilized ot
applied in the taxable quarters of the immediately succeeding year
bhe remaining amount shall be claimed as refund or credit by
taxpayer pursuant to Sec. 204 of the Tax Code (see Sec. i, Reu. Reg
No. 7-93).
It should be noted, however, that in the aforecited. case,
was no taxable income, but instead, there was a net loss in
immediately succeeding taxable year of the corporation against w
the application was sought to be made.
Under Sec. 76 of the Tax Code of 1g77, in case the corporation !
entitled to a tax credit or refund of the excess estimated quarter
income taxes paid, the excess amount shown on its final adjustmer
return may be carried over and credited against the estima
quarterly tax liabilities for the taxabie quarters of the succeedind
taxable year. Once the option to carry-over and apply the excesi
quarterly income tax against ihcome tax due for taxable quarters o:
the succeeding taxable years has been made, such option shall be
considered irrevocable for that taxable period and no application
cash refund or issuance of a tax credit certificate shall be allow
therefor.
8. Regulo.tory fees - May q,n exaction be both a tatc as well as
regulatory fee? Tt would seem that this is possible, as in the case
Iicense taxes. Incidentally, a law iike P.D. 198T which regulates th
videogram industry may validly impose a tax of B0% on the g
receipts of videogram operators. In the case of Tio u. Videogram
Regulatory Board, et al. (G.R. No. 75692, June 18, 1g8Z), it was held
that the provisions of sec. 26 of the constitution which requires tha
every bill must contain only one subject which must be expressed in
the title thereof is not violated.
In Philippine Educational Publishers Association, Inc., et al. u.
De Ocampo, etc., et ol. (G.R. No. 115981, Oct. 80, lggb), the Court
explained that unlike an ordinary tax, a license tax is mainly for
regulation. Hence, according to the Court, its imposition on the press
is unconstitutional because it lays a prior restraint on the exercise
of its right.
9. Subsidy - A subsidy is a legislative grant of money in aid of a
private enterprise deemed to promote the public welfare. It is not a
tax althoirgh it may be necessary to raise the money to pay the
22
OENERAL PRINCIPLES
lrly lrv rlrtl&ns of a tax (1 Cooley 77). Subsidies are sometimes
l irt licu of tax exemptions,
ll1, (iustoms duties and fees' These are duties charged upon
orlitios on their being imported into or exported from a country
€hHlsy 73). Customs duties are taxes, but a tax is a broader term
larrludo not only customs duties but other taxes as well. Customs
trtr rogulatory imposts on goods'
11, lleuenue - This is a broad term thai includes not only taxes
lnCurne from other sources as well. Internal revenue refers to
t ut,h0r than duties on imports or exports in the nature of excise
auilh as taxes on tobacco, Iiquor, etc. (1 Cooley 75)-
'l'ribute - It has been said that tribute is synonymous with
l\,nl'nxation
implies tribute from the governed to some form of
telgnty (1 Cooley 78).
lll, Irrupost - In its general sense' it signifies any tax, tribute or
r, Irr its limited sense, it means a duty on imported goods and
Irntrrlise (1 Cooley 75).
BH CLASSIFIED
r 1, l'ersanal ?or - Also known as "capitation" or "poIl" taxes,
nro baxes of a fixed amount upon all persons of a certain class
iitl,t,r [he jurisd.iction of the taxing power without regard to the
i#srrrrl, ()f their property, or the occupations or businesses in which
ftly rr,uy be engaged. Before the effectivity of the Local Government
p6,iu, 1,,,.ronal tax was exemplified by the basic residence tax' Under
{klrle, however, the residence tax is now kn'own as "eoffii[runity
Mure on this tax will be discussed in the chapter on local
ilstt.
t, l'roperty Tax '' Property tax-es are taxe's aesessed on all
or all prop,erty'of a eertain class within the jurisdiction of
g power '(/ Cooley 1 1 8). An example of property tax is the
I lrrgperiy tax and additional levies on real property except special
i$lmrn,:nts under the Local Government Code. More on these taxes
*llt t u tahen up in the chapter on real property taxation'
l|. Direct ?or - D,irect taxes are taxes whereiR both the incidence
llability forthe paymeht of the tax as well as the impact or
lg of the tax falls on the same persan. An example of this tax is
ro tax where the person subject to tax cannot shift the burden
Jl Uru tux to another person. Estate and donor's gift taxes are other
Bluploe of direct taxes.
23
 l,AW Ot,. llASl(),l,AXA't'toN IN .l,l,,l I,IllLll)l,tNl,l.S (I I'N T' ITAL PII,INCII'L!]S

4. In,direct zor - Indirect taxes are t,axes wherein the incid.ence

of or the liability for the payment of the tax fals o" or"
f""ron, but
' t,, lr,rrt,['it. lhe contractee who will no longer shoulder the burden
,,t tlr,.r'onLrucLor's tax which contractors usual'Iy shift or pass on to
the burden thereof can be shifted or passed on to anoth". pu"rorr. rlr,,rr r'ust,orners and clients (Commissioner of In'ternal Reuenue u.
The sales tax, now the value-added tax (VAT), is t',ltrt (iolnmco a,nd Son.s, In,c., et al., L-31092, Feb. 27, 1987).
an exampie of
an indirect tax. VAT is payable by any person who,
in the course of Irr llrc above situation, it should be borne in mind that the ruie
trade or business, sells, barters, u*.hurrg", o" luu"u, goods
properties, renders services, and any person who or rlrirt lrrx cxemptions are personal to the grantee is not violated
an indirect tax, the burden-of paying the amount of
imports goods. As l,i, rrrri(, t,he overriding intention of the contracting parties is to
tfr" ir" may be , i''url)l t,he contractor for the benefit of the contractee.
shifted or passed on to the buyer, trinsferee or ressee
of the goods, ll,,trt ubout if the buyer himself is the one exempt, would he then
properties or services (Sec. 105, lggf NIRC)
t,, , rt t r tl,cd to cloim for refund of the tax that the seller might haue
_ Incidentally, w_hen the seller passes oru the tax to his customer, is
he going against the principre tiat tqxes,re personar t,,t , .t'rl on. to |tim? Inasmuch as an indirect tax, iike the sales tax or
payment of which cq.nnot be transferred to aruother person?
tiabilities the \ \'l', lioes on to the buyer not as a tax, but only as a component of
]s not going against the rule. when the serler puuul, on the tax to
No, he r l,
' t) r rt:hase price, it may be assurned that the buyer has no right to
r

rrlrl ;r rn lrrry refund.

his buver, he is only shifting the tax burd.en tt e liability to pay
it) to the purchaser as part of the cost of thelnotgoods ol services
llrrwover, if what is covered by the tax exemption grant are
rendered. "ord ,,' L'(,(:t, l,axes which sellers of goods and services usually pass on to
t lr, rr r:rrstomers, then it may be said that there is a valid reason for
The nature of the indirect tax, as exemplified by the
sales tax, ,, l l,,w r rrg the refund,
has been discussed by the supreme court in the case ph,ippine
of 'l'lrrrs, in the case of Macedau. Macaraig, Jt., etc., et al-, suprQ.,
Acetylerue co., Inc. u. commissioner of Internal Reuenue,
(L-19707, Aug. 17, 1987). According to the court,
et al. rlr,,(lourt ruied that the National Power Corporation (NPC), a
the sales tax that
is passed on to the purchaser as part of the p;.h;;;.i"u 1..r i.r'nrnerlt controlled corporation, could justifiably claim for the
or tnu , I rrrrrl of the tax on petroleum products that it had purchased from
commodity is a tax on the seller, and not the buyer. Hlrrce,
buyer happens to be tax-exempt, the seiler is nonetheless
if the ,, \,{'r'aI oil companies, where it appears that under a number of tax
liabre for , ,,, nr t)t,ion laws and presidential decrees enacted for said entity, its
the payment of the tax as the same is a tax not on the
buyer himself , r,,rnl)tion from the payment of said taxes was clearly shown.
but is actually a tax on the seller.
l,'or instance, the tax exemption grants to NPC mentioned NPC
_In a case, however, where the transaction in itself is tax-exempt
an-d the buyer pays the tax as part of the purchar" ,, lrr,ing "x x x exempt from aII taxes, duties, fees, imposts and ali
p"1.", it is the ,,tlr,,r'charges imposed x x x on all petroleum products used by the
I
seller's obligation, in case he has obtained a refund oi
the disputed ,,,r1roration," or that NPC's exemption includes those imposed
tax, to hold such refunded tax in trust for the buyer (Coikctor
Interrual Reuenue u. Americqn Rubber Co., et
of ,lrrr,ct,Iy and indirectly," or when said grant stated that NPC's
i lOS6i, Apr. 50, , \,'nrption covers "all forms of taxes, duties, fees, imposts, etc."
I e6s). "t.,
Analyzing the Court's decision in the abovecited case, the several
- Despite his right to shift, however, the seller may erect to absorb
the tax himself (Maceda u. Macaraig, Jr., etc., et at., G.R. Lr x t'x€rlption grants in favor of NPC all point to only one thing:
No. gg2gl, rir;r( the legislative intent is to grant immunity to NPC from the tax
May 31, 1991).
t lrrrt. oil companies invariably pass on to their buyers'
where, under an executive agreement between the philippines
and a specialized agency of the united Naticns like the ln other words, NPC's exemption herein is from the payment of
world Health
Organization (WHO), the contractee (WHO) in a corstruction r r, I i rect taxes
r
- something which is quite different, for instance, from
contract is designated as the tax-exempt party as where such I lr(, cxemption from taxes for which the grantee is directly Iiable.

agreement provides that said contractee is exempi from

all indirect It should be remembered in this connection that the liability for
taxes, the contractor under the said contract is actualry
the person tlrc payment of the indirect tax lies with the seller of the goods or
who is tax-exempt as the clear intention of the executivl
ugru"-"rt 'r.r'vices only, not the buyer thereof. Hence, it is important to find

24 25
 LAW Ot,' BAtil(i'l'nx^'l'l()N I N't't I l,) I,l ll l,ll,l,lNL.ls
out if the tax exemption grantcd t,o a t,axpir.ycr specifically includes
the indirect tax which is shifted to him as pa rL of the purchase price;
otherwise, iL is reasonable to assume that the tax exemption should
embrace only those taxes for which the buyer is directly liable.
Summarizing all possible situations involving indirect taxes, the
following points are worthy of note:
(a) When the consumer or end-user of a manufactured product
is tax-exempt, such exemption covers only those taxes for which such
consumer or end-user is directly liable. Indirect taxes are not
included. Hence, the manufacturer cannot claim exemption from
the payrnent of sales tax; neither can the consumer or buyer of the
product demand the refund of the tax that the manufacturer might
have passed on to him (Plr,ilippine Acetylerue Co. case, supra).
(b) When the transaction itself is the one that is tax-exempt,
but through error the seller pays the tax and shifts the same to the
buyer, the seller gets the refund, but must hotd it in trust for the
buyer (American Rubber Co. case, supra).
(c) Where the exemption from indirect tax is given to the
contractee, but the evident intention is to exempt the contractor so
that such contractor may no longer shift or pass on any tax to the
contractee, the contractor may claim tax exemption on the
transaction (Gotamco case, supra).
(d) When the law granting tax exemption specifically includes
indirect taxes or when it is clearly manifest therein that the
legislative intention to exempt embraces indirect taxes, then the
buyer of the product or service sold has a right to be reimbursed the
amount of the taxes that the sellers passed on to him (Maceda u.
Macaraig, Jr., etc., et al., supra).
In,cidentally, why is this particular tq,x known q.s arl "indirect
tax?" It is called as such because the one who actually pays the tax
(as part of the purchase price of the commodity or service) is the
purchaser. The purchaser, in the other words, is "indirectly" paying
the tax.
5. Excise Tax - Excise or privilege taxes are laid upon the
manufacture, sale, or consumption of commodities within the
country; upon licenses to pursue certain occupations and upon
corporate privileges (1 Cooley 127).
6. Gerueral Tax - General taxes are taxes levied for the gcineral
or ordinary purposes of the Government (1 Coaley 142). Exarnples
of these are internal reventre taxes, the collection of which is trtilized
for the general expenditures of the Government.
26
(I l,lNI,lltAL l'ltlN(lll'1,lls
7. SpeciaL Tax - Special taxes are taxes levied for special
l)rrrl)oses, such as the additional real estate tax levied under R.A.
1%o
1,.147 (now, Sec. 235, Local Gouernment Code) for the benefit of the
prrblic school system.
'lhe Constitution provides that "(a)ll money collected on any tax
lr,vied for a special purpose shall be treated as a special fund and
p;rid out for such purpose oniy. If the purpose for which a special
lrrnd was created has been fulfilled or abandoned, the balance, if
,rrry shall be transferred to the generai funds of the Government"
1Scc. 29[3], Art. VI, 1987 Constitution).
8. Specific ?or - This is a tax which imposes a specific sum by
I lro head or number or by sorne standard of weight or measurement
rr ntl which requires no assessment beyond a listing and classification
rrf'the subject to be taxed (1 Cooley 143). Specific taxes on alcohol,
Iobacco, etc., products are called excise taxes (Title VI, 1997 NIRC).
g" Ad Velorem Tax - An ad ualorem tax is a tax upon the value
rr('the article or thing subject to taxation. An example of an ad
uulorem lor is the real property tax.
tO. Customs Duties - The word "duty" is sometimes used in a
gcneral sense as synonymous with "tax." Customs duties are duties
r:harged upon the commodities on their being imported into or
cxported from a country (1 Cooley 73).
\1. Notional Tax - National taxes are taxes levied by the National
(,lovernment. Sec. 6, Art. X of the constitution provides that "(1)ocal
government units shall have a just share, as determined by law' in
l,he national taxes which shall be automatically released to them'"
1,2. Local Tctx - Local taxes are taxes levied by the local
government. Locai government units are authorized 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 (Sec. 5, Art. X, 1987 Constitution).
73. Progressiue Tax - Progressive taxes are taxes imposed
whereby the rate or amount of tax increases as the amount of the
income or earning to be taxed increases.
An example of progressive taxation is our present income tax
system. The following table on the tax rates for individual citizens
of and individual resident aliens in the Philippines shows a
graduated tax system starting from 5"/o on taxable income not
exceeding I}10,000.00 and a maximum of 34o/o if the taxable income
is over P500,000.00 (Sec. 24[A][1][c], 1997 NIRC).
27
 (I I.)N I]ITAL PHINCIPLES
I,AW OII tsASIC TAXATION IN'I'III')
I'IIII'IPI]INIIS

rr illegally disposed of are objects which were acquired

r() allegerl to be
ToxDutis:
lf Taru,blnhwmeis: l'rom private sources (Joya, et q'1. u. PCGG, et al', G''R' No' 96541'
5%
Not over?10,000 ,,lrt.g" 24, 1993).

Over? l0,00Obutnotoverf 30,000 ? 500+ 10%oftheextpssover? 10'000

Over? 30,000butnotoverP 70,000 ? 2'500+ 15% oftheexcessover? 30'000 CASES

OverP 70,000butnotover?140,000
? 8'500+20%oftheexcessover? 70'000
Over?140,000 but not over?250,000
f 22'500 + 25% of ihe excess over?140'000 lll,lPUBLIC v. tsACOLOD-MURCIA MILLING CO" INC"
f 50'000 + 30% of the excess over?250'000 l,)'l'AL., L-19824-26, JULY 9, 1966
Over?250,000 but not overf 500,000
Over?500,000 f 125'000 + M% of the excess over?500'000 !'ACTS: This is a joint appeal by the above-named sugar centrals
t r., r* a decision of the bourt oi f irst Instance of
Manila finding them
Note:EffectiveJanuary1,1999'themaximumratewillbechangedtn33%and32%on
lrrrble to pay special assessments under R'A' 632 (charter of
January 1,2000. l'lrilippine Sugar Institute)' R'A. 632 imposes a tax of F0'10 per
whereby the tax rate 1,',',,1'of sugar-collectible for five years' such
tax to be borne by the
14. Regressiue Taxes - These are taxes
or earning to be taxed increases' plan"ters and sugar central operators in proportion to their
decreases as the amount of income ',,,r1,., Institute, using the tax collected,
,,, illing share. The Philippine Sugar
|S.Proportioruate?or-Thisataxbasedonafixedproportionof Refinery, the operation of which by
U"i'u iu*"a' like the real estate tax which is 1,,,.chlsed the Insular Sngu"
the value of the ilr,, phiiippine Sugar Institute resulted in tremendous losses'
""Ui""i the property assessed'
a fixed proportion of ti'" uui"" of ,l.he three sugar centrals refused to pay their tax balances and
the-re are several ;r;;ked for the refund of the amounts paid on the ground that the tax
TAXPAYER'S SUIT' In our legal system' l,r.ing in reality a special assessmeht; once it had been determined
be maintained in our courts'
instances where tu*puy*''* suits may t lrrrt no benefit u..rr", or inures to the
property owners paying the
For exampie, in one'case, the Court ruled
that a taxpayer has the
from said assessment were being
q";;tioning the.vatidity or constitutionalitv of
right to file an ."ti;;-,-fri-ifr"ory
:|lrsossffrel}t, or that the proceeds
whom it had been levied'
tiat the expenditure of public funds ,r, is[pplied to the prejudice of those against
a statute or law payment said assessment ceases'
"rr purpoge-o{ administering or t L,,n the authority to insist on the of
by an officer of tntCot'""t'*ut't for the
implementing an u"con"titutional or
invalid law constitutes a
et al' u' Arroyo' etc" et
ql'' ITELD: The special assessment at bar is not so much an exercise
misapplication of ,'"n f"tta" (Gascon" 0l l he power of taxation nor the imposition of a special assessment,
G.n. No' 78389, Oct' 16, 1989)' t i rt. the exercise of police power for the
general welfare of the entire
etc" et al" supra' it was
,

In the case of Maced'a u' Macoraig' Jr'' philippines a-nd a taxpayer ,'()untry. It is, therlfore' an exercise of a sovereign power' which no
herd that a d.uiy "i".i"a senator of
the The three sugar centrals are,
1'r ivate citizen may lawfuily resist.
thereof has the i;;;i;;;;itv to file an action for certiorari' Ilrlrefore, Iiabl6 to pay the tax in question'
legality of a claimed
prohibition una *"u"rrau*r, to question the
producls' since the refund
refund of indirect taxes like the tax on oil
itself, if found ;;;;ihout legal basis' constitutes an illegal ( ItIUNJIENG v. PATSTONE, 42 PHIL' 818
expenditure of Public funds' ITACTS: Plaintiff was rlenied a building permit until he could
held to have been of the city
A "derivative" or "representative" suit was also councilors of a t)Iy a permit fee equal to one-half of the assessed value going to
were building he was
validly filed by a group of taxpayers who iilegal disbursemr:nL of i,,,,d to be covered by the arcade of the
city, where rt app-eared that there was an ,.orrstruct. Plaintiff assailed the legality of the fee and commenced
(City Councit of Cebu City
public funds which emanated from taxes l,'11irl action to contest the same.
31' 1972)'
u. Cuizon, etc., et at', L'28972' Oct'
Inordertojustilyataxpayer'ssuit'itisnecessarythrrl'ptrblic HELD:Inimposingafeeequaltoone.halfoftheassessedvalue
suit would I'rrrl il"what Municipal Board
he portion of the wal-k covered by the arcade, the
funds should be invoived. Thus, a taxpayer's
,,1.t

oo
 I,N W 0IT I}ASIC'|AXA?ION IN'I'III.] I'IIIT,II'I'INIIS
of Manila exceeded its powers. Nothing in the charter of the city
shows an intention to confer power on the Municipal Board to impose
a license tax for revenue anent the construction of buildings. The
fee is a license tax, for a license fee may only be a sufficient amount
to include the expense of issuing a license and the cost of necessary
inspection.
There are three classes of licenses which are recognized. They
are as follows: (a) License for the regulation of useful occupations
or businesses, (b) License for the regulation or restriction of
non-useful occupations or businesses, and (c) Licenses for revenue
only.
Licenses for useful and non-useful occupations or businesses
originate from the police power and the accepted rule is to the effect
that the power that is conferred to regulate and to issue the license
includes the right to fix the amount of the Iicense fee. License for
non-useful occupations are also based on the police power and the
exaction of a fee may be justified hy the power to license and regulate.
However, in the fixing of the amount of the license fee, municipal
corporations are allowed a wider latitude. Consequently, Iicense
fees which are in the nature of privilege taxes have been upheld as
in the case of the sale of liquors.
CITY COUNCIL OF CEBU CITY v. CUIZON, ETC., ET AL.,
L-28972, OCT. 3t, tg72
FACTS: The seven plaintiffs, majority members of the City
Council of Cebu City, fiied an action against Carlos Cuizon, Mayor
of Cebu City; Jesus Zabate, Acting Cebu City Treasurer; the PNB
Co.; and, Tropical Commercial Co., praying inter alia that the
contract of Feb. 5, 1966, between Cuizon, in behalf of the city, and
Tropical Commercial Co. for the purchase of road construction
equipment from the latter for P685,767.30 on a five-year deferred
payment plan be annulled because the contract was entered into
without the necessary authority and approval of the City Council.
Furthermore, the City Treasurer had not certified to the City Mayor
as required by Sec. 607 of the Revised Administrative Code that the
funds had been appropriated for the purpose; and that the City
Treasurer did not certify the availability of funds for the purpose.
The lower court, however, ruled that on the basis of Art. l39T of
the Civil Code, the plaintiffs lacked the legal capacity to sue since
they are not the real parties in interest.
30
(i ltlN I,lltAl, I)ltl NUI I'l,US
lll,) l,l): '['he ruling of the lower court is erroneous since the
, ,,rrlrlrrinl. of the plaintiffs is not a personal suit but a representative
' rr r I lr.v t,he city councilors on behalf and for the benefit of the city of
(','lrrr lrncl as taxpayers.
'l'lre lower court's interpretation that only the City Mayor is
,.rrrlrowored to sue for the city is untenable because here, the Mayor
rr .rrltl be the last person to file such suit since he himself maintains
llr,. lt'gality of his act.
'l'her suit is like a derivative suit or a representative suit of a
,lr, liholder on behalf of a corporation"
( t/\scoN, ET AL. v. ARROyO, ETC., ET AL., G.R. lIO. 7g3gg,
( )( t'l'. 16, lggg
ILACTS: Following the 1986 EDSA Revolution, the Philippine
(',rrrrrnission on Good Government (PCGG) sequestered the Lopez
l;rrrrily's TV stations, Channels 2 and 4, and the Office of Media
,\ll'rrirs took over its operation. The Lopez farnily, through counsel,
r
'rluested the Aquino Government for the return of TV Channels 2
,rnrl 4. The PCGG approved the return of TV Channel 2 to the
|,,pezes. As regards TV Channel 4, respondent executive secretary,
l,r' rruthority of the President and representing the Government,
,.rrt.ered into an "Agreement to Arbitrate" with ABS-CBN,
r,,lrresenLed by its president, Eugenio Lopez, Jr., pursuant to which
,rn arbitration committee rvas created"
Petitioners, as taxpayers, filed a petition for certiorari and
rrrjrrnction, seeking to annul and set aside said agreement.
HELD: As to whether or not petitioners have the legal
1rr:rsonality or standing to file the instant petition, the Court ruled
llrat in several cases, the right of a taxpayer to file an action
,ltrestioning the validity or constitutionaiity of a statute or law has
lrcen recognized, on the theory that the expenditure of public funds
lr.y an officer of the Government for the purpose of administering or
rrnplementing an unconstitutional or invalid law, constitutes a
rnisapplication of such funds.
The present case, however, is not an action to question the
r:onstitutionality or validity of a statute or law. It is an action to
lnnul and. set aside the "Agreement to Arbritrate," which, as between
Lhe parties, is contractual in character. Petitioners have not shown
t.hat tirey have a legal interest in TV Station Channel 4 and that
t,hey wiII be adversely affected if and when the said television station
31
 (i IiN I,lttAl, l'll.l N(ll l'l,l')Ii'
LAW 0!' IlASlo'fAxA'.ftoN
lN'ftl l' l'tlILlPPlNl'ls
, rrrrl. r)rl rtntl other oil pr<-rducts which contint-red to be subject to the
isreturnedtotheLoper,family..petitioners,therefore,havenolegal ' t",, I lr rl.or(' trl ridditional duty. Following suf5mission of a report by
rr

to file the present petition' rlr, 'l'rr'ilf'oommission upon the cornpletion qg public hearings' per
"tu"ai"g 1,r,r,,'tlrrrc set lbrth in the Tariff and Custorr\s Code, the President
t AUDIT' , , ,,,,.,1 l,l.O. 478, dated Aug. 23, 1991, which lQvied in addition to the
CA1,Tp;X PHILIPPINES, INC' v'-COMI\IISSION ON
MAY 8, 1ee2 crrLioned 9% ad, ualorem additional dut .y and all other existing
Eill;- G.R. NO. s2585, ,, t,, r,. r r r

',,1 r',rlttratn duties, a special duty of

F0'95 P'er liter or P151'05 per
on Audit (COA) directed
FACTS:Respond'ent Commission l,;rrr.l of imported crud'e oil and '00 Pet liter of imported oil
F1
(CPI) to remit to the OiI Price
petitioner Cuft"f iftifiPilneg' Inc'. 1,r,,rlrtt't,.
collection of the additional tax on
St"abiiizatior f'o.ra iOfSpl its lrr petition for certiorari, prohibition and mandamus, petitioner
1956' as weII as unremitted rr
petroleum p.oatttl-' put't'uu"t to P'D' ,,', ,,rtlcd the validity of E'O' 475 and E'O' 478 for being violative of
the years 1986, tr987 and 1 988'
c.ilections uf tfr" ufrou, tax covering li, , ll4, Art. VI of the Constitution' It was contended that since
arJvising it that all its claims for
with intere.tt a"il"charges' and , rr I 1, ( llyylglsss has the authority to enact rev€ nus bills, the President

reirnbursement iiomlh* opsr

shall be held in abeyance pending ,

rr'r 1' ttt)t u.ar*" such power by issuing the afcJrementioned executive
COI further directed petitioner oil cornpany
to
sui:h remittrrr"* ,,r rl('r's which are in the nature of revenue-EQnerating measures'
thc taxes coilected against outstarrding
desisi, from further'-oiisetting
periods'
claims for 1989 snd sxbsequent ll IILD: While the enactment of appropriQtion, revenue and tariff
of-the eventuai decision of ttre COA l,rll:r is within the province of the Legislat ive, it does not follow'
I1s motion f's1 lsssnsideration
CPI imputes that respourient lrowtlv€r, that E.O.475 and E.O.478 ma), not be issued by the
on fhe matter ;";*g been denied'
commissio., u"lal'i" ''igi't ter aliu' in.preventing the former from t,r,,sident, because under sec. 28(2) of Article vI of the constitution,
exercising tf'" t? "lf:.:l its remittances against lt's tlr.rc is explicit permission to Congress to authorize the President
reirnbu rsement vis-A-ris
the OFSIr' ,;rrbject to such limitations and restrictiQns as [congress] may
,,,,g,cise,'to fix*within specific limits" "tariFf rates x x x and other
or not the amounts due tc tlie
ItttLD: On the iseue of whetheragainst the latter's outstanding
,lrrt ies or imposts x x x'"
lr* offset
clpsts r"om petiiio"rur*uv
it is settled that a taxpayer rnay not offsel The relevant congressional statute is t-he Tariff and Customs
claims frr- ( torle of the Philippines, particuiarly Secs- 104 and 401, being the
"uii"f,'rnd,
taxes due fro*'"tui*t that
he may have against the G-overnment'
of compensation because the Governmertt
p.rtinent provisiqns. These are the provisions which the President
Tsxes cannot fr* ii* ouUj"ct ,'xlrlicitly invoked in promulgating E'O' 475 and E'O' 478'
creditors and debtors of each
and tlre tu"puV*' u'e not mutuaily
other a,d u iortute" is not s^uch a debt, demand' cont'ract or
"t.i* set off' OSMEilIA V. ORBOS, ETC., ET AL.' G'Et . NO. 99886' MAR' 31'
:.,,ig*""t as is allowed to be envisioned as 993
'lhe Court furthel ruled that taxation is no longer
I
the of the
FACTS: Under P.D. 1956, the Oil Price Stabilization Fund
revenue.to support existence
a measllre merely t0raise purpose such as
for a reguiatory (oPSF) was created as a special fund for reimbursing oil companies
Governrnent. fui"r,"uy be levied stabilization of a
*"u"'"f" ihe reh^abiiitation and 1or cost increases in crude oil and imporrted petroleum products
to provide
threatenedindustryruhichisaffectedwithpublicinterest'aconcern resulting from exchange rate adjustments and from increases in
of the State to address' world market prices of crude oil. The OPSI' was reclassified into a
which is within the police power
trust liability account by virtue of E'O' lo24 in 1985 and was ordered
E'f AL'', G"Id' released to the Ministry (now, Department) of Energy' Said executive
GARCIA v. EXEOUTM SECRETARY', order also authorized the investment of tihe fund in government
hro. rorzzS, JULYS' 1992
securities, with earnings therefrom accruir:\g to the fund. E.O. 137,
FACTS: Ii.O 4i5 was issued
on Aug' 15' 1991 bv [)r'csident issued on Feb, 27,1987 , amended P.D. 1956 tay expanding the grounds
Aqtrino,"a,.ingLt,i.rrrbeof'ad.l.itionaldutyonallinrptlr'l,r:tlrrrticles for reimbursement by oil companies for po ssible cost underrecovery
9'% t'tt |o/u utf r'tulorenr, tlxct'pl' itr t:rtsers of
frorn the or"ri,,X.f r'irrlposed
33
 LAW Ol,' llASl(;'t'AXA'l'lON IN't'll I,t I,illl,lt,l)lNI,tS
due to reduction of dornestic prices of petroleum produced, as
determined by the Ministry (now, Department) of Finance.
Petitioner avers that the creation of the trust fund violates
Sec. 29(3), Art. VI of the Constitution. He argues that the monies
collected pursuant to P.D. 1956 should be treated as a speciar fund,
not as a trust account or trust fund and should be used onry for the
special purpose or objective for which it was created.
HELD: Likening the OPSF to the sugar stabilization fund and
citing the ruling in Gaston, et al. u. Republic Planters Bank, et al.
(G.R. No. 77L94, Mar. 15, 1988) which explained the nature and
upheld the validity of the sugar stabilization fee, the Court held
that while the funds collected may be referred to as taxes, they are
exacted in the exercise of the police power of the state. Moreover,
that the OPSF is a special fund is plain from the special treatment
given to it by E.O. 137. It is segregated from the general fund; and
while it is placed in what the law refers to as a "trust liability
account," the fund nonetheless remains subject to the scrutiny and
review of the coA. The court is satisfied that these measures comply
with the constitutional description of a "special fund."
MACEDA v. MACARAIG, JR., ETC., ET AL., G.R. NO. 88291,
JUNE 8, 1993 (RESOLUTION)
FACTS: Petitioner moves for reconsideration of the decision in
the instant case promulgated on May 81, 19g1 sustaining the
exemption of private respondent National Power Corporation (NpC)
from all forms of taxation.
HELD: A chronological review of the NPC laws will show that
it has been the lawmaker's intention that the NPC was to be
completely exempt from aII forms of taxes - direct and indirect.
On the issue as to who pays for the taxes due the Government
for the sale of bunker fuel oil to the NPC, the Court, quoting DOJ
Opinion No. 106, series of 1954, ruled that oil companies which
supply bunker fuel oil to the NPC have to pay the taxes imposed
upon said bunker fuel oil sold to the NPC. By the very nature of
indirect taxation, the economic burden of such taxation is expected.
to be passed on through the channels of commerce to the user or
consumer cf the goods sold. Beca,u,se, however, the NPC has been
exempted from both direct and indirect taxation, the NPC must be
held exempted from absorbing the economic burden of indirect
taxation. If the NPC purchases such oil from the oil companies, the
34
(i l,)N l,lltAl, l'ltl NC I t'l,lts
irl'(' r:i t'rrt,it,lcd t,<-r lre reimbursed by the BIR for that part of the
l, r r,, r. ;i l r rir:o ol' Nl'}C which verifiably representQ the tax already paid
l,. tlr. ,il conrpany-vendor to the BIR.
lr)\'4, t,l'll AL. v. PRESIDENTIAL COMMISSION ON GOOD
r ioV I,ItNMENT (PCGG), ET AL., G.R. NO. 96541, AUG. 24, 1993
/, l(l'l'^S; Petitioners, luminaries in the local art scene and as
rir rt,, \,(,r's, filed a petition for prohibition and mandamus seeking to
!,r 1 r n t lrc PCGG from proceeding with the auction sale by Christie's
,
,,t llr,,"v York, per Consignment Agreement, of the OId Masters
l',irrrtnrgs as well as 18th and 19th century silverware seized from
l\lirl;r.irrrang and Metropolitan Museum of Manila and placed under
tlr,., rr:;tocly of the Central Bank. They alleged that said artworks
,., r, lrrst.orical relics having cultural significance whose disposal
,,, , 1,r'ohibited by law. Respondents defended the Consignment
\1,r.r'111g111 and their authority to sign the same averring that said
I',urrlrngs and antique silverware were part of the ill'gotten Marcos
'- , ,r lllr ;rnd did not fall within the classification of protected cultural
1,r,,1r.r'tics nor specifically qualified as part of the Filipino cultural
11, r rltr11c.
llllt,D: The rule is settled that no question involving the
,,,rr,t rrtionality and validity of a law or governmental act may be
rl
1,,,rr rl rrnd decided by the court unless there is compliance with the
l, 1,irl lcquisites for judicial inquiry. Petitioners, having failed to
,lr,,rv Llrat they are legal owners of the artwork or that the valued
i.,,,,'r; have become publicly owned, do not possess any clear legal
rrl,lrt lo question the alleged unauthorized disposition thereof.
l.lr,it,her can this petition be allowed as a taxpayer's suit. Not
, , , r 1, rrction filed by a taxpayer can qualify to challenge the legality
,,1 ,,llrr:iul acts done by the Government. A taxpayer's suit can prosper
,, rr I y rl t,[-re governmental acts being questioned involve disbursement
, ,l 1, rr lr lic funds upon the theory that the expenditure of public funds
lr1' ;ur officer of the State for the purpose of administering an
,r rr, rs[itutional act constitutes a misapplication of such funds, which
,r r
r,r:r v l)(' enjoined at the request of a taxpayer. Obviously, petitioners
,, r ,' not, challenging any expenditure involving public funds but the
,lr''p.sition of what they allege to be public properties. It is worthy
t', not,e that petitioners admit that the paintings and antique
,rrl'r,r'w&r€ were acquired from private sources and not with public
Irntl('y.
35
 LAW OIT BASIC TAXATION IN THE PHILIPPINES
COMMISSIONER OF CUSTOMS v. MANILA STAR FERRY,
INC., ET AL., G.R. NOS. 31776-78, OCT. 21, 1993
FACTS: Manila Star Ferry, Inc., United Navigation and
Transportation Corporation and Chiat Lee Navigation are the owners
of the tugboat 'Orestes,' the barge Iighter UN-L-106, and the vessel
S/S Argo.
On June 12, 1966, the S/S Argo, the Orestes and UN-L-106, along
with two wooden bancas of unknown ownership were apprehended
for smuggling. They were caught in the act of unloading imported
cigarettes, clothing materials and apparel and piastic bags along
the Manila Bay, all of which were not manifested and declared for
discharge by said vessel.
Seizure and forfeiture proceedings against S/S Argo and its cargo
and the other watercrafts were initiated for violation of Sec. 2580(a),
(b) and (c) of the Tariff and Customs Code, along with appropriate
criminal charges. In a decision by the Collector of Customs, as
affirmed by the Customs Commissioner, the vessels and watercrafts
were declared forfeited in favor of the Government pursuant to
Sec. 2530(a) and (b). The CTA, acting on the petition for review,
substantially modified said decision by ordering private respondents
to instead pay fines.
HELD: Sec. 2530(a) in unmistakable terms provides that
vessel engaged in smuggling "in a port of entry" cannot be forfeited.
This is the clear and plain meaning of the law. It is not within the
province of the Court to inquire into the wisdom of the law, for indeed,
it is bound by the words of the statute. Neither can words be put in
the mouths of the lawmakers. A uerba legis non est recedendum.
Nevertheless, although the vessel cannot be forfeited, it is subject
to a fine of not more than F10,000 for failure to supply the requisite
manifest ofthe unloaded cargo under Sec. 2521 of the Code.
SAN CARLOS MILLING CO., INC. v. COMMISSIONER OF
INTERNAL REVENUE, ETAL., G.R. NO. 103379, NOV.23,1993
FACTS: Petitioner corporation had a totai income tax
overpayment of P781,393 for taxable year 1982, reflected as
creditable income tax in its annual final adjustment return. Said
amount was not applied against its 1983 tax liabilities because it
sustained a net loss for that year and it still had a creditable income
tax of ?4,47A. Thus, its final adjustment income tax return for
taxable year 1983 reflected the amount ofF781,393 carried over as
36
GIINERAL PRINOIPLF]S
rr t,rrx credit and F4,470 as creditable income tax.
Iretitioner signified its intention to apply the total creditable
rrrrruunt of P785,863 against its 1984 tax liabilities pursuant to
Firt:. 86 of the Tax Code (now, Sec. 76, 1997 NIRC), accompanied by
rrrr trlternative request for a refund or tax credit' Respondent
r,ornmissioner disailowed the proffered automatic credit scheme, but
l,r*rrted the request as an ordinary claim for tax refund or credit,
rrrrrl pursuant to Sec. 292 (now, Sec' 229, 1997 NIRC) in relation to
l,ir,c. 295 (now, Sec, 204, 1997 NIRC) of the Tax Code, subjected the
rin rne to verification/investigation.
On review, the CTA heid that prior investigation by and authority
l'rom the CIR were necessary before a taxpayer can avail of a tax
rt,l'und or credit. The Court of Appeals, upholding the ruling of the
I,rrx court, dismissed the appeal thereto'
On the main issue of whether or not prior authority from
HELD:
I,lro Commissioner ofInternal Revenue is necessary before a corporate
lrrxpayer can credit excess estimated quarterly income taxes paid
rrllainst the estimated quarterly income tax iiabilities for the
rrrrt:r:eeding taxable year, under Sec. 86 of the Tax Code (now,
,\r'r:. 76, 1997 NIRC). respondent court correctly held that the choice
nl'u corporate taxpayer for an automatic tax credit does not lpso
f trcto confer on it the right to immediately avail of the same and
a
r,rrrphasized the need for an investigation to ascertain the correctness
ol'Lhe corporate returns and the amount sought to be credited.
Prior approval by the Commissioner of Internal Revenue of the
l,rrxcredit would appear to be the most reasonable interpretation to
lrc given to said section. An opportunity must be given the internal
rovenue branch of the Government to investigate and confirm the
vcracity of the claims of the taxpayer. The absolute freedom that
pctitioner seeks to automatically credit tax payments against tax
lirrbilities for a succeeding taxable year, can easily give rise to
r:onfusion and abuse, depriving the Government of authority and
r:ontrol over the manner by which the taxpayers credit and offset
l,heir tax iiabilities, not to mention the resultant loss of revenue to
t,he Government under such a scheme.
I'ATALINGHUG v. COURT OF APPEALS, ET AL.' G.R.
NO, 104786, JAN. 27,1994
FACTS: The Sangguniang Panlungsod of Davao City enacted
()rdinance No. 363 in 1982, otherwise known as the Expanded Zoning
Ordinance of Davao City, Sec. 8 of which provided that C-2 districts
37
 LAW OF BASIC TAXATION IN THN PHILIPPINES
shall be for predominantly commercial and industrial use.
Petitioner applied for and was granted a building permit for the
construction of a funeral parlor named Metropolitan Funeral Parlor
at Cabaguio Avenue, Agdao, Davao City. Private respondents who
are residents of Barangay Agdao, complained that since the
construction of said funeral parlor was within the b0-meter radius
from the Iglesia Ni cristo (INC) and several residential structures,
it violated the restrictions under Sec. 8 of said city ordinance. The
Iower court dismissed the complaint on the ground that there was
no violation of the regulatory provision of the zoning ordinance.
On appeal, the Court of Appeals reversed the lower court's
decision by annulling petitioner's buiiding permit. It ruled that even
if the buildings owned by the INC and respondent Cribillo were
beyond the 5O-meter residential radius, the funeral parlor was
within the 50-meter radius from the building of one Wilfred Tepoot.
Overruling the lower court's determination that said building was
commercial, the appellate court held that although Tepoot's building
was used by a lessee for a laundry business, nevertheless, per tax
declaration, it was a residential lot.
HELD: The appellate court's decision is reversed and the lower
court's ruling that petitioner did not violate the city zoning ordinance
is reinstated.
The reversal by the Court of Appeals of the trial court's decision
was based on Tepoot's building being declared for taxation purposes
as residential. The court held that a tax declaration is not conclusive
of the nature of the property for zoning purposes. A property may
have been declared by its owner as residential for real estate taxation
purposes but it may well be within a commercial zone. A discrepancy
may thus exist in the determination of the nature of property for
real estate taxation purposes vis-d-vis the determination of the
property for zoning purposes.
COMMISSIONER OF INTEBNAL REVENUE v. MOBIL
PHILIPPINES,INC., ET AL., G.R. NO. 704920,ApR. 28,1994
FACTS: The Energy Regulatory Board (ERB) issued Resolution
No. 87-02, dated Feb. 11, 1987 and Resolution No. 87-03, dated
Mar. 16, 1987, respectively increasing by an average of 30.2 and
54.7 centavos per liter, retroactive to Jan. 1, 1987 and Mar. I, 1g87,
the cost recovery of oil companies on the various petroleum products
refined and marketed by them locally. As a result of theee reuolutions,
BIR assessed Mobil Philippines, Inc. (Mobil) a deficiency ad. ualorem
38
GIINERAL PRINCIPLES
t,ux on petroleum products withdrawn from the refinery. In addition,
rr surcharge of 25oh was imposed by the BIR for Mobil's failure to
lrrry tho additional ad, ualorem taxes in a timely manner,
i.e., within
I 5 days from the respective dates of the two resolutions'
while Mobil agreed to pay the additional a.d ualorem taxes, it,
Irowever, protesred the assessment of the 25% surcharge on the
grcrund that at the time the excise tax or ad ualorem tax on the
yet in existence
ltroducts were due, the additional tax base was not
irnd hence the additional tax could not be paid. There was, therefore,
rrs argued by Mobil, no delay for which the 25% surcharge was sought
t,o be collected.
In rejecting the protest of Mobil, the commissioner of Internal
Itovenue stated that the dates of the two BOE (now, ERB) resolutions
wcre,,by inference the date of removal of the products from the place
of'production mentioned in Sec. 110" of the Tax Code (now, Sec' 130,
teeT NIRC}
After the BIR Commissioner was sustained by the cTA, Mobil
wcnt to the court of Appeals which declared that Mobil was not
guilty of delay in the payment of the adjusted excise tax for the reason
lhat there was no period specified in the resolutions for the payment
of'said taxes. According to the court of Appeals, one cannot incur in
tlr.:lay when there is no period fixed for payment'
HELD: In reversing the decision of the Court of Appeals, the
supreme court declared that while it is literally true that the
rrtljusted tax base, or the wholesale posted price as increased by or
rrs a result of the operation of the two resolutions did not exist 15
rluys after physical removal of the product from the refinery, however,
il' t,hat contention were taken literally and seriously, the additional
rrd ualorem taxes on the previously withdrawn petroleum products
would be payable only when it would please Mobil to pay such taxes'
Such a r"rrrit is absurd and certainly repugnant to public policy, for
(lre additio rtal ad. ualorem taxes were clearly due on the additional
vrrlue undeniably accruing to Mobil's benefit in respect of previously
w ithdrawn prod.ucts but not yet disposed of by the time the increase
in cost recovery of oil companies was arithorized by the ERB
rcsolutions.
MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS,
INC. V. DEPARTMENT OF FINANCE SECRETARY, G.R.
NO. 1"08524, NOV. 10, 1994
FACTS: Petitioner coconut traders association is engaged in
39
 LAW OT BASIC TAXATION IN THE PHILIPPINES
buying and_ selling copra in Misamis oriental. petitioner alreges
that under sec. 108(b) of the Tax code (now, sec. 109[cJ, lggr NIRC),
copra was classified as an agricultural food product, and,
therefore,
exempt from value-added tax (vAT) at alr rtugu. of production
or
distribution.
on June 11, 1991, Revenue Memorand.um circurar No. 47-g1
was issued, classifying copra as an agriculturar non-food product
under Sec. 108(a) (now, Sec. l\g[aJ, iSSf NmCl and declaring
exempt from vAT only if the sale is made by the primary prod.ucer.
it
Petitioner challenges such reclassification of copra as an
agricultural non-food product because it has the effect of denying
to
petitioner the exemption it previously enjoyed when
classified as an agricuitural food product. "opr"
*r.
HELD: In inte_rpreting Sec. 1QB(a) and (b), NIRC (now,
sec. 109[a] and [cJ, r99z NIRC). the commission"" of Internal
Revenue gave it a strict construction consistent with the ruie
that
tax exemptions must be strictly construed against the taxpayer
and
liberally in favor of the State.
Moreover, as the government agency charged with the
enforcement of the law, the opinion of the commissioier of Internal
Revenue, in the absence of any showing that it is plainly wrong,
entitled to great weight. The ruling was made by the commissioner
is
of Internal Revenue in the exercise of his po*u, und.er s"..
z+s or
the NIBC (how, secs. 244 a*d, z4i, rggr tunq to make rurings
or
opinions in connection with the implementation of the provisions
of
internal revenue laws, including rulings on the classification of
articles for sales tax and similar purposes.
coMMIssIoNER oF INTEBNAL REVENUE v. couRT oF
APPEALS, ET AL., G.R. NO. t041Et, and
ATLAS
CONSOLIDATED MINING AND DEVELOPMENT
CORPORATION v. CoURT oF APPEALS, nr ei., c.n.
NO. 105563, jointly decided on MAR. 10, 1996
FACTS: Petitioner Atras consolidated Mining and Development
corporation (ACMDC) is a domestic corporation which owns and
operates a mining concession in Toledo City, Cebu.
on Apr. 9, 1980, the commissioner of Internal Revenue, acting
on the report of BIR examiners, served on ACMDC an assessment
notice and demand for payment of F1Z,gg1,0T0.b1 representing
deficiency ad ualorem percentage and fixed taxes prus increments
for the taxable year 192b. Likewlse, another assessment notice
with
40
GENEBAL PRINCIPLES
tllrrrund for payment and business taxes with F5,000 compromise
lrt'nultf was served on ACMDC.
ACMDC protested both assessments, but the same was denied,
Irt'nce it filed petitions for review before the Court of Tax Appeals
((1'l'A). On May 31, 1991, the tax court rendered a consolidated
rf r'<rision holding that (1) ACMDC was not liable for deficiency ad
t'tt,lorem tax on copper and silver for 1975 and 1976, thereby
rrl'f"cctively sustaining ACMDC's theory that in computing ad uq.lorem
Irrx on copper minerals, the refining and smelting charges should be
rloducted, in addition to freight and insurance charges from the
l,ondon Metal Exchange (LME) price for manufactured copper; and,
(2) ACMDC was liable fot ?1,572,637.48, exclusive of interests,
r:rrrrsisting of 25o/o surcharge for late payment of the ad ualorem tax
rr nd late filing of notice of removal of silver, gold and pyrite extracted
tluring certain periods and for alleged deficiency manufacturer's sales
l,lrx and contractor's tax.
In separate petitions for review elevated to the Court ofAppeals,
t,he Commissioner questioned the portion of the CTA's decision
rlcleting the ad ualorem tax on eopper and silver, and ACMDC, on
t,he other hand, assailed the portion of the decision ordering it to
lray P1,592,637.48 representing deficiency assessment.
Respondent appeilate court rendered judgment affirming the tax
<:ourt's manner of computing the ad valorern tax. Thus, the
Oommissioner filed a petition before the Supreme Court (G.R.
No. 104151) raising as sole issue whether in the computation of od
palorem tax, smelting and refining charges, in addition to freight
and insurance charges, should be deducted from the price ofcopper
concentrates.
ACMDC, stiil not satisfied with the decision of the Court of
Appeals reducing its tax liability to F906,124.49 by deleting the 25%
surcharge on silvdr, gold and pyrite, similarly filed a petition before
the Supreme Court (G.R. No. 105563) alleging that it should not be
liabie for any deficiency tax assessment for 1975 and 1976.
HELD: In G.R. No. 104151, the Court held that the provisions
ofthen Secs. 243 ar,d246 ofthe Tax Code provide that the assessment
shail be based, not upon the cost of production or extraction of said
minerals or mineral products, but on the price which the same-
before or without undergoing a process of manufacture-would
command in the ordinary course of business.
In the instant case, the allowance by the tax court of smelting
and refining charges as deductions is not contrary to the above-
4L
fl
I,AW OF BASIC TAXATION IN THE PHILIPPINES
mentioned provisions of the Tax Code which ostensibly prohibit any
form of deduction except freight and insurance charges. A review
of the records showed that it was the London Metal Exchange price
on copper wire bar which was used as tax base by ACMDC for
purposes of the 2o/o ad ualorem tax on copper concentrates since there
was no available market price quotation in the commodity exchange
or markets of the world for copper concentrates nor was there any
market quotation locally obtainable. Hence, the charges for smelting
and refining lyere assessed not on the basis of the price of the copper
extracted at the mine site which is prohibited by law, but on the
basis of the actual market value of the manufactured copper which
in this case is the price quoted for copper wire bar by the London
Metal Exchange.
In several cases, it has been held that the ad ualorem tax is to be
cornputed on the basis of the market value of the mineral in its
condition at the time of such removal and before it undergoes a
chemical change through manufacturing process, as distinguished
from a purely physical process which does not necessarily involve
the change or transformation of the raw material into a composite
distinct product.
Therefore, the imposable od uqlorem tax should be based on the
selling price of the quarried rninerals, which is its actual market
value, and not on the price of the manufactured product. If the
market value chosen for reckoning is the value of the manufactured
or finished product, as in the case at bar, then all expenses of
processing or manufacturing should be deducted in order to
approximate as closely as possible the actual market value of the
raw mineral at the mine site.
As a matter of practice and principle, the Supreme Court will
not set aside the conclusion reached by an agency such as the CTA,
which is, by the very nature of its function, dedicated exclusively to
the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse
or improvident exercise of authority on its part.
In G.R. No. 105563, the Court ruled that under Sec. 248 of the
then Tax Code, the payment of ad ualorem tax shall be made upon
removal of the mineral products from the mine site or if payment
cannot be made, by filing a bond in the form and amount to be
approved by the Commissioner conditioned upon the payment of said
tax.
In the instant case, the records show that the payment af. od
ualorem tax on gold, silver and pyrite was belatedly made. Bad faith
42
GTiNERAL PRINCIPLDS
is not essential for the imposition of the 25% surcharge for Iate
justification given by ACMDC
lrayment of the ad. ualorenr. tax. The
i,t ut tfru quantity of gold, silver and pyrite on which t]ile ad ualorem
l,ax is based can only be determined after it goes through some
processing is not sufficient to relieve ACMDC of its liability to pay
l,he 25% surcharge for }ate payment.
The law requiring the payment of the 25% surcharge in case the
q,d, ualorem tax is not seasonably paid is mandatory' It provides a
plan which works out automatically. The cornmissioner of Internal
il*,r".rru is not vested with any authority to waive or dispense with
bhe collection thereof.
As for the manufacturer's tax imposed under then Sec. 186 of
the Tax code and based on the legal concept of "engaging in
business,,'ACMDC cannot be held liable therefor. A manufacturer,
in order to be subjected to pay the percentage tax under said section,
must be "engaged" in the sale, barter or exchange of personal
property. It cannot be legally asserted, for purposes ofthis particular
u"r"".*"rt only, that ACMDC was engaged in the business of selling
grinding steel LaIIs on the basis ofthe isolated transaction entered
into by lt i., f gZS. There is no showing that said tralsaction was
underiaken by ACMDC with a view to gaining profit therefrom and
with the intent of carrying on a business therein. The sale v/as more
of an accommodation to the other mjling companies. weII settled is
the rule that anything done as a mere incident to, or as a necessary
consequen"" oi, the principal business is not ordinarily an
independent business in itseif. ACMDC was not a manufacturer
subject to percentage tax imposed under Sec' 186'
The same conclusion, however, cannot be made with respect to
the contractor's tax being imposed on ACMDC under the former
sec. 191 of the Tax Code. It cannot validly claim that the leasing
out of its personal properties was merely an isolated transaction.
Its book of accounts .ho*. that several distinct payments were made
for the use of its personal properties such as its plane, motor boat
and dump truck. Considering that there was a series of transactions
involved, plus the fact that there was an apparent and protracted
intention io profit from such activities, it can be safely concluded
that ACMDCwas habitually engaged in the leasing out of its plane,
motor boat and dump truck, and is perforce subject to the contractor's
tax.
Assessmen ts are prima facie presumed correct and made in good
faith. It is the taxpayer and not the Bureau of Internal Revenue
who has the duty of proving otherwise' It is an elementary rule that
43
 LAW Ol,' llASl()'l'Axn'l'lON IN't'ltl,l PHILIt,PINITS
in the absence of proof of any irregularities in the performance of
official duties, an assessment will not be disturbed. All presumptions
are in favor of tax assessments. Verily, failure to present proof of
error in the assessment wiII justify judicial affirmance of said
assessment.
Tax statutes are to receive a reasonable construction with a view
to carrying out their purpose and intent. They should not be
construed as to permit the taxpayer to easily evade the payment of
the tax.
PHILIPPINE AIRLINES, INC. v. SECRETARY OF FINANCE,
ET AL., G.R. NO. 115852, OCT. 30, 1995, and companion cases
(RESOLUTTON)
HELD: Reiterating its earlier decision declaring the
constitutionality of R.A. 7716, otherwise known as the Expanded
Value-Added Tax Law, the Court held, inter alia, that the enactment
of R.A. 7716 as a revenue tax measure conforms with the procedure
prescribed by Sec. 24, Art. Vl of the Constitution.
While Sec. 24, Art. VI provides that all appropriation, revenue
or tariff bills, bills authorizing increase of the public debt, bills of
Iocal application, and private bills must "originate exclusively in the
House of Representatives," it also adds, "but the Senate may propose
or concur with amendments." In the exercise of this power, the Senate
may propose an entirely new bill as a substitute measure. S. No.
1630, as a substitute measure, is therefore as much an amendment
of H. No. 11197 as any which the Senate could have made.
As regards the requirement in Sec. 26(2), Art. VI of the
Constitution that the title of the law shall contain the subject of the
bill, by stating that R.A.7716 seeks to "[Restructure] The Value-
Added Tax (VAT) System [By] Widening Its Tax Base and Enhancing
Its Administration, and for These Purposes Amending and Repealing
the Relevant Provisions of the National Internal Revenue Code, as
Amended and for Other Purposes," Congress thereby clearly
expresses its intention to aurend any provision of the NIRC which
stands in the way of accomplishing the purpose of the iaw.
As a general proposition, the press is not exempt from the taxing
power of the State and that what the constitutional guarantee of
free press prohibits are laws which single out the press or ttrrget a
group belonging to tire press for speciai treatment or which in any
way discriminate against the press on the basis of the contctrt, r-r{i the
publication, and R.A. 7'i16 is not one of these.
44
( I t,lN I,lltAL P tilN() l l,l,lrs
Wrth respect to the contention that by removing the exemptions
,l't.he press from the VAT while maintaining those granted to others
rrrirkes the law discriminatory, it was held that since the law granted
ilrc press a privilege, the law could take back the privilege anytime
w it,hout offense to the Constitution. The reason is simple: by granting
,.xcmptions, the State does not forever waive the exercise of its
:rovereign prerogative. In withdrawing the exemption, the Iaw
rrrorely subjects the press to the same tax burden to which other
lrrrsinesses have long been subject.
The VAT is not a Iicense tax. It is not a tax on the exercise of a
lrrivilege, much less a constitutional right. It is imposed on the sale,
lr;rrter, Iease or exchange of goods or properties or the sale or
,';rchange of services and the lease of properties purely for revenue
t)urposes. To subject the press to its payment is not to burden the
lxercise of its right any more than to make the press pay income tax
or subject it to general regulation is not to violate its freedom under
l he Constitution.
I'HILEX MINING CORPORATION v. COMMISSIONER OF
INTERNAL REVENUE, ETAL., G.R. NO. 125704,AUG.28, 1998
FACTS: The BIR sent a letter to petitioner Philex Mining
Corporation (Philex) on Aug. 5, 1992 asking the latter to settle its
tax liabilities for the second, third and fourth quarters of 1991, and
of the first and second quarters of 1992, totaling ?123,821,982.52.
l'}hilex protested the demand for payment of tax liabilities stating
t,hat it has a pending VAT input credit/refund for taxes paid for the
.years 1989 to 1991, amounting to P119,977,037.02 plus interest,
which should be applied against its tax liabilities, citing as authority
t,he ruling rn Collector of Internal Reuenue u. Itogon-Suyoc Mines,
Inc., et al.
On Sept. 7,1992, BIR, disregarded Philex's position and declared
that no compensation can take place and reiterated its demand for
payment of tax liabilities plus interest within 30 days from receipt.
In view thereof, Philex raised the issue before the CTA on Nov. 6,
1992. In the meantime, the BIR issued a tax credit forP13,144,313.88
which, as applied to Philex's tax liabilities of ?123,821,982.52,
Iowered petitioner's tax obligation to ?110,677,688.52.
The CTA ordered Philex to pay the remaining balance of its tax
obligation plus interest, holding that there can be no legal
compensation between a iiquidated debt to the Government and an
unliquidated claim ofpetitioner; besides, taxes cannot be subject to
45
 LAW Ol.' llAslLl't'AXA'ftON lN 1'll t'l l'Flll,l l)l'lN!)S
offset or compensation. The Court of Appeals affirmed the decision
of the CTA, and denied petitioner's motion for reconsideration.
A few days after such denial, Philex obtained its VAT input
credit/refund for 1989 to 1991, 1992 and 1994. Consequently, Philex
insisted that ipso jure there can now be an offset between said input
credit/refund and its excise tax liabilities since both have already
become due, demandable and fully liquidated, and legaI
compensation can properly take place.
HELD: The Supreme Court found no merit in petitioner's
contention. Taxes cannot be subject to compensation for the simple
reason that the Government and the taxpayer are not creditors and
debtors of each other. 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.
It has been categorically and repeatedly held that taxes cannot
be subject to set-off or compensation (Francia u. Intermediqte
Appellate Court, et al., G..R. No. 67649, June 26, 1988; Coltex
Philippines, Inc. u. Commission oru Audit, et al., G.R. No. 92585'
May 8,1992).
The ruling in Commissioner of Internal Reueruue u. Itogon,'Suyoc
Mines, Inc., et al. (L-25299, July 29, 1969) no longer has any support
in statutory law. The premise of the ruling in the aforementioned
case was anchored on Sec. 51(d) ofthe National Internal Revenue
Code of 1939. However, when the National Internal Revenue Code
of 1977 was enacted, the same provision upon which the ltogon,'Suyoc
pronouncement was based was omitted. Accordingly, the doctrine
enunciated in ltogon-Suyoc cannot be invoked by Philex.
A distinguishing feature of a tax is that it is compulsory rather
than a matter of bargain. Hence, a tax does not depend upon the
consent of the taxpayer. If any taxpayer can defer the payment of
taxes by raising the defense that it stiil has a pending claim for
refund or credit, this would adversely affect the government revenue
system. A taxpayer cannot refuse to pay his taxes when they fall
due simply because he has a claim against the Government or that
the collection of the tax is contingent on the result of the lawsuit it
filed against the Government.
46
(I I,lN I,)Rn L PItl N(ll l'l,lrs
AuISCO INSURANCE CORPORATION, ET AL. v. COURT OF
,\t,t,lrALS, ET AL., G.R. NO. 112675, JAN. 25, 1999
ttAcTS: Petitioners comprise 41 domestic non-life insurance
, or-l)or6tions. Upon issuance by them of various machinery insurance
lrolit:ics, petitioners entered into reinsurance treaties with
Nlrrnchener Ruckversicherungs'Gesselschaft (Munich), a
,,,,rr resident foreign insurance corporation on Aug. 1, 1965' The
nlirlrirnce treaties required petitioners to form a pool, as one was
,',,',rrlingly formed on the same day.
'l'he pool of machinery insurers submitted on Apr' 14, L976 a
lrrr;rrrcial statement and an "Information Return of Organization
l,lxr.rrrpt from Income Tax" for 1975 on the basis of which the
('ollccior of Internal Revenue assessed deficiency corporate taxes
,,rrtl withholding taxes at source and on dividends paid to Munich
petitioners. The assessment was protested through the pool's
rr rrrl to
,rutlitor, SGV and Co.
On Jan. 27, 1986, the Commissioner denied the protest and
,,r'tlcred. petitioners, assessed as "Pool of Machinery Insurers"'to pay
,1,.l'iciency income tax, interest and withholding tax-
The court of Appeals ruled that (1) the pool of machinery insurers
\ry1rs a partnership taxable as a corporation and that the latter's
,.ollection of premiums on behalf of its members, the ceding
,'ornpanies, was taxable income; and, (2) prescription does not bar
-BIR
rlrt: from collecting taxes due because the taxpayer cannot be
located. at the address given in the income tax return filed.
l'ctitioners contend otherwise.
HELD: The petition has no merit. The supreme court sustained
l,he ruling of the appellate court that the pool is taxable as a
r.orporation, and that the Government's right to assess and collect
t,he taxes had not prescribed.
on the issue of whether or not the pool or clearing house is
I,axable as a corporation, the supreme court ruled that ineludibly
the Philippine legislature, per Sec. 24, NIRC as worded in 1975,
included in the concept of corporations those entities that resembled
t,hem such as unregistered partnerships and associations. The NIRC's
inclusion of such entities in the tax on corporations is made even
clearer by the Tax Reform Act of 1997 which amended the Tax Code,
the pertinent provisions being Secs. 22 and 27(A), 1997 NIRC'
The court, citing Euangelista et al. u. collector of Internal
Reuenue, et al. (102 Phil. 140), heid that then Sec' 24 covered
47
 l,nw olr llnsl(l'l'AXA',l'toN lN 1'illl pHlLilrplNlrs
unregistered partnerships and even associations or joint accounts
which had no legal personalities apart from their individual
members.
In the instant case, prescinding from Art. 1T6z of the civil code,
which defines a contract of partnership, the court ruled that the
ceding companies entered irrto a pool agreement or an association
that would handle all insurance businesses covered und.er their
quota-share reinsurance and surplus reinsurance treaties with
Munich, considering the following indicia: (1) the poor has a common
fund that pays for its administration and operating expenses;
(2) the pool functions through an executive board composed of
representatives from the ceding companies; and (3) while the pool
is not a reinsurance and does not issue i.nsurance policies, its work
is indispensable, beneficial and useful to the business of tire ceding
companies.
As to whether or not remittances to the pool are dividends
subject to tax and would constitute double taxation for taxing the
same premium income twice, the court ruled that the pool is a
taxable entity distinct from the individual corporate entities of the
ceding companies. The tax on its income is obviously different from
the tax on the dividends received. by said companies. clearly, there
is no double taxation here.
The tax exemptions claimed by petitioners cannot be granted,
since their entitlement thereto remains.,,.rp"ou!., and
unsubstantiated. It is axiomatic in the law of taxation that taxes
are the lifeblood of the nation. Hence, exemptions therefrom are
highly disfavored in law and he who claims tax exemption must be
able to justify his claim or right. petitioners have failed to discharge
this burden of proof. The sections of the 1g77 NIRC cited are
inapplicable because these were not yet in effect when the income
was earned and when the subject information return for the year
ending 1975 was filed.
The exemption granted to the reinsurance companies under
sec. 255 of the 197b version of the NIRC cannot be applied to the
instant case because the pool is a taxabre entity distirrct from the
ceding companies and, therefore, the latter cannot individually claim
the income tax paid by the former as its own. Sec. 2a@)(1) (now,
sec. [28J[1J, 1997 NIRC) pertains to tax on foreign corporations, hence
it cannot be claimed by the ceding corporations. Neither ca, Munich
be granted exemption solely on the basis of this provision of the Tax
code because it specifically taxes dividends, the type of remit,tances
forwarded to it by the pool. whiie not a signatory o[' 1,he pool
48
( ; I.] N IIITAL PII,INC]IPI,ES
,\1irct'rnent, Munich is apparently an associate of the companies
1,rn-suant to the reinsurance treaties, which required the formation
,,1 llrt'said pool. Munich cannot be considered tax exempt under the
li l' Wcst Germany Tax Treaty because the assessment for corporate
nr('()rne tax was made when the treaty was not yet in effect.
l,'inally, on whether or not the Government's right to assess and
,,,llcct the subject taxes had prescribed, the Court ruled that the
1,r'r'ricriptive period was tolied under Sec. 333, NIRC (now, Sec. 223,
t !97 NIRC) because "the taxpayer cannot be located at the address
lirvt'n in the information return filed and for which reason there
rlelay in the sending the assessment." The law states that said
'r':rs
1,r'r'iod will be suspended only if the taxpayer informs the
(lr)nrmissioner of any change of address. Indeed, whether the
( i,rvernment's right to collect and assess the tax has prescribed
rrrvolves facts which have been ruled upon by the lower courts. In
tlrr, :rbsence of a clear showing of palpable error or grave abuse of
,lrscretion, as in this case, the Court rnust not overturn factual
I rnrlings of the CTA or the Court of Appeals.
EXERCISES
1. (a) What is taxation? What are the elements of a tax?
l,)xplain.
(b) Do tax laws operate beyond the jurisdictional iimits of a
country? Explain.
(c) Is not the principle of territoriality or situs vioiated
whenever the Philippine Government taxes the income of
rron-resident citizens abroad? Explaiu ycur answer.
2. (a) Distinguish between tax and iicense fee.
(b) Is the taxing power inherent in the State as well as in the
local governments? Explain.
3. The VAT (value-added tax) law authorizes the refund or tax
credit of "input taxes" passed on to the manufacturer-seller of the
t'inished products on which the inputs subject to input taxes had
been used. The refund or tax credit is authorized only if the
rnanufacture-seller exports the finished products and is registered
with the BIR, as a"zere rated exporter." That, is to say, he is exempt
lrom VAI and also entitled to refund or credit of i.npr,rL taxes. On
the other hand, a rnanufacturer-seller who exports his product but
is not VAT-registered is only exempt from VAT but is not entitled to
refund or credit of input taxes. (a) Is this not contrar], to tlie equal
.,i tl
 l,Aw 0lf IJn stC l'Ax^'t,toN lN ,t't-lti l,t-ilLIt,l,tNlrs
protection clause in the Constitution? (b) What non-revenue aspect
of taxation can you perceive in the problem above? Explain your
answer.
4. The withholding tax law requires the withholding agent to
withhold aird remit the corresponding withholding tax to the BIR
during the year a person's income is earned. A taxpayer, however,
contends that since a person's income tax under the law is due
and payable only after the end of the year, the act of withholding
the tax is an invalid payment of an obligation and is an undue
deprivation of property without due process of law. Is the taxpayer's
contention correct? What principle in taxation can you discern
herein? Explain.
5. Distinguish taxation from police power as to purpose, basis,
and benefits received.
6. What is a regulatory tax? Is the margin fee an example of a
regulatory tax? Explain.
7. What is the distinction between a direct tax and an indirect
tax? When a manufacturer passes on the percentage sales tax to
the purchaser, is he not going against the principle in taxation that
taxes are personal and may not be assigned to another person or
entity? ExpIain.
8. A Iaw imposes a tax of 115 of 1% of the export price of prawns
produced in the Philippines. The law provides that the proceeds of
the tax shall be turned over to the Philippine Prawn Growers
Association, Inc. (PPGA), a non-profit private corporation registered
with the Securities and Exchange Commission to be used by the
PPGA exclusively to undertake activities that promote the growth
of the Philippine prawn industry such as undertaking research on
how to improve the productivity of prawn farms in the Philippines,
undertaking marketing activities to promote the export of Philippine
prawns abroad and similar activities that will directly further the
growth of the industry.
The members of PPGA constitute 90o/o of all the prawn growers
in the country representing 100% of the country's prawn exports.
JN, a practicing lawyer and taxpayer filed a suit with the Suprerne
Court questioning the constitutionality of the law on the ground that
the funds raised through taxation wiII be used for a private purpose.
WiIl said suit proper? Explain. (1988 Bar)
9. In 1985, Bolinao Manufacturing Corporation (BMC) sold steel
bars to the Philippine Government through the Department of Public
Works and Highways. BIVIC stiil has an uncontested Pl.0 Miltion
50
(I l,lN l,lliAL PItl NCI Pl,l'ls
r,,,.r!,il1)le from the Government by virtue of the sale of the steel
lrrrr', ln 1986, BMC overpaid the Bureau of Internal Revenue
f 'ol),000 in corporate income tax, an amount not contested by the
Itllt l,rrt, which has remained unrefunded. For calendar year 1990,
I tN l( ' r rrl,icipates to pay the BIR a corporate income tax of ?2.5 Million
I
l,r !rrl tro of an unexpected windfall income in the last quarter of
t!r,ro May BMC offset all its receivables from the Government in
t,i,r tl]rl payment of said anticipated P2.5 Million corporate income
lir,, rn 1990? Explain. (1990 Bar)
tt), 'l'he police power, the power to tax, and the power of eminent
,1,,r!urr1 are inherent powers of government. May a tax be validly
r,,,;,,,r;t,tl in the exercise of the police power and not of the power to
Lr ' Il'.your answer is in the affirmative, give an example. (1991 Bar)
"
I l. Sometime in December 1980, a taxpayer donated to his son
I oo() s|ares of stocks of San Miguel Corporation. For failure to file
;, rlorr()rl)S return on the donation within the statutory period, the
r .r \ l)iryor wa-s assessed the sum of F102,000 as donor's tax, plus 25%
,rr, lurrge or F25,500 , and 20% interest or F20,400, which he paid
,'n .lurte 24,1985.
( )D Aug. 10, 1986, he filed his income tax return for 1985, claiming
,11(,11{ others, a deduction for interest amounting to P9,500 and
r,,lr,rting a taxable income of P96,000'
on Nov. 10, 1986, the taxpayer filed an amended income tax
rr,lrrrn for the same calendar year 1985, claiming therein an
,r,l,l rt.ional deduction in the amount of F20,400 representing interest
1,;r rr[ tln the donor's gift tax.
A claim for refund of aileged overpaid income tax for 1985 was
Ir llrl with the Commissioner, which was subsequently denied.
Upon appeal with the CTA, the Commissioner took issue with
tlrc CTA's determination that the amount paid by the taxpayer as
r rrl,crest on his delinquent taxes is deductible from gross income for
ilrirt same year pursuant to Sec. 29 (b)(1), NIRC (now, Sec' 34[B]t1l'
reeT NIRC).
The Commissioner of Internal Revenue pointed out that a tax is
rrot, an indebtedness. He argued that there is a fundamental
,lrstinction between a "tax" and a "debt." According to the
( )ommissioner, the deductibility of interest on indebtedness from a
lrcrson's income tax cannot extend to interest of taxes.
(a) What is your opinion on the argument of the Commissioner
( hat, a tax is not an indebtedness so that deductibility on the interest
rn taxes should not be allowed?
51
 LAW OF BASIC TAXATION IN THE PHILIPPINES

(b) Distinguish between the legal concepts oftaxes and debts. Chapter II
(c) Pursuant to the National Internal Revenue Code, for interest
to be deductible what are the requirements to be met? Explain. I,IMITATIONS ON THE TAXING POWER
(1992 Bar)
12. Are motor vehicie registration fees taxes or Iicense fees?
Explain. INIIERENT LIMITATIONS ON THE TAXING POWER.
Irrlr.rr.rrt, Iimitations are so called because they proceed from the
i lr v rrirl,rrre of the taxing power itself. As stated by an authority on
iu r rr ( ron, the taxing power has very distinct and positive limitations
,rrirrr,' ol'which inhere in its very nature and exist whether declared
,f rr(ll, rlcclared in the written constitution (1 Cooley 211).
'l'rrxution is bound in its exercise by its own nature, essential
and purpose (In the Matter of Washington St., 69 Pa.
,.lrrr lrrct,crristics
Iit |tLil;see McFadden u. Longham, 58 Tex. 579).
'l'lrose inherent limitations on the taxing power are: (a) Public
I'ru t)ose of taxes; (b) Non-delegability of the taxing power;
tr r 'l'r'rritoriality or situs of taxation; (d) Tax exernption of the
{ l,ivr.rnffirert; and, (e) International comity.

A. Public Purpose of Taxes - It is the first requisite of lawful

ll rrrl,ion that the purpose for which it is laid shall be upg}]l_g purpose
1 I t 'ooley 212). Public purpose in taxation is important because of

,rll I,lrc powers of government, that of taxation is said to be the

,rlrorrgest as it can be readily employed against one class of
rrrrlrviduals in'favor of another so as to ruin one class and give
rrrrlrrnited wealth'and property to another, if there is no implied
lrnr r (,ution on the uses for which such taxing power may be exercised
1 t {:ooleY 398).

According to a U.S. case, "to lay with one hand the power of the
fi(|vcrnment on the property of the citizen and with the other to
lrr,rl,ow it on favored individuals to aid private enterprises and build
r r I r private fortunes, is nonetheless a robbery because it is done under

tlrc lbrms of law and is called taxation" (Citizens Sauings & Loan
.1,;s)r o/ Cleueland, Ohio u. City of Topeha, 20 Wall. tU.S.l 655, 663,
:t:: L. Ed. 455).
What are the tests for determining the public purpose in a tq,x?
( lnc test is whether the thing to be furthered by the appropriation
,'l'public revenue is something which is the duty of the State, as a
liovernment, to provide (Waples u. Maruast, 108 Tex. 5, 184 S.IY.
ftt}, L.R.A. 1917 253).
Another test is whether the proceeds of the tax wiII directly
promote the welfare of the community in equal measure. The right
58 53
 Ln w ol,' tlASto 't'AXAl'toN tN ,t'il t, t,llil,tpplNES
to tax depends upon the ultimate use, purpose and object for which
the fund is raised. There is no power to tax an object which is not
within the purposes for which governments are established
(1 Cooley 384).
Included as being within the public purpose iimitation are taxes
that would raise revenue for the general expenditures of the
Government, infrastructure and other public works, projects such
as the construction and maintenance of roads, bridges and highways,
social welfare and amelioration such as charity and self-help projects
for the infirm, destitute and handicapped persons, protection,
security and defense, and similar other functions.
The promotion of the general welfare is the State's paramount
concern. Thus, a law imposing a tax on sugar produced by sugar
centrals for the purpose of using the proceeds thereof in the
rehabilitation and upliftment of the sugar industry is a tax levied
for a public purpose (Lutz u. Araneta, 98 Phil. 148).
In the imposition of taxes, public purpose is presumed. Hence,
it was held in a certain case that where an ordinance did not
specifically state the purpose for which the tax was to be used, it is
presumed that said tax is created for a public purpose (Mendoza
Santos & Co. u. Municipality of Meycauayan, et al., 94 Phil. 1047
IUnrep.J).
In one case, there was a law (R.A. 1635) which required a semi-
postal stamp on mail matter berween Aug. 19 and Sept. B0 of each
year to raise funds for the Philippine Tuberculosis Society. The
validity of the tax was upheld by the Supreme Court because the
Court ruled that the eradication of TB as a contagious disease is a
public purpose (Gomez u. Palomar, etc., et al., L-23645, Oct. Zg, l96S).
The collection of market stall fees by a private organization
validly delegated does not adversely affect the public purpose of the
imposition considering that the proceeds of collection thereof will be
devoted to a public use (Bagatsing, etc., et ol. u. Ramirez, etc., et al,,
L-41631, Dec. 17, 1976). It should be observed, however, that under
the Local Government Code, one limitation on the taxing power of
Iocal government units is to the effect that "the collection of local
taxes, fees, charges and other impositions shall in no case be let to
any private person" (Sec. 130[cJ, Local Gouernment Cod.e).
-,,8. Non-delegability of the Taxing Power - In the
distribution of the powers of government into three departments,
namely, Iegislative, executive and judicial, the power of taxation is
exclusively legislative (51 Am. Jur.71-72). Consequently, the taxing
54
I,I MI'I'A'|IONS ON'IIIE'TAXING POWEIT
t,,,w(,1' as a general rule may not be delegated.
( lcrtain notable exceptions to non-delegability may, however, be
rrrlrrt,ioned.
I. Under the Constitution, Congress may expressly authorize
tlrr. I)resident to fix within specified limits, and subject to such
lrrrrrtations and restrictions as it may impose, tariff rates, import
rrrrrl cxport quotas, tonnage and wharfage dues, and other duties or
rrrr posts within the framework of the national development program
,,1 llre Government (Sec. 28[2], Art. VI, 1987 Constitution).
'l'he power granted to Congress under this constitutional
;,r',,vision to authorize the President to fix within specified limits
,rrrrl subject to such limitations and restrictions as it may impose,
trrli['('rates and other duties and imposts includes tariff rates even
l,r' rr:Vsnu€ purposes only. Customs duties which are assessed at
tl'r, prescribed tariff rates are very much like taxes which are
lrr,tltrently imposed for both revenue-raising and regulatory purposes
tt i,rrcia u. Executiue Secretary, et al., G.R. No. 101273, July 3, 1992).
2. Another exception is in the case of the local taxing power.
'l'lrr, Constitution on this point states: "Each local government unit
',lr:rll have the power to create its own sources of revenues and to
li'\,.y taxes, fees and charges subject to such guidelines and limitations
rr:; I he Congress may provide, consistent with the basic policy of local
,rul,onomy. Such taxes, fees, and charges shall accrue exclusively to
tlr,' Iocal governments" (Sec. 5, Art. X, 1987 Constitution).
It has been held that the general principle against the delegation
,,l ltrgislative powers as a consequence of the theory of separation of
t,i)wers is subject to one well-established exception, namely, that
l,,11islative power may be delegated to local governments. The theory
,,l non-delegation of legislative power does not apply in matters of
lrrt'rrl concern (Pepsi-Cola Bottling Co. of the Philippines, Inc. u. City
,tl l)u,tuan, et al., L-22814, Aug. 28, 1968).
In the case of William Lines, Inc., et al. u. City of Ozamis, et al.
t L i15048, Apr. 23, 197 4), the Supreme Court ruled that the delegation
ol t,axing powers to Iocal governments is an exception to the principle
,,1'non-delegability of legislative power. Thus, the power of the City
, l' Ozamis to impose a gross sales tax of one-half percent on the gross
r
l rcight and fares of the cargo and passengers shipped or transported
,,rrt, from Ozamis City by vessels plying between that city and other
""T;]Jitljl"l?",1r,r,^tive taxing power to rocar governments is
lrrstified by the necessary implication that the power to create
g,olitical corporations for purposes of local self-government carries
55
 t^w 0t' BnstcTAxAl.lON tN'l'ttll t,ilILtpptNEs
with it the power to confer on such local government agencies the
authority to tax (Pepsi-cola Bottling co. of the philipplnes, Inc. u.
Municipality of Tanauan, Leyte, et al., L-Ji 156, Feb.'if, t9T6).
The court, in the above-cited case, exprained that in delegating
to local goverhments the authority to levy taxes, the state is not
limited to the exact measure of that which is exercised by itself.
when it is said that the taxing power may be deregated to
municipalities and the like, it is meant that there may be dlelegated
such measure of power to irnpose and collect taxes as ihe legislature
may deem expedient. That being the case, munieipalities may be
permitted to tax subjects which, for reasons of public policy, the
state
has not deemed wise to tax for more general purpos*s. -'
However, despite the grant of taxing power to rocar governments,
_
judicial admonition is given to the effectthat the tax si levied
must
be for a public purpose, uniform and does not transgress any
c_onstitutional provision or is not repugnant to a controlling statute
(Villanueua u. City of lloilo, L-Z6S2t, Dec. 28, t968).
whenever delegation of legislative power is the issue, it is
important to know the distinction between tax legislation and tax
administration. This is so because if what is "clelegated is tax
legislation, the delegation is invalid; but if what is invilved is only
tax administration, the non-delegability rule is not vioiated.
Every system of taxation consists of two parts: (1) the erements
that enter into the imposition of the tax; and, (2) the steps taken for
its assessment and collection (r cooley /9J). one is legllation, the
other is tax administration.
*". Non-delegable legislative powers, that is to say, those ihat cannot
be delegated to administrative agencies, include ihe
@/selection of
the property to be taxed; (b) determination of the prr"pl"", for which
taxes shall be levied; (c) fixing ofthe rate oftaxation; and, (d) rures
of taxation in general (1 Cooley 1g4).
Delegable powers which are not legislative include (a) the power
to value property for taxation in pursuance of fixed ruies; (b) the
equalization of assessments by a central bcdy; and, (c) collection of
taxes (1 cooley 1g5). rn short, assessment and collection are not
legislative but only administrative matters.
In brief, legislation is making the law, while tax administration
is giving effect to the law (J Coaley 196).
A case which illustrates the nature and extent of tax
administration is smith Beil & co. (phil.), Inc. u. commissioner of
Internal Reuenue (L-28271, Juiy 2b, lgTb). The petitioner in that
I,IMI'I'A'I'IONS ON THI4 TAXING POWER
, ,r,,r' rlisputed the classification by the Commissioner of imported
ra,rr. us "sparkling wine" which resulted in the assessment of a
,l,.lrcrr,ncy tax. The petitioner contended that the taxing provision
1, i, r' l.:)lal; now, Sec. 139, 1997 NIRC), aside from laying down an
rrr,,rrl'l'icient and hazy standard for ascertaining the policy and
I'rr t)os(, of the law, gave the Commissioner blanket authority to
,lr.r'rrlr, what is or what is not sparkling wine in disregard of the
,,,,rr rlrrlogability rule or the doctrine of d.elegatus non potest delegari
,,', wr.llas the due process clause of the Constitution.
'l'lre Court, however, ruled that the provision in question clearly
,r rr I r rrtlisputably discloses the legislative will leaving to the officers
r
, l,,rr'1:ed with implementation and execution thereof no more than
t lr,, rrtlministrative function of determining whether a particular kind
.l wrne or imitation wine falls in one class or another. In the
1,,.r'lirrrnance of this function, the internal revenue otTicers are
,l,,rrronstrably guided by the sound, established practice and
l ,.r lr rrology of the wine industry as aged and widely dispersed as one
, ,rr care to know (Srnith Bell & Co. fPhil.], Inc. u. Commission'er of
I rr t r' r' n al Reuenue, supra).
(1. Territoriality or the Situs of Taxation
'l'he Situs Principle in General - Territoriality or the situs of
trrx:rtion, which means "pleqq of taxation," is a limitation on the
t;rxing power. This is so because the principle is weil-recognized
I lr:rt,, however broad the power of taxation may be as to its character
,,rrtl no matter how searching it is in its extent, such power is
,,,,r:essarily limited only to persons, property or businesses within
rls jurisdiction; that is to say, to subjects within its jurisdiction, or
,,vcr which it can exercise dominion (Shaffer u. Carter,252 U.S. 37,
i4 L.8d.445,40 S. Cr. 221; Louisuille & J. Ferry Co. u. Kentucky,
/,tB t/.S. 384 47, L. Ed" 513, 23 S. Ct. 463; Dewey u. Des Moines, 173
U S. 193, 43 L. Ed. 665; i9 S. Cr. 379 citedin 51 Am. Jur. 457).
As aptly stated in decided cases, "all subjects over which the
r;overeign power of a state extends are objects of taxation but those
over which it does not extend are, upon the soundest principles,
cxempt from taxation" (Curry u. McCanless,307 U.S. 357; 83 L. Ed.
1339, 59 S. Ct. 900; 125 ALR 162; McCulloch u. Maryland, 4 Wheat
lUSl 316;4 L. Ed. 579 citedin 51 Am. Jur.457).
Some Basic Considerations Affecting Situs of Taxation
l. Protection - Protection is a basic consideration that justifies
the situs of taxation. One authority opines that a iegal situs cannot
57
 LnW Ol,' IIASIO'I'AXA'IION lN'l'll[] l,illt,lPPlNES
be given to property for the purpose of taxation where neither the
property nor the person is within the protection of the taxing state
(2 Cooley 954). For example, under our law, where the decedent at
the time of his death was a non-resident alien, his real and personal
properties which are situated outside the Philippines are not subject
to estate tax (Sec. 98,' now, Sec. 104, 1997 NIRC). However,
ci,tizenship and residence are factors that justify the taxing situs
even assuming that the property is situated outside the taxing
jurisdiction like the Philippines. For instance, property wherever
situated of decedents who are Filipino citizens, whether resident or
non-resident as of the time of death, as well as of resident aliens are
subject to estate tax (Sec. 77 in relation to Sec. 98,. now, Sec. 85 in
relation to Sec. 104, 1997 NIRC). Actually, what is subject to estate
tax here is not the property, but the transfer thereof.
In the case of fire in surance couering property situq.ted in the
Philippines, q.re the insurance premiums paid thereon taxable as
against the insurer euen though the fire insurq.ruce contruct was
executed outside the Philippines, and the insurqnce policy is deliuered
to the irusured therein? The Supreme Court ruled that said premiums
are taxable in the Philippines because the Philippine Governrnent
must get something in return for the protection it gives to the insured
property in the Philippines, and by reason of such protection, the
insurer is benefited thereby (Manila Electric Co. u. Yatco, etc., 6g
Phit. se).
During the time when reinsurance premiums (covering risks
situated in the Philippines), which were ceded to foreign reinsurers,
were taxable to such foreign reinsurers, the Supreme Court in one
case justified their taxability on the ground that the reinsurance
premiums in question were afforded protection by the Government.
Moreover, the recipient foreign reinsurer exercised rights and
privileges guaranteed by our laws (Philippine Gucr.ranty Co., Inc. u.
Commissioner of Internal Reuenue, L-22074, Apr. 30, lgGS).
Reinsurance premiums ceded to the foreign reinsurer abroad are,
however, no longer taxable (Sec. 28[BJ[1], 1997 NIRC).
2. Double Taxation ond the Situs Limitation - Double taxation
is never invalid where it is imposed by different states. In
determining situs, it is of no importance that the property has already
been taxed or is subject to tax in another state. For instance, if a
non-resident Filipino like a U.S. immigrant (non-resident citizen)
receives income in the U.S. (country of source), that Filipino is subject
to U.S. tax as well as Philippine tax on the same income. Both the
Philippines and the United States have the right to tax the same
income. There are, therefore, two situses of taxation in this situation.
58
I,I M I'I'A'I'I()NS ON'I'HIT TAXING POWER
t\1,,r.t. rirr double taxation will be discussed in a later chapter. It should
I,,. nol,()d that under the 1997 Tax Code, non-resident citizens, Iike
l,'rlr1ri19 immigrants abroad, and non-resident aliens are subject to
ln x ()n income derived from Philippine sources'
:t. The Moxim of Mobilia Sequuntur Persona'n7 and Situs of
I,,rtrttirn - fi-ffiElGf;iflC maxim means "movables follow the
personal property is
1rr,r.:ion." According to this maxim, the situs of
il,,,,lornicile of the owner. This is merely a fiction of law intended
where justice does not
l,,r.r'onvenience and not to be controlling
,l,,rilrrrrd it. As stated aptly, the doctrine of mobilia sequuntur
t,t,t.:ionarn is not allowed to stand in the way of taxation of personalty
',
,, I lro place where it has its actual situs and the requisite legislative
l,rr.isri.iction exists (2 cooley 955-957), The maxim applies to the
I rr xrrLion of personal property (Ibid').
'l'l-rus, for instance, shares of stock may have a situs lbr purposes
, ,l l rxittion in a state in which they are permanentiy kept regardless
r
,,1 llro domicile of the owner, or the state in which the corporation
,uru; t.,rganized (51 Am. Jur. 502).
tn the case of wells Fargo Bank & union Trust co. u. collector
,,f lnternal Reueruue (70 Phit.325), the Supreme Court ruled that
llr(} shares of stock left behind by a non-resident alien decedent in
r n anonymous partnership (forerunner of corporations) in the
l'hilippines are subject to Philippine inheritance tax notwithstanding
tlte mibilia rule. According to the Court, the mobilia rule should
shares of stock are also taxable in the situs of
.y ield to reason. The
t,lreir actual location, i.e., the Philippines. If the mobilia rule had
been foltrowed in that case, the shares would not have been taxed in
t.he Philippines since the owner died as a resident of a foreign
country, and under Philippine law (Sec' 85, 1997 NIRC), properties
left behind by a non-resident alien are taxable only if the properties
are situated in the PhiliPPines.
4. Legislatiue Power to Fix situs - It has been opined that if no
constitutional provisions are violated, the power of the legislature
fo fix situs is undoubted (2 Cooley 90).
For example, our law fixes the situs of intangible personal
property for purposes of the estate and gift taxes. Under sec. 98
properties are
1.ro*, Suc. 104, 1g97 NIRC), the following intangible
considered as properties with a situs in the Philippines:
(a) franchise which must be exercised in the Philippines;
(b)shares'obligationsorbondsissuedbyanycorporationor
socied.ad, anonima organized or constituted in the Philippines in
accordance with its laws;
69
r t,AW Ot' llAslC'l.AXA.l.lON lN,t,ll t,i I,Hll,l
l,l,lNlrs I,IMI'I'A'I'I0NS ON TIIIT TAXING POWER

(c) shares, obligations or bonds issued by any foreign 'l'ltr

eighty-five percentum (gb%) of the business of which
corporation Territariality Principle as Applied in the Philippine
Sit.us or
is iocated in ' Broadly speaking, for Philippine tax purposes' the following
.! tt t nt!. -
the Philippines;
,r,r1, lro the factors that could interplay in a given legal situation
(d) shares, obligations or bonds issued by any ,r'lr.r.r.situs or territoriality is the focal question:
foreign corporation
if such shares, obligations or bonds have acquired a business
in the Philippines; and situs I Kind or classification of the tax being levied;
(e) shares or rights in any partnership, business :l Situs of the thing or property taxed;
established in the philippines.
or ind.ustry :t.
Dornicile or residence of the person taxed; '

The law further provides, however, that no tax .l

shall be collected
under Title III of the code in respect ofintangibr"
,"r*""iproperty:
(a) if the decedent at the time oi his rleath,
or the donor at the time
of the donation, was a citizen and resident
of a foreign country which
at the time of his death or donation did not imposei
any character, in respect ofintangible personal property
t";;"fu" tax of
ofcitizens
of the Philippines not residing inlnat io""igr, """
Citizenship or nationality of the person taxed;
Ir
Source of the income taxed; and
(i.
Situs of the excise, privilege, business or occupation being
taxed.
'l'he above iterns may be explained through the different
,,r I rrtional incidents below:
rr

laws of the foreign country oi which the decedent

.irri"r, iul if the (r) Property Tax 'T'n considering the place at which property is
or donor was a
citizen and resident at th€ time of his death or
donation allows a trrr:rble and the governmental unit which may rightfully levy and
similar exemption from transfer or death taxes
of ,,,llccL the property tax, the basic factor is the situs of the property
or description in respect of intangible personal property "rr*"y-"iru"u"t", ,rr rluestion. This is true whether such property is owned by the
owned by
citizens of the Ph,ippines not reslding in trrat r*"ig.,
.orrrrt"y.
r'':;idents of the taxing state or by non-residents thereof. The
It will be observed from the foregoing enumeration that 1,r iuciple applies both with respect to real
property and personal
the various l,rrperty (51 Am. Jur. 457). The authority of every State to tax ail
intangible assets therein are deerned t be assets
with a Brinppu* 1,r'operty, real and personal, within its limits is unquestionabie
situs as determined by domestic (i.e., philippine)
raw. An inieresting Multnomdh County, 169 U.S. 421;
question now arises: suppose there is in 1,\ttuings snd Loan Society u.
intangibie airet o1 a l:l t,. Ed. B03). The taxing power reaches everything in the State
deced,ent which is nat anl.ong those enumerated,
in, tte bw, would, it rv Irich can be denominated as property (Washington. Iron, Works Co.
be justified to maintain tnit it is qn
asset with a philippine situs Pac. 1004). ReaI estate is taxable
because the "mobilia" rure d,oes not appry? r,. f{ing County, 20 Wash. 150; 54
or shourd, such asset be rrr t,he State where it is located regardless of the owner's residence.
considered as being comprehenaea *tinin the
mobf,tfairio"iotnt A State has no power to tax real property located outside its limits
Bringing the problem into concrete terms, suppose
non'resident alien decedent reaves behind after his A, a (2 Cooley 969).
auutrr'"irl;uccount (Y:) Tax on. Persons - The rule is well'settled that a State may
or note payable" of, say, p100,000 collectibie from B,
anindi,idual levy a personal tax upon persons subject to the jurisdiction of its
who resides in the philippines. where is the situs
of the obligation? scrvereignty (51 Am. Jur. 457). An example of a tax on persons is
Is it not accurate to say that under the above enumeratiorr,
debt) has a Philippine situs because the abovecit"d
it 1s,. l,he community tax of P5.00 for individuals and ffi00 for corporations.
of corporate obligations? So, adverting to the
lu*;;;;ks onry
(c) Income Tax -In general, the crucial factors that go into the
,ulu'r*prir-sio unius
est exclusio olterius,"it may be said that the
debt has ,o riririppi.," sit,us probiem in taxation when it involves income tax are
situs' May such obrigation, howeuer, be d.eemed. ,ru"rui by the (1) nationality or citizenship of the taxpayer, (2) his residence or
mobilia rule? domicile, and (3) source of the income.
The bottom line here, therefore, is: In those cases Sec. 23 of the Tax Code of 1997, provides the following general
where the
situs for certain intangibles are not categorically
spelred out as in principles of income taxation in the Philippines:
the above situation, there is room for applying tie
mobiri, rure.

60 61
r I,AWO!'BASIC I'AXA'TION IN THE PHILIPPINF]S
"Except whrn otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable
on all ilcome derived from sources within and without
the PhiliPPines;
(B) A nonrcsident citizen is taxable only on income derived
from sources within the Philippines;
(C) An indiridual citizen of the Philippines who is working
and deriving income from abroad as an overseas contract
workeris taxable only on income from sources within the
Philippnes: Prouided, That a seaman who is a citizen of
the Philippines and who receives compensation for
servicesrendered abroad as a member of the complement
of a vessel engaged exclusively in international trade
shall belreated as an overseas contract worker;
(D) An individual, whether a resident or not of the
alien
Philippines, is taxable only on income derived from
sources 1yithinthe Philippines ;
(E) A domesiic corporation is taxable on all income derived
fror[ sources within and without the Philippines; and
(F) A foreigr corporation, whether engaged or not in trade
or business in the Philippines, is taxable only on income
derivedfrom sources within the Philippines.,'
For Philippine tax purposes, the kind of tax imposed is sometimes
a crucial factorin determining whether the situs of taxation is in a
particular taxing jurisdiction or not. In one case involving a foreign
airline but whose airplanes do not carry passengers to and from the
Philippines asithad no landing rights here, the Court ruled that for
income tax purposes, said airline is taxable on the irrcome realized
from the sale ofiis tickets in the Philippines tfrrough a sales office;
but at the samelime, the Court observed that the airline would not
be subject to anybusiness tax inasmuch as the absence of any landing
rights would rnean that it is not engaged in the exercise of any
privilege whichcould be subject to the business or privilege tax
(Commissionerof Internql Reuenue u. British Ouerseas Airways
Corp., et al., G,l,Nos. 65773-74, Apr. 30, 1987).
It should benoted that under the present law, an international
carrier doing business in the Philippines is taxabLe at two and
one-half percenl(ZYzYo) on gross Philippine billings (GPB) "derived
from carriage ofpersons, excess baggage, cargo and mail originating
from the Philippines in a continuous and uninterrupted flight,
irrespective of itre place of sale or issue and the place of payment of
l{ 62
I,IMI'I'A'I'I()NS ON 1'HI]'I'AXING POWEIi
f lr,. tr, lrcl or pussugc document: Prouided, That tickets revaiidated,
=*,
indorsed to another international airline form part
l,,r rr1,,r,rl irtrcl/or
,,1 r lr,. lr',rss l'hilippine Billings if the passenger boards a plane in a
(
l,,,rt ,,f sroirtt, in the Philippines: Proulded further, That for a flight
*lrr, lr ,,r'iginates from the Philippines, but transshipment of
takes place at any port outside the Philippines on another
trH,iLi,,nti(,r.
g1lrrr,., orrl.y the aliquot portion of the cost of the ticket corresponding
lH tlrr, 1r,11 I'lown from the Philippines to the point of transshipment
l,,r-rrr part of the Gross Philippine Billings" (Sec. 28 tAlt?ltal'
=lrrrll
t4,t, Nlll(:).
r,l) or Priuilege Taxes' Where the tax that is being
llx<:ise
Ilrl',r,r(,(l is a tax upon the performance of an act, enjoyment of a
known
Irf r I r l('ti(', or engaging in an occupation, or what is sometimes
ry1 inr i.x(:ise or privilege tax, the situs of taxation is the place in
olrr, lr Ilrc act is performed or where the occupation is engaged in.
!1rr rrr llrr,case of sales tax imposedby a city government, for instance,
I 1,, r r I I r rr g in one case is that it is the place where the sale is perfected
lrnll ( ()lsummated that determines the situs of taxation (Allied
Ittr,',t,1 ()o., Inc., et al. u. City Mayor of Manila, et al-, L'40296'
i\",, :'1,1984).
ll rs noteworthy that the legislative power to fix the situs of
t,rrirtrorr includes the power to fix the place of taxation between
,lrll,,r.rrt, places in the same state (2 Cooley 959-60).
lrr local taxation, as in the case of the sales tax (which is an
,.i, r',, or privilege tax), the situs of the sale or transaction (i.e., where
tl,, ,,rrlt, Lakes place) is not necessarily the situs of taxation, unless
Irr tlrr. situs of the sale the taxpayer maintains a branch office in
,r lr|i lr t,vert, 100% of the sale is taxable by the city or municipality
,r lrr.r'r,t,[re branch is located (Sec. 150, Local Gouernment Code)-
I I t,he situs of the sale is one where no branch office is maintained,
tlr, il ll07o of the sale goes to the local government unit (city or
,,r,,,'rr:ipality) where the taxpayer's principal office is located and
I 1,,. r.r.rrrainrng 7Oo/o is taxed by the local government unit where the
Lr \ t)il.yer maintains its factory (Ibid.). In the latter case, therefore,
,,rtrr:i o['the sale is not a limitation on the taxing power of the local
r,,,\.(,r.r)ment unit where the taxpayer establishes its principal office
rr rr,l llrctory.
,l'lre principie that situs of taxation is determined by the situs of
tlr,'r;rrle may in some cases bow down to statutory rules depending
,,rr wlurt situs policy the taxing power at a given point desires to
t,rr! r;uc. The rule of situs oftaxation for business taxes is discussed
rr rr()rc detail in a later charrter.
63
 LAW OF BASIC TAXA1'ION IN'I'IIE I'TlII,IPPINES
On the basis ofcourt rulings, it is necessary to point out that the
situs of the sale for tax purposes is not the place where the contract
of sale is perfected but the place of its consummation. Hence, in the
case, for example, of the additional sales tax on the sale of fuels and
oils, said tax may not be applied to deliveries outside the municipality
since the consummation of the sale is determined by the delivery of
the things vrhich are the subject matter of the contract (The Shelt
Co. of the Philippines, Ltd. u. Municipality of Sipocot, Camarines
Su,r, 105 Phil. 1263 [Unrep.J).
In one case, however, the Supreme Court ruled that the city can
tax the sale of matches where shipments or deliveries are made
direcbly to customers outside the city provided the sales are booked
and paid for in the city to a carrier for shipment to the buyer.
Generally, delivery to the carrier is delivery to the buyer (Philippine
Match. Co., Ltd. u. City of Cebu, et al., L-30745, Jan.. 18, 1975).
In situations involving brokerage as in the case of a broker, for
instance, the rule is such that a lclcal broker is taxable in this country
with respect to the commissions received by it for negotiating and
consummating the sale in Japan of products belonging to a Philippine
corporation (A" Soriano Y Cia u. Collectoi'of Internal Reuenue, l0l
Phil. 504). What is important here is that the broker's tax is not
being levied on the sale ofthe goods in Japan but on the taxpayer's
brokerage services in the Philippines. Incidentally, brokers are
subject to the 10% value-added tax (Sec. 108, 1997 NIRC).
I). Exemption of the Government from Taxes - It seems
that as a matter of public polrcy, property of the State and of its
mu nicip a I subdivisions.devoted tp gevernmept-use +a nd rr urpo ses is
generaily deemed to be exempt from taxation although no express
provision in the law is made therefor (51 Am. Jur.503). Tax
exemption of government entities and the political subdivisions of
the State seems to be a well settled principle (Ibid.).
The exemption frorrr taxation of the Government and its political
subdivisions might also emanate from a statutnry grant. This
is obviously in conformity with the abovementioned principle.
For instance, under Sec. 28(b)(8)(B) of the Tax Code (now,
Sec. 32[B][7][bJ, 1997 NIRC) income derived from any public utility
or from the exercise of any essential goyernment function accruing
to the Government or any political sutrdivision i.s exempt frorr income
tax. Also, under the Local Government Code, real property owned
by the Government or any of its political subdivisions is cxrrrnpt from
real property tax unless the beneficial use thereol'is grirrrted for
64
I,IMI'I'i\'I'IONS ON TTIE TAXING POWER
,,,rr:rrtle-ration or otherwise to a taxable person (Sec. 234[a], Local
| :| ) t tt, t' tL metll COde).
ll
is significant to note that the Consitution does not contain
,, ,r rovision granting tax exemption to the Government. Obviously,
1, 1r
r lr,' r tirson for this is that the Government's exemption from taxes is
,, rr rrrllerent limitation on the State's taxing power.
Notwithstanding the immunity of the Government from taxes,
tl,r' lrrinciple is also weII recognized that the Government may tax
rt:;r,ll'. In one case, the Supreme Court held that there is no
, ,,rrst,itutional limitation on the power of Congress to tax the Armed
l'rrr:os of the Philippines if it wishes to do so (Bisaya Land
I'rttnsportation Co. Inc. u. Collector of Internal Reuenue, 105 Phil.
t:i:tB [Ururep.]).
[,'or example, a contractor who undertakes a job
contract for the
( l,vcrnrn€rrt is not justified in claiming that it should be exempt
l.orn the payment of the contractor's tax simply by arguing that if
1
,: r.y rnent thereof were insisted upon, he would just shift the tax over ,
t,r l,he Government; and that, as a consequence, the Government
I r; r.y ing the tax as part of the purchase price of the contractual services
,.rrdered would be taxing itself.
'
E. International Comity - More often than not, states find it
rrrutually advantageod6 for themselves to create self-imposed
rlstraints on their taxing powers especially with reference to the
properties of foreign governments within their territorial domain.
Itcciprocity lies at the root of this limitation for it cannot be denied
t lrat lvith reciprocity located at the bottom line, harmonious and
p roductive relationships among the various states can be maintained.
An authority on taxation has this to say on the subject of
international obligations: "International obligations concominant
with our acceptance ofthe principles ofinternational law as part of
our law demand that certain representatives of foreign states
stationed and property of such foreign states found within our
l.erritory be exempted from taxation x x x" (Matic, Taxation iru the
l'hilippines, p. 63).
It is significant to note that Sec. 12, Art. II of our Constitution
declares that the Philippines "adopts the generally accepted
principles on international law as part of the law of the land and
adheres to the policy of peace, equality, justice, freedom, cooperation
and amity with all nations."
65
 I,AW OI,' I]ASIC] TAXA'I'ION IN'I'II I' PIIII,IPPINI'S
The above observation seems to be reflqted in the following
provision of the Local Government Code on the c\mmunity (formerly,
\
"Sec. 159. Exemptions - The following are\exempt from
the community tax; \ (Sec. 26[1], Art. VI);
(1) Diplomatic and consular representatives;
xxx."
CoNSTITUTIoNAL LIMITATIoNS oN THE
YPOWER. TAXING
The following
provisions may be said to be the limitations
prescribed in the Constitution on the taxing power of the
Government:
(a) Due process clause, whether it be substantive or procedural
(Sec. 1, Art. Iil);
(b) Equal protection of the laws (Sec. 1, Art. III);
(c) Freedom of speech and of the press (Sec. 4, Art. III);
(d) Non-infringement of religious freedom and worship (Sec. 5,
Art. III);
(e) Non-impairment of contracts (Sec. 10, Art. AD;
(0 Non-imprisonment for debt or non-payment of poll tax
(Sec. 20, Art. III);
(g) Rule requiring that appropriations, revenue and tariff bills
shaII originate exclusively from the House of Representatives
(Sec. 24, Art. VI);
(h) Uniformity, equitability and progressivity of taxation
(Sec. 28[1], Art. VI);
(i) Limitations on the congressional power to delegate to the
President the authority to fix tariff rates, import and export
quotas, etc. (Sec. 28[2], Art. VI);
(j) Tax exemption of properties actually, directly and exclusively
used for religious, charitable and educational purposes
(Sec. 28[3], Art. VI);
(k) Voting requirement in connection with the legislative grant
of tax exemption (Sec. 28[4], Art. VI);
(I) Non-impairment of the jurisdiction of the Supreme Court in
tax cases (Secs. 2 a.nd 5, Art. VIil); and
(m) Exempiion from taxes of the rerrenues and assets of
educational institutions, including grants, endowments,
donations and contributions (Sec. 4[3] and [4J, Art. XIV).
bt)
r,tMl'r'A'r'roNS 0N 1'lili'l'AxlNG PowEIt
'l'hcrc are, however, certain provisions in the Constitution which
,rrc r)t)t actually limitations on the taxing power but which have a
l,,.rrring on taxation. Such provisions are:
(rr) Constitutional requirement on the subject and title of bills
(b) Power of the President to veto any particular item or items
in an appropriation, revenue or tariff bill (Sec. 27[2],
Art. VI);
(r:) Provision which requires that no money shall be paid out of
the Treasury except in pursuance of an appropriation made
by law (Sec. 29[1], Art. VI);
(d) Frovision against the appropriation of public money or
property for the benefit of any church, sect or system of
religion, etc. (Sec. 29[2], Art. VI);
(c) Provision which mandates that money collected on a tax
ievied for a public purpose shall be paid out for such purpose
only (Sec. 29[3], Art. VI); and
(f) Provision regarding allotments to Iocal governments (Sec. 6,
Art. X)"
('ONSTITUTIONAL LIMITATIONS EXPLAINED
A. Due Process of Law - Sec. 1, Art. III of the Constitution
;,r'ovides in part that "(n)o person shall be deprived of life, Iiberty,
,,r' property without due process of law." In the tax sphere, there
lrrrve been occasions when the Supreme Court ruled on the
,,,rrstitutionality of certain taxing measures where due process of
lirw was the focal question. In the case, for instance, of. Kapatiran
ntt mgct Naglilinghod sa Pamahalaan ng Pilipinas u. Tan, etc. (G.R.
Nos. 81311,81820,81921 and 82152, June 30, 1988), the Court ruled
Ilnt due process was not violated rr"hen the VAT la',v (8.O. 273) was
promulgated because there was no grave abuse of discretion incident
l, its promulgation. The Court also pointed out that petitioners
llriled to show that 8.O.273 was issued capriciously and whimsically
or in an arbitrary or despotic manner by passion or personal hostility
:;ince it appears that a comprehensive study of the VAT was made
lrtrfore 8.O.273 was issued.
It should be noted in this connection that when tlie
r:onstitutionality of a legislative taxing act is questioned on the
llround that there is a denial of due process, an actual case or
r:ontroversy must first exist before the courts can be called upon to
67
 LAW OI.' IJASIC'I'AXA1'ION IN 1'II T,.] PIIII,IPI]INI'S
rule on said issue.
In the case, for instance, of Tolentino ,r/n, Secretary of Finaruce,
et al. (G.R. No. 115455, Aug. 25, 7994), and companion cases, the
Court said:
"x x x There is, however, no justification for passing upon
the claims that the law (i.e., Expanded Value Added Tax Law
or R.A. 7716) x x x denies petitioner's right to due process.
x x x Indeed, the absence of threat of immediate harm makes
the need for judicial intervention less evident and
underscores the essential nature ofpetitioner's attack on the
law on the ground (of) denial of due process x x x as a mere
academic discussion of the merits of the law. For the fact is
that there have been no notices of assessments issued to
petitioners and no determinations at the administrative
levels of their claims so as to illuminate the actual operation
of the law and enable us to reach sound judgment regarding
so fundamental questions as those raised in these suits."
Adverting to its previous decision in the VAT case of Kapatiran
ng mga Naglilingkod sa Pamaholaan ng Pil.ipinas, Inc., et al. u. Tan,
elc. (G.R. No. 81311, June 30, 1988), the Court further said:
"At aII events, our 1988 decision in Kapatiran case should
have laid to rest the questions now raised against the VAT.
There, similar arguments made against the original VAT Law
(Executive Order No. 273) were held to be hypothetical with
no more basis than newspaper articles which this Court found
to be hearsay and without evidentiary value. As Republic
Act No. 7716 merely expands the base of the VAT system
and the coverage as provided in the original VAT Law, further
debate on the desirability and wisdom of the law should have
shifted to Congress."
f( Wh"r, a tax turns out to be of a confiscatory nature, such an
imposition could very well be considered as being violative of the
due process principle. In one case, the Court ruled that the due
process clause in the Constitution may be invoked where a tax statute
is so arbitrary that it finds no support in the Constitution. An obvious
example is where the same can be shown to amount to confiscation
of property. Classification for taxation must not be prornpted by a
spirit of hostility or discrimination that finds no support in reason
(Reyes, et al. u. Almanzor, et al., G.R. Nos. 4983g-46, Apr. 26, 1gg1).
Again, in another case (Slson., Jr. u. Anchetq,, etr:., t:l al., G.R.
No. 59431, July 25, 1984), the Court held that the modified
schedular income tax whereby individual income was classified into
68
I,IMI'I'A'IIONS ON'I'HU'I'AXING POWER
tl,r,',' rlil'l'crent classes under different tax rates (compensation,
lrrr ,rrrr,r;s/ot,her income and passive investment income) is not a denial
,,1 ,lrrr. l)rocess because there is no proof of arbitrariness in the
uul,r':lti0rt of tax rates.
Irr uuc case, it was held that due process is not violated if a
iir,\., r'nrncntal body like the Fiscal Incentives Review Board (FIRB),
,. lr r,.lr was tasked with the duty of recommending the restoration of
rrr r r,xt'mptions previously abolished under presidential decrees, is
li,.;,,1,,t1 by the Minister (now, Secretary) of Finance, who at the same
I r n !, r:i t,[re very same person who approves or disapproves the FIRB's
|
r,'r ,rnrrlcndation provided no two opposing or conflicting interests
,r,. urvolved, Iike the case of the restored tax exemption of a
l,,rrlrcular taxpayer where it appears that there is no interest that
1 , r'xrstiDg which is in conflict with the interests of such taxpayer
1ll,tt'r'rl.a u. Macaraig, Jr., etc., et q.I., G.R. No. 88291, May 31, 1991).
( )rr the other hand, the Court ruled in the case of Villegas u. Hiu
t'tut,ntl Tsai Pao Ho, et al. (L-296a6, Nov, 10, 1978), that there is a
,l, rrrrl of due process on account of the passage of an ordinance in
tl,,' ( lily of Manila which imposes a permit fee of F50.00 on aliens as
ir r ,rrtlit,ion to employment or engaging in any business or occupation,
. l , ,r'c it appears that under said ordinance, the City Mayor of Manila
, , ,,r lr I withhold or refuse issuance of such permit at wiII. The Court
1,, r rrl ctl out that aliens, once admitted in the Philippines, cannot be
,
,1,.1,r'ived of life without due process of law and this guarantee
rrr,.l11slss the means of livelihood.
ln the case of Prouince of Abra u. Hernq,ndo, etc., et q.l. (L-49336,
\,r1i.31, 1981), the Supreme Court held that due process was not
,,lr::r,rv€d when the trial court, in an action for declaratory relief,
,1,., 1;rred that certain property owned by the Roman Cathoiic Church
,,, llrrngued, Abra was tax-exempt under the 1973 Constitution, it
.' 1r;itrapiqg that no court hearing was conducted thereon.
iiimilarly, in another case (Commissioner of Customs u. CTA, et
,,1 , G.R. No. 70648, July 31, 1987), the Court also held that the
rrrporter of goods is deprived of procedural due process when
t:alled "alert notices" (i.e., valuation of goods made by Finance
',,
,\liuches abroad) were not presented in the Customs protest
lrr.oceedirrgs in the Bureau of Custorns as we]i as in the Court of Tax
\trr1reais when the case was on appeal therein. Inciclentally, the "alert
,,,l,ices" contained a higher valuation of the irnported goods than
llrt,vah.lation indicated in the knport Entries covering the goods in
, lr tr"Stion.
69
r
L,AW Ot' llASlC,l'Axn'l'lON lN'l'lIl,' PlIll,llrPlNl,ls
B. Equal Protection of the Law - The Constitution doesnot
only speak of non-deprivation of due process but in Sec. 1, Art lll
thereof, it also emphatically ordains that "x x x nor shall any person
be denied the equal protection of the laws."
With particular reference to taxation, it has been aptly stated
that the power of the State to make rejggll\le and naJu.pal
classifications for the purposes of taxation is unquestioned and such
claGrTidations may relate to the subject of taxation, the kind of
property, the rates to be levied or the-amounts to be raised, andthe
methods of assessr,nent, valuation and co]lgction' ,Such power to
classify in matters bf taxation GBaid to be broader than some other
exercises of Iegislative power, entitled to presumption of validity
and will not, as a rule, be interfered with by the judiciary in the
absence of a clear showing of unreasonableness, discrimination or
arbitrariness.
However, the classification must be based upon real and
substantial differences between the persons, property or privileges
and those not taxed must bear some reasonable reiation to the object
or purpose of legislation or to some permissible governmental policy
or legitimate end of governmental action (see Tomas P. Matic,Jr.,
Taxation. in. the Philippines, Vol. I, pp. 79'80).
It is recognized that Congress can make distinctions and
classifications. Thus, it can, for example, classify taxpayers into
"calendar year" and "fiscal year" taxpayers for income tax purposes
(Manila Times Pubtishing Co., Inc. u. Commissioner, CTA Case No.
2263, Dec. 17, 1973).
* tt equality of taxation rule, therefore, is not violated if
"
classifications or distinctions are made as long as the saililr-dTiIed'
on reasonable and substantial differences. For instance, there is a
reasonabi6-basis for imposifif lower rates on the foreign'sourced
income of non-resident citizens as evidenced by the preferential or
Iower rates of 1%,2% and 3% because these are the people whoearn
foreign currency abroad which are remitted here, as compared to
the resident citizens who have to pay the ordinary graduated rates
(Sec.21[a] and [b], 1977 NIRC).
It should be noted that the preferential tax rates are no longer
applicable on income of non-resident citizens abroad' Under the
Tax Reform Act of 1997, non-resident citizens are taxable only on
income derived from sources within the Philippines. Hence,
beginning Jan. 1, 1998, income of non-resident citizens frorn foreign
sources are not subject to Philippine tax (Sec. zafA][1J[a] and' [b],
1997 NIRC).
1n
I,I MI'IA'I'IONS ON'I'H!] TAX]NG POWER
our jurisprudence is replete with rulings on the equal protection
r'lirus(,of the Constitution as it relates to taxation. In the following
,-uric,s, our Supreme Court has held that the equal protection principle
rr':rr rrot violated:
l. 'l'he value-added tax (VAT) law does not discriminate unduly
,,1,r nlsl customs brokers who are subject to said tax. The exclusion
,,1 ::irirl brokers from the exemption granted to professionals under
rl.r' lt)3(r) of the Tax Code is justified by the fact that customs
l,r,lirrs differ from tax-exempt professionals considering that the
,r, lrvit,ies of customs brokers (like those of stock, real estate and
,r, rrrrgration brokers) partake of the nature of a business rather than
,, 1,r'trl'ession (Kapatiran ng nt.ga Naglilingkod sa Pamahalaan ng
I'tIr1tinas, Inc. u. Tan, etc., supra).
:l The State has the inherent power to select the subjects of
I ;r xrrl,ion and inequalities which result from the singling out of one
1,,rr I.rcular class for taxation or tax exemption infringed no
, ,,rr;l,it,utional limitation. Consequently, the schedular income tax
* lr r,'lr imposes graduated rates from 0% lo 35% without deductions
rrrr lr)rnpensation income of individuals (except their personal and
,r,l,lrl,ional exemptions for qualified dependent children), and a rate
,, lr{'rne of from \Yo to 60% on business and other income with
,l,,,lrrr:Lions does not violate the rule on equal protection since there
r, r,o infirmity if classifications are made to rest on substantial
,lr',trnctions (Sison, Jr. u. Ancheta, etc., et al., supra).
;l The remission or condonation of taxes due and payable to the
,,, lrrsion of taxes already collected does not constitute unfair
,1,,,, r'rrnination. Each set of taxes is a class by itself and the law
,,,,rrlrl be open to attack as class legislation only if aII taxpayers
1,, l,rrrging to one class were not treated allke (Juan, Luna Subdiuision,
l,t, r,. Sarmiento, 91 Phil. 371).
,l A tax on an o'installation manager" is not discriminatory just
lr.r r u SC at the time said tax was imposed, there was no other person
r', I lrt, locality who exercised such occupation. The tax is and will be
,,1,;rlrr:irble to any person or firm who exercises such calling or
,,, ( r rl)r Lion designated as installation manager (Shell Co. of P.1., Ltd.
r, 1',rricr, etc.,94 Phil.387).
t, A law (R.A. 3843) which imposes a preferential franchise tax
r rrl,. rrl 2%o on a particular franchise grantee while other franchise
g r ir r l .cs are subject to 5% is not violative of the equal protection or
r
,,,1rr:rlil,y of taxation rule in the Constitution. The legislature has
llr'' nrherent power not only to select the subjects of taxation but
rrl,,rr trr grant tax exemptions (Commissioner of Internal Reuenue u.
71
 l,AW OI l]ASl(l'l'AXn'l'l()N lN'l'lI lil I,lllt,ll,l,lNIJS
Lingayen Gulf Electric Power Co., In,c., l,-ZSf f l, Aug. 4, lgSS).
6. The fact that the taxpayer is the only sugar central or refinery
in the municipality where the tax ordinance is enacted does not make
said ordinance discriminatory (Victortas Miiling Co., Inc. u.
Muruicipality of Victorias, L-21183, Sept. 2f , l96S). The reason for
this is that since other refineries to be established in the future would
also be taxable, no singling out of the taxpayer to its disadvantage
has ever taken place.
7. There is no discrimination or class legislation if a statute
authorizes the city of Manila to levy occupation taxes whereas that
same authority is withheld from other cities and municipalities. It
is not for the courts to decide what cities or municipalities should be
so authorized for that is a matter for the legislature to decide
(Pun.salaru u. Municipal Boord of tlte City of Manilu, gS phil. 46).
8. A tax levied on boarding stables for race horses is not
discriminatory where it appears that no such tax is imposed on
boarding stables for other types of horses (Manila Race Horse
Trqiners Ass'n, Inc. u. De lq Fuente, 88 Phil. G0).
In the following cases, how,ever, the Supreme Court ruled that
* the equal protection rule has been violated:
a{ A tax ordinance levied an export tax on centrifugai sugar
milled by the Ormoc Sugar Co., rnentioning only ;hifiom#ny by
name. The ordinance does not satisfy the requisites of reasonable
classification. Although Orrnoc Sugar Central was the only sugar
central existing at that time, the ordinance is defective because even
if a similar company is later set up, it cannot be subject to the tax
since the ordinance specifically points to Ormoc as the one to be
taxed (Arrtoc Sugar Co. trnc. u. Trea.surer of Orrnoc City, et al.,
L-23794, Feb. 17, 1968).
/. There is discrimination where a local tax was imposed. on
"agents or consignees of outside dealers" in softdrinks without said
tax being levied also on local dealers. The classification of such
"agents and consignees" who are taxable and "local dealers" who are
exempt is not based on substantial distinction (Pepsi-Cola Bottling
Co. ofrthe Phili,ppines, Iruc. u. City cf Butuan, et al., supra).
/. A" emoloyment perrnit fee imposed on alien joLr applicants
regardiess of the nature of employment (whether casual, perrnanent,
part-tirne or fuil-time, or J"owly paicl employee or highly paid
execr"itive) is constitutionally invalid because it fails to consider valid
substantial differences in situation arnong the aliens requirecl to pay
it. classification should be i:ased on real. and substantial differences
72
I,IMI'I'A'I'IONS ON THD TAXING POWER
lr ir v r r r g rr reasonable relation to the subject of legislation (Villegas u.
t lr rr ('lt,i.ong Tsai Pq.o Ho, et al., supra).
.[. A local ordinance which levies an ad, ualorem tax on motor
,,'[rr,:lcs registered in Manila without also taxing those which are
r,.1,ril,crcd outside the city but which enter the city and use its streets
,,, , ru;irrrrally violates the rule on the equality of taxation (Association
,,1 ('ustoms Brokers, Inc., et al. u. The Municipal Board, et al.,
,t ; l'lti,L. 107).
#. Where it appears that Sec. 109 of the Tax Code (before its
rrrrlrlied repeal) which required skimmed (non-fat) milk
r r f,acturers to place a warning sign on their products stating that
r rr r r tr
',Irrrrmed milk is "not suitable for feeding infants less than one (1)
1','rrr'" is enforced only against manufacturers of evaporated filled
,,,rlh and noL against makers of condensed skimmed milk like
: :l M ILAC, SMA or BREMIL, such action is discriminatory and is
,' ,l,,rrial of equal protection of the law (Vera, etc., et al. u. Cueuas,
t .i:|(;93-94, May 31, 1979).
Like in the question of alleged denial of due process, judicial
, ,I r
,rvention is also unnecessary in the absence of a factual setting
r
,,r ;rn actual controversy which is engendered by the issuance of an
,.;:;r$sment against the taxpayer (see Tolentino u. The Secretary of
l,'trtunce, et al., supra),
C. Freedom ofSpeech and ofthe Press - Sec.4, Art. III of
ttr,' (lonstitution provides: "No law shall be passed abridging the
l r.cdom of speech, of expression, or of the press, or the right of the
,,', rple peaceably to assemble and petition the government for redress
1
,,1 grievances."
The focal question now arises: When is a tax said, to be violatiue
,,f stress freedom or freedom of thought and expression?
To epitomize, the Supreme Couq! held in its decision on the
'''l'otentiio E-VAT" ,uprr, thafihere isjurlailgsnj of press
"uru,
lrcedom and freedom ofthought and expression ifa tax is levied in
,rrd€r to suppress this basic right of the people under the
( lonstitution.
Along with other issues in that case, the constitutionality of the
l,lxpand.ed Value-Added Tax (E-VAT) under R.A. 7716 was assailed.
'l'he Court, however, citing American cases upheld the E-YAT's
vrr [it*ity. The court differentiated the disputed E-VAT f,rom the tax
ltrat was levied in the case of Grosiean u. Americun Press Co. (2$7
tl.S. 233; 80 n . Ed. 660 [1936]), where the discriminatory character
73
 I,AW OF I]ASIC 1'AXA'I'I()N IN'I'III' I'IIILIPPINES
of the tax was considered as an abritlgcrncnt of the freedom of the
press and of expression.
Acting on the premise that, like others, u newspaper publisher
must pay equitable and non-discriminatory taxes on his business
(citing Associated Press u. NLRB, 301 U.S. 103, 132, 81 L. Ed. 953,
1961 [193U), the Court pointed out that in the Grosjean case, supro,
the law imposed a license equivalent to 2o/o of the gross receipts
derived from advertisements only on newspapers with a circulation
of more than 20,000 copies per week. Because the tax was not based
on the volume of advertisement alone, but was measured by the
extent of its circulation as well, the law applied only to the thirteen
large newspapers in Louisiana, Ieaving untaxed four newspapers
with a circulation of only slightly less than 20,000 copies a week and
120 newspapers in question. It was well known that the thirteen
newspapers had been critical of Senator Huey Long, and the long-
dominated legislature of Louisiana responded by taxing what Senator
l,ong described as the "lying newspapers" and by imposing on them
"a tax on lying." The effect of the tax was to curtail both their revenue
and their circulation.
As the U.S. Supreme Court noted, the tax was "a deliberate and
calculated device in the guise of a tax to limit the circulation of
information to which the public is entitled in virtue of the
Constitutional guarantees" (297 U.S. at 250,80 L. Ed. at 669). The
case, said the Court, "is a classic illustration of the warning that the
power to tax is the power to destroy."
Incidentolly, ffie! a busine.ss license be required for the sale or
distributian of pri:nted materials like newspapers? Anegative answer
is in order.
The U.S. Supreme Court, in the case of People u. Korins (38b
U.S. 2d 474 W975)) said: "x x x (T)o apply an ordinance requiring a
business license to be obtained before a person could sell newspapers
in the streets would be to impose a prior restraint on press freedom
because a newspaper is not in the same category as a pineapple or a
soap powder, or a pair of shoes whose sale may be conditioned on
the possession of a business license."
Speaking further on the nature of press freedom in relation to
taxation, particularly as it refers to license taxes imposed mainly
for regulation and taxes, which like the VAT, are imposed purely for
revenue purposes, the Court said that the imposition of a Iicense
tax is unconstitutional because it lays a prior restraint on said right.
The license might apply to the sale of goods but to extend it to the
press would of course be unconstitutional (Philippine Airlines, Inc.
74
I,IMITN'I'I()NS ON THtI TAXING I'OWt'IT
r, 'l'h( Secretary of Finance, et al., G.R. 115852, Aug. 25, 1994, citing
frlrtrtlo<'k u. Pennsyluania, 319 U.S. 105, 87 L.Ed, 1292, 1943).
It, is important to note in this connection that the E-VAT law
rll A. 7716) requires the payrnent of the surn of P1,000 (now, F500)
,,,, rr nnual registration fee on all persons subject to the value-added
r:rx (Sec. 236[8], 1997 NIRC)
WiLl this fee not constitute a restraint on press freedom or, for
tltttl matter, the freedom of worship?
'l'lre Court, again in the "Tolentino E-VAT'case, ruled in the
rr,,11rrt,ive. According to the Court, this fee is not imposed for the
,.r,,rt:ise of a privilege but only for the purpose of defraying part of
llrt t:ost of registration. It is, thus, a mere administrative fee, one
rrul, irnposed on the exercise of a privilege, much less a constitutional
r r1,lrt,.
D. Non-Infrihgement of Religious Freedom - Sec. 5,
\rt. tII of rhe Constitution provides that "(n)o law shall be made
r,'specting an establishment of religion or prohibiting the free
',r('rcise thereof. The free exercise and enjoyment of
religious
preference shall
1'rol'ession and worship without discrimination or
lur'cVer be aliowed. No religious test shall be required for the exercise
,,1' t:ivil or political rights."
In the case of American Bible Society u. City of Manila (101 Phil"
.ttl(;), the Supreme Court ruled that a municipal license tax on the
,rrrlo of bibles and religious articles by a non-stock, non-profit
,,rrssionary organization at a little profit constitutes a curtailment
,,1 religious freedom and worship which is guaranteed by the
( '()nstitution. The Court heid that an ordinance of the City of Manila,
,vlrich imposed a license fee on those engaged in the business of
li,.ncral merchandise could not be applied to the appellant's sale of
l,rlrles and other religious literature. The Court relied on Murdock
r, ['ennsyluania, ante, in which it was held that as a license fee is
I'r xccl in amount and unrelated to the receipts of the taxpayer, the
Irr:r:nse fee when applied to a religious sect was actually being
rrrrltosed as a condition for the exercise of the sect's right under the
( lonstitution. For that reason, it was held that the license fee
"r.ostrains in advance those constitutional liberties of press and
rt'ligion, and inevitably tends to suppress their exercise" x x x"
What the Court has ruied regarding press freedom, as earlier
,lrscussed, could very well be applied also to reiigious freedom" As
rr lrt,ly stated by the Court in the "Tolentino E'VAT" case:
75
 I,AW OT IJASIC'I'NXN'I'ION IN'I'I IId I'IIILIIJI'INI1)S
"What has been said above also disposes of the allegations
of the PBS that the publication or importation of books and
religious articles, as well as their printing and publication,
likewise violates freedom ofthought and conscience. For as
the U.S. Supreme Court unanimously held in Jimmy
Swaggart Ministries u. Boqrd of Equalization, the Free
Exercise of Religion Clause does not prohibit imposing a
generally applicable sales and use tax on the sale of religious
materials by a religious organization."
Note, however, that as in press freedom, a Iicense tax would
constitute a restraint on the freedom of worship as guaranteed in
the Constitution.
In the Philippine Airlines case, the Supreme Court ruled that
the application of a license tax to religious groups, such as the
Jehovah's Witnesses, in connection with the latter's sale of religious
books and pamphlets, is unconstitutional. According to the Court:
"As the U.S. Supreme Court put it, it is one thing to impose a tax on
income or property of a preacher. It is quite another thing to exact
a tax on him for delivering a sermon."
Obviously, in conjunction with this constitutional limitation,
Sec. 26(e) and (g) (now, Sec. 30[E] and [G] of the 1997 Tax Code),
exempts from the income on non-stock corporation organized and
operated exclusively for religious, charitable, scientific, athletic or
cultural and social welfare purposes, no part of the income of which
inures to the benefit of any member, organizer or any specific person.
However, notwithstanding said exemption, the income of such
organizations from any activity conducted for profit or from any of
their property, real or personal, regardless of the disposition made
of such income, is subject to tax under the Tax Code.
In connection with the above-cited codal provision regarding the
taxabiiity of listed organizations under Sec.26 (now, Sec. 30, 1997
NIRC), on their income from activity conducted for profit, or from
any of their property, real or personal, regardless of the disposition
made of such income, the Secretary of Justice, in his Opinion. No.
45, dated March lA, 1958 (cited in the cases of Union Chwrch of
Manila, Manila Polo Club, CTA Case No. 293, Aug. 31, 1959;Xauier
School, Inc., CTA Case No" 1682; Congregaci,an de la Mission de Sqn
Vicente d,e Paul, CTA Case No. 1486, Act. 14, 1968), opined that
considering the history of the provision in question, it would seem
that the statute as now amended. has restricted the tax exempti"on
of religious and other organizations therein specified only to the
extent of withdrawing the exernption with respect to the income
76
I,I MI'IA'I'I()NS ON'I'I{I''|AXING I'OWER
rr';rlizcd from (a) the productive use of their properties, real or
g,,,rsor)al, e.g., rents, dividends or interest; and, (b) from profitable
lrrrsincss pursuits, which properties or businesses are not essential
lo or necessarily connected with their religious, charitable or
,,rlrrr:i.rtional purposes, as the case may be.
'l'hus, in an isolated sale of a church lot being used for reiigious
t)rrrposes, the proceeds or net income of which was used to buy
;rrrother lot, as a new site to build a church, income from the
1r'rrnsaction was considered merely incidental to its religious
t)rrrposes. The property was not acquired for speculation or as an
rrrvestment to be eventuaily sold primarily for monetary gain.
It should be noted that the BIR has consistently ruled that
p;rssive investment income such as interest income from Philippine
('rrrrency (now, ony currency) bank deposit and yield or any other
rrronetary benefit from deposit substitutes, trust funds and similar
;u'rangements of religious corporations and.other organizations
,,rrumerated in Sec. 26 (now, Sec. 30 of the 1997 Tax Code), are subject
to 2O%a final withholding tax imposed under Sec. 2a(B)(1) of the same
( lode.
fn. Norr-Impairment of Contracts - Sec. 10, Art. III of the
(lonstitution provides that "(n)o Iaw impairing the obligations of
contracts shall be passed." The nature of this limitation is aptly
,l rscussed. as follows:
t=& ,-p"t" tr t" w""tqd- to deprive of strength. Hence,
to im-p;irilEi6ii[alion of a contract is to alter or change the
terms or effect of the contract, and thus in contemplation of
law, to weaken the position or rights of one or all of the parties
to it. A law, which changes the terms of the contract by
making new conditions, or changing those in the contract, or
dispenses with those expressed impairs its obligations. It is
not important that the impairment is but slight, if it exists
at all, if there is any impairment, the provision of the
-
Constitution is violated and the courts will interfere. x x x"
(Matic, Taxatiotl in the Philippines, Vol. I, p. 62, citing
Watson on the Constitution of the U.5., pp. 797-798).
Along this rule, it was held in the case of. Casanoua u. Hord
(B Phil. 125) that where a mining concession was granted under a
ll,oyal Decree and where it appears that under said decree no other
l.axes except those mentioned therein shall be imposed on mining
and metallurgical industries, the levy of a tax on said mining claim
plus an qd ualorem tax on mineral output under a subsequent law
lt
 l,nW Ol,' IIASI()'l'AXA'l'lON lN'l'll l,) l)tltLll,l'INUS
(Act 1189) constitute an impairrnent ol'contract because a mining
concession is a contract.
44ru non-impairment rule does not apply to public utility
frdnchises. According to Sec. 11, Art. XII of the Constitution, no
public utility franchise or right shall be granted except under the
condition that it shall be subject to amendment, alteration or repeal
by the Congress when the common good so requires. Accordingly, in
the case of Cagayan Electric Power & Light Co., Inc. u. Comm,issioner
of Internal Reuenue (G.R. No. 60126, Sept. 25, 1985), the Supreme
Court ruled that non-impairment may not be invoked in the case of
a public utility franchise grantee. This is so because under Sec. 8,
Art. XIV of the 1935 Constitution and Sec. 5, Art. XIV of the 1973
Constitution (now, Sec. 11, Art. XII, 1987 Constitution), the
legislature can impair a grantee's franchise since a franchise is
subject to amendment, alteration or repeal by the Congress when
the public interest so requires.
In said case, the validity of the removal of the grantee's exemption
from income tax, which was provided for in its franchise, was upheld
by the Court. The same ruling was also made in the case of Radia
Communications of the Phils., In"c. (ltCPI) u. Commissioner of
Internal Reuenue (G.R. No. 60547, July 1, 1985 [Resolution]), where
the Court held that in the revocation of a franchise grhntee's income
tax exemption, there is no question as to the public interest involved
inasmuch as the country needs increased revenues.
The nature and extent of the legislative power to alter or amend
a public utiLity franchise is succinctly explained by the Supreme
Court in thf"iotentino E-VA?"case, supra, as follows:
"It is }iilE6l"olte d that amendment of petitioner's
franchise may only be made by special law in view of $ 24 of
P.D. No. 1590 (N..B.; PAL's franchise exempts it from all taxes,
except corporate income tax or 2%o tax on gross receipts),
which provides:
'This franchise, as amended, or any section or
provision hereof may only be modified, amended or
repealed expressly by a special law or decree that
shall specifically modify, amend, or repeal this
franchise or any section or provision thereof.'
"This provision is evidently intended to prevent the
amendment of the franchise by mere implication resulting
from the enactment of a later inconsistent statute, in
consideration of the fact that a franchise is a contract which
78
l,tMt'IA'l'toNS 0N THU',I'AXING l'OWhllt
cun be altered only by consent of the parties. Thus, in Manila
Ilailroad Co. u. Rafferty (40 Phil. 224 [19191), it was held
that an Act of the U.S. Congress which provided for the
payment of tax on certain goods and articles imported into
Lhe Philippines, did not amend the franchise of plaintiff,
which exempted it from all taxes except those mentioned in
its franchise. It was held that a special law cannot be
amended by a general law.
"In contrast, in the case at bar, Republic Act No. 7716
expressly amends PAL's franchise (P.D. No. 1590) by
specifically exempting from the grant of exemptions from the
VAT PAL's exemption under P.D. No. 1590. This is within
the power of Congress to do under Art. XIII, $ 11 of the
Constitution, which provides that the grant of a franchise
for the operation of a public utility is subject to amendment,
alteration or repeal by Congress when the common good so
requires."
In the "Tolentino E-VAT" case, su,prct,, one of the petitioners was
t lrc Chamber of Real Estate and Builders A-ssociation, Inc. (CREBA).
t )rro issue that was raised was whether the imposition of the VAT
,,rr sales and leases ofreal estate by virtue ofcontracts entered into
1,r'ior to the effectivity of the Iaw would violate the non-impairment
,,1'r:ontracts rule in the Constitution. In resolving the issue in favor
,,1't,he VAT, the Court said:
"x x x It is enough to say that the parties to a contract
cannot, through the exercise of prophetic discernment, fetter
t,he exercise of the taxing power of the State. For not only
rure existing laws read into contracts in order to fix obligations
tus between parties, but the reservation of essential attributes
of sovereign power is also read into contracts as a basic
postulate of the Iegai order. The policy of protecting contracts
against impairment presupposes the maintenance of a
government which retains adequate authority to secure the
peace and good order of society."
ln another case, the Court of Tax Appeals held that the rule on
r',,rr-impairment is not disregarded with the imposition of a higher
t r r rate on an existing franchise, it appearing that said franchise
rv;rs gr&DtBd with the express understanding and upon the condition
tlrrrl, it shall be subject to amendment, alteration and repeal (Phil.
l'rntr(,r & Deu. Co. u. Commissioner, CTA Co,se No. 1152, Oct. 31,
lt)ti[t).
79
 I,AW Ot.' IIASIC'I'AXA'I'I0N IN'I'III' I'H II,IPPINIJS
F. Non-Imprisonment for l)ebt or Non-Payment of Poll
Tax - sec. 20, Art. III of the constitution provides that "(n)o person
shall be imprisoned for debt or non-payment of a poll tax"'
Debt, as covered by the constitutional guarantee, means any
Iiability to pay money arising out of a contract, express or implied
(Tan Cang u. Stewart, 42 Phil. 809). The prohibition against
imp.isonment for debt was brought about by the force of public
opirriol which looked with abhorrence on statutes permitting the
cruel imprisonment of debtors. The constitution seeks to prevent
the use or tnu power of the state to coerce the payment of debts.
The control of ihe creditor over the person of his debtor has been
abolished on humanitarian considerations. one should not be
punished on account of his poverty. Moreover, the Government is
not a proper party to private disputes. It is not called upon to render
its aid to one-who deems himself aggrieved by imprisoning the other
for failure to pay his debts (Ganaway u. Quintin, 42 Phil' 805)
A potl tax (or personal or capitation tax) is a tax of a fixed amount
on individuals residing within a specified territory, whether citizens
or not, without regard to their property or the occupation in which
they may be engaged (51 Am. Jur. 660). The residence tax (now, the
community tax certificate) is in the nature of a poll tax. The
l
prohibition against imprisonment for non-payment of poll tax is
di.t"t"d by a sense of humanity and sympathy for the plight of the
poorer elements of the population who cannot even afford to pay
iheir ced.uto or poll tax (i.e., community tax certificate) (Vicente G.
Siruco, Philippine Political Law, 1L'h Ed.' p- 682).
G. Origin of Appropriation, Revenue and Tariff Bills
VI of the constitution provides that "(a)II appropriation,
sec. 24, Art.
revenue or tariff bills, bilis 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."
With reference to the extent of the Senate's power under this
constitutional provision to propose or concur with amendments to
revenue bills that should originate from the House of
Representatives, the Court, in the "Tolentino E'VAT" case, supro,
said:
"x x x bill originating in the House may undergo such
(A)
extensive changes in the Senate that the result may be a
rewriting of the whole. x x x At this point, what is important
to note is that, as a result of the senate action, a distinct bill
I,I M I'I'A'I'I0NS ON'I'Hh]I'AXING IJOWER
rrray be produced. To insist that a revenue statute - and not
only the bill which initiated the legislative process
crrlminating in the enactment of the law - must substantially
bethe same as the House bill would be to deny the Senate's
t)ower not only tr "9nl! tg!"!!_y&aU9?lllsilsJbutAso
"to propose amentlments." It would be to violate the
.o-"ffiof the two houses of congress,
and in fact make the House superior to the Senate."
H. Uniformity, Equitability and Progressivity of Taxation
li'c. 28(1), Art. VI of the Constitution provides: "The rule of taxation
,lrrrll be uniform and equitable. The Congress shall evolve a
l' rltirglllp-sYstem of taxation-"
Ilniformity in taxation means that aII taxable articles or kinds
,rl lrroperty of the same class shall be taxed at the same rate. It does
rr,l, mearr that lands, chattels, securities, income, occupations,
lnrrrchises, privileges, necessities and luxuries shall be assessed at
tlrc s&rl€ rate. Different articles may be taxed at different amounts
g,r'ovided that the rate is uniform on the same class everywhere with
,r ll lreople at aII times.
A tax is uniform when it operates with the same force and effect
rlr overy place where the subject of it is found (Churchill, et al. u.
r'oncepcion, 34 Phil. 969). Consequently, a tax of P2.00 per square
rrrr,t,er on all electric signboards all throughout the Philippines
';rrtisfies the requirement of uniformity (Churchill, et a.l. u.
t' r t rr,cepcion, supra,).
Uniformity in taxation is further defined in one case as that in
-
rv lr ich the tax levied "operates with the same force and effect in every
where the subject of it is found. Uniformity means that all
1,|;rce
1,r'operty belonging to the same class shaII be taxed alike"
(( tommissioner of Internal Reuenue u. Lingayen Gulf Electric Power
l'rt., Inc., supra).
The Supreme Court, in the case of ' Tan u. Del Rosario, Jr., et al.
t( l.R. No. 109289, Oct. 3, 1994), had occasion to rule on the question
;rr; to whether or not the "Simplified Net Income Tax System" or the
IINITS (R.A. 7496) violated the rule of uniformity in taxation. The
pt'Litioner in that case alleged that uniformity was violated because
,rnrler the SNITS, the law, for tax purposes, singled out business
proprietors and professionals differently from corporations and
l,rrrtnerships. The taxabtre income of individual proprietors of
l,rrsinesses and professionals was taxed at rates of frorn 3o/o to 3Oo/o,
wlrile that of corporations and partnerships is taxed at the unitary
81
 LAW 0t' llASto'l'nxA't'toN rN't'll t, t,tilt,lPPtNES
rate of 35%.
The Court ruled that rhe constitutional mandate has not been
disregarded. According to the Court, uniformity of taxation, like
the kindred concept of equal protection, merely requires that all
subjects or objects of taxation, similarly situated are to be tneated
alike both in privileges and liahiiities.
In the case of Villanu.er'rz u. City of lloilo, supra, the Court held
that a local tax on tenerue,nt houses does not violate the rule of
uniformity and equality of taxation even if the tax in question is not
aiso levied on other classes of buildings in the locality where such
tax is imposed. And fina[1;,., the Court also ruled that uniformrty is
not disregarded if a tax is ievied on admissions to cinema, theaters,
vaudeville companies, therrtrical shows and boxing exhibitions but
does not tax other places e{'amusernents such as race tracks, cockpit,s,
cabarets, concert halls, circuses and other places of amusernent
(Eastern Theatrical Co., Inr:" u. Alf,tnso, etc., et al., 83 Phil. 852).
Uniformity in taxation, r"hich means geographical unif,ormity
only, is also underscored. ir: fhe realm of local taxation. In Art. 218
of the RuIes and Regulations Implementing the Local Government
Code, it is mentioned that; "'uhe uniformity required (in local taxatior:)
is only'within the territorial jurisdiction of a province, cify,
municipality or barangay." Taxation is said to be equitable when .its
burden fails on those better ai:le to pay (Reyes, et al. u. Almanzor, et
al., supra).
Progressiuity of taxati,on. is also mandated in the Constitulion.
Our income tax systenl is one goud example of such progressivit.y
because it is buiit on the principle of the taxpayer's ability to pay.
Taxation is progressive when its rate goes up depending *n Ll:e
resources of the person afl'ected (Reyes, et al. u. Almanzor, el ul.,
supra).
Incidentally, the Supreme Court in the celebrated "Tolen,tino
E-VAT" case, supra., declined to rule on the constitutionality of lhe
Expanded Value-Added 'Iax Law (R.A. 77L6) for lack of any
"empirical" or factual data with regard to uniformity, equality arud
progressivity of taxation.
Howevern the Court elaborated further on the concept of
progressivity as mandated in Sec. 28(1), Art. VI of the Constitution,
as may be gleaned from an excerpt of its decision in the followrng
paragraph:
"Indeed, regressivity is not a negative standard for courts
to enforce. What Congress is required by the Constitution to
82
I,IMI'I'A'II0NS ON THTT TAXING POWI'R
rlrr is to'evolve a progressive system of taxation.' This is a
rlrrt,ctive to Congress, just like the directive to give priority
t, t,he enactment of laws for the enhancement of human
rlrgnity and the reduction of social, economic and political
rrrr,tlualities'(Art. XIII, $1), or the promotion of the right to
',lrrality education' (Art. XIV, $1). These provisions are put
r rr Lhe Constitution as moral incentives to legislation, not as
I rrtl icially enforceable rights."
'l'lrr: Supreme Court has more to say on the question of
rr.1,r.r.ssivit! in taxation particularly as it relates to the VAT. The
t ', rr rl said:
,
"The Constitution does not really prohibit the imposition
ol" indirect taxes which, Iike the VAT, are regressive. What
l, simply provides is that Congress shall 'euolue a progressive
r
system of taxation.' x x x Indeed, the mandate to Congress
r; not to prescribe, but to evolve a progressive tax system.
( )t,herwise, sales taxes, which perhaps are the oldest form of
rndirect taxes, would have been prohibited with the
lrroclamation of Art. VIII, $17(1) of the 1973 Constitution,
l'rorn which the present Art. VI, $28(1) was taken. Sales taxes
rrre also regressive.
"Resort to indirect taxes should be minimized but not
lvoided entirely because it is difficult, if not impossible, to
avoid them by imposing such taxes according to the taxpayer's
ability to pay. x x x" (Philippine Airlines, Inc. u. Secretary
of'Finuruce, et at., G.R. No. 115852, Oct. 30, 1995 [Resolution]).
I. Delegation of Legislative Authority to Fix Tariff Rates, fl1711
lrrrport and Export Quotas' etc. - Sec' 28(2), Art. VI of the
(',rrstitution provides that "(t)he Congress may, by law, authorize
tlrc President to fix within specified limits, and subject to such
lrrnitations and restrictions as it may impose, tariff rates, import
:r rrd export quotas, tonnage and wharfage dues, and other duties or
r r prosts, within the framework of the national development program
r r
,l'Lhe Government."
It has been held that the President may increase tariff rates as
;rrrthorized by law even for revenue purposes only. Sec' 28(2),
r\ rt. VI of the Constitution expressly grants permission to Congress
ro authorize the President "to fix within specified limits and subject
io such limitations and restrictions as it may impose, tariff rates
i x x and other duties or imposts x x x." Customs duties which are
,,,rsessed at the prescribed tariff rates are very much like taxes which
8tl
;,
I,AW OI.' BASIC'I'AXA'II0N IN 1'HE PHILIPPINDS
are imposed for both revenue-r&ising and regulatory purposes
(Garciau. Executiue Secretary, et al., G.R. No. l0lZTS, July S, 1gg2).
J. Tax Exemption of Properties Actually, Directly and
Exclusively Used for Religious, Charitable and Educational
Purposes - Sec. 28(3), Art. VI, of the Constitution provides:
"Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries and all lands,
buildings and improvements actually, directly, and exclusively used
for religious, charitable, or educational purposes shall be exempt
from taxation."
To what kind of tax does this exemption apply?
In the case of. Lladoc u. Commissioner of Internal Reuenue, et ol,
(L-19201, June 16, 1965), wherein petitioner assailed the donor,s
and donee's gift taxes on the cash donation for the church building,
the supreme court ruled that the abovementioned constitutionar
provision which grants tax exemption applies only to property or
realty taxes assessed on such properties used directly, actually and
,
exclusively for religious, charitable and educational purposes.
It would seemr however, that under existing law, gifts made in
favor of religious, charitable or educational organizations would
nevertheless qualify for donor's gift tax exemption in light of the
provisions of Sec. 94(a) (now, Sec. 101[A]ISJ, 1ggf NIRC)which reads,
as follows:
"Sec. 101. Exemption of Certain Gifts. - The following
gifts or donations shall be exempt from the tax provided for
in this Chapter:
"(A) In the Case of Gifts Made by a Resident. -
xxxx
"(3) Gifts in favor of an educational and/or charitable,
religious, cultural or social welfare corporation, institution,
accredited nongovernment organization, trust or
philanthropic organization or research institution or
organization: Prouided, howeuer, That not more than thirty
percent (30%) of said gifts shall be used by such donee for
administration purposes. For the purpose of this exemption,
a'non-profit educational and/or charitable corporation,
institution, accredited nongovernment organization, trust or
philanthropic organization and/or research institution or
organization, is a school, college or university and/or
charitable corporation, accredited nongovernment
\ 84
LIMI'I'A'I'I()NS ON THT] TAXING POWER
orgunization, trust or philanthropic organization and/or
roscarch institution or organization, incorporated as a
rronstock entity, paying no dividends, governed by trustees
who receive no compensation, and devoting all its income,
whether students'fees or gifts, donations, subsidies or other
lirrms of philanthropy, to the accomplishment and promotion
of the purposes enumerated in its Articles of Incorporation."
On this score, in Commissioner of Internal Reuenue u. Court of
.|1'1teuls, et al. (G.R. No. 115349, Apr. 18, 1997), the Supreme Court,
,vlrrlc sustaining the cancellation of the deficiency contractor's tax
,r,,:rr.ssment against therein private respondent Ateneo de Manila
llrriversity, acknowledged that "x x x the Court of Tax Appeals
rr.r'rrrately and correctly declared that the 'funds receiued by Ateneo
,1,. Muruila Uniuersity are technically not a fee. They may however
lrrll as gifts or donations which are tax-exempt' as shown by private
, ,,r;lrondent's compliance with the requirement of Section 123 of the
l.lrrl,ional Internal Revenue Code 1now, Sec. 101(A)(3), 1997 NIRCI
l,roviding for the exemption of such gifts to an educational
rr u;t.itution."
'fhe same tax exemption privilege is also granted to donations
,,r;rrle by a nonresident who is not a citizen of the Philippines
1:;,'c. 94[b][2],'now, Sec. 101[B][2], 1997 NIRC).
To be entitled to tax exemption under the Constitution, is proof
,,f trctual use for the tax-exempt purpose necessary?
In the case of Prouince of Abra u. Hernando, etc., et al. (L-49336,
Arrg. 31, 1981), the Supreme Court ruled that actual use is necessary.
,\r:cording to the Court, to be exempt under the 1973 Constitution,
lrrnds, buildings and improvements of religious and charitable
rrrstitutions must not only be exclusively but also actually and
,lrrectly used for religious and charitable purposes. This is the
,liff'erence between the 1973 Constitution and the 1935 Charter which
rcryuires only that the property be exclusively used for the purposes
r rrdicated.
Hence, in that decided case, the Court ruled that it was not in
;rccordance with the Constitution for the lower court to declare in
:rn action for declaratory relief that the properties of the Roman
( )atholic Church in Bangued, Abra were tax-exempt without first
,:onducting a hearing thereon to determine the factual question of
:rr:tual use and direct use.
It is worthy of note, in this connection, that the 1987 Constitution
:rlso employs the berms "actually, direc'iiy and exclusively" to
85
r LAW O!' I]ASIC TAXA'I'I()N IN'fTII] PHII,IPPINES
emphasize the importance of use of the property for tax exemption
purposes.
It has been held that the test of exemption from taxation is the
use of the property for the purposes mentioned in the Constitution
(Abya Valley College, Inc. u. Aquino, etc., et al., L-39086, June 15,
f98}, It is important to note also that for purposes of tax exemption,
{'usej/overrides "olqpgrs,bid' such that if property, although actually
brrtfed by a religious, charitable or educational institution, is actually
++Ae{=fo" a rp*S5g*mglpg1p_osg, the exemption from tax of said
property vanishes.
Consequently, in the Abra Valley College case, supra, the ruling
that the lease by the school of the lower portion of its school building
to a commercial establishment known as the Northern Marketing
Corporation, which is not even incidental to the educational functions
of such school, is outside the scope of the constitutional grant of tax
exemption and is, therefore, subject to real estate tax on a pro rata
(one-haifl basis. Incidentally, the second storey of the school building
which was used for educational purposes (as residential quarters of
the School Director's family) is tax-exempt.
For tax exemption purposes, however, the term "exclusively used"
is not Iimited to total or absolute use for religious, charitable or
educational purposes. If a property is incidentally used for the
aforementioned purposes, it is clear from decided cases that tax
exemption may still subsist.
Thus, in the case again of Abra Valley College, supra, ttre
Supreme Court held that where the main building of an educational
institution is used both as classrooms for its high school and coilege
students as well as residence of the School Director and his family,
the tax exempt character of such property remains despite the fact
that it is used as such, as the same may be justified as being only
incidental or complementary to its main or primary purpose of
providing education to its students. But, as earlier pointed out, the
lower portion of the school building is taxable since its use is
unrelated to the school's educational functions.
Several parallel rulings may be cited on the question of tax
exemption that is granted under this constitutional provision. In
the case of The Roman Catholic Bishop of Nueua Segouia u. Prouincial
Board of llocos Norte (51 Phil. 352), the ruling is to the effect that
the tax exemption extends to a vegetable garden in an adjacent Iot
and another lot formerly used as a cemetery. Exclusive use considers
incidental use also. Hence, the exemption of the convent includes
not only the Iand occupied by the building but also the adjacent
86
I'
I,IMI'I'A'I'IONS ON 1'[tF]'IAXtNC POWER
r,,rr'(l('n devoted to the incidental use o1. the parish priest as well as
tlr,. i,rtlging place incidental to religious t'unctions.
'l'lrc phrase "exclusively used for educational purposes" was
lrrr tlrt,r clarified in the case of llerrero, et al. u. Quezon City Board
,,/ rri)-(,ssment Appeals (L-15270, Sept. .30, 1961) and Commissianer
,'1 ln.lerna,l Reuenue u. Bishop of the Missionary District of the
I'lttltJttrtine Islonds, etc., et al. (L-I94a5, Aug. 31, 1965), to include,
r rr) lhe case of a hospital, a school for training nurses, home and
lr,r,r ;u)g facilities for interns, resident doctors, superintendents and
,rtlrt.r' rrlerlbers of the hospital staff, recreational facilities, etc.
r\ct-'ording;4ir. the decision in said case, the admission of pay
, rrrr.rrts doe{gg#detract from the charita$9_g"fug-racter of the hospital
rl rr /l of it*Ir{!p are devoted.sxclusively to the m4intenance of the
rrr,,iiI u!io+.as a public charity. The fact that the hospital which is a
, l,:rrilable institffijl- admits pay patients does not bar it from
,lrrrrnirrg that it is devoted exclusiveiy to benevolent purposes if it
r r,t){,itrs that the income derived from pay patients is devoted to the
,nrl)r'ovement of the charity wards which represents almost
lrv,r t,hirds of the total bed capacity aside from "out charity" patients
\\, l)() come only for consultation.
K. Voting Requirement in Connection with the
Llgislative Grant of Tax Exemptions - Sec. 28(4), Art. VI of the
( 'r,rrstitution provides#No law granting any tax g;pmption shall be
ti:rri!ii;rd without the concurrence of a majority of(rliltt members of
(',,rtHreSS." Ll ***-.-..-
"
F)uppose a law authorizes the refund of a tax already collected
,,r ;ir'rtnts the deduction of certain items of expenses for income tax
tru rir()ses. Con,siderin.g that refunds af taxes and deductions partah,e
,f tltc ruatLLre of exemptiorus, is this ttating requirentent applicable'l
It is a settled rule that refunds partake of the nature of
,'xt,mptions (Aguilar u. Commissianer, CA-G.R. No. SP- 16432,
illrrr. 30, 1990). Condonation oftaxes already paid or yet unpaid are
;rlr+o in the nature of tax exemptions (Surigao Consolida.ted Mining
t'o., Inc. u. Collector of Internal Reuenue, et al., L-14878, Dec. 26,
t e63).
L. Non-Impairment of the Supreme Court's Jurisdiction
irr Tax Cases - The pertinent provisions of the Constitution are:
Sec. 2, Art. VIII: "The Congress shall have the power to
defrne, prescribe, and apportion thejurisdiction ofthe various
87
 LAW OI.' I}ASI(]'I'AXA'I'I0N I N'I'IIIJ PTIII,IPPINI,JS
courts but may not deprive the Supreme Court of its
jurisdiction over cases enumerated in Sec. 5 hereof."
xxx
Sec. 5, Art. VIII: "The Supreme Court shall have the
following powers:
xxx
"(2) Review, revise, reverse, modify or affirm on appeal
or certiorari as the law or the Rules of Court may
provide, final judgments and orders of lower courts
in:
xxx
"(b) all cases involving the legality of any tax,
impost, assessment or toll, or any penalty
imposed in relation thereto."
xxx
M. Tax Exemption of Revenues and Assets, Including
Grants, Endowments, Donations or Contributions to
Educational Institutions - Sec. 4(3) and (4), Art. XIV of the
Constitution provides:
xxx
"(3) All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from
taxes and duties. Upon the dissolution or cessation of the
corporate existence ofsuch institutions, their assets shaII be
disposed of in the manner provided by law.
"Proprietary educational institutions, including those
cooperatively owned may likewise be entitled to such
exemptions, subject to the limitations provided by law,
including restrictions on dividends and provisions for
reinvestments.
"(4) 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."
It appears, however, that under Sec. 27(B) of the Tax Code of
1997, proprietary educational institutions shall pay a tax of ten
percent (10%) of their taxable income, except those covered by
88
l,lM I'l'A'l'IONS ON'II1l.l TAXING POWER
I irrlrsr,r:tion (D) of said section. Non-stock and non-profit educational
rrr:rlrlrrtions and government educational institutions are exempt
lr,rrr income tax under Sec.30(H) and (I), respectively, of the 1997
'l'rr x ( lode. Notwithstanding the provisions for income tax exemption
rrrrrlt'r'said Sec. 30 of the Tax Code, the law provides that income of
rr' lr rr l,cver kind and character of said organizations from any of their
l,r,rlrr,rties, real or personal, or from any of their activities conducted
l,,r' lrrofit, regardless of the disposition made of such income, shall
1,,'rrtrbject to tax imposed under the Tax Code.
Analyzing the aforequoted provisions, it is c1ear, therefore, that
l,r,plietary educational institutions cannot be categorized as tax-
.rurrpt under the Tax Code, and that their tax-exempt status
1ru;r;runing all the requisites for exemption are present) will have to
1,,'lrrsed only on the Constitution.
on the basis of the opinion of the Secretary of Justice (Opinion
N,. 130, S. of 1987), the following legal points on the aforequoted
,,rrrstitutional provisions may be considered important:
1. The exemption from taxes and duties granted to "non-stock,
rrorr-profit educational institutions with respect to their revenues
rrrrrl assets took effect upon the ratification of the Constitution on
l|r'lrruary 2, 1987 because the rule that a constitutional provision
,lr.r:laring certain properties as exempt from taxation is seU-executing
,,ntl proprio uigore exempts the property specified and does not,
I lrt'refore, need a legislative enactment to put it into effect.
2. Legislation is not essential in order to prescribe the
r'('(luirements for exemption such as who would qualify as "non-stock,
rron-profit" institutions and the meaning of "actually, directly, and
,,xclusively used," as these things can be the subject of executive
,rnd judicial interpretation. The legislature is not, however,
precluded from providing for reasonable regulations in the exercise
,rf'the right to exemptions.
3. Tax exemptions, however, of proprietary educational
rrrstitutions require prior legislative implementation since the use
,,[' the permissive tetm "rnay" in the provision gives Congress
rliscretion to determine whether or not assets and revenues of
proprietary educational institutions should likewise enjoy
cxemptions from taxes.
It is pertinent to add, however, that this particular exemption
l,o proprietary educational institutions will apply only after Congress
lras laid down the conditions for its enjoyment. In short, the tax
r.xemption here is not self-executing.
89
r I,AW OF BASIC I'AXA'I'I()N IN 1'[tI.] PIIILIPPIN!]S
4. All grants, endowments, donations or contributions usetl
actually, directly and exclusively for educational purposes are tax-
exempt where the donee-school is non-stock, non-profit.
xxx
The pertinent portion of Sec. ga(a)(3) (now, Sec. t0t[A], lggr
NIRC), clearly provides that for purposes of this exernptic,n, a
'non-profit educational andlor charitable corporation, institr.rtion,
accredited non-government organization, trust or philanthrr:pic
organization and/or research institution or organization' is a schoo),
college or university, trust r:r crharit,able corporation, accredited
non-government organization, trust or philanthropic organization
and/or research institution or organization, incorporated as a
non-stock entity, paying no dividends, governed by trustees who
receive no compensation, and devoting ail its income, whether
students' fees or gifts, donations, subsidies or other forms oi
philanthropy, to the accomplishment and promotion of the purpo$es
enumerated in its articles of incorporation.
It should be noted that in the implementing regulatir:ns,
Department of Finance (DOn Order No. 137-82, dated Dec. 16, 1gB?,
this point has been emphasized:
"1. The exemption herein granted refers to internal revenue
taxes and customs duties imposed by the National
Government on all revenues and assets of non-stock.
non-profit educational institutions."
xxx
In a nutshell, the following are some of the highlights ol'tire
DOF Order governing the tax exemption of this particular class cf
educational institution:
1. The exemption is not only limited to revenues and assets
derived from strictly school operations like income from tuition and
other miscellaneous fees such as matriculation, library, ROTC, etc.,
fees, but it also extends to incidental income derived from canteen.
bookstore and dormitory facilities.
2. In the case, however, of incidental income, the facilities
mentioned must not only be owned and operated by the school itself
but such facilities must be located inside the school campus.
Canteens operated by mere concessionaires are taxable.
3. Income which is unrelated to school operations 1ike income
from bank deposits, trust funds and similar arrangements, royalties,
dividends and rental income are taxable.
90
T,IMITA'I'IONS ON THE TAXING POWER
4. The use of the school's income or assets must be in consonance
w rt.lr [he purposes for which the school is created; in short, use must
1,,. sc:hool-related, like the grant of scholarships, faculty development,
,',rtrrblishment of professorial chairs, school building expansion,
lrlrrrrry and sports facilities, etc.
Supposing income from tuition is inuested for an unrelated
t'rtrpase like placements in the money market, is the inuested income
t,rtuble? The invested income is not taxable, but the earnings
,,.rrlized thereon, Iike interest on the placement, is the one that is
rrrxrrble (DOF Order No. 137'87).
It may be, however, that further clarification was made by the
llrrreau of Internal Revenue (BIR) on the issue of whether or not
r r I,grest income of non-stock, non-profit educational institutions from
r
('rrrrency bank deposits or any monetary benefit from deposit
:rrr[stitutes as well as from trust funds and similar arrangements
,, r'l subject to the twenty percent (20%) final withhoiding tax imposed
,rrrtler Sec. 24(e)(1), (now, Sec. 24[B][1], 1997 NIRC) considering the
,,,rrstitutional provision that aII revenues and assets of non-stock
,,,ltrcational institutions used actually, directly and exclusively for
,.rlucational purposes are exempt from taxation'
In 1996, the BIR issued a revenue regulation to the effect that
r r light of the provision in Sec. 4(3), Art. XIV of the 1987 Constitution,
r
r nlerest income of non-profrt, non-stock educational institutions from
l,rrnk deposits shall be exempt from the 2oo/o ftnal withholding tax
l,rovided that said income are actually, directly and exclusively used
li,r educational purposes, subject to compliance with the conditions
sct forth in said regulation.
In Comntissioruer of Internal Reuenue u. Court of Appeals, et al.
t(l.ll. No. 124043, Oct. 14, 1998), the Supreme Court declared that
I lre exemption from payment of income tax under Sec. 4(3), Art. XIV
,,1' the consti.tution may be granted to an educational institution
lrrovided that it proves with substantial evidence that (1) it falls
rrnd.er the classification as a non'stock, non-profit educational
institution; and, (2) the income it seeks to be exempted from taxation
is used actually, directly and exclusively for educational purposes.
'['he bare allegation that it is a non-stock, non'profit educational
institution is insufficient to justify its exemption from the payment
oI income tax.
As used in the aforesaid constitutional provision, and to debunk
t,he claim of therein private respondent YMCA for tax exemption as
Irn educational institution thereunder, the supreme court further
held that -
91
 T,AW OF BASIC TAXATION IN l'HT] PHILIPPINES
"x x x The term 'educational institution' or ,institution
of learning' has acquired a well-known technical meaning,
of which members of the Constitutional Commission are
deemed cognizant. Under the Education Act of 1982, such
term refers lo schools. The school system is synonymous with
formal education, which 'refers to the hierarchically
structured and chronologically graded learnings organized
and provided by the formal school system and for which
certification is required in order for the learner to progress
through the grades or move to the higher levels. x x x
xxx
"Furthermore, under the Education Act of 1g82, even
non-formal education is understood to be school-based and
private auspices such as foundations and civic-spirited
organizations are ruled out. It is settled that the term
'educational institution,' when used in laws granting tax
exemption refers to a 'x x x school, seminary, college or
educational establishment."'
OTHER CONSTITUTIONAL PROVISIONS RELATED TO
TAXATION
1. Constitutional Requirement on the Subject and Title of Bills
- Sec. 26(1), Art. VI of the Constitution provides: "Every bill passed
by congress shall embrace only one subject which shall be expressed
in the title thereof."
In the case of Tan u. Del Rosario, Jr., etc., et al. (G.R. No. 10g2gg,
Oct. 3, 1994), the constitutionality of the SNITS, or the ,,Simplified
Net Income Tax System" (R.A. 74g6) was assailed on the ground
that House Bill No. 343t4, which later became R.A. 24g6, is a
"misnomer" since, although the titie speaks of the net income tax,
actually what the law levies is the gross income tax, considering the
number of disallowed deductions therein as compared to the law
existing before its passage. The Court, in upholding the validity of
SNITS, ruled that the net income tax system is still retained. under
the new law. The number of deductions heretofore allowed may
have been significantly reduced. However, this is neither discordant
with nor opposed to the net income tax concept, for the fact is,
according to the Court, various deductions which are by no means
inconsequential continue to be well provided under the new law.
In the "Tolentino E-VAT" case, supro, the E-VAT, or the
Expanded Value-Added Tax Law (R.A. 7716) was also questioned
T,IMITA'I'IONS ON THE TAXING POWER
,,rr (lro ground
that the constitutional requirement on the title of a
l,rll was not followed. One of the petitioners in that case, the
| 'lr r lippine Airlines (Philippine Airlines, Inc. u. Secretary of Finance,
, t ,t1., G.R. No. 115852, Aug. 25, 1994), contended that the removal
,,1 rts tax exemption under its franchise, P.D. 1590, is not contained
rrr .it.her House Bill No. 11197 or Senate BiII No. 1630, which finally
, rrlrrrinated in R.A. 7716.
In resolving the issue in favor of the validity of the E-VAT, the
('.rrrt took note of two important things: First, the title of the
l,l VAT Law (R.A. 7716)itself speaks of E-VAT's purpose which is to
,'*prrnd the value-added tax system, and one way of doing this, the
('.rrrt said "is to widen its base by withdrawing some of the
,'rr,rnptions granted before," and second, in amending Sec. 103 of
tlrt Tax Code, which specifies those transactions which are
VA'l'-exempt, the amendment specifically speaks of P.D. 1590, the
r''r'.y franchise of PAL, as one of those transactions that no Ionger
r.ulr)fs tax exemption. Said provision reads:
"Sec. 103. Exempt Transactions - The following shall be
exempt from the value-added tax:
xxx
"(q) Transactions which are exempt under special laws,
except those granted under Presidential Decrees Nos. 66, 529,
972,1497,1590. x x x"
The Court said: "x x x To insist that P.D. No. 1590 be mentioned
rrr the title of the law, in addition to Section 103 of the NIRC, in
n,lrich it is specifically referred to, would be to insist that the title of
,, lrill should be a complete index of its content. x x x"
2. Power of the President to Veto ltems in an. Appropriation,
litu€nue, or Tariff Bill - Sec. 27(2), Art. VI of the Constitution
1,r'ovides that: "The President shall have the power to veto any
p:rrticular item or items in an appropriation, revenue, or tariff bill
lrut the veto shall not affect the item or items to which he does not
,,lrject."
3.
Necessity of an Appropriation Made Before Money May be
l',ri.cl Out of the Treasury - Sec. 29(1), Art. VI of the Constitution
provides: "No money shall be paid out of the Treasury except in
t) rr rsuance of an appropriation made by law."
4. The Prouision Against the Appropriation of Public Money or
I'roperty for the Benefit of Any Church, Sect or System of Religion -
iir'c. 29(2), Art. VI of the Constitution provides: "No public money or
lrroperty shall be appropriated, applied, paid or employed, directly
93
 I,AW OI' BASTC'I'AXA'[']ON IN'fI I I.] PIIIT,IPPINI'S
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
governlnent orphanage or leprosarium."
u5.' The Constitutional Prouision. on Taxes Leuied for a Slecial
Purpose - Sec.29(3), Art. VI of the Constitution provides: "AIl money
collected or any tax levied for a special purposes shall be treated as
a special fund and paid out for such purpose only. Ifthe purpose for
which a special fund was created has been fulfilled or abandoned,
the balance, if any, shall be transferred to the general funds of the
Government."
A good illustration of a special fund under this provision is the
OiI Price Stabilization Fund, or OPSF, created under P.D. 1956 to
stabilize the prices of imported crude oil. In a decided case, it was
held that where under an executive order of the President
(8.O. 1024), this special fund is transferred from the general fund
to a "trust liability account," the constitutional mandate is not
violated. The OPSF, according to the Court, remains as a special
fund subject to COA audit (Osrr-efi,a u. Orbos, etc., et al., G.R. No.
99886, Mar. 31, 1993).
fr Allotmeruts to Local Gouernmeruls - Sec. 6, Art. X of the
Constitution provides: "Local government units shall have a just
share, as determined by law, in the national taxes which shall be
autornatically released to them."
CASES
CASANOVAS v. HORD,8 PHIL. 125
FACTS: Plaintiff herein was the grantee of a mining ciaim by
virtue of a Royal Decree from the Spanish Government, which was
issued in 1867. Under the terms of the aforesaid decree, no other
taxes except the taxes Ievied therein could be imposed on mining
and metallurgical industries.
It so happened, however, that afterwards a law (Act 1189) was
promulgated which levied a tax on mining claims and an ad ualorem
tax on mineral outputs. Flaintiff now claims that the law imposing
said taxes is void for being an impairment of a contract. Incidentally,
the taxes levied under Act 1189 were made to appiy to mining
concessions of the plaintiff herein.
94
LIMITA'IIONS ON'I'HE TAXING POWER
llliLD: There was an impairnnent of the contract existing
I',,tw('on the plaintiff-concessionaire and the Spanish Government
,,,rr1ir(lering that under said decree no taxes outside of those
,r
'i I lrorized therein could be levied on mining concessions.
vll.l,trGAS v. HIU CHIONG TSAI PAO HO, ET AL., L-29646,
N( )V. 10, 1g7g
I,'ACTS: Ordinanee No. 6537 was enacted by the City of Manila
rrr l!)68 prohibiting aliens from being employed or to engage or
t,ru t rcipate in any position or occupation or business enumerated
r lr, r'r,in whether permanent, bemporary or casual without first
,,.' r1 pi11g an employment permit from the Mayor of Manila and paying
ilrr. perfirit fee of f50.00, except aliens employed in the foreign
r,,r,,:;ions, members of religious cougregations, etc.
Itcspondent Hiu Chiong Tsai Pao Ho sought to have the ordinance
,'rrr,rrlled on the following grounds: (f) that the ordinance violates
r1,,, rrrle of uniformity in taxation; (2) that the ordinance violates
r1,,. principle against the undue delegation of legislative power; and,
r.lt i.[rat it violates the due process and equal protection clauses in
r lr,, r lonstitution.
l{ELD: The City Mayor contended that the princip}e of
'r,ri{iirmity of taxation does not apply to the case because the
, rli nance in question is not a revenue measure. The Court, however,
l. '
lrl that while the first part of the ordinance is regulatory in nature,
r Irr, ,reco[d part requiring a fee of F50.00 is a revenue measure. There
, , r,,; logic or justification in exacting f50.00 from aliens who have
i,,',,:r cleared for employment. It is obvious that the purpose of the
,,r'ilinance is to raise money under the guise of regulation.
'l'he amount of F50.00 is unreasonable not only because it is
,.'iL:cssive but also because it fails to consider valid substantial
I rllirrences in situations among individual aliens required to pay it.
('lrr;rsification should be based on real or substantial differences
l,rrving a reasonable relation to the subject of the particular
1,,Iislation. Here, the same amount of P50.00 is being collected
l'r' ,r11 every empioyed alien whether casual, permanent, part-time or
lrrll-time, or iowly employee or highly paid executive.
fhe ordinance is void because it does not lay down any criterion
,rr st,andard to guide the Mayor in the exercise of his discretion. It
v rotrates due process and the equal protection rule because requiring
:r person before he can be employed to get a permit from the City
Nlayor of Manila who may withhoid or refuse it at will is tantamount
95
r LAW OT'BASIC TAXATION IN THE PHILIPPINF]S
to denying the basic right of the people of the Philippines to engage
in a means of livelihood. Aliens, once admitted in the Philippines,
cannot be deprived of life without due process of law and this
guarantee includes the means of livelihood.
VERA, ETC., ET AL. v. CUEVAS, ETC., ET AL., L-8B69B-94,
MAY 31, 1979
FACTS: This controversy arose from the order of BIR
Commissioner Misael P. Vera requiring respondents, all engaged in
the manufacture, sale and distribution of filled miik products such
as "Darigold," "Liberty" and "Dutch Baby," to withdraw from the
market all of their filled milk products which do not bear the
inscription required by Sec. 169 of the Tax Code within 1b days from
receipt of the order, with the warning that failure to comply will
result in the institution of court action for violation of the order.
Sec. 169, in substance, required that the containers of skimmed milk
and all milk from which the fatty part has been removed shall carry
the words: "This milk is not suitable for nourishment for infants
less than one year of age," or such other equivalent words. The
validity of the Commissioner's order was contested.
HELD: Sec. 169 of the Tax Code has been repealed by
implication. Sec. 169 was enacted in 1g39 together with Sec. 141
(which imposed a specific tax on skimmed milk) and Sec. 1?7 which
penalized the sale of skimmed milk without payment of the specific
tax and without the Iegend required by Sec. 1G9.
However, Sec. 141 was expressly repealed by Sec. 1 of R.A. 844,
and Sec. 777 by Sec. 1 of R.A. 463. With the express repeal of
Secs. 141 and L77, Sec. 169 became a mere declaratory provision
without a tax purpose or penal sanction.
Filled milk is not similar to skimmed milk. The general clause
of Sec. 169 is restricted by the specific term "skimmed milk" under
the rule of ejusdem generis, Thus, the use of the term "skimmed
milk" in the head note and "condensed skimmed milk" in the text
restricts the scope of non-fat milk only to skimmed milk and,
therefore, does not include "filled milk," a milk where the fatty part
is removed and substituted with refined coconut oil or corn oil.
Sec. 169 is being enforced only against respondent, filled milk
manufacturers, and not against makers of condensed skimmed milk
tike SIMILAC, SMA, BREMIL, etc. which are similarly situated. This
is a denial of the equal protection of the law.
96
I,I MI1'A'IIONS ON'IHE TAXING POWER
l'ctitioner BIR Commissioner has no jurisdiction to enforce Sec.
I r;1) by virtue of Sec. 3 of the Tax Code which authorizes the BIR "to
;,rvr. effect to and administer the supervisory and police power
, ,,rrli:rred to it by this Code or other laws." The enforcement of Sec.
It;1) sntails promotion of health and is not connected with any tax
t,rr rl)ose. The BIR can exercise police power only when
necessary in
llr t,nforcement of its powers of collection of all national internal
r (.v(.1ue taxes, fees and charges, and enforcement of all forfeitures,
l,,.rrrrlties and fines connected therewith.
I,lnforcement, however, of Sec. 169 is the exclusive function of
t Ir,' l,'ood and Drug Administration (now, Bureau of Food and Drugs)
rr rrrler the law.
l'IIOVINCE OF ABRA v. HERNANDO, ETC., ET AL., L-49336,
r\tlG. 31, 1981
FACTS: The Roman Catholic Bishop of Abra Province (RCBB)'
, lrr irning that the property of the catholic church therein is exempt
,rrrtler the provisions of Sec. 1?, par. 3, Art. VII of the 1973
t'opstitution, filed an action for declaratory relief in the Court of
l''rrst Instance of Abra, Branch I, of which respondent Hon. Harold
llcrnando is the presiding judge.
Without any hearing, however, the trial court adjudged said
property as tax-exempt under the aforecited provision. Hence, the
r rrsLant petition for certiorari and mandamus by the Province of Abra,
,,'lrresented by the Provincial Assessor, was filed seeking to review
I lrr' lower court's decision.
HELD: To be exempt under the Constitution, Iands, buildings
rr improvements of religious and charitable institutions must not
rrcl
,,rrly be exclusively but also actually and directly used for religious
,rrrd charitable purposes. This is the difference between the 1973
( bnstitution and the 1935 Constitution, which requires only that
tlre property be exclusively used for the purposes indicated. Hence,
rl. was error for the trial court to declare said property exempt without
Ir rst conducting a hearing to determine the factual question of actual
rr nd direct use of the property in question.
Moreover, there was a denial of due process to the Province of
Abra when respondent judge made a summary finding of the tax
.xempt status of the aforementioned property' The lower court was
ordered to hear the case on the merits.
97
f LAW OF tsASlC ]'AXA1'[ON tN'l,HtJ t,IUl,tpptNtrls
N.B.: The abovecited case involved an application of thc
provisions of sec. 17(3), Art. vIII of the 1g78 constitution. The
pertinent provision now is sec. 28(3), Art. vI of the 1982 constitution.
Both of these provisions require that property, to be tax-exempt,
should be "actually, directly and exclusively used" for religious,
charitable and educational purposes.
CAGAYAN ELECTRIC POWER & LIGHT CO., INC. v.
COMMISSIONER OF INTERNAL REVENUE, G.R. NO.60126,
SEPT.25, 1985
FACTS: Petitioner Cagayan Electric Power and Light Co., Inc.
(cEPALCo, for short) was granted an electric power franchise und.er
R.4.3247 under which it was subject to S% tax on gross receipts ,,in
Iieu of all taxes and assessments of whatever authority upon
privileges, earnings, income, franchise, and poles, wires,
transformers and insulators of the grantee, from which taxes and
assessments the grantee is hereby expressly exempted."
On June 27, 1968, R.A. 5431 took effect making all corporations
liable to income tax except those exempt under Sec. 24(c)(1) and
Sec.27 (Sec. 26 ofthe Tax Code of tg77). However, on Aug. 4, 1969,
petitioner's exemption was restored under R.A. 6020.
The question is whether or not petitioner is still exempt on its
income between Jan. 1, 1969 (after the effectivity of R.A. 5481) and
Aug. 4 of said year when its tax exemption was restored. petitioner
invokes non-impairment of contracts.
HELD: The Iegislature can impair petitioner's franchise. The
constitution provides that a franchise is subject to amendment,
alteration or repeal by the congress when the public interest so
requires (Sec. 8, Art. XIV, 1935 Constitution; Sec. S, Art. XIV, lgTJ
Corustitutior,,'now, Sec. 11, Art. XII, lgSf Constitution). Also, Sec. 1
of petitioner's franchise (R.A. 3247) subjects the franchise to the
Constitution and to Act 3636 (the Model Franchise Act) where
sec. 12 states that the franchise is subject to amendment, alteration
or repeal. R.A. 5431, subjecting corporations to income tax, has in
effect withdrawn the exemption previously enjoyed by petitioner.
N.B.: The law governing franchises now is the Uniform
Franchise Law (8.O. 72, effectiue Dec. 19, 1gSG) which establishes
uniform franchise tax rates of 2o/o fot electric power, water and city
gas; SYo for telecommunications like telephone, telegraph, including
radio broadcasting (except T\); and bYo for all other franchises. Aside
from this, franchise holders now pay income tax.
98
LIMI1'A'I'IONS ON'IHItr TAXING POWER
ll shcruld be noted that in the abovecited CEPALCO case, the
| ',rrrt (lispensed with the delinquency surcharge as it appeared that
tlr,. ( lrrrrmissioner himself was in doubt as to whether petitioner's
lr rrrrt'lrise was taxable.
IiAI'ATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN
N(l I'ILIPINAS, INC., ET AL. v. COMMISSIONER OF
lN'r't,)ttNAL REVENUE, G.R. NO. 81381, JUNE 30, 1988, and
r .rrr1r&niotl cases
ITACTS: There are four petitions assailing the constitutionality
,,1 tlr value-added tax OAT) law, or a tax levied on sellers of goods
,, rrrl scrvices with aggregate gross annual sales exceeding P200,000.
\r,\'l' is computed at O% or 10% of the gross selling price of goods or
1, ,,,,,r receipts from sale of services.
1
l'ctitioners contend that the VAT is not within the powers of the
I'r,.riident to enact and that it is regressive, discriminatory,
,,;rlrrcssivs and violates the due process and equal protection clauses
,rrr,l ol,her provisions of the 1987 Constitution'
IIELD:
t) Legislatiue authority of the Presidervt - It is should be noted
tlrrr{ Lhe under both the provisions of the "Freedom Constitution"
,,r,rl t,he 198? Constitution, the President is vested with legislative
I',,w()rs until a legislature under a new Constitution is convened.
I trr, I'irst Congress created and elected under the 1987 Constitution
\1 convened on July 27,1987. Hence, the enactment of E-O.273
^:i
rVA'l' [aw) on July 25, 1987, two days before Congress convened on
.triy 27,1987, was within the President's constitutional power and
ir rr I lrority to Iegislate.
lt) Graue abuse of discretion - This contention is also without
,,r,'r'it. Petitioners have failed to show that E.O' 273 was issued
, ,,lrriciously and whimsically or in an arbitrary or despotic manner
l,r' passion or personal hostility. It appears that a comprehensive
,t rrrly of the VAT was made before 8.O.273 was issued. In fact the
rrr,,r.its of the vAT had been extensively discussed by its framers
,, rrrl other government agencies involved in its implementation even
rurrlcr the past administration.
c) VAT alteged as being oppressiue, discriminatory, uniust and
i t't!ressiue - This assertion is not supported by facts and
, rrr:umstances. Petitioners merely rely upon newspaper articles
justify
n, lrich are actually hearsay and have no evidentiary value. To
99
t
I,AW OI.' I}ASIC TAXAI'ION IN'I'IIIi PHILIPPINI.,]S
the nullification of a law, there must be a clear and unequivocul
breach of the Constitution, not a doubtful and argumentativo
implication.
The sales tax adopted in E.o. 278 is applied similarry on all goodo
and services sold to the public which are not tax-exempt at the
constant rate of O% and l0%.
d) Alleged discrimination - The vAT does not discriminate
unduly against customs brokers with the imposition under
sec. 103(r), NIRC of the tax on customs brokers *ho excluded
from the exemption of professionals under said provision. """
The distinction of customs brokers from the professionals who
are subject to occupation tax under the then Local rax code is based
upon material differences in that the activities of customs brokers
(Iike those of stock, real estate, and immigration brokers) partake
more of a business rather than a profession and are thus subject to
the percentage tax under sec. 174 of the NIRC prior to its amendment
by E'o. 273 which abolished the percentage tax and replaced it with
the vAT. If petitioner association did not protest the classification
of customs brokers, then the court sees no reason why it should
protest now.
REYES, ET AL. v. ALMANZOR, ET AL., G.B. NOS. 49889-46,
APR.26, 1.991
FACTS: Petitioners are owners of parcels of land in Tondo and
sta' cruz, Manila, which are leased and. occupied as dwelling sites
by tenants who pay monthly rentals not exceeding?800 in July rozt.
On July 74, 1971, R.A. ObBg was passed. prohibiting for one year
from its effectivity increases in monthly rental on dwelling units or
lands where the rentals do not exceed ?800 per month, buiallowing
a 70o/o increase thereafter. The law also suspended Art. rroz of the
civil code, thus disailowing ejectment of lessees upon expiration of
the period of lease. P.D. 20 later amended R.A. 668g by making
absolute the prohibition to increase ngonthly rentars below?800 per
month.
In 1973, respondent city Assessors of Manila reclassified and
reassessed the value of subject properties using the schedule of
market values reviewed by the secretary of Finance, thereby
entailing an increase in the corresponding tax rates. petitioners
filed a Memorandum of Disagreement with the Board of rax
Assessment Appeals averring that the reassessments were excessive,
unwarranted, inequitable, confiscatory and unconstitutional since
100
I,IMI'I'ATIONS ON THE'I'AXING POWER
rlr,. tux irnposed greatly exceeded the annual income from the
t,r"p,'r't,y- Likewise, it is argued that the income approach rather
llrrrrr (,he comparable sales approach should have been used in
,1,.t,.r'rrr ining land values.
ll:rrd Board's decision finding the assessments valid was affirmed
,r r I lr :rorre modification by the Central Board of Assessment Appeals
r t 'ltr\A).
lll,)l,D: Petition is impressed with merit. The crux of the
, ,,rr r.( )vcrsy is in the method used in tax assessment of the properties
I
rrr,lrrt'stion,
llrrquestionably, both the comparable sales approach and the
,.{ ,)rn(} approach are generally acceptable methods of appraisal for
I rr r rr l,ion purposes. However, it is conceded that the propriety of one
,, , r llrc cither depends on several factors and assessors, in fixing
ri,,. v;rlue of the property, must consider all circumstances and
, l,.rrrcnts of value and musl exerci.se a prudent discretion in reaching
, !rilr'luSiOnS.
'['he taxing power has the authority to make a reasonable and
,,,, I r riri. elassification for purposes of taxation but the Government's
r
'i, I rrrust not be prompted by a spirit of hostility or, at the very least,
,1, ,, r'irnination that finds no support in reason. It suffices then that
ll',. lrrws operate equally and uniformly on all persons under siurilar
1u( urrst.ances or thai all persons must be treated in the same
,,r;rnner, the conditions not being different both in the privileges
, ,,rrli'rred and the liabilities imposed.
Verily, taxes are the lifeblood of the Government and so should
1,,. , ,rllected without unnecessary hindrance. However, such collection
,lrrrrrtrd be made in accordance with law as any arbitrariness will
.,'ft;rte the very reason for the Government itself. It is, therefore,
rrr.r'ciisary to reconcile the apparently conflicting interests of the
'rri.lrorities and the taxpayers so that the real purpose of taxation,
*'lrieh is the promotion of the common good, may be achieved.
t',rnsequently, it stands to reason that petitioners who are burdened
lry f]1p Government by its Rental Freezing Laws (then R"A.6359
,"rt{ P.tr}.20) under the principle of social justice should not now be
1,,,ualized by the same Government by the imposition of excessive
l;rrics petitioners can ill afford and eventualiy result in the f,orfeiture
,,1 I heir properties.
1()1
r LAW O}- BASIC TAXAI'ION IN'I'IIE PHILIPPIN!]S
GARCIA v. EXECUTIVE SECRETARY, ET AL., G.R.
NO. 101273, JULY 3, 1992
HELD: Customs duties which are assessed at the prescribed
tariff rates are very much like taxes which are frequentiy imposed
for both revenrle-raising and for regulatory purposes. Customs duties
which constitute taxes in the sense of exactions the proceeds of which
become public funds, have either or both the generation of revenuo
and the regulation of economic or social activity as their moving
purposes.
E.O. 475 and E.O. 478 which it may be conceded to be substantially
moved by the desire to generate additional public revenues, are not,
for that reason alone, either constitutionally flawed, or legally infirm
under Sec. 401 of the Tariff and Customs Code. Petitioner has not
successfully overcome the presumptions of constitutionality and
legality to which those executive orders are entitled.
OSMENA v. ORBOS, ETC., ET AI-., G"R. NO. 99886, MAR. 31,
1993
HELD: With regard to the alleged undue delegation of legislative
power, the Court finds that the provision conferring the authority
upon the ERB to impose additional amounts on petroleum products
provides a sufficient standard by whieh the authority must be
exercised. In addition to the general policy ofthe law to protect the
local consumer by stabilizing and subsidizing domestic pump rates.
Sec. 8(c) of P.D. 1956 expressly authorizes the ERB to impose
additional amounts to augment the resources of the OPSF.
MACEDA v. MACARAIG, JR., ETC., ET AL., G.R. NO. 88291,
JUNE 8, 1993 (RESOLUTION)
HELD: E.O. 93, as a delegating law, was complete in itself - it
set forth the policy to be carried out and it fixed the standard to
which the delegate had to conform in the performance of his
functions, both qualities having been enunciated in Pelaez us. Auditor
General (L-23825, Dec. 24, 1965).
PATALINGHUG v. COURT OF APPEAX,S, ET dL., G.R.
NO. 104786, JAN. 27, Lg94
HELD: The declaration of the area as a commercial" zone through
a municipal ordinance is an exercise of police power to promote the
good order a.nd general welfare of the people in the locality. Corollary
i02
LIMI'['A'I'IONS ON'fIIE TAXING POWER
t,lrereto, the State, in order to promote the general welfare, may
rnterfere with personal liberty, with property, and with business
rr nd occupations. Thus, persons may be subjected to certain kinds of
rostraints and burdens in order to secure the general welfare of the
St,ate and to this fundamental aim of the Government, the rights of
tlrc individual may be subordinated. The ordinance which regulates
t,he location of funeral homes has been adopted as part of
r,ornprehensive zoning plans for the orderly development of the area
, overed thereunder.
COMMISSIONER OF INTERNAL REVENUE v. COURT OF
't'Ax APPEALS, ET AL., G.R. NO. 106611, JULY 2l,l9g4
FACTS: Private respondent Citytrust Banking Corporation
(Oitytrust) filed a claim for refund on Aug. 26, 1986 with the BIR in
llre arnount of P19,971,745 representing the aileged aggregate of
lhe excess of its total quarterly payments over actual income tax
,ltre, ptrus carried-over withholding tax payments on government
sccurities and rental income, as computed in its final income tax
rt:turn for the calendar year ending Dec. 31, 1985'
In order to interrupt the running of the prescriptive period,
( iitytrust filed on Aug. 28, 1986, a petition with the CTA for refund
ol'its income tax overpayments for the years 1983, 1984 and 1985
Iotaling ?19,971,745. The Solicitor General, in its answer, argued
I,lrat a mere averment of net loss does not ipso facto merit a refund,
that the amounts claimed were not propertry documented and that
I he entitlement to refund, if any, has already prescribed.
The case was decided solely on the basis of Citytrust's evidence
Irt,:cause no evidence was presented by respondent commission due
tl,l the repeated failure of the Tax CreditlRefund Division to transmit
{ he records of the case and investigation report to the Solicitor
( leneral.
The CTA ordered the refund ofthe overpaid taxes for 1984 and
1985, although only for the amounts properly documented, but not
liir 1983 on the ground of prescription. The Solicitor General moved
l"or reconsideration of said decision contending that Citytrust had
rrnpaid deficiency income taxes for 1984 and for ruhich assessment
rrotices had been issued. The CTA denied the motion and its decision
rvas affirmed by the Court of Appeals.
Petitioner elevated the case to the Supreme Court faulting
rcspondent appellate court with the grant of the claim for refund
rlespite failure of Citytrust to substantiate its claims and the BIR's
rCI3
 I,AW OI.' I]ASIC'I'AXA'I,ION IN'IHE PHILII'PIN!]S
LII\4ITATIONS ON THE TAXII\IG POWER

findings of income and business tax liabilities

payment. which bar such r,rrly t.hc power of supervision over local governments to the
l'r r,r-ridr:nt.
HELD: The Supreme Court remanded the case to the
further proceedings. CTA for llliLD: Sec. 187, LGC does not violate Secs. 4 and 5, Art. X of
tlr,, ()onstitution and the policy of local autonomy.
The BIR, represerted by petitioner commissioner
Revenue, was denied its day in court by reason
of Internal on the issue of noncompliance with the prescribed procedure in
of the mistakes tlr. cnactment of the Manila Revenue Code, the Court ruled that
and/or negligence of its officiais and employees.
Due to unavailability tlrr' lrrocedural requirements have been duly observed: notices were
of records from the BIR, the solicitor General,
tax court, was constrained to submit the case
in deference to the rr.nl. to the interested parties and the minutes of the hearings showed
presenting any evidence.
fo, d;;ir; without tlrrrt, the proposed and approved ordinances were published in the
ri'wspapers. The only exception is the posting of the ordinances as
The aforestated impass6 came about due ,r;rproved, but this omission does not affect its validity since its
to the fact that, despite
the filing of the aforementioned initiatory petition
in crA case No. l,rrblication in three newspapers of general circulation wiII satisfy
4099 with the cTA, the Tax Refund Division ,lrrc process.
of the BIR still continued
to act administratively on the craim for refund p""ui"urry
therein, instead of forwarding the record.s of nr"a
the case to the crA as 'I'OLENTINO v. SECRETA.RY OF FINANCE, ET AL., G.R" NO.
ordered.
I 16455, AUG. 25, lgg4, and companion cases
It is a long and firmry settied rule of raw that the Government
is
not bound by the errors committed by its agents.
In the p"rfor*ur." FACTS: Various suits for prohibition and certiorari were filed
of its governmentar functions, the dtate cannot ,'lrnllenging the constitutionality of R.A. 7716, ar the Expanded
be estopped by the
neglect of its agents and officers. Although trre Value-Added Tax Law (E-VAT).
generally be estopped through the affirmative coreii'-ent may
acts orprruii. officers
acting within their authority, their negrect o"
o*iriio, of public HELD: The value-added tax (VAT) is levied on the sale, barter
duties-as exemplified in this case wil not and ()r exchange of goods and properties as weII as on the sale or exchange
shourd not produce
that effect' Nowhere is the aforestated rule more ,rl'services. It is equivalent to 10% ofthe gross selling price or gross
true than in the
field of taxation. value in money of goods and properties sold, bartered or exchanged
or the gross receipts from the sale or exchange of services. R.A.
'/716 seeks to widen the tax base of the existing VAT system ancl
DRILON, ETC. v. LIM, ET AL., G.R. NO, ttZ4gT,AUG.
4, Ig94 onhance its administration by amending the NIRC.
FACTS: On appeal of four oil companies and In a 10-5 vote, the Supreme Court upheld the vaiidity of R,.A.
^
secretary a taxpayer, the
ofJustice, pursuant to sec. 1gT ofthe Locar Government '7716 on the following grounds:
code of 1991 (LGC), d.eclared ordinance No.
T294, (1) The procedural requirements of the Constitution have been
as the ";h;;;; known
Manila Revenue code, nur and void ro" rro**piiance
with complied with by Congress in the enactment of the statute.
the prescribed procedure for enactment of tax
ord.inances and for
containing certain provisions contrary to law (2) Judicial inquiry on whether the formal requirements for the
;;l;pifi"v. enactment of statutes, beyond those prescribed by the Constitution,
RTC-Manila, on petition for certiorari filed ""d
revoked the secretary's resolution and sustained city of Manila,
by the have been observed is precluded by the principle of separation of
holding, inter olia, that the procedurar requirements th""o"diru".u, powers.
observed and declaring that dec. 1g7, LGC had been (3) The law does not abridge freedom ofspeech, expression or of
was unconstitutionar
because it' vested the secretary of Justice
with the power of control the press, nor interfere with the free exercise of religion, nor deny
over local governments in vioratio, of the policy to any of the parties lhe right to an education.
mandated by the constitution and the provisions
or-rr.Ju"tonomy
therein vesting (4) In view of the ahrsence of factual foundation of record. clairns
that the iaw is regressive, oppressive and confirscatory and that, it
104
105
 t,AW Ol,. I}ASl.,t,AXA,l,loN l N,t,ll t,i l,,
l l,lt,l)lNl,lti. I,tM I'I'A'I'IONS ON'I'HE TAXING POWER

violates vested rights protected u,der

prematurely raised and do not justify
the contract clausc ar. r rlr.r)t. ol'tlcrlr-rctions applicableto all individual income taxpayers
the grant r non-compensation income. There is no evident intention in
"io"""o*rive reri.r,
,, r ( lrt'i
by writ of prohibition. r

tlr,, l:rw, oithcr before or after the amendatory legislation to place on

,rn unequal footing or in significant variance the income tax
TAN v' DEL Ros-ARIo, JR", BT AL., G.R. t r r.:r t,rnent of professionals who practice their respective professions
CARAG, CABALLES, JAMORA AND SOMERANo. 109289, and ,ir,lividually and of those who do it through a general professional
ET AL. v. DEL RosARro, JR., nic., iEW"ON'N'TCNS,
jointly decided on OCT. A, tgg4 ET AL.;G;.'N6. rog+ao, 1,;r rt,nership.

FACTS: petitioners crairn to be taxpayers MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS,

the implementation of R.A. 74g6, commonly adversery affected by lNCl. v. DEPARTMENT OF FINANCE SECRETARY' G.R. NO.
known as simprifie,
Net Income Taxation Scherne (,iSNITS,,). - I" t08524, NOV. 10, 1994
pertitioners chalrenge the co,stitutionarity C.R.io. r0gZAs,
of n-a.-iago; Jrra i, c.n. HELD: The Court did not find merit in petitioner's argument
No' 109446, the varidity of serc. 6 of Rev.
Reg. No. 2-98 promurgated tlurt, RMC No. 47-91 granting exemption to coconut farmers and copra
pursuant to said amenclatr:ry law is
assailed.
l,roducers but not to traders and dealers is discriminatory and
HELD: The court rejecteri the contention of petitioner v rolative of the equal protection clause of the Constitution. There is
in G.R. rrr;rterial or substantial difference between coconut farmers and copra
the title of Fr. No. B4st4,which nu"urnu
ili_l?"]]:lthat n.a . v4s6, l,roducers, on the one hand, and copra traders and dealers, on the
,rllrer. The former produce and sell copra' the latter merely sell
The full title reads: "{n Act Adopting the simprified ,.opra. The Constitution does not forbid differential treatment of
Taxat'ion scheme for the serf-n*proyua Net Income
und professionul, er.gug"a t)('rsons so long as there'is a reasonable basis for classifying them
in the Practice of rheir Frofession, imending ,lilTerently.
sections 21 and 2g of
the National Internar Revenue code, As
Amlnded." i;;. worded,
the title of the b,r sufficientlv meeis the
objecti,r"* or iu.. 26{1), COLLECTOR OF INTERNAL REVENUE v. COURT OF TAX
Art. VI of the ConstiLution.
T'he amendatory law cannot be considered
AI'PEAL, ET AL., G.R. NO. L24043, OCT. 14, 1998
gross i,come, instead of having as having adopted a
retained the net i".rn,-'"]r"xation FACTS: Private respondent Young Men's Christian Association
scheme. Limiting alrowabre deJuctions
from gross ,,Ithe Philippines, Inc. (YMCA) is a non-stock, non-profit institution
discordant with, nor opposed to, the net incole income is neither which conducts various programs and activities that are beneficial
,". .r"""pt.
That R.A, 7496 imposes tax on single proprietorships t,o the public, especialiy the young people, pursuant to its religious,
professionals differentry from the manner and cducational and charitable objectives.
corporations and partnerships cannot be it imposes tax on
said to violate In 1980, private resporldent earned, among others, an income of
constitutional requirement that taxation sha,l the l*676,829.80 from leasing out a portion of its premises to small shop
equitable. Neither is R.A. 74g6 violatrve be uniform and
of due process. The due owners, like restaurants and canteen operators, and?44,259 from
process clause may correctly be invoked.
only whei-r tf."."'i" a clear parking fees collected from non-members' On July 2, 1984, the
contravention of inherent or constitutional
rimitations irJrr" commissioner of Internal Revenue issued an assessment to private
of the tax power. "*u".rr" respondent, in the total amount of ?415,615.01, including surcharge
on petitioners' contention in G.R. No. 10g446 and interest, for deficiency income tax, deficiency expanded
respondents exceeded their rule-making that pubric withholding taxes on rentals and professional fees and deficiency
i*"pplyi;;
authority
to general professional partnerships [y promulgating SNITS withholding tax on wages. Private respondent formally protested
Reg' No. 2-98, the court held that *rio sec. 6, Rev. the assessment and, as a supplernent to its basic protest, fiIed a letter
s".. o aid not arierbut merely dated Oct. 8, 1985. In reply, the Commissioner denied the claims of
confirmed sec. 28 of the Tax code as amended
by R.A. 7496 on the YMCA"

106 107
 t,Aw ot,, BASt0,t.AxA't,toN tN,t,illd
I,iltLII'l'lNt,ls LIMITATIONS ON THE TAXING POWER
with the denjal.of its formal protest by
the collector of lnternal
Revenue, YMCA a p"iitil" ,r ,r, w,,ll trs that arising from any activity it conducts for profit, is
Mar. 14, 1e8e. The CTA rutiJi" r"""" "urriu* ;;f;;; ;" CTA on
liled r r, r r lt'. 1'he phrase "any of their activities conducted for profit" does
r Ir

that the reasing of private :M.,CA;;;;_rri", holding

"r facilities;;J;;; r',rt rlualif/ the word "properties." This makes income from the
""rpo"a*t's
of a parking rot are. reasonabrv operation 1,r,,pr,rt,y of the organization taxable, regardless of how that income
incidentar to and ;;;;;;ry for
the r'i ,r(,(l
accomplishment of its objectivls.
The tax court thus dismissed
1980 deficiency fixed, contracto"jrlrra the - whether for profit or for lofty non-profit purposes.
l't'rba legis non est recedendum. The law does not make a
the deficiencv expanded ,"ithh;l;i* irr.o,ne taxes, but sustained
wages for the same year.
,"r and withhording taxes on ,lr:ilrrrct,ion. The rental i.ncome is taxable regardless of whence such
nr( ornr) is derived and how it is used or disposed of. Where the law
l

The commissioner erevated the rl,r.r; not distinguish, neither should the Court.
case to the court of Appeals
which initia,v decidSd in its favor 'l'he exemption granted by Sec. 28(3), Art. VI of the 1987
i"y reinstating the assessment
deficiency fixed' contractor's of t',,rrst,itution to charitable institutions pertains only to property
and irr".omu taxes. However,
merit in yMCA,s finding
fo" the appellate court Irr rcs, not to income tax. "(W)hat is exempted is not the institution
reversed itserf and-motion
prornulgated "u"orrrideration,
the iirst assessed dated
rl,ir.lf x x x; those exempted from real estate taxes are lands,
sept' 28, 19g5 grantirrg.uiJ-oii"i "u"orutio., l,rr rltlings, and improvements actuaIIy, directly and exciusively used
bv affirming the crA,s
decision in toto. on "iylaca
c;;;;;iffi*:i"nied
Commissioner,s motio" febrzg, ige6,-;; the
l,,r' religious, charitable and educational purposes" (Record of the
fo" i".on*ii"r"rir". t',,rrstitutional Commission, VoI. 2, p. 90).
HELD: The petition is meritorious" Neither can YMCA invoke Sec. 4(3), Art. XIV of the fundamental
, lrrrrLer to claim exemption from income tax. Private respondent is
It is a basic rure in taxation that the .xr'rrpt from payment of property tax, but not from income tax on
factuar findings of the crA,
when supported by substantiar
r,'rrtals from its property. To be granted the exemption under the
appeai unless it is-s-hown that ""ia"".", wilr not be disturbed on
said court ,rlirrecited provision, YMCA must prove with substantial evidence
the appreciation of,facts. In trr" pl".""t committed gross error in
I lrrrt, (1) it falls under the classification of non-stock, non-profit
the Feb' 16, 1994 decision ,f ;hJa;;t case, the Court found that
,'rlucational institutions; and, (2) the income it seeks to be exempted
from this rute. The,tatter ;;;;;;;lied of Appeals did not deviate
the law ro the facts as lr.om taxation is used actually, directly and exclusively for
found bv the crA andruled on
th""i.;;; raised by the commissioner ,'tlucational purposes. However, the Court notes that not a scintilla
of Internal Revenue. That it dii
of the crA did not necessar,y
;;;; manner different from that ,,1'evidence was submitted by private respondent to prove that it
imply a reversar of factuar findings rnct said requisites. The bare allegation that it is a non-stock,
nor was it irregular or abnormat.
,,on-profit educational institution is insufficient to justify the
on the crucial issue of whether the rentar (.xemption from payment of income tax.
its real estate is subject to tax, ii" income of yMCA on
claimed bv yMCA is expressrv
irr.t rured that the exemption The Court ruled that YMCA is not an educational institution
Ji""riJ*"a bv rhe verv wording of within the purview of Sec. 4(3), Art. XIV of the Constitution. Under
the iast paragraph of the; s".-;i-trr*;
which rnandates that the income
or
rr"*, ^dr". ii,'iiir wmcl t he Education Act of 1982, such term refers to schools. The school
system is synonymous with formal education which "refers to the
the YMCA) from anv of their p;;ili;, "r**ot organizations (such as
to the tax imposed by the .rr*
rear or-personar, be subject hierarchically structured and chronologically graded Iearning
C"au. il""r,ruu the ]ast paragraph organized and provided by the formal school system and for which
said section unequivoca,v uubjects't"i* of
YMCA from its'eal nroperty, the the rent incoml of the certification is required in order for the learner to progress through
court is duty-bound to abide strictrv t,he grades or move to the higher levels."
by its iiteral rneaning anei to refrain
attempt at construction.
i""* ,u.orting to any convorutei Furthermore, under the Education Act of 1982, even non-formal
education is understood to be school-based and "private auspices
A reading i:f tire last paragraph of
Sec. 2? (now, Sec. *,)ineludibly such as foundations and civic-spirited organizations" are ruled out.
show-sthat the incoine f"o*"u"i pr"r*, of exernpt organizatians, trt is settled that the term "educational institution," when used in
Iaws granting tax exemptions, refers to a school, seminary, college
108
109
 IAW OI I}ASIC TAXATION IN'I'IIF] I'HII,IPPINES
or educational establishment. Therefore, private respondent
cannot be deemed one of the educational institutions covered by
the constitutional provision under consideration.
EXERCISES
1. San Antonio Colleges Foundation, Inc. (SACFI) is a non-stock,
non-profit educational institution. SACFI owns a 5-hectare lot
one-half of which is used as SACFI's school campus, while the other
one-half is vacant. To cope with the increasing operating costs and
to upgrade its facilities, SACFI plans to do the following, effective
Jan. 1, 1991: (1) rent out to Supermarkets, Inc. the vacant portion
of the lot for Pl.0 Miliion a year; (2) increase tuition fee by 6% in
accordance with government regulations; and (3) import 30
computers for use in its computer courses.
(a) Is SACFI subject to real estate tax on its 5-hectare lot for
calendar years 1990 and 1991? Explain. (b) WiIl SACFI be subject
to income tax on its renlal income from Supermarkets, Inc.? Explain.
(c) If the increase in tuition fee results in a net income from school
operation in 1991, will SACFI be subject to income taxes and duties
on the importation of the 30 computers? Explain. (1990 Bar)
2. State at least three constitutional limitations on the power to
tax. (1970 Bar)
3. State at least three inherent limitations on the power to tax.
(1970 Bar)
4. X, a private individual, leased his piece of land to a school
which is being operated for profit. A building was constructed by
the school on the leased property to be used as its library. Is the
land subject to the real property tax? Can the school claim exemption
from the payment of the permit fees for the construction of the
building? State your reasons. (1969 Bar)
5. A law was passed condoning unpaid real property taxes. WiIl
this law benefit the taxpayers who have been prompt in paying their
taxes? Explain. (1968 Bar)
6. The municipal council of Taal, Batangas passed an ordinance
which reads: "An Ordinance Imposing Upon Asis Candy Company
or Any Other Person or Entity Operating a Candy Factory Within
the Municipality An Annual Tax of f1,000.00." At the time the
ordinance was approved, Asis Candy Company was the only candy
factory operating in Taal. Is the ordinance valid? (1968 Bar)
110
I,IMI'I'A'I'IONS ON TI-IE TAXING POWER
'/ ljt,ate at least three provisions of our Constitution which have
,r rlrrctrL or indirect bearing on taxation. (1965 Bar)
tl What is meant by situs of taxation? What determines situs of
t ,r r;r l iun? (1973 Bar)
t) 'fhe City of Manila passed an ordinance imposing a fee on the
1,r r, ,' of admission tickets to cinematographs, theaters, theatrical
,l,,,ws and boxing exhibitions. Said ordinance, however, did not tax
\', r'r()us other kinds of amusement such as race tracks, concert halls,
, n.uses, and other places ofamusements. A corporation engaged in
tlr,' rrrotion pictures business attacked the validity of the ordinance
,,rr llre ground that it is violative of the principle of uniformity of
r;rxrrl,ion enjoined by the Constitution. Decide and briefly explain
tlr,, s'lyasens for your decision. (1973 Bar)
10. Pursuant to the Land Reform Program, it was provided by
lirr,v t,lrat land bonds issued by the Land Bank in payment for lands
{ x t)r'opriated by the Government may be used by the former landlords
ti, l)iry for their taxes. Subsequently, the privilege was modified by
,'llowing instead a bondholder to borrow money from the
l)i.v()lopment Bank of the Philippines (DBP) by assigning the bond
,,,, ir discounted basis to the latter. Does this constittrte an
'rrrlrrirment of the obligation of contracts? (1974 Bar)
I l. Explain briefly the limitation of international comity on the
1rr rw0r of taxation. (1989 Bar)
r2. Sec. 28O)(8)(A) (now, Sec. 32tBlt7ltzl) of the Tax Code exempts
Ir ,ru tax the interest on foreign loans extended to Philippine debtors
l,y I'oreign financing institutions owned, controlled or enjoying
r ,,l inancing by foreign governments like the Export-Import Bank of
,l:rgran. Private foreign financing institutions, however, outside the
,rl,rrr:mentioned class do not enjoy the same tax exemption privilege.
l:r il not violative of the rule on equal protection, uniformity and
,'rltrality of taxation? State your reasons.
13. Assume that there is a bill pending in Congress, which
pr'oposes to levy the VAT on apartment lessors. Assume that you
iu.(, one of those who are opposed to the passage of the legislative
rrrt.itsur€. What possible objection can you put up in light of the rule
,rl'progressivity of taxation, which is embodied in Sec. 28(1), Art. VI
,,1' t,he Constitution? Explain fully.
14. Discuss the rule of situs of taxation as to -
(a) the imposition of the estate tax on the property left behind
lr.y a non-resident alien decedent abroad.
111
I LAW Ol,' BASIC'|'AXATION tN,il-ilt t,l-llt,tpptNlls.
(b) the assessment of incorne tax on the salary earned by u
resident citizen in the United States; and
(c) the applicabiiity or inapplicability of the principle of ,,mobiliu
sequuntur personanL."
15. New Horizons Electric company is a grantee of a franchiso
to construct, maintain and operate an electric iight prant in tho
Province of Nueva viscaya for a period of twenty-five years. under
the terms of the franchise, the company shall pay a franchise tax
of 2% annually on its gross receipts which shall be "in lieu of all
taxes of whatever kind and nature that may be imposed by any
national or local government" for the duration of its franchise. on
Dec. 19, 1986, however, E.O. Z2 was promulgated establishing
uniform franchise tax rates on all existing franchise guarantees. The
BIR assessed the company for income tax on income earned. after
the executive order went into effect. Is this not an impairment of
the obligation of contracts? Explain your answer.
112
Chapter III
I X ) UBLE TAXATION AND TAX EXEMPTIONS
ll()UBLE TAXATION DEFINED. Doubie taxation is defined
,,1-ll',,*,,rg the same propelty twice when it should be taxed but once.
lt lrir:r rrlso been defined Sjtaxing the same person twice by the same
;rri r:rrlrt:Lion over the same thing (Victorias Milling Co. u. Municipality
,,1 l'tctorias, Negros Occidental, L-21183, Sept. 27, 1968). U.S.
f ,n r,,prudence describes it a$frpxing the same person twice by the
,,rr,r,, jrrrisdiction for the samdlhing or purpose (Haruey Coal & Coke
r',, rt. I)illon, 59 W. Va. 605; 53 S.E. 928, 6 L.R.A. [NS] 628).
N0 PROHIBITION AGAINST DOUBLE TAXATION.
\,,,,r'rling to the Supreme Court in the case of Villanueua u. Citv of
tt,,tht (L-26521, Dec. 28, 1968), there is pdconstitutional prohibition
rrlirrrnst double taxation in the Philippines. trt is something not
l,rv,red, but is nevertheless permissible. Double taxation is not
t,,r lritlden by our fundamental law (Pepsi-Cola Bottling Ca. of the
t'ltrli.ppines, h,c, u. City of Butu,arl, et al., L-22814, Aug. 28, 1968).
tt is interesting to note that the Philippines has not adopted the
,,,yrrrrction against double taxation found in the Constitution of the
I I rLed States and in some states of the American Union (Serafica u.
rr
l'tt'nsllrey of Ormoc City, et al., L-24813, Apr. 28, 1969). There is,
tlrlrefore, definitely no prohibition against double or rnultiple
t;rxrrtion in our jurisdiction (Comrnissioner af Internal Reuenue u"
Ilrrtoaiian-Philippine Co., L-16315, May 30, 1964).
KINDS OF DOUBLE TAXATION. Double taxation is
,rornetimes known as "darplieate" tq4_aliqrr,, Duplicate taxation may
llr,t1irectorindirect.ffidqbordoubIetaxationin
tlro objectionable or prohibited sense (also known as obnoxious)
r!rcans that the same property is taxed twice when it shoutd lre taxed
,rrrly once; and that both taxes are imposed on the same property or
:rrrl:ject matter for the same purpose, by the same State, Government,
,rr taxing authority within the same jurisdiction or taxing district
tlrrring the same taxing period and covering the same kind or
r:lraracter of tax (Yi,llanueua u. City o{ Ilaila, supra).
Consequently, it has heen hetd that l.h.ere. is no objectionable
,louble taxation if a reaJggate tax as,vfel as a'tenemegLlg$ are
imposed on the sarne property because the two impositions are not
o2roT
r [,AW OIT I]ASIC TAXATION IN THE PHILIPPINES
of the same kind or character (Ibid..).
\rmdircglguplicate taxalion, which is the opposite of direct double
ta x a t i o n, is n o-fregTlff o b j e ct i o n ab I e. Th e fo llow i n g c a se il
s I u st ra te
the point that in the absence of the elements oflirect duplicato
taxation, double impositions levied on a particular subject of taxation
may be justified.
- 1. The taxpayer's warehousing business, although carried on in
relation to the operation ofits sugar central, is a distirict and separate
taxable business. There can be no double taxation where the state
merely imposes a tax on every separate and distinct business in which
a person is engaged. Moreover, there is no prohibition against
double
or multiple taxation in this jurisdiction (commissionir of Internal
Reuenue u. Ho,waiian-Philippine Co., supra)
2" A license tax may be levied upon a business or occupation
although the land or property used in connection therewith is subject
to property tax. The state may colect an gdlqg!9t\.won property
used in a calling and at the sarne time irfpo;;lG;; tax on that
c_alling, the imposition of the latter kind of tax being in no sense
a
double tax (Villanueua t). City of llailo, supra),
Thus, there is no objectionable double (or multiple) taxation if
tenements in a city are subject to real estate tax while the business
of leasing said property are arso subject to real estate d.earer's tax
under the National Internal Revenue code as well as the tenement
tax levied by the city. There is nothing inherently obnoxious in the
exaction of license fees or taxes with respect to the same occupation,
calling or activity by both the state and apolitical subdivision thereof
(Villanueua u. City of lloilo, supra; cf. Sec. I0g, lgg| NIRC).
3. Both a tricense fee and a tax may be imposed on the same
business or occupation for selling the same articie and this is not in
violation of the rules against double taxation (compafi,ia General de
Tabacos de Filipinas u. City af Manila, L-l6dtg, iune Zg, 1g6J).
4. where a local tax is levied on the sale or disposar of every
bottle or container of liquor or intoxicating beverages and at the
same time the business of selling such product is also sub;ect to liquor
Iicense annually of P600, there is no doubre taxation since the liquor
license constitutes a regulatory measure which is imposed in the
exercise of the statet police power (san Miguel Brewery, Inc. u.
city
of cebu, L-2N12;-F ;b. zo, tir\.
_ 5" A tax imposed both on the occupation of fishing and on the
fishpond itself does not constitute doubre taxation. The subjects of
taxabion are different from each r ther (people u. fuIend"aros,
97 Phil.
958 [Unrep.J).
114
AND'l'AX EXEMPTIONS
l)( )l.l Ill,l,)'l'AXA't'lON
ti
'l'lrrrro is no double taxation if a local ordinance imposes a tax
,,rr sl,orage of copra where it appears that the finished products
I lr.
r,r:rrrrrlrt:l,ured out of the copra are subject to sales tax (now, VAT)
rrr,l,.r l,lrc Tax Code (Procter & Gamble Philippine Man'ufacturing
t ,tt t, (). Municipality of Jagna, Prouince of Bohol, L-24265, Dec. 28,
l,t,'l))
'/
'l'here is no double taxation involved in a case where a tax of
t",, rs imposed under Sec. 249 of the Tax Code for bank reserve
,lr.lrr:ioncy while a penalty of 1/10 of 1% a day is also imposed as a
1,,.rrrr lt,y as a consequence of such reserve deficiency under the Central
Ir;rrrk Act (R.A.265) (Republic Bank u. CTA, et al., G.R.
/V,,: 62554-55, Sept. 2, 1992).
g Double taxation means taxing the same property twice when
rr :,lrould be taxed only once. That is, taxing the same person twice
l,y llrc same jurisdiction for the same thing. In Afisco Insurance
r',,rttorcttiorl, et al. u. Court of Appeals, et al. (G.R. No' 112675,
.l rr r 25, 1999), the pool of machinery insurers was held to be a taxable
r
,.rrt rl,.y distinct from the individual corporate entities of the ceding
,,,rr,pi,rnies. The tax-on its income is different from the ta{-Qbe
,l,r'rrlcnds received-by said comp-6nies, and clearly, no double taxation
r', i rrv olv€d"
MEANS EMPLOYED TO AVOID DOUBLE TAXATION. It
, , ,'rlgnificant to note that our tax system provides for certain schemes
irr .rder to avoid or minimize the harsh or burdensome effects of
,l,,rrble taxation. These tax reliefs or schemes are sometimes
,.rrrlrodied in tg$ trqaties or agrqpnge4]ls with foreign countries while
, I I t ,r's are imbedded in statutory proviiions found uider our existing
r r
lrrrvli.
lfor example, under Sec. 25(b)(5)(B) of the Tax Code (Cf.
::,','. 28[B][5][b], 1997 NIRC), the burden of double taxation on the
',,rrrre dividend income earned in the Fhilippines by a no:r'resident
l.r'1,lgn corporation (one tax in the Philippines and another tax in
tlr(. do-dfrilIary country) is reduced by the imposition of the lower
,,,lc of 75% (rn iieu of the 35%) subject "to the condition that the
, ,,urrtry in which the non-resident foreign corporation is domiciled
foreign
'lrrrll allow a credit against the tax due from the non-resident
,,,'' pr-rra[iffiTEf es-deerrEl-i6-EETe bben p aid in the Ph ili ppi nes
,,,1rrivalent h 2A% which represents the difference between the
r,'tlrrlar tax (35%) on corporations and the tax (15o/o) on dividends
r x x" (see also Commissianer of Internal Reuenue u. Procter &
ritttnhle Philippine Manufacturing Corp., et al., G".8" No. 66838,
!tt't 2, 1991).
r I,AW OF I]ASIC I'AXATION IN TIIE PHILIPPINES DOUI]I,f] TAXATION AND TAX EXEMPTIONS

Most common of these tax reriefs are tax deductions ( )r,

and tax
g_ry:lits. To illustrate: In the case of deductidis,-6;
;;;;;i;;
estate tax law (Sec. 79;now,,Sec. S6[A]IZJ, tggT NIRC)p"oula""
;;;
the so-called "vanishing deductiin''i in order t" fo, -It'ro,oi6loiC
too,ooo x ?3,500,000
(at fl00,000
-iiir"I""ilr. i 35o/o)
u
b-urdensome gffects of double taxation on the
propiiy tfrrt i
"u-" io two l" _o"
the subject of two or more transfers pertaining
decedents. l"T -2'
u: the
To credit foreign tax against FhiLippine tax, deduct the
As to the tax credit set'up, our present law contains " " 1' foreign tax credit (per formula) from the Philippine tax
a number of ttt llrt) toreign
1

tax relief schemes also. For example, for value_added tax actually paid, whichever is lesser.
purposes' the tax on inputs or items that go
tax (VAT)
into the manufacture of
finished products (which are eventually sord) may be
credited against F3,500,000
or deducted from the output tax or tax on the finished proJuct.
In income taxation, too, the credit scheme is present. For l'ess: Fq.slgn
tax Credit Allowable 700,000
instance, in the case of a resident citizen or domestic
corporation
whose income from sources within a foreign P2,800,000
country is arso taxable
under Philippine law, the tax paid to such fJreign.o""try*ry,
under
certain limitations, be claimed as a credit agaiist thu phili;eine tax credit method, as a means of *iryr-igg1lggLl"
tax ..I.1"-t".uign
Lroll' applies
on the same income (See. SaICJ[S][oJ, tggf NIRC) I Ir xrr
also to resident aliens provided thaffie reciprocity
r''(luueme\t
How is the cred.it for foreign toxes paid ctrriued o1? Assuming jtabhslred in the law is satisfied and subject to the allocation rule
the income from a foreign ,orr"* is derived from only one country, ,',,i' in the Tax Code (see Sec.SaIC][3/ and par. [a][A] &
the Tax code provides that, "(a) The amount of the .rldit in
/,/'/,tnereofi see also Commissioner of Internal Reuenue u. V.E.
respect t "ttttcRy, et ql.,
to the tax paid or incurred to any country shall not exceecl L-tsl69, L-18262 andL-21434, July 13, 1964).
the same In thu
propgrtiqn of the tax against which such creditlE-I6r6i, which however, of non-resident Filipinos, since their
the
taxpayer's taxable income from sources within such country ']':::'c'-:9\,rced "u"", income is subject to two taxes levied under two
under lt ll erent j,rri.di.tions,
this Title bears to his entire taxabre income ro. trr* .u*e ia*aute ' the tax .o-", in the form of a deduction
year; and, (b) The total amount of the credit shari
not exceed the "' '!: tbrelgr national income"uli"f tax from:the foreisn soursed income
sarne proportion of the tax against which such credit 'l:""'-,The- tu* credit scheme in this instancJ is(tlol!-Available
is taken, which
the taxpayer's taxable income from sources without the
Fhirippines
[b], I gfT NIRC).
1,\,'c. 21
taxable under this Titre bears to his entire taxable i*coine
fbr the Il.:ho.,ta be noted that under Sec. 23 of the 1997 Tax Code
sarne taxable year" (Sec 34 tcltAlful and.
[b], tggf NIRC). lllul'dtts for the general principles of income taxation in the
Thus, supposing the taxable income of X Corp., a t'rttupprri€s,
domestic a non-resident citizen is taxable only on income derived
corporation, from fo'eign country frI is F2,000,000 rr L'm.sources
anel its philippine within the Philippines. An alien indidividual, whether
sourced income is F8,000,000. The foreign incorne ;t reslo€rlt of,
tax actually paid not of the Philippines, is taxable only on income derived
is P800,000. The foreign tax credit is coLputed r|om sources
as follows: within the Philippines. A foreign corporation, whether
t'n$a$€d or
step 1: To get the maximum allowable foreign tax credit not in trade or business in the Philippines, is taxable
_-
Philippine law:
under ')niy on rncome derived from sources within the Philippines.
r,h9 bun"rit
Taxable Incorne of credit against income tax for taxes of foreign
r"(runrnes shall
(Foreign Source) Philippine Tax {,iriiit of be
(rornestlc corporation
allowed to a citizen of the Philippines and a
Total Taxable Income on the $'oleign if the taxpayer so signifies in his return; but
Total Incorne :;ucn oenefit
(Foreign and Philippine T"'ax ilr"eelit shall not be allowed to an alien individual and a foreign
t:orporatioq Sec. Sa[cJt3]tal and.
Sources) [b], 1gg7 NIRC).

t16 t\7
r l,AW olf Bn sl( t ,l,AXA'l'loN lN ,l,il l,l I,lil l,ll,l,lNl,tS
I)OIJtlt,14'l'AxA'l'loN ANII'lAX ITXUMPI'IONS

Among the examples of tax t,r:caties ftrr ro.[ierf'r'rorrr

of double taxation are the RP_US Tax Treaty ancl or rrvoirrlrrrr,o
tho ll.I]:Wur'rt,
Germany Tax Treaty which *frit-nc-sutject
of compu.utirrr r()vr(,w
in C3mylssioner of Internal Reuenue u. S. C. Johnsoi
et al. (G.R. No. 12710b, June 2b, 1999).
,ni ion, t,,r.,
TAX EXEMPTIONS. An exemption frorn taxation
defined as a grant of imgrynity, exDress or imglied, may bo
to particular i
corporations from the obligation to pay taxes (51
Sillilii" Arnt, I
KINDS oF TAx ExEMprIoNS. Immunities from taxation
which originate from the constitution are know n
as constitutionar
exemptions; those which emanate from legisl
exemptions. Whenever exemptions u"" "tio" "J€.id.*,oii
granted
or statute law, they are called expL?:!-_g_Lemptions.
"*p""r"ly by organic
'I;pn;;
exemptions, however,-exist whenever
[Efiicuiai pe"sors-, properties
or excises are deemed exempt as they fa, outsiie
il;;;"
taxing provision itself. For example, if a tax is r""i"J* of the
houses in a particurar rocality but such law is
t"nement
silent as to tho
taxabilitv of other-types of dweiling which u""
locality, it is implied that the ratter aie exempt from"*lrlins
i., tlu,t
said t;,..'ffi
exemption connotes absolwe immunity; whiL pqrtial
exemption is
one where coltection of a pilt of the ,t:1!]9B6nffi1lrln.'
PRINCIPLES GOVERNING TAX EXEMPTION
1' Exemptions from taxation are highly disfavored in law,
and
he who claims an exemption must be abL to
i-r,*iry hrs claim by the
clearest grant of organic or statute law. a"
f"r* trru
common burden cannot be permitted to exist
rpo.,",.l"rrilori
uugi," i*pir.rtio.r.
(Asiatic Petroreum co. [p.1.], Ltd. u. Lranes,
49 phil. 466 cited in
Collector of Internal Reuenue u. Munila Jockey
Ctub, Inc,-, gg phil.
670; Dauao Light & power co., Inc. u. comiissiiil,
et al', L-28739 & L-28902., Mar. 29, 1gr2). "r'c"ston.S,
To epitomize thf principre,
it is well settled that ,.taxation . -+"--
is the
gxcgpliorr,' '- ----:--:-Iule' teljlgmption it-tl5
2. He q,ho claims an exemption from his share of
the
burden in taxation must justify his crairn uv ,rro*irf common
legislature intended to exempt him by words too plain
ttut trr"
to bI mistaken
(surigao consolidated Miiing co., Inc. u. cirtector
Reuenue, et al., L-14gfg, Dec. 2b, lS6S).
of internal
lt, is ir w0ll settled rule that he who claims exemption should
li.
r,r'()vr) by convincing proof thq!*-h"g !p exgmpted
(Visayan Cebu
L- 19530 &
l't'ilni.tlal Co., Inc. u. Commissioner of Internal Reuenue,
t t9,144, Fe,b. 27, 1965).
4. Tax exemptions must be s!11c-L=b:s1{,-q!-ry-gd such that the
,.xemption wiII n-ot be held to be conferred unless the terms under
, *hich it is granted clearly and distinctly show that such was the
rrrtention of ttt" parties (Philippin'e Acetylene Co', Inc' u'
(tomrnissioner of Iniernal Reuenue, L'19707, Aug' 17, 1967; Manila
t,)lectric Company u. Vera, etc., L-29987, Oct' 22, 1975; Surigao
(:ctnsalid.atei runng Co., Inc. u. Collector of Internal Reuenue,
(Lealda Electric
r,l, al., supra). Tax exernptions are not presumed
Apr' 30, 1963)'
r:o., inc.-u. iollector of Internal Reuenue, L'16428,
5. Constitutional grants of tax exemption are glf:exeeuiius' The
rcason for this is thai a constitutional provision declaring certain
enactment to
lrroperties as tax-exempt does not need a legislative
with the presumption that
irut'it into effect. This is in'consonance
provisions of the Constitution are generally self-executing; otherwise,
it *itt be within the power of the legislature tq--lgqgte or practically
nullify the directions of the fundamental law (opinion No. 130,
S. 1987, SecretarY of Justice).
6. In much the same wav that !q49p ry8l.99='4qLtql -e-4glqgigry
are likewise personal. For exarnple, under sec. 282 of the Local
6;;;;;-""t ft"-gnTtfions, exemptions from local Laxes are obtained
through the issuance of a Jax exeropl-Lo-rr--cqfJ{igatg -and the
,egulalio.rs provide that the same shall be nof]'tr-a'lferable'
?' Deductions for income tax purposes partake of the nature of
the tax exemptions; hence, if tax exemptions are to be strictly
construed, then it follows that deductions must also be st-f-tc-llV
consBUed.
g. The rule of strict construction of tax exemptions should not,
for obvious reasons, be applied to organizations performing strictly
religious, charitable and educational functions'
on strict
It should be noted in this connection that this rulegranted
interpretation also does not apply in cases of exemptions in
favor of a government political subdivision or instrumentality
(Mq.ced.a u. Macaraig, Jr., et al., G'R' No' 88291, May 31' 1991)llke
public corporations.
9. A claim of exemption from tax payment" tqq-9! ]9 'Jqqly-plgyq
and based on languagl in t-!9-l1y-!9" llain to be mistaken'
Since a
effi ust be
p ;f;tt rt;fm-a'fi iF tFe u:r
n-a t m
"

118 119
 I,N W 0II t}ASIC'I'AXA'I,ION iN'I,HIi I'IIILIPPINUS I)OUI]I,t' 1'NXA'IION AND'I'AX UXUMP'TIONS

t construed pJrtc_lisp-lttijptls_against the grantee.

exemption solely on the ground of equity (Dauao
Corporation u. Commissioner of Internal Reuenue, et Lumber
There is no tax
Gu,ly
,r;r1r.r'l,cnunt thereto, mosques and all lands, buildings and
,,,,t,r()v(rnents actually, directly and exclusively used for religious,
al., G.R. , l,,r r rtrrlrle and educational purposes are exempt from tax (Sec. 39[a],
{r. I17359, July ZS, 1998; A"tlas Consolid,ated'Mining and I ,,,,r1 (i<tuernment Code; Sec. 28[3], Art" VI, Constitution).
Deuelopment corporation u. commissioner of tnternal
iet)entte, (ct 'l'ax on Excises and Priuileges - Under Sec. 103(b) of the Tax
et al., G.-8. No. tI9f86, Sept. 27, tggS).
t'r,,lr, (now, Sec. 109[c], 1997 NIRC), the sale or importation of
10. A tax amnesty, much like a tax exemption,
is never favorctl rcrrltural and marine food products in their original state are
or presumed in law and, if granted by a statute, the 'r1,r
terms of thc ,.,i,,rrr pt. frorn value-added tax.
u exemption must be construed-stricttv
::l:::rrl,^T -1li! "f lu,T, jr,__b:.orj!thet";;;;;ti## :l It has been held that a condonation of unpaid tax liabilities is
ffi ?P\lh::tSllui-"r,ur$,l,4udly
The rule on slrictlssimi jurii a -
*_$}iffi rrr tlrc nature of a tax exemption. Hence, if there is no clear-cut
application of an amnesty law/decree should be resoived ;,r,,vision in the law condoning such liabilities that taxes already
in favor or.
the taxing authority(-commissio*er of Inter*al Reuenue t,,rrrl :lre also condoned (so much so that the taxpayers thereof would
ut. court of
Appeals, et ql., G.R. No. 17g|f 6, Jon. 20, lggg). l,, r'rrt,itled to a refund), then no refund of the paid taxes is authorized
l,r'r'nus€ exemptions must be sustained only when expressed in
Finding petitioner's craim of immunity from prosecution of
-11' "1,licit terms (Surigao Consolidated Mining Co.,Inc. u. Collector
,
under the shield of availing of a tax amnesty untenabre,
the court Irttr,r'rr,ctl Reuenue, et al., ante).
held that "(h)e did not meet the twin requirements
of p.D. 1740 and :1. Where a corporation engaged in a certain industry obtained
1840, i.e', declaration of his untaxed income
and full payment of tax ,.{,.rnption from all taxes "directl.y payable in respect to said
due thereon. clearry, the petitioner is not entitled
to the benefits of rrr,ltls{,1y," the following taxes may be within the scope of the
P'D' Nos. 1740 and 1g40. The mere filing of tax *-rru"ty
under P.D. Nos' 1740 and 1g40 does not rpso return t ,r x'exemption: tax on products manufactured for the industry; the
/ocro shietd hirn from ,, r'rrp&tion or business tax thereon; the import or compensating tax
immunity against prosecution. Tax an
taxpavers *lthout iaving to
*" r*affi"tl
case. To avail of a tax amnesty granted by the
(rrow known as VAT) on machineries used therein; the tax on the
l,,rsoline and oils necessary to move or operate its machinery as weII
Cou"rn_irrrt, and to rr:; the purchase of the original site for its plant. But the acquisition
be immune from suiton its deiinquencies, rh;
voluntarily disclosed his previousiy untaxed income
;;p;;1"'_u.t rr"u" l,y clonation of lots, contiguous to the original lots, after the operation
and must have lrirs lasted a few years, is no longer exempt since said acquisition is
paid the corresponding tax on such previously untaxed
(Bafi,as, Jr. u. Court of Appeals, et al.,
income,, rr,rt directly related to the industry (Collector of Internol Revenue u.
G.R. *o. tOi^6i, iii.- to, 2000). fr'lurcela Steel Corp., et ol., 100 Phil. 271).
ILLUSTRATIVE SITUATIONS ON TAX EXEMPTIONS .1. In the case of a corporation that is engaged in the manufacture
,,1 lrlywood, its tax exemption extends <intry to "machinery and
1. The following are examples of existing tax ,'rlrripment to be used exclusively in the new and necessary industry,"
exemptions
classified as to (a) tax on person, (b) tax on property, rrrrt, "rnerely in conneclion therewith." Hence, is it also exempt ott
and (c) tax on
exercise or privilege. tlte "transportcttion t'acility" used irt. connection with its business?
(a) Tax on person - The residence tax (now known 'l'lre Court rr.rled in the negative. The Court said that with or without
as community
tax) which is a personar tax is not imposed on dipromali. t,lre taxpayers owning any transportation facility, the tax-exernpt
representatives as well as transient visitors when
ura.orrr.,r""
their stay in the rrrdr.rstry could be operated (Plywood Industries, Inc. u. Arq,fi,as, etc.,
Philippines does not exceed three (B) months (sei. l,- 1 6466, Mqr. 3 1, I 964).
Gouernment Code).
iig, to"or
5. Where the taxpayer receives as part of the purchase price of
. Q) .!yx on Property - property owned by the Republic of lhe land expropriated by the Government, tax-exempt bonds issued
the Philippines or any of-Real
its poliiicai subdivisi"". p-"iaed the under R.A. 333, such tax-exempt bonds should be included in the
beneficial use thereof is not transferred to t"*iui"-p""ror' total purchase price in order to determine the correct taxable profit
charitable institutions, churches, parsonages " or convents bherefrom, i.e., profit arising from the expropriation sale. This is so

120 L27
 LAW ol,' BnSlO,t'AXA,t.lON tN .l'llt,l l,ilU,lt,l)tNIrS
lx)LJ llt,lt'l'AxA'l'l()N AND'l'AX !;XEMI'}TIONS

because tax exemptions are strictly construed

(8. Rodriguez, Inc. p, , r t,r lrr n Ilase employee of his car inside the Base to another American
Collector of l*ternal Reuenue, et ai., L-ZS04t,
July Jl, igiil irrrtronal (Reagon u. Commissioner of Internal Reuenu.e, L'26379'
6' The salaries of judicial officers are not tax-exempt I t,'r' 27, 1969).
taxability is not and thoir
contra-ry to the provisions of sec. 10, Art. vIII t t. Art. XVIII of the Bases Treaty exempts from tax the gross
of tho
1987 constitution on the non-diminution of the salaries
of memb.rr r.r .r1)ts of a Base concessionaire from the business of hauling and
of the Judiciary during their continuance in
office. The clear intont t r rr rrsporting of cargoes inside the Base belonging to the U.S. Army
of the constitutional commission that
iramed the constitution lJ t,
rvrr is (t'ttn,las, et a.l. u. Republic, et ol., 103 Phil. 712).
tl:,::_.ltles to ta1 as in the case of uI tu*puy"" (tvirofon, llJ
:yi,,-:l r:: 12. Where an electric iight and power franchise holder (Meralco)
li.,?!, 23,
July ::' * n e r . o f r nt e r n at R e u e n u ", " t ii.',' 8."i.' i;."
! ; 1987yfResatution]). " ;;;;i ;i, r,, r,xempt under its franchise fronn property tax on its poles, wires,
tr rrrrsformers and insulators, its exemption does not extend to the
7' The exemption of the contractee (wo4d Hearth organization) , ,,rnpensating tax (now, VAT) on its importation of said articles. Said
from ail "indirect taxes" as provided in the Host
Agreeor"'rrt u"t*""n ,,,rrrpensating tax (now, VAT) is not a property tax but an excise
the Republic of the philippines and wHo shoura
mean that the entity or person exempt is the
tel-pi"-".rt"a to tirx. Exemptions, being highly disfavored in law, must be strictly
constructed the buildiag owned by the contractee itself who .rrrstrued (Meralco u. Vera, etc., supro).
"orrt"u.i-o"
(commissioner of
Internal Reuenue u. John Gotaico s, s;;;-i;i.',"i""i.,"t-sI0gz, 13. Where it appears that under a certain law (8.A. 79), atacilag
Feb' 27, lgsr). This does not viorate the , lub (Manila Jockey Club) is "exempt from the payment of any
ruie that tax exemptions rrrunicipal or national tax," such exemption does not include
are personal because the manifest intention
of the ug";-"rrt, o, ,'xemption from income tax on the rentals received from the lease of
stated earlier, is to exempt the contractor
so that no contractor,s tax
may be shifted to the contractee WHO. rLs race tracks to the Philippine Charity Sweepstakes Office. The
sl,atutory exemption covers only taxes in connection with races like
8' A.tax exemption in the manufacture and. sare of
^ making cigarette paper machineries t.he municipal license fee of ?600 per day of racing and the ?500
for does not incrude the manufacture and I'ixed tax for each day of racing under Sec. 193, NIBC (now, 30% tax
sale of the products produced bv the machine
Erugineering Corp. u. CTA, et it., t _iZeOS Nr;i;;-M;tchanicar on gross receipts under Sec. 125[e], 1997 NIRC). Tax exemptions
I e75).
and L-2TgSg, June J0, are strictly construed (Collector of Internol Reuenue u. Monilo Jockey
Club, Inc., 98 Phil. 670).
9' In the contract c_ove:ing the construction of the Mactan
(the contractor was p.J. Kiener & Airport 14. R.A. 1435 allows a partial refund (i.e., tax exemption) of 25o/o
it *a" piouiJ"l-tn"t ,,rro
co. Ltd.),'revied of the specific tax paid on fuel oil used in the operations of forest
tax of anv kind or description wilr be
equipment or supplies which may be purchased
;;;-;"teriar, concessionaires. Since tax exemptions are strictly construed, the
o. ott
in connection with the project .r.rd"" the contr&ct.,, u.qri""a exemption refers only to the operations of forest concessionaires,
"i*i.u Does this and not to oil used in the operation of sawmills (Insular Lumber Co-
exemption include the-tax on the petroreum pr:oaiii,
project? The court ruled in the negative. uJ"a ro th" u. CTA, et ol., L-31057, May 29, 1981).
The court said that the
itels are those malerials o" .,rpfii". ,ihi"h 15. In the case of two electric power plants, which are operating
31!
rncorporated,elempt
in the construction u""
-*ortar, in the same locality, it cannot be presumed that the.exemption of
of the airfierd ,r
cement, sand, bricks, etc., but not the petrole"* "r"h i"r,i.r, one should also be enjoyed by the other' Tax exemptiQns are never
p"oJ""t. presumed (Dauao Light & Power Co. u. Commissioner of Custorns,
not materials or supplies since they do ""u
not
in the construction of the project b.,i-r"" usedinto
go or are consumed et al., ante).
and equipment (cammiss{oner of Internar
in the machineries
Reuenue u. p.J. Kiener 16. Inasmuch as under the Bases Treaty only sales of goods "for
Ca., Ltd., et al., L-24f54, July lS, tifb. the exclusive use in the construction, maintenance' oper&tion or
10' The exemption from income tax on Base-connected defense of the Base," i.e., only sales to the U-S. quartermaster are
non-resident American Base personnel income of exempt, it follows that the sale of oxygen and acetylene gases to the
under ttre u.s. gasu" r""uty
does not extend to the income realized VOA (Voice of America) is taxable (Philippine Acetylene Co.,Inc. u.
fiom the sare by an American
I
Commissioner of Internal Reoenue, et ol., L'19707, AW. 17, 1967).

122 L23
 rrlrw (rt,. trnslO,l.AXA,l,lON
lN,l,lil.: lrllll,llrplNl.;S
DOUBLE TAXATION AND TAX EXEMPTIONS
are strictlv construed. Th-erefore,
,rJ';J"T;ff?I"'il"" if what thr
ss".. r;;; s;;-;#Ti""):l:::.*
e c. rreo vAr) tlr /\ll il,s income, whether students'fees or gifts, donations or
i ;;
e 0 (no w, sec. r,;
;,'.i11i*,-
i;; ;;' iE "","in )iZ; b,"ffl ""au"
and/or cargo,' vessers, ;'h;;1ii;'b;;;i,iuru-rot
tr,un
"J,l*:"l[:l arl,,rrrlrr.s are devoted to the accomplishment and promotion of the
within
the exemption because
tugboatsri" nJt .r"*a for carryingthe scope of l,rr r,():r(,s enupe.rated in its articles of incorporation; and, (b[q.t
or cargo but onlv for towing
,rt passengerl rr,,rr. Lhan @9 of the gift shall be used by the d.onee'-for
(Lu-"on S;r"-aiioe
u. CTA, et at., L_J0z3z, "i ""rr"il" a,owing
nt1'.ii,"iig;;:;*. corp, Brlrrr r rr rsLr&tive purposes.
a re co nstru ed sr ri,iss tax exemptiou
f ii jurisdiction. According to
j 'l'rr x
^i i " r ri-i;;; ;;;-,R
i m i u r is c
r.r^* uvoidance is not forbidden in our
o u, lrr.
j;;;r;1,
" "
u
111'gi6lsdcase, an attempt to minimize one's tax does not
Yfi[i:;;;;"'.::t:',;!,ti,iiii{ili;;6{,iiili! r',r r'.r.urily constitute fraud. It is a settled principle that a taxpayer
rrrrr y rlirninish his liability by any means which the law permits (Heng
l\'trs'l'extiles Co., Inc. [Philip Mfg. Corp.] u. Commissioner of Internal
TAX-E*EMPT PERsoNs litrcn.Lt€t et al., L-19737, Aug. 26, 1968).
RE',TRED To KEE, Boors or Moreover, as stated by the U.S. Supreme Court: "To avoid is legal
t:,:-:"',H';*n.l,yii:;";:""Tji'sratusa*,",,l,stirythe
,*r ,""I*"?Ji,
l,ul to evade is illegal. The legal right of a taxpayer to decrease the
provision of "r s!;, ffi ,;i;:"i",.tLTol. r"":llffi lXT,tjli
existing g";"ui
rrrrr)unt of what otherwise would be his taxes, altogether avoid. them,
;r-speciar r;-* i" ii" contrary l, y c&ns which df_e ]AU:-BerI0*s-_sannat_bs_{olbted- ( Grego ry u.
notwithstanding, ttre u'oo'ts r r r

of tax-exempt organizati"rr
or;;.;;;. and other pertinent records tl,'locring, 29 U.S. 465).
subJect to examination
g"r"tees of t-ax incentives shall be 'l'a.x evasion may be exernpiified by means of. tax fraud, or the
""
by trr"'g;r""u of Internar Revenue for ,r:;r'of deceit in order to evade taxes. Fraud, however, is a serious
ff#ffi ""[::iTnT,'Jr-,TIJj:ffi ,]itr,tr,u*"Tr',r*,"laerwhich ,lurrge and to be sustained, it rnust be supported by clear and
tax liability, if r'nr." -
Is or tex incentives, and their , ()rrvineing evidence (Republic u. Ker & Co. Ltd., L-21609, Sept. 29,
t 966). Fraud, being a question of fact, must be aileged and proved
TAX AVOTDANCE; TAX 1t iutierrez, et al. u. CTA, et al., 101 Phil. 713).
EVAS.TpN; TAX FRAUD. Illte=4elstqrqr!-s:uhpl}er-tg-rr4-9g-qle,-FLbs-!e;r99q"{qq!&rq,
s' u oi ,s n,,is-rh e m i n i m i z i t i r r r t - ii* Tar
u, i t i h ro u gh -il.;anau
re ga l m e-a ns. ,;hould control. When the purpose of a taxpayer, at least in part, is
means used to *i"i*ir" " ,u*u, u""".,r.egar,-ii
Ii:,:i:" -t
,o, 1,, evide--[il-ei, the court should exarnine with particu].ar care the
Tax avoidar." lbrms used by him for the sccomplishrnent of his purposes and if his
U" illustrated, as follows: rngenuity fails at any point, such court should not lend him its aid
11v,
income frorn his oroperty Suppose that A,s
reaches th" ,nu*i*um lly resolving doubts in his favor (51 Am" Jur. 45).
To avoid this, he rate under the raw.
institution that ouarifi"; i;;r*
aon"t"r;;;:ilr';"hi.
to ,, Our jurisprudence includes cases where tax evasion or fraud was
Art. xrv or the'consitt;;;";i#,aonu" ""."t,
,rrJ"" "ir.ational
i'rrire". f'ound to have been perpetrated. For instance, in one d.ecided case,
"-",ortion rrsl,
non-profit educationat ;;t";
i".tiiulior'*rr"l income it was held that the failure of the taxpayer to declare for taxation
actuattv' directrv ,"a ".iJr,-"to"r.,
and assets are purposes his true and actual incorne derived from his furniture
Having thus transferred"*.ruri;;i;';; for educationar purposes. husiness at Clark Airbase for two consecutive years is an indication
said ;r;; dii".""ro"",
pavment of the tax succeeds in avoiding of his fraudulent intent to cheat the Governrnent of taxes (Republic
9n.the i".r-" i"riuua tn"r"r" o^. uii-ioout the
donor's tox? rs A tiabte-tieffi;iH,i u. Gonzqles, L-17962, Apr.30, 1965)"
donor's tax on the donated a*"rrilr"J?o.0", In another case, the Co,rrt described the taxpayer's fraudulent
Ibr exemption under S"".'g<trjiij'f;;, "r,,
*op"rtv, o"""ia"a the folrowing requisites actuations in these words: "The net income underd.eclared in 1946
Code concur: ( 1) Donee instituiio" sec. t0t[AJts]) otrhe
Tax ls rnore than 100% of the net income declared. trn 194?, the
(2) It is incorporarea ,, i. ,'".r,r"r,
""ii"*,J "?,-lnir,"".ity; undeeiared net income was more Lhan 1,079% of the net ineome
dividends: (3) It is governed3.r"r:;;*k, ion_profit enrity paying no declared. In 1948, the undeclared n"et incorne was 260% of the net
uy tru"t"us who receive
no compensation;
income declared. In i 950, the undecl.ared net income was rnore than
1,00070 *f the declared net incorne. We have no iresitancy in
124
 l,n w ol.' tlAsr()
1.AxA,t,roN rN,r,ilr,: I,ilrr,rI,r,rNrr.s
I)()T]I}I,I.]'IAXATION AND TAX EXEMPTIONS

,:L:::#:":HX ::l1l ly1 :10,", the ci rcumsta nces, such h sa u --1r1,1,,1,r'tl by him in computing his tax liability is correct, he does

*,f,:1ffi J;f;* j;taIi:t3li,i:T jlilfi Iili,"",t"*ffi :f }:fr

l',r rni'rrr ilny fraud, in which case, no fraud penalty attaches
rr,,rrrnrr:;si.<tner of In.ternal Reuenue u. Visayan Electric Ca., et al.,
which would ne to mister'jrerrect trom any conduct the likely effect oi t "t;t l, May 27, 1968).
u. Reyes, 104 Phit. ,t;;;;;:::.;,1."u, (cotteetor of Internat R","nuo
t lfurthermore, where it appears that the underdeclaration of
t,rt,ilrlc property is only inconsequential and is the result of the
,,.01T"1.1:n :::,f,, II i:, J; xisred i n rh e rouowing case : rh n t!,rt,iryur's inadvertence, no fraud exists. The following cornn"rents
,,t tlr,.Supreme Court in the case of the Republ.ic u. Heirs of Cesar
:?.ff i#Jilx':J,llx'il$r#"],,T];il?i,l';???f :J[:I,,XT t , , , t rt tlani, onte, illustrates this point:
1

when he actuallv
"x x x (OX the seven lots alleged to have been excluded
hisact,";;;;,H'"f,:^,^,:ltitiii:i?#fr:#;:,."i??"'3# I.r'orn the return, three were actually included with the (
;f :1tl jffi ?i:;ii"Hilt'1iii:!t;:!i,',il::"Ifir"r" j:..lJ,fl ,?; p:rrticularity that they were the most -,'aluable, to wit: Lot
.11)ll with a market value of F21,630.00; Lot 521 with a market
R eu enue, L - I T f 1 s, r, ilr:"r?rtfi
(Au ud elino u. C o llector o f Internil vrrlue of ?80,000; and Lot 229 with a market value of P12,000,
Where it appe while another lot was not also included because it belonged
had wilifulry ffi;*r""r'li:11:,r::llr"r,
although on accrual basis, lo Delfin Jalandoni; or Lot 228 which, including
worth almost ff OO,OOO :r.,rv?.1-rncome by treating copra outturn irnprovements, has a market value of ?16,900.00. Hence,
fact such copra ^::
i"Y::: :tjlloutstanding at the end of 19b1, lrorn the foregoing, we find that the aggregate value of the
"when-in
af'oresaid four lots is F86,610.00 which if deducted from the
i:iii:srffffi:H:":l*:*r#:ff i:it'i,"l,'J:""::1?:":iI
if the taxpayer includea 't'urthermore, such fraud is aggravated
Lotal value of the seven Iots amounting to ?90,110.00, gives
a balance of ?ts,500.00 as the value of the three remaining
"rll;
for 1952 thus eventu"il;;:1:i1,"::.1tturn in its beginning inventory lots. These three lots being conjugal property, one-half
[hereof belonging to the deceased's spouse should still be
i?Xtri:,#,;?n,Jj'l.;#ff ::il?J:lilf ;ff :,(;H,,1;"Tli:;; deducted thus leaving a smali balance of ?1,750.00" trf to
L'::731'
Looking at the o,ilJ]':' Mar' 31' tiob)"'""*"' this we add that, as the record shows, these three lots were
there was no fraud. i" tfr"."ll,ot the question, it was determined that already declared in the return submitted by Bernardo
-
1. The fact thr _ 'Qllowlng cases: Jalandoni as part of the property and his wife for purposes
of income tax, there is reason to betrieve that their omission
is statedli;; ;::aff ,"Jl:" ordeceden_rs shares of stock (which
from the return submitted by Cesar Jalandoni was merely
lffiil{X,:;t?iJff :1;:ji:i.,:[":]fi:,""T"fi1T,,,ff ff:]#Ji? due to an honest mistake or inadvertence as properly
value. of stock
Mere differ"""" oi-^j.nares frequently fluctuate in explained by appellants. We can hardly dispute this
assessing an conclusion as it would be stretching too much the imagination
intentio, to all'''o.n ganltot serve as a proper basis for
if we would find that, because of such inadvertence, which
of cesar ratand.oni, ,.d;;:U::;F,T;iifent (Repubtic u. Heirs
appears to be inconsequential, the heirs of the deceased
2. Where taxpr -, deliberately omitted from the return the three lots with the
differs from rhe ,;iJ;r1:.ratuation of certain rice and susar tands only purpose of defrauding the Government after declaring
Revenue, there is by the Commissioner oilnternal
valuation is only basea "" b;J; ,ri
Pla"
co rmpute flayd
where the difference in
therein as asset of the estate property worth ?1,324,555.80."
taxpayer made a honest difference of opinion. 4" A tax return which does not correctly reflect income noay
-i"takl';*qntfluation, the same If the only be false but not necessarily fraudulent where it appears that
mistake (Republic r. Aa* is only an honest
it
noted that an honest irrt""Lr Lesor,lalandoni, supra). It should be the return was not prepared by the taxpayer himself but by his
ca se, it wa s h eld tha t w accountant and that after the original deliciency tax assessrnent was
he re
;T#r#:rf ;:,ii:i::";hfr* Jill; made, the sarne was subsequently reduced by the BIR by a
substantial amount. Hence, the 50% surcharge for fraud may be
126 127
r I,AW OI.'tsASIC TAXAI'ION IN TI{U I'HILIPPINES
dispensed with but the tax may stillbe assessed within tho
prescriptive period of ten years from discovery tbercof (Aznor
u. crA,
et al., L-20569, Aug. 2J, 1gf4).
It should be noted that in the abovementioned case, the taxpayer,o
deficiencv income tax was assessed. and. d.etermi".d ;iJ;;;h
the uee
of the so'called "net worth" method, or what is otherwis"irro*r,
the "inventory method of income tax verification."
"u
5. In a certain case decided by the tax court, the ruling was to
the effect that where a coupre in ihe philippines
a dolar
""""irr*a
remittance check from abroad in the.*orr.,i $t Miuiorr, said amount
being the result of an error of the remitting bank as the sum
that
was actually supposed to be remitted was only
Et,O0O, if it appears
subsequently that said coupre spent the differeo"" or
$ggs,ooo on
various purchases of property both here and abroad for their
own
material benefit, said sum constitutes taxable income.
However, no fraud was imputed against them since in the income
tax return, the amount in question was declared with the notation:
"Taxpayer was the recipient of soroe money from abroad
presumed. to be a gift but turned out to be an
which he
error and. is now the
subject of litigation." No fraud existed because the taxpayer
had
Iiteraily laid his cards on the tabre (Metchor Je,uier u. comiissianer,
C'I'A Case No. 33g,?,,luly ZT, tggs; Comm.issioner of Internal
Rerenue
u. Jq.uier, Jr., et al", G.R" No" VggSS, Juty 51, lggl).
CASES
MANITA ELECTRIC COtif,pANy v. VERA, ETC", L-zgg8?,
0cT" 20, t976
FACTS: Manila Erectric Bail and Light co. (Merareo), holder of
a franchise to constmct, maintain and operate an electric right,
heat
and power system in the City of Manila, imported
wires,
transformers and insulators for use in the operation of"oep*1
iii business
in 1962. In 1968, it again imported ccpper wires, transformers and
insulators to be used therein. Both fmportations were subject
io
compensating tax (now, VAT). So Meralco, after paynaent
thereof
claimed its refund which was denied first by tne n'rd urJ
iut"*, o*
appeal, l:y the crA. frIeraico eraims thst ttre irnpoJations
tax-exempt under its franehise. Is &{erarc*'position eorrect?
are
HE{,D: The Court ruled tha* &{eralco's positioar cannot be
sustained" one who claims to be exeurpt fmm paymen& of a
fa*icular
128
DOUIJLI' TAXA'TION AND TAX EXEMPTIONS
r.! r.usl, tlo so under clear and unmistakable termg found in the
r, 'l'ax exemptions are strictly construed against the taxpayer,
.,1 tr r r r I
rl,,.y lrr.in11 highly disfavored and may almost be said to be odious to
I1,,. irrw.
l'r,lrt,ioner's franchise exempts it from the payment of property
l.q .n i[s poles, wires, transformers and insulators, but not from
,n t of taxes, like the one in question which, by mere necessity
1,, l r r r r
*r r rrrrir)euence alone, fall upon property.
Il rs a well settled rule that a compensating tax is not a property
rrrr lrrrt an excise tax. An excise tax is one that is imposed on the
1,r.rl.r'rrl&[ce of an act, the engaging in an occupation, or the
,. 1.y rnert of a privilege. A property tax is a direct tax, whereas one
rr
l, r,rr.rl on property because of its use, is an excise tax.
t,I(OCTER & GAMBLE PHILIPPINE MANUFACTURING
{'( I It P" v" IVIUNICIPALITY OF JAGNA' PROVINCE OF BOHOL'
t,'1,t')66, DEC" 28, 1979
/ACTS: Plaintiff company appealed from a judgment of the
('rrrrrt, of First Instance of Manila, BranchVI, upholding the validity
,,1 ( )rclinance No. 4, S. of 1957, of the Municipality of Jagna impoeing
,, :rt,orage fee of F0.10 for every 100 kilos of all exportable copra
,1,'l,risited in its bodega at said municipality.
'lhe issues raised were as follows: (1) Whether or not the
,lrr.stioned ordinance is valid, legal and enforceable against the
;,lrrintiff; and (2) Whether or not plaintiffs action to recover the tax
s,rrid under protest pursuant to such ordinance has prescribed.
HELD: The main question to be determined is whether or not
,lt,fendant municipality was authorized to impose and collect the
,rl,or&ge fee provided for in the challenged ordinance under the laws
I lron prevailing. The law then in force (C.A. 472) provides as follows:
"Sec. 1. A municipal council or municipal district couneil
shall have the authority to impose municipal license taxes
upon persons engaged in any occupation or business or
exercising privileges in the municipal district, by requiring
them to secure licenses at rates fixed by the municipal council
or municipal district council, and to collect fees and charges
for services rendered by the municipality or nnunicipal district
and shall otherwise have the power to levy for public local
purposes, and for school purposes, including teacher'g
salaries, just and uniform taxes, other privilege taxes and
taxes on specified articles."
r29
 Suid provisio I)OUITLE TAXATION
AND TAX EXEMPTIONS
i::"r "J;;;;:
rrcense tax t.,ll['fi-:lt3;i::l1l or ricenses rbr regurarion
f..
or is actually a municipal llflirl) r'r rrrrt'lrority for
tt, u p"i',rlt"'s; ";;;;;:;iffj::uestion
#1."^:-'"""ons,
fi rm s rd
"o"po"ar;;;, ht; exercisins
Ht
the view that the period for prescription
lt,ttrr l,o recover municipal cf
jurisaicti-oT. copra in
oo;""t^"^:'"*
" u uoausu ;i;;ffi'il:,ke
within the m u n icip r I I I 'l r'(2)
of the ci":r c"aul
lia";;'r".es is six years under
copra is properlv .",o"ui.tr," t"-J;;."::ga a Ii t)/; '1
arc 1't'111' lrom the irr*, ,r."r"tiff s action brought within
time the right#;;i;; first
Ilrl yi.l prqsCribed. accrued in 19bg has
$hTHTh;:,1trH{"j:,r'ffi *il{l:,}ilhlll*i",ffi lv /l ' '['he prescriptive
period now for the recovery of local
Plaintiffs
- inappiic;';i;;:"P"nt rd r, l,,,,rrs (Sec. 194, taxes
is . ave tha+" the ordi iocal A;;;;;;;i"ioo"l.
ll : u ", i " ; ;fi # l,_ ". "
p
u u. u
"i
t" ;' ;ffi
; !H", f H :' il
ff I """1,,j; iIII \I.'\N. ., O!.^.,U-. COMMISSIONER
;::ffi ::,.,,""'xl,tli._rlii!J,"j,_rlii:!;uu,io".,ryi;.;;#*coprain r r r, \, r,, N r r rr, Er AL., c,n. NoI ;r;ffi;;J; OF INTERNAL
28, 1e8z (RESoLUrroN)

i,, I l,',i Seek tO

lrr I\lrrrrrlA, -' --'' qvlJvruuts(r
appointed arltr qualifr ed Rrc
a nd qUalllled I('IU jJUClgeS
ud ges
D
""1;'l'1"::jr.1,"lv and/or perpetually
Ir rrrsl 11s1,Lir.,, ,;Lo^libit enjoin respondents
l::;:;::l:l*:ff
t,rrl.rrrling that y_*1""i;;f
"._
this
;,,,hffji"'#i,J";ililiJ""'1,"Tff :,j
unelr salartes,
j,'r lo,
ri,,r lg. Art- Art. VIII, r"lj}"'ilYtes.
vTTr lggz diminution of
".,r,"tii,,i^l';.::]l?."rts^rruru
ur salary
$arary contrary to
c".".r*,,*l'-:-'-'Jl-"""
I rlr. r,erlbers nr ,r1?:-l"rnution, which provides tt rtifr"
: I
fixed f..',i
l,, : I i' ;,l,t::' ;,T:;
',1',rll :
by lu* and lt
s o #'c
,.,Jii;;;r:::'j
" "L
that "ffi :";'u'jTJ;::"# ffJ :: ""tu"y
a[q Juqges ot lower :3lT:
courts

m,,m tr,'r r 51[s1y

Irrr,.11 ..;11211, oh.rr "during
-^j U" a""i"urJj.,,
shall not
lll')LD: The salaries of the
their coitirrrrurr"" in office,

llt. chief Justice and Associate Justices

supreme court.as well-as-il;;
"l of judges of inferior courts
't' l111s,s' The crear i"t""t
tt t
r,,,rr,rcre the proposed orfi" iioi*,ir.,rional commission was
,'|, (,rre tax to members".r;;;;;;;;ii"."_ption
& trr" *il;;,
from payment of
so
"'1r'rlity among the threet;il#r rido.,,""rr-".t. as to give substance to
t lr' rlcliberations
in the c"*;iffit"*ltommis"ion, In the course of
""r'l' clear that the it was expressly
"utu"ruloi;;ffi;r of the judiciary would be
'rrill.ut to the sener1lln9o.m;6.;;ffid
rl"' I'undamentar principle to au raxpayers. settled is
,, r l,;r nic law
thalJi'"lrr"r, of the framers of the
,,,,, t, turi n
and of tl
ifi
;;;:; T:1,.:r ;i:,i #' e ct ( G o t d.
:ii:rti
; :;; "Xerr
t',wtMISsroNER
*"*g***rm$.rm*x** li,'Jlo"
OF-INTERNAL REVENUE
coRP'' nr ei. c]il*tt.^JnrO8 v. MITSUBTsHI
and 80041, JAN. 22,
FACTS: Mitsubishi
Metals Corp. (Mistubishi),
'ttrporation licensed t" a" u""i"";;"rh" philippines, a Japanese
rr l'oan and sale
cortract *trh"dil consolidated entered into
fr*,fi5$fl||$g[Hrl'd'[,*lx,H,:#$ I )r'velopment
corp. ta,r".i ii,"""oi
llrtl expansion of the_lattu"'.
Mining ancl
iili."bishi lent $20, 000,000 for
rr('w concentrator -ir"",'*.ri.rr"rly the installation of a
for copper p"oar"tiorr.
Atlas, in turn, undertook
130

131
 LAW OF BASIC TAXATION IN THE PHILIPPINES
to sell to Mitsubishi all of the copper concentrates produced by
machine for 15 years.
For this purpose; Mitsubushi applied for and was granted a
by the Export-Import Bank of Japan (Eximbank) and a consortiu
of Japanese bahks. As agreed upon between Mitsubishi and A
the latter gave interest payments for 1974 and 1975 amounting
P13,143,966.79, with the corresponding 15o/o tax thereon withh
and remitted to the Government as required by the Tax Code.
On Mar. 5, 7976, Mitsubishi filed a claim for tax credit of
sum of Fl,972,595.01representing the tax withheld on the inte
payment. That claim, not having been acted upon by the BI
Mitsubishi then filed a petition contending that Mitsubishi was
mere agent of Eximbank, a Japanese Government financi
institution which financed the loan. Such governmental status
Eximbank was the basis of Mitsubishi's claim for exemption f
paying tax on the interest payments pursuant to Sec. 29(b)(8)
(now, Sec. 32[B][7J[a], 1997 NIRC). The CTA granted the tax
in favor of Mitsubishi, which later executed a waiver in favor of A
HELD: The principal issue in both petitions is whether or
the interest income from the loans extended to Atlas by Mitsu
is excludible from gross income taxation and thus exempt f
withholding tax; and, corollarily, whether Mitsubishi is a
conduit of Eximbank.
While factual findings of the CTA are generally not disturbed
appeal, a misapprehension of facts on the part of the tax court w
warrant a departure from sai.d general rule. The loan and sa
contract between Mitsubishi and Atlas does not contain any di
or inferential reference to Eximbank, and was, therefore, stric
between Mitsubishi and AtIas.
It is settled that laws granting exemption from tax are constr
strictissimijuris against the taxpayer and iiberally in favor of
taxing power. Taxation is the rule and exemption is the exception,
The burden of proof rests upon the party claiming exemption to
that it is in fact covered by the exemption so claimed, which on
private respondents have failed to discharge.
The taxability of a party cannot be blandly glossed over on th
basis of a supposed "broad, pragmatic analysis" alone withou
substantial supportive evidence, lest governmental operations suffer
due to diminution of rnuch needed funds.
DOUBLE TAXATION AND TAX EXEMPTIONS
ll 1,, l't I ITLIC BANK v. COURT OF TAX APPEALS, ET AL., G.R.
Nr )S. (;2554-55, SEPT. 2, t992
lt,,lOTS: Petitioner was assessed a lYo monthly bank reserve
,1, l r, rlrrcy tax in the amount of (a) ?1,060,615.06, plus 25% surcharge
,rr'.rrrrt,irIB to P265,153.76, or a total of ?1,325,768.82 for taxable
i , ,, r lt)69; and, (b) F1,562,506.14 plus 25% surcharge of F390,626.53,
,,r ,r tolal of ?1,953,132.67 for taxable year 1970. All motions for
1, , ,,r.;ideration having been denied by the Commissioner of Internal
It,,r,,'11,,", petitioner filed a petition for review with the tax court
,, r l.r r r rg that Sec. 249 of the then Tax Code is no longer enforceable
f
lr.r rrrSC Sec. 126 of Act No. 1459, which was allegedly the basis for
tlrr rrrrposition of the 1% reserve deficiency tax, was repealed by the
I i'rr.r'al Banking Act and the Central Bank Act. trt was also argued
rlr,rt rrr case of a reserve deficiency, a violating bank is liable for a
r,,n ,l loA payable to the BIR under Sec.249, NIRC, and a penalty
,'l r/l() of 7%o a day payable to the Central Bank under Sec. 106,
li \ :r{;i-),
II l,)t,D:
The wisdom of the tax legislation is not the province of
rl,, ,,rrrt. lt is clear from the statutes then in force that there was
,,,,,l,,rible taxation involved was a penalty and the other was
'r r,rr Al any rate, the validity of double taxation has been upheld.
ll,, Irr!ment of 1/10 of 7% for incurring reserve deficiencies
( ,, , 106, Central Bank Act) is a penalty as the primary purpose
r' is regulation, whiie the payment of lo/o for the same vioiation
11,1,6[
1 ,,, :119, NIRC) is a tax for the generation of revenue which is the
It,,r;rry purpose in this instance. Petitioner should not complain
t l
r t ( is being asked to pay twice for incurring reserve deficiencies.
r
lr ';11q always avoid this predicament by not having reserve
,1,'lr,'rtncies. Petitioner's case is covered by two special laws one,
,, l,;11111 ing law and the other, a tax law. These two Iaws should -
receive
,,r, lr construction as to make them harmonize with each other and
,. rrlr llre other body of pre-existing laws. Durct lex sed lex.
N,\'r'!ONAL POWER CO&POBATION v. PROVINCE OF
I .\NA() nEL SUR, mT AL., G.R" NO. 96700, NOV. 19, 1996
/,'.,1(]7S; Fetitioner National Fower Corporation (NAFOCOR)
,,* r'; r'ofll property in Saguiaran, Lanao Del Sur comprising its Agus
Il llvtlroelectric Polver Plant Cornplex. It was assessed real estate
i,q,,r.;; 1v11 said property for the period from.,Tune 14, 1984 Lo Dee. 31,
| 'ri iir rrrnounting to FI54,114,854.82, aliegedly hecause its exemption
t,!,nr rllrl esLaLe taxes has been withtiralvn.
 LAW Ot,' IIASI(;,t,Ax^,ftoN lN .fHE
t'Hu,il,t,tNES DOU ltl,lrl'l'AXA'tlON AND'l'AX lIXEMPTIONS
I)emand letters for the payment of said
real estate taxes v e;r.rrrlrtl)n o1July 1, 1985, to continue for an indefinite period. Thus,
provincial i"uu rr"", *ith a warnir*,r,
::li :J i::T:-d""l
settled, legal remedies will be resorted nl, n
to. O" D"". i;,lA;0,*u w,,
-' l,rl'' l,l O. 93 again withdrew petitioner's tax exemption,
of Auction Sale was s.erved on p"tiiio""r Ht.,r rtlr|less Sec. 2 thereof authorizes the FIRB to restore tax
posted in the provincial capitoi
with copies thereof tl Hull!,r rlrrty exemption thereto' FIRB Resolution No' 17-87 restored
bril;;;; ffi';;;;;ffi;:l; rlr, ,.rr.rrrption privileges of petrtiotter, effective Mar' 10, 1987'
in n-ewspapers. The auction sate was schedu
:-"ll::^*Y;rti,s1a
at 10:00 AM., July 22, tggi,at the (',rrrsidering the entire chain of events, it is clear that
Office of the provincial Treasu
in Marawi City. I i \ t,( )( toR's tax exemptions for the periotl in question (1984 to 1989)
Petitioner directry filed with lIr,l ,,ll'r,r:lively been preserved inLact by vtrLue of their restoration
prohibition with p.rayer,for athe supreme court the petition
pi"ii*i.r""y injunction and/I rl,r,,rr11lr !'IRB resolutions. Moreover, this Court tn Maced'a u'
temporary restraining order 7l't,1il (tig, Jr., etc., et at. (G'R'. No. 8829 i, .lune 8, 1993) reaffirrned
(TRO) r1,,, ,l,,l,crmination tn National Pawer {'orporation' u. Prouince af
"":oi"i"g-"J.o"ra""r_'i
of-subsecJ properties.
::::::j.:q^Tll,!h:,"uction
auction sare was held as schedured, iriilriir"'p";.
However, ttt,,rs', t't ol. (G.R. No' 87479, June 4, 1ti$il) that E'O' 93 along with
sur as the sole bidder' A certificat" orrriu i,,."'riillT; l'tt 't'16 and P.D. 1731 were all vaiid, and that FIRB R'esolution
with the Register of Deeds was issued and resisrr
th;;;;;;;;. tiiJil5"Tf,:":; 1,, t'l 87 and the tax exemptions restored thereunder were valid
day,. respondents provincial "" so""i;o; and. provincial ,,rr,l ,'l'fective.
treasJ
received telegraphic notices oflire
C*it," fnO. Asicle from the FIRB resolutions, sec. 40(a) of P.D. 464, the law
r I ,, .r r i n force, expressly exernpts "rea-l property owned by the
Republic
Petitioner contends that it has never been
'which, effectively depri ,,t rlrc philippines or any of its poiitical subdivisions and any
j"1.T_r:.1_1y.lr. exemption, ti lJ*ior" so exempt by its
::_,*
withdrawn, were just as quickty ""J ";;; 1,r vr,frrrl€D.t owned and controlled corporation
ti";;##;"j;#illil
"".to""a.' , I'r, rl,er,"
piop"*iu, were wronsruuy reviel
I,#::1
and sold;':?t:.:iT:', 11".i"u: "*
at public. auction. n""p""a"";r';;r;;;iiil:ilJ",x:l lnasmuch as the realty tax assessntent levied against and the
petitioner's exemption from real
taxes were withdrawn ol ,,rrr'(iorI sale of petitioner's properties had been premised on
revoked by P'D. 19s1 and had never "riui"
blen_varidly restored by thr ,,.,,Pond.ents' erroneous belief that FIRB Resolutions Nos. 10-85'
resolutions of the Fiscar Incentives
R"uie* Board (FIRB) nor by thc I f1(i and 17-87 are void, the judicial declaration of the validity of
memorandum of Executive Secretary
Macaraig, Jr., thus ,"rra""ing ,,,rtl resolutions ipso jure remders such assessment and sale void'
it liable for real estate taxes. ,l-he
assessment of realty tax being void, petitioner never became
,l,.linquent in the payment of said taxes to respondent province and
HELD: The main issue is whether or not respond.ent tlr. latter never acquired any right to sell nor to purchase said
and provinciar officials can validly province
""J]"*rrlry
taxes ibr the period from June r4-, rgg'to
assess real property ;,roperties at auction. In short, there were never any taxes'
ouc. at, tgg6 una ,lr,linquent or otherwise, to satisfy.
thereafter se, at pubric auction trre suuject
properties of ^i.'ir",
NApocoB This decision is solely with respect to the purported tax
to effect collection of aresed deficien-Jies
taxes.
in fi," ;;6;; of such (,xcmption liabilities of NAPOCOR for the period from June 14, 1984
r,r Dec.31, 1989 vis-i-vis its tax exemption status based on P.D.
on the pivotar issue of whether or not petitioner .lci4, which was still good law at the time the exemption was claimed,
and duty exemption privileges, trru has rost its tax
cr""t
of P'D' 1gB1 withdrew alr tal exemptio,i.
ruted thaiairrrrrut sec. I \vithout ruling upon the effect of R.A. 7160, or the Local Government
pr"r.r*abry incruding those ( )ode of 1991.
of NAP.COR, Sec. 2 thereof u"iiro"ir"a
President and/or the Minist", oi'i"""ce ,"J;;;;;ied the
deserving entities. In order to
to restore the sarne to CoMMISSIoNERoFINTERNALREVENUEv.S.C'JoHNSON
petitioner,s tu* e*"rip*ons,
FIRB Resotution No. 10_8b.""irr"tui"
*;; ;;;;"tgated, effectiv* as of AND SON,INC., ET AL., G.R. NO. 127105, JUNE 25, 1999
June 11, 1984, the promulgation aui"
1985' FIRB Resorution No. r-eo fuliy
orp.n. rgBl, r.iit'"lurr* go, FACTS: Private respondent S.C' Johnson and Son, Inc' (S'C'
restored NApoco*,s tax .lohnson), a domestic corporation organized and operating under

134
135
{ LAW OF BASIC TAXATION IN THE PHILIPPINES
Philippine laws, entered into a license agreement with S.C. Johnson
and Son (USA), a non-resident foreign corporation based in the U.S.A.
Pursuant thereto, private respondent was granted the right to uso
the trademarks, patents and technology of the latter, including the
right to manufacture, package and distribute products covered by
the agreement and to secure assistance in management, marketing
and production from S.C. Johnson and Son (USA). Said license
agreement was duly registered with the Technology Transfer Board
of the Bureau'of Patents, Trademarks and Technology Transfer.
For the use ofsuch trademark and technology, private respondent
paid S.C. Johnson and Son (USA) royalties based on a percentage of
net sales subject to 25o/o withholding tax thereon. For the period
from July 1992 to May 1993, private respondent paid ?1,603,448 as
withholding tax from royalty payments"
On Oct. 29, 1993, private nespondent filed with the BIR
International Tax Affairs Division a claim for refund of ?g68,226
representing overpaid withholding tax on royalties paid, arguing
that since the agreement was approved by the Technotrogy Transfer
Board, the preferential rate af LAo/o should be appiied pursuant to
the most-favored nation clause in the RP-US Tax Treaty (Art. 18,
Par. 2tbltiiil) in relation to RP-West Germany Tax Treaty
(Art. t2[2][b]).
For failure of the comrnissioner of Internal Reventre to aet on
said claim, S.C. Johnson frled a petition with the CTA. The CTA
ruled in favor of s.c" Johnson and ordered the commissioner of
trnternal Revenue to issue a tax cred.it certificate for ?g63,226. The
Court of Appeals affirrned the decision of the C,tA in toto.
?he main point of contention is the interpretation of
Art. 13(zXbxiii) of the RP-US Tax Treaty regarding the rate of tax
to be imposed by the Fhitippines on a royalty received. by the
non-resident foreign corporation, which read.s "the trowest rate cf
the Fhiiippine tax that may be i.mposed on the royalties of the sarne
kind paid under similar circumstances to a resideni of a third state."
S.C. ,lohnson contends that based thereon, it is entitled to the
concessional tax rate of 10% on royalties, per Art. 1Z(ZXb) of the
RF-lVest Gerrnany Tax Treaty. flontrariiy, the Commissioner of
Internal Rerrenue avers that the taxes upon royalties under the
HF-us raN Treaty are not pair3. r"rnder circumstances similar to those
provided in Art. 24 of the RF-West Gerrnany Tax Treaty since there
is no provision for a 2Q% matching credit in the former convention
anei $.c. ,leihnssn cannot imr,.oke the eoncessional tax rate *n t]:e
st,rcngth sf thr: nrr:et-favored natr*n clause in tire i{,p-q_i$ T,ax "{'reat;y.
i Qcl
DOUBL!] 1'AXATION AND TAX EXEMPTIONS
'l'hc issue in the present case is whether or not S'C. Johnson
rtlliA) is entitled to the "most'favored nation" tax rate of 10% on
r,,y:rll.ies as provided in the RP-US Tax Treaty in relation to the
l{ l' Wcst Germany Tax Treaty.
t tltLD: The petition is meritorious. The phrase "royalties paid
rrrrtlor similar circumstances" in the most-favored nation clauSe of
tl',. IIS-RP Tax Treaty necessarily contemplated "circumstances that
,, r ,. l,irx-reIated."
I n the case at bar, the state of source is the Philippines because
r lr(. royalties are paid for the right to use property or rights, i.e',
I I rrrlcmarks, patents and technology, Iocated within the Philippines.
'l'lr(' united states is the state of residence since the taxpayer, s.c.
.l,lrnson and Son, U.S.A., is based there. Under the RP-US Tax
'l,r-ilgty, the state of residence and the state of source are both
1r|rrnitted to tax the royalties, with a restraint on the tax that rnay
1,,' r:ollected by the state of source. Furthermore, the method
,.rrrployed to give relief from double taxation is the allowance of a
I :r x credit to citizens or residents of the United States (in an
amount based upon the taxes paid or accrued to the
',g,lrropriate
l,lrilippines) against the united states tax, but such amount shall
,,,,t exceed the limitations provided by united states law for the
l;rxable year. Under Art. 13 thereof, the Philippines may impose one
,,1't,hree rates gross amount of the royalties; 15% when
- 25% af.t]he
r lre royalties are paid by a corporation registered with the Philippine
Itoard of Investments and engaged in preferred areas of activities;
,rr {,h€ lowest rate of Philippine tax that may be imposed on
r.oyalties of the same kind paid under similar circumstances to a
rrsident of a third state.
Given the purpose underlying tax treaties and the rationale for
i,he most-favored nation clause, the concessional tax rate of 10%
provided. for in the RP-Germany Tax Treaty shouid apply only if the
i,trxes irnposed upon royalties in the RP-US Tax Treaty and in the
Ii.P-Germany Tax Treaty are paid under similar circumstances" This
would mean that private respondent mtrst prove that the RP-US
.[,ax
Treaty grants simiiar tax reliefs ts residents of the United States
in respect ofthe taxes imposable upon royalties earned frorn sources
within the Phiiippines as those allowed to their Gerrnan counterparts
rrnder the RP-Germany Tax Treaty'
The RP-US and the RP-West Germany Tax Treaties do not
corrNain similar provisions r:n 1,ux crediting' AtL. 24 of tlie
ii,P"West Gerrnany ilax Treatv expressly allou's crecliting against
{}erman income and corporation Eax af 2A% of the gross atnou;li '-ri
r l,nw olr IIASIO'l'AxAl.loN lN,l.llt,l l,llt l,lt,t,lNl,ls
royalties paid under the law of the philippines. on the othor ha,rl,
Art- 23 of the RP-us rax Treaty, which is the counterpart pr.visi.rr
with respect to relief for double taxation, does not p.ouldu ri,,. ,,
similar crediting of zo% of the gross amount of royalties paid.
The reason for construing the phrase "paid und.er simir,r
circumstances" used inArt. 1g(zxbxiii) of the Rp-us rax Treaty ur
referring to taxes i.s anchorett upon a logical reading of the text in
light of the f*nda*ental purpose of such treaty which is to grant a lr
incentive to the foreign investor by lowering the tax and at the samo
time crediting against the domestic tax abroad a figure higher tha n
what was collected in the Philippines.
since the RP-us rax Treaty does not give a matching tax credit
of 2a% for the taxes paid to the philippines on royalties-as allowecl
under the RF-west Germany Tax Treaty, private respondent cannol;
be deemed entitled to the 10 percent rate granted under the latter
treaty for the reason that there is no payment of taxes on royalties
under similar circumstances.
Tax refunds are in the nature of tax exemptions. As such they
are regarded as being in derogation of sovereign authority and to be
construed strictissimijurls against the person or entity claiming
lhe exernption. The burden of proof is upon him who claims the
exempt'ion in his favor and he must be able to justify his claim by
the clearest grant of the organic or statute law.
EANAS, JR. V. COURT OF APPEALS, ET AL., G.R. NO. 102967,
FEB. L0,2000
FACTS: On Feb. ZA, !976, petitioner Bafras, Jr. sold to Ayala
trnvestment corporation (Ayala) rz1,z6b square meters of land in
Bayanan, Muntinlupa for P2,B0B,rr0. upon signing of the contract
of sale' ?46L,754 was paid as an initial payment, urrd thu balance of
F1,847,016 was to be paid in 4 equai annual installments with 12%
interest per annum on the outstanding balance. Ayala issued a
promissory note covering 4 equal annual installments payabie at
the rate of P461,?b4 starting on Feb. 20, 1977, and e.,re.y year
thereafter until Feb. 20, 1990.
on the same day, petitioner Baflas, Jr. discounted the promissory
note at its face value as evidenced by a deed of assignment. Ayala
issued 9 checks to petitioner, all dated Feb. 20, 1976, drawn against
the Bank of the Philippine Islands with the uniform amount of ?20b,224.
In his 1976 income tax return, petitioner reported the initial
payment of ?461,754 as income frour sale of a capital asset. In
the
138
IX)T1I}I,IJ TAXA'I'ION AND TAX EXEMPTIONS
,,,,,,,.r.r1ir)g years until 1979, petitioner reported a uniform income
,'t tr:l:i0,877 representing \Oo/a of the agreed yearly installment of
r l(i I ,71)4, as gain from sale of capital asset. The same amount was
;,';,,,r'1.r.{ in his 1980 income tax amnesty reiurn as the realiaed gain
,,,, ,lrslrosition of capital asset.
( )rrApr. 11, 19?8, then Revenue Director Calaguio authorized
Itll( t.rrx exarniners Tuazon and Talon to examine the books and
1r., or.(ls of petitioner for 19?6. They discovered that petitioner had
r,,,,rrrl,standing receivables from the 1976 land sale to Ayala, thereby
, ,,r,,.ltrding that the same was a cash sale and the entire prolit should
l,,rvr.been taxable in 1976 since the income was wholly earned in
t'rlt;. [,'inding a discrepancy of f2,095,915 in petitioner's 1976 net
nr(.()rpe, they recommended a deficiency tax asseSSment Of
t'.',.173,673. Subsequently, Revenue Director Larin, herein
,, :,lrondent who succeeded Director Calaguio, directed the revision
,,1 llrt: audit report to have the land considered as capital asset, with
tlrr. t,rrx due of only 50% of the total gain frorn the sale of the property
1,,'yrrnd 12 rnonths, pursuant to Sec. 34, NIRC. Accordingly, the
,l,.lrt:iency tax was reduced to?936,598.50, inclusive of surcharges
,,r,rl penalties for 1976, with the demand for the same to be settled
,,,rrnediately. On Sept. 26, 1980, petitioner acknowledged receipt of
rlr,. IJIR letter but insisted that the sale was on installment. on
,,.,,.rmmendation of the BIR Tax Fraud Unit, respondent Larin filed
,, ,.riminal complaint for tax evasion against petitioner Baflas, Jr.
,,rr .lune 1?, 1981, with news reports about the tax evasion charges
l,r.ing published in the newspapers shortly thereafter.
On July 2, 1981, petitioner filed an amnesty tax return under
I'l). 1?40 and paid?41,729.81. On Nov. 2, 1981, he filed another
:r rrrnesty tax return under P.D. 1S40 and paid an additional amount
,,1'tl,525.62. In both returns, petitioner did not recognize the land
rrrr lc as having been made on cash basis. In reaction to the criminal
,.,rrnplaint for tax evasion and the news reports, petitioner filed an
rr.,t,ion for damages against herein respondents Larin, Tuazon and
't'rrlon for extortion and malicious publication of the tax audit report,
rr rrd claimed that the filing of the criminal complaint was improper
lrccaus€ he availed of the tax amnesties under P.D. 1740 and
I'_D. 1840. The trial court ruled in favor of respondents and awarded
rlllmages to respondent Larin, which decision was affirmed by the
( lourt of Appeals.
Hence, this petition, faulting the appellate court for holding that
( l) there was no extortion attempt by the BIR; (2) P.D. f i40 and
t'.D. 1840 granting tax amnesties did not grant immunity from tax
su its; (3) petition""'r income from the 1976 land sale to Ayala should
139
r LAW OF BASIC TAXATION IN THE PIIILIPPINES
have been declared as a cash sale since he discounted the promissory
note on future installment payments on the same day of the salo;
and, (4) damages should be awarded to respondent Larin.
HELD: The Court of Appeal's factual finding that there was no
evidence of the alleged extortion attempts by BIR officials other than
petitioner's self-serving deciarations cannot be disturbed unless said
findings are not supported by evidence. The supreme court upheld
the respondent court's conclusion that respondents could not be held
liabIe for extortion.
On the issue of whether P.D. i?40 and p.D. 1g40 granting tax
amnesties also granted immunity from criminal prosecution for tax
offenses, the court ruled that petitioner did not meet the twin
requirements of P.D. 1740 and P.D. 1840, i.e., declaration of his true
and correct untaxed income and full payment of the tax due thereon.
In this case, petitioner entered into a contract of sale purportedly
on installment, but on the same day of the consummation of the
sale, he discounted the promissory note covering future installments
with the buyer, rather than a Iender. After the filing of the criminal
complaint, petitioner filed his tax amnesty return in Bulacan, instead
of Manila where he had his office. His tax amnesty return under
P'D' 1840 did not disclose that the land sale to Ayala was in cash.
Not having complied with the requisites, petitioner is not entitled
to the benefits of P.D. 1740 and P.D. 1840. The mere filing of tax
amnesty return thereunder does not ipso facto shield him from
immunity against prosecution.
Tax amnesty is a general pardon to taxpayers who want to start
on a clean tax slate. It also gives the Government a chance to collect
uncoilected tax from tax evaders without having to go through the
tedious process of a tax case. To avail of a tax amnesty granied by
the Government, and to be i.mmune from suit on its derinquencies,
the taxpayer must have voluntarily disclosed his previouslyuntaxed
income and rnust have paid the corresponding tax on such previousl.y
untaxed income.
A tax amnesrLy, much like a tax exemption, is never favored. nor
presumed in law and if granbed by statute, the terms of the amnesty,
like that of a tax exernption, must be construed strictly against the
taxpayer and triherally in favor of the taxing authority. Hence,
pet'itioner'e claim. af imr:lunity from prosecution under the sleieirl of
avaiiing of a tax an:lnesl,y is untenable.
O* ihe matter cf wl"ref,her t,ire land sale to Ayala should be
cc)llsidered ils a cash sale or on instailment trasis, the prevaili.ng ru.le
i
i r.il
l)ou t]t,!l'l'AxA'l'IoN AND TAX rlx!)MPTI0NS
Ir, IrIl,ri(:{rn law is that where an installment obligation is discounted
,\
,rt ,r lrrrrrk or finance company, a taxable disposition results, even if
t1,,. :rr.llor guarantees its payment, cOntinues to colleCt on the
r,, ,I,rIl,r,cniobligation, or handles repossession of merchandise in
r,'r. r)l clefault. Sin"u Philippine income tax laws are of American
,.r rl,rr, interpretations by American courts on our parallel tax laws
1,,,u,^ l,.rrsuasive effect o.t th" interpretation of these laws'
Thus' by
,rilrrl(,g!, all the more would a taxable disposition result wtren the
,1,',,',,,i'.ting of the promissory note is done by the seller himself'
I
,1,.:rrly, the indebtedr"r. of the buyer is discharged, while the seller
,,, , ,Ls money for the settlement of his receivables. Logically then,
, ,i
rl,,l income should be reported at the time of the actual gain. For
1
,rr'()nle tax purposes, income is an actual gain or an actual increase
,,1 wt:alth.
,l'he
court thus ruled that although the proceeds of a discounted
s,r,,rnissory note is not considered initial
payment, still it must be
,,,,'luded. as taxable income in the year it was converted to cash'
wlrcn petitioner had the promissory notes covering the succeeding
rr,,rt,allment payments of the land isstred by Ayala discounted by
Ayala itself on the same day of the sale, he lost the entitlement to
rr.lrort the sale as a sale on installment since a taxable disposition
,,,sulted and petitioner was required by law to report in his returns
ttrc income derived from the discounting. what petitioner did is
lrrrrtamount to an attempt to circumvent the rule on payment of
ilrcorle taxes gained from the sale of the land to Ayala for the year
t1)-/6.
Lastly, on the award of damages, the Cotlrt found that the
baseless and that said
l,rosecuti-on against respondent Larin was
.n,spondent sulfered urr*i"ty and humiliation due to the unfounded
,,l",arges against him. The Court thus found sufficient basis for the
,,*^id of moral and exemplary damages as well as attorney's fees'
Irgt deleted the award for actual or compensatory damages for want
of evidence on record to support the same'
E)MRCISES
1. From what sources may tax exemption emanate? May tax
exemptionsexistbyimplication?Maytaxexemptionsberevoked?
(1967 Bar)
To encourage the production of newsprint, the Rizal Paper
2.
Mill was accorded tix exemption privileges under R.A. 90,1 by virtue
of which no internal revenue tu*"" "directly payable" could be
141
 LAW OI,- BASIC TAXATION IN THE PHILIPPINES
collected from
(1972 Bar)
it. Is it likewise exempt frorn wharfage dues? Reasons.
3' The income earned by Denny santos in 1gg1 in the united
states amounted to gb0,000 consisting of salaries, dividends, capitar
gains from real estate transactions, etc. This income is
subject to
u.s. federal income tax and und.er our Tax code this income is also
subject to the preferential rates of from r% Lo B%. Is this ,
double taxation ofthe direct type? Explain briefly. ";;;i
4. It is axiomatic in taxation that "tax exemptions are construed
strictissimi juris." Does this rule apply also to the granting or ir*
refunds as well as questions affecting the condona-tion of unpaid
taxes? Explain your answer.
5. A certain corporation was established to manufacture
prefabricated concrete slabs for export as well as local consumption.
By way of tax incentive, the corporation was granted by law an
exemption from all taxes "directly payable in respect to said industry',
for the duration of its tax-exempt status which is five years. state
whether the tax exemption granted to the corporationincludes the
following: (a) payment of VAT (value-addea tax; on imported
concrete, steel and other raw materials used in the manufacture
of
concrete slabs; (b) taxes on gasoline and other fuels needed. to operate
its plant; (c) motor vehicle fees for the registration of its delivery
trucks and panels; (d) community tax payable by the entity every
year; and, (e) donor's tax on donated rand to be used as a site
for
another factory building needed for expansion purposes. The
donation is made two years after the corporation had commenced.
the actual operation of its business.
6. (a) "A," after studying his tax problems, decided to withdraw
his bank deposits and to buy non-taxable or tax-exempt securities.
Does "A's" act constitute tax evasion which is penalized? Explain.
(1972 Bar)
(b) "B," who wishes to avoid payment of taxes assessable on the
transaction, was advised by his tax consultant to make it appear on
the deed of sale that the selling price was only?200,000 although it
was actuallyft)00,000. Is this tax avoidance of tax evasion?
Explain.
(1972 Bar)
t42
Chapter f!
TAX LAWS AND REGN.TLATIONS
NA'I'URE OF TA)( LAWS. Tax laws are civil -in o"t"l, *ot
(such
1,,,lrtrr'rrl. Hence, even during the period of enemy occupatioli
11,r lor. instance, during the Japanese occupation of the FhiLippines
irr Wor'ld War II, which lasted from 1942 to 1945), tax laws are
, ,,r,1 rrrrrally enforced as they are deemed to be the laws of the occupied
lr,i r rlory and not those of the occupying power.
Irr t,lre case of Hilad.o u. collector of Internql Reuenue, et ol.
r I ilr I l,lr il. 288), the Court did not allow the taxpayer to deduct from
lrr. l1)51 tax return a "casualty" loss incurred during the war, i.e.,
l,' l'r'otn fire, storms, shipwreck, etc., including war Iosses (now
rilIl|r. sec. 34[D][1][b], 1gg7 NIRC). Although such loss was incurred
,lr, ru11 said war-it was not possible for him to make the deduction
1,, r;rilse, according to him, internal revenue laws were at the time
,lr(,llorceable Or in a state of suspension. The Court, however,
,,, r'r'r'uled this contention and held that during the Japanese
,,i i ul)irtion, the internal revenue laws of the Philippines continued
t,,lrc in force.
Neither are tax laws penal in nature. Hence, the'rule on the
r,.t roactive effect of penal laws under Art.22 of the Revised Penal
r ',,rle which reads: "Plnal law shall have a retroactive effect insof,ar
rr:r (.hey favor the person guilty of a felony, who is not alabitual
, runinal as defined in rule 5 of Article 62 of this Code, although at
rlrc time of the publication of such laws a final sentence has been
1'ronounced and the convict is serving the same'" frnds no application
rrr tax cases. As stated in a decided case (Lorenzo u. Pasados, Jr",
,'tc., 64 Phil. 353), revenue laws which impose taxes collected by
rirc&ns which are ordinarily resorted to for the collection of taxes
rr rc not classed as penal laws and, therefore, cannot be
given
rct,roactive effect.
Furthermore, tax laws not being penal in charactbr, the rutre in
r lre constitution against the passege of er post /octo laws
cannot be
,rrvoked. The constitutional prohibition against the passage of er
post facto legislation, according to the Supreme Court, applies only
i,o or penal matters, and not to laws which concern civil
""iminal
rnatters or procledings generally, or which affect or regulate civil or
private rights @epuUtii u. Oassnvdd. de Fernandez, et ol., 99 Phil.
'934;
Ex Pirte Garlond, 18 Low Ed- 366, 16 C'J'S' 889'891}
143
r LAW OF BASIC TAXATION IN TTIT] PHILIPPINES ,I'AX I,AWS AND RI']GULAI'IONS

Ir,rr,,1' lrr ttltrop{ls to mention that since our income tax laws
Moreover, it was also held that the constitutional prohibi are
against ex post focto laws is not applicable to the collection of interort ,,1 ,irr,,,,,,,n t,rigin, interpretations by American courts on our
(Baft'os' Jr' u' Court of
on back taxes, nor to laws which, as stated concern civil mattorl i,e,, ll, I t,,* lrrw-s lraru peisrasive effect
'1,,1,,,,/
generally or regulate civil or private rights. The collection of interort '. ,'t trl., (i.R- No. 102967, Feb' 10,2000)'
in tax cases is not penal in nature (Central Azucarera de Don Pedro
u. CTA, et ol., L-23236 and L-23254, May 31, lgif). :iulrlt(;l,ls OF TAX LAWS. The following may be said to be
Increased tax rates may also be given retroactive effect so as to ()l'tax laws:
*1r,. ,,,,'rr r'(':t
apply to income earned before the passage of the law authorizinj t ('orrsIitution
such increase. As in the case of interest, no constitutionai the National Internal Revenue code, Tariff
infringement would exist anent the ex post facto prohlbition. :, ,l,rr
x qrdes such as
,rrrrl ()ustoms Code, and portions of the Local Government
( lrrrle
INTERPRETATION OF TAX LAWS. It is a well-settled rule
in taxation that a statute will not be construed as imposing a tax .t ljlntutes like R.A. 1125 (An Act Creating the Oourt of Tax
unless it does so clearly, expressly and unambiguously. A tax cannot Appeals), R.A' 7?16 (E'VAT Law), and R'A' 8424 (Tax Reforrr
be imposed without clear and express words for that purpose. Act. of 1997)
Accordingly, the provisions of a taxing act are not to be extended by t l'residentialdecrees
implication (Marind.uque lron Mines Agents, Inc. u, The Municipal t, l'lxecutive orders
Council of the Munictpality of Hinabangan, Frouince of Samar,
L-18924, June 30, 1964).
t; (-lourt decisions

Furthermore, in errery case of doubt, tax statutes are construed
most strongly against the Government and liberally in favor of the
citizen because burdens are not to be imposed beyond what the
statutes expressly and clearly import (Collector of Internal Reuenue
u. La Tondefi,o, Inc., et al., L-10431, July 31, 1g62; see also
Commissioner of Internal Reuenue u. Fireman's Fund Insurance Co.,
et a1,., L-30644, Mar. 9, 1987; Commissioner of Internal Reuenue u.
Court of Appeals, et al., G.R. 115349, Apr. 18, lggT; Lincoln
Philippine Life Insurance Company, Inc. u. Court of Appeals, et al.,
G.R. No. 118043,Ju|y 23, 1995).
Aithough, tax burdens are not presumed, it is important to
consider, however, that tax laws are not promulgated in order to
encourage tax evasion or tax avoidance. Thus, in one case, the
Supreme Court said that the purpose of the Tax Code is to impose
taxes, not to enhance tax avoidance (Commissioner of Internal
Reuenue u" Phoenix Assurance Co., Ltd., L-I9903, May 20, l965).
In this connection, it should be noted also that like other statutes,
tax laws operate prospectively whether they enact, amend or repeal
unless the purpose of the legislature to give retrospective effect is
expressly declared or may be implied from the language used
(Philippine Educatian Co. u. Commissioner, CTA Cqse No. Z0S,
Sept. 20,1965 citing Lorenzo u. Posadas, Jr., etc., supra; Commissioner
of Internal Reuenue u. Filipinas Cia. De Seguros, 5S O.G. No. J, p. 460).
t Ilevenue regulations promulgated by the Department of
Finance
n Adnninistrative issuanees of the BIR like Revenue
Mernorandum Circulars, and those of the Bureau of Customs
like Customs Memorandum Orders
1) tsIR ruiings
t0. L,ocal tax ordinances
I I " Tax treaties and conventions with foreign countries"
MANDAToRYANDDIBECTORYPR0VISIoNS.TheTeaTe
l,rovisions in existing tax laws w-hich lay down performed
mandatory
certain acts
,,..1.,irements for purpoJes of the validity of
laws.
l,y those who are entrusted with the enforcement of revenue
'lihese are known as mandatory provisions'
For instance' a mandatory provision in the Tax Code of
1977
was sec. 20? therein on the distraint of property. As a summary
.,,*edy in tax collection, the law then required that the same should
t," employed,,not earlier than three months nor later than six months
r,-o* of the demand." It shouid be observed' however' that
""""ipt
onlythethree-monthperiodasabovestatedismandatoryinasmuch
not be
as the admonition that summary collection sf taxes should
Iater than six months from date sf dernand is only a directory
provision. In other words, should collection be instituted beyond

144 l.4t)
r
I,AW OI.' I}ASI(],I'AXAl'I0N IN'I,I I I) I)IIII,II)I,INI.]S 'fAX I,AWS ANI) Itlrl(l[Jl'A'l'IONS

the six-month period provided in the law, such actio' will l'l I ltl,l(lA'l'tON REQUIREMENT' Not ail sources of tax as
laws
necessarily result in the nullity of the collection. in the Official Gazette
r- r , ,rrr, r'rtlt'(l itbove r"qt,i'u publication
states that "(I)aws shail
There was, however, no need for the Bureau of Internal
Rev.r, 1r,' ,,t,,1 rrr Art'. 2 of the'cirrit'cod", which the completion of their
bo allow three months from date of receipt of assessment to errr; ral., ,ll, r'l rtt't,u. lifieen days following
before summary re,redies for collection ar:e resorted to, if ther ,,,,', ,,, ,lr,rtt itt the Official
Gazette unless it is otherwise provided'"
being collected is a self-assessed tax, as in the case of the inc
ll,rr:;, trr t,he case of Tafi'ad'a, et q'l' u' Tuuera' etc'' et
ol' (G'R'
tax, which the taxpayer reflects in his tax return, but which that the following require
he fail ri,, i, ri)1i,, l)ec. Zg, iggOl, it was ruled
to pay on the date for payment prescribed by law. The three-morr for their effectivity: statutes,' including
period applied only when there was a previous demand ;:r1l,lr, ,rlror) us u "orrJilio,,md private laws' presidential decrees and
or assessm() 111,, ,, ,,1 l,t:irl applicuiiorr
from the BIR. Presid'ent' and administrative
e ,' r r , t r u,' o rd ers promulgatea Uy tt'u
Sec. 207 of the lgg' NIRC, as amended, no longer provides
lo! lrl, rrrrrl regulations iitheir purpose is to enforce or implement
the mandatory period of "not earlier than three (s) months,, , ,, r Iurli Iltw, pursuant to a valid delegation'
beforg
the BIR could use the summary remedy of coilection or""y iJirqr"nt
l rrt.t'lrretative regulations and those which
are merely internal
!,1I bV distraint of personal property andlor levy on only the personnel, of the
What is now mandated by the iaw is that upon failure"eut
prop"rty, ,, ,,,,1rr.., i.e., thos? which regulate not be published
of the person ,,,lr,,rrr.;t,t'ati,r. usu;"y u,tJ "ot ihe public' need
owing any delinquent-revenue to pay the same within the period instance' the following do not
prescribed by law, the Commls.lorre" or his duly authorized ilt',,1) (lonsequentfy, l" lhe BIR for Revenue
, , ,,,,,,',' publlcation for purposes
of effectivity:
representative shall seize and distrain personal prop"rty and/or Circulars' Revenue
levy i\1, rrlrr';rndum Orders, Revenue Memorandum
real property of the derinquent taxpayer in sufficieni qu,^.ntity rulings'
t, \,lrrrrrrst.rative Orders, and BIR
satisfy the tax charge together with any increment thereio incident
I rr one case, a BIR Memopandum
Circular was ruled as one which
to delinquency. and not a regulation
1 , ,, r I y tbr the internal admiiristration of the BIR
Another example of a directory provision is Sec. 12 of R.A. of theTax Code and' therefore'
._ 112b , rrl,rrr the contemptullo,, of Sec' 245
(the law creating the court of raxAppeals, effective Gazette (La Suerte Cigar and
June 16, 1gb4) rri, rlr; t)o publicatron-i" tftu Official
which provides that cases brought blio"u the court shall be
decided I ti:tu'ttlte F'actory, CTA' et al'' L-36130' and Alhambra
within thirty days after submission thereof for decision (Lidd,er
&
"'ol' ''
l,,,lrt:;lries, lnc., et ol. u' CTA, et ol'' L'36131'
jointly decided on
Co., Inc. u. Collector of Internal Reuenue, L-g6gf, June
50, lg61). t, t rt t 7, 1985).
The crA is not a rnere superior ariministrative agency by means of
or tribunal;
rather, it is a part of the judicial system of the ntitipirnes. It When an administrative agency renders an opinion
was ,r i.rr.cular o, -u*orundum itLerely interprets
a pre-existing law
created by congress as a centralized court specializing in Arca'
1.r(l rro publication is required for its validity
tax cases. (Romualdez
It is a regular court vested with excrusive appellate jurlsdiction over -u'
, t t, t)t al., L.2 5924, Apr. 18, 1 969, cite,J,
tn La Suerte Cigar & Cigarette
cases arising under the National Internal Rurru.,rru '
Cod.e, Tariif and al', supra)'
Customs Code and the Assessment Law. l"ttt'Lory, et al. u. CTA, et
ruled that
As a matter of practice and principle, the supreme court ln one case involving the Bureau of Customs' it was
not set aside the conclusion reached by the crA which is, by
will (,rrs[oms Memorandrrri Ord"r, issued by the Commjssioner of
the (.llsLomsneednotbepublishedintheofficialGazette(Yaokasinu'
very nature of its function, dedicated exclusively to the study 22' 1989)'
consideration of tax problems and has necessarily deveroped
and t'rtmmission", o1Cu,[o*s, et al'' G"B' No' 84111' Dec'
an of the
expertise in the subject, unless there has been an abused
and Incidentally, construction by an executive branch tfe courts'
improvident exercise of authority on its party (commissioner t lovernment of a particular law, although
not binding o1
Internal Reuenue u. CTA, et al., G.R. No. 1041i1,-Mar. 10, lggS). af rrrust be girr"n *"ighf u" tf'" construction comes from the branch of
(Ibid.).
tlre Government ciued upon to implement the la'w

t46 147
 LAW OF BASIC TAXATION IN THE PHILIPPINE$
ARE TAX LAWS SPECIAL LAWS? Tax laws are special
The Tax Code is an example of a tax law. According to one
case, the Tax Code is a special law and prevails over a gen
such as the Civil Code (Republic u. Gancayco, L-18307, Jw
1964). But in case the provisions of a special law are found
deficient in a particular situation, the Civil Code shall ap
Art. 18, Ciuil Code).
Tax laws treat of a special subject, i.e., taxes. Hencg
publication of a Iocal taxing ordinance enacted pursuant to the
Local Tax Code (P.D. 231, as amended) which requires publi
only after the approval thereof, even though the particular
of the city in which the ordinance was enacted requires publi
before and after its approval, was considered validly promu
In one case, the ruling was to the effect that although the
Charter of Manila speaks of ordinances in general, irres
the nature and scope thereof, Sec. 43 ofthe former Local Tax
on the publication of tax ordinances should apply because the
Tax Code relates to ordinances levying or imposing taxes, f
charges in particular (Bagatsing, etc., et al. u. Ramirez, etc., et
L-41631, Dec. 17, 1976).
In an action, instituted by the Gauernment for the recouery of
erroneously refunded ta.x, which prescriptiue period will apply *
six-year prescriptiue period for quasi-contracts under Art. 1146
the Ciuil Code, or the three-year prescriptiue period for assess
uruder Sec. 223 of the Tax Code which is a special law? The ar,s
to this question is, since an action to recover an erroneously refu
tax is in effect an assessment of such tax, and considering that
special law like the Tax Code prevails over the Civil Code, a
Iaw, then it is the three-year period under the Tax Code that
apply (Guagua Electric Light Co., Inc. u. Collector of Intern
Reuenue, et al., L-23611, Apr. 24, 1967).
TAX REGULATIONS. Tax regulations are promulgated by
Secretary of Finance in order to implement the provisions of t
Tax Code. Sec. 245 (now, Sec. 244 of the 1997 Tax Code), provt
that "(t)he Secretary of Finance, upon recommendation of t
Commissioner, shall promulgate ail needful rules and regula
for the effective enforcement of the provisions of this Code.
Regulations must not be contrary to law for a regulation promulga
on a wrong interpretation of the Iaw or in contravention
cannot give rise to a vested right that can be invoked either by the
taxpayer or the Government (Quiazon and. Lukban, Philippine
Income Taxation, p. 18). They must be published in the Official
148
TAX LAWS AND REGULATIONS
:le rrr in e newspaper of general circuiation (B'O' 200)' They
Ire r0rtsonable (Quiazon and. Lukban, op cit') and must be
within
Brrllroril,y conferued since the power to make regulations is not
guise of regulation, Iegislation
ltilwrtr to legislate. under the
Irrrt,lrrr onacled (bid). Administrative regulations have the force
pl,lirr:L of law (valerio u. secretary of Agriculture q.nd Natura'l
r*,s, L-18587, APr. 23, 1963).
trYell n(Jttled is the rule that administrative regulations must
be
[xrrrr,,,:y with the provisions of the law. In case of discrepancy
pilil the basic law and the implementing rule or regulation, the
er lrrcvails (Philippine Petroleum corp. u. Municipality of Pililla,
tl, it ol., G.B. No. g0776, June 3, 1991). Rules and regulations
rl, rtol override, but must remain constant and in harmony
with
law they seek to apply. They must neither supplant nor modify
lnw (Commissioner of Internal Reuenue u' Court of Appeals'
ttl,, (;./?. No. 108358, Jan' 20, 1995; Republic u' Court of Appeals'
u,,, (j".1?. No. 109193, Feb. 1, 2000).
'l'lttts, in Phitippine Bank of Communications u' Commission'er
U{ lntt'rnal Reuenue (G.R' No. LL2O24, Jan' 28, 1999),
the Supreme
regulations by
flrrrrrt ruled against the relaxation ofcertain revenue
!rr,,,,,," Mernorandum Circular No. 7-85 (RMC 7-85) as it
tlhr,,gflrded the 2-year prescriptive period set by iaw. Said the Court,
i,l*tt,,,,, the Acting Commissioner of Internal Revenue issued RMC
years on
'f Hlr, r:hanging the prescriptive period of two years to ten
t|lnt|ils of excess quarterly income tax payments, such circular created
the 1977 NIRC.
6 1,1,u r inconsistency witir the provisions of Sec.
230 of
lir rr,, doing, the BiR did not simply interpret the law; rather' it
l+'girlated luidelines contrary to the statute passed by Congress'"
,l,he court thus upheld the nullification of RMC 7-85 as an
"nrlrrrinistrative interpretation which is not in harmony with
Ht,t,. 230 of the 1977 NIRC, for being contrary to the express provision
u!'rr statute," and concluded that the same "could not be given weight
lirr t,o d.o so would in effect amend the statute"'
Moreover, the internal revenue commissioner cannot' by
turlrninistrative fiat, amend. the Iaw by making compliance therewith
Irrore burdensome (Atlas Consolidated Mining and Deuelopment
{irtrporation u. Commissioner of Interrtal Reuenue, G'R' No' 133467'
Nou. 17,1999).
TAX RULINGS. Administrative rulings have been aptly
rloscribed as follows: "They are the best guess of the moment and
rrrcidentally often contain such weil-considered and sound Iaw; but
r49
rr LAW ol,' llASl(t 'l'AXA'l'lON lN ,I,lt Ll t,llll,lt,l,lNllS
the courts have held that they do not prevent an entire change of
front at any time and are merely advisory * sort of an information
service to the taxpayer" (euiazon and. Lukban, op cit.).
POWER OF THE COMMISSIONER TO INTERPBET TAX
LAws AND To DECIDE TAx CASES. sec. 4 of the 1992 NIR0
specifically provides that the power to interpret the provisions of
the Tax code and other Lax laws shall be under the excrusive and
original jurisdiction of the commissioner, subject to review by tho
secretary of Finance. The power to decide dilputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto or other matters arising ,rd"" ihr.
codu
or other laws or portions thereof administered by the Bureau of
Internal Revenue is vested in the commissioner, subject to tho
exclusive appellate jurisdiction of the Court of Tax Appeals.
The opinion or ruling of the commissioner of Internal Revenue,
the agency tasked with the enforcement of tax raws, is accord.ed. much
weight and even finality where there is no showing that it is patently
wrong, particularly in a case where the findings and conclu"ions of
the internal revenue commissioner were subsJquentry affirmed by
the crA, a specialized body created for the excrusive purpose of
reviewing tax cases, and the court of Appeals (Afisco Insurance
Corp., et al. u. Court of Appeals, et al., C.A. .l/o. llZ6fS, Jan. 25,
I 999).
Rulings which merely embody administrative opinions on queries
submitted do not have the force and effect of law s (Alexand,er Howd.en
ctnd Co., Ltd. u. Collector of Internal Reuenue, L- l gSgZ, Apr. 14, g6i).
l
NON-RETROACTIVITY oF RULINGS. Generalry, rulings are
not retroactive if they are prejudicial to the taxpayer. sec. 246 of
the 1997 NIRC provides: "Any revocation, modification or reversal
of any of the rules and regulations promulgated in accord.ance with
the preceding sections or any of the rulings or circulars promulgated
by the commissioner shall not be given retroactive apprication if
the revocation, modification or reversal will be p""j"ai"iut to the
taxpayers, except in the following cases:
"(a) where the taxpayer deriberately misstates or omits
material facts from hisreturn or any document required of him by
the Bureau of Internal Revenue;
"(b) where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on which
the ruling is based; or
150
'l'AX l,nWS n Nl) ll,l,)(itlt,n'l'lONSi
(, ) Wlrcrc t,hc taxpayer acted in bad faith."
lrr tlrc t::rso of Beruguet Corporatiott, u. Commissioner (CTA Case
!i,, I'ttt)'/, [ob. 14, 1996), the Court held that the retroactive
',1,1,111 ;qliorr of VAT Ruling No. 8-92 will not be prejudicial to the
l.r 1t,r1'('r' urrder the aforequoted exception to the general rule.
\ r';rsc which illustrates the non-retroactivity of BIR rulings is
| ,,rrnt:;:;ioruer of In.ternal Reuenue u. Buruoughs Ltd., e, ol. (G.R.
Il', r;(i(il-):], June 19, 1986). In that case, there was a BIR ruling
1, 'r,.rl ,rrr.Ian. 21, 1980 wherein it was ruled that the 15% branch
t,r,,lrl rrrnrittance tax under Sec. 25(a)(5) of the Tax Code should be
l,'r ,.rl on the amount of profit actually remitted by a Philippine
l1r,,rr, lr t,o its parent company abroad. However, in 1982 under
li, r'r'nuc Memorandum Circular No. 8-82, the BIR reversed the prior
r, r I r r1,, rr nd held that the 15% branch profit remittance tax should be
r
l,,r,,,rl not on the amount of profits actually remitted but on the
,,r,,(,rInl, applied for remittance thereby making the basis of ttre LSyo
t,,i l;rrger than that on which said tax was computed under the
,,,,1,,nirl 1980 ruling. The BIR in its subsequent ruling in 1982
r, .'rrrrod that the amount applied for remittance should be the tax
l,,r r,., t.hus giving rise to a bigger amount of tax.
'l'lre question here, however, is: will the reuersal ruling in 1982
t, trrttlct to the braruch profit remittances made before thot yeclr or, qs
t tt tltc cas€ of Burroughs hereiru, will said ruling apply to remittances
'tt,rrle by it in 1979?
'l'he Supreme Court ruled that the payment of the branch profit
r, rlril,tance having been made on Mar. 14,1979, it follows that BIR
Nlr,rrrorandum Circular No. 8-82 issued on Mar. L7, 1982 cannot be
1r\,(,n retroactive effect (Cf.. Bank of America NT & SA u. Court of
t1,1teals, et al., G..R. No. 103092, July 21, 1994).
ln another case, the Court of Tax Appeals held that it is a settled
r u lc in this jurisdiction that the administrative rulings of previous
( ',r rrrmissioners are not conclusive and binding upon their successors.
,\rr incumbent Commissioner may revoke, reverse or abrogate the
rrr'(5; s1 rulings of his predecessors in office if he becomes convinced
t lrrrt a statute warrants a different construction (Antonio Tuason u.
t ,itt,gad, CTA Case No. 1398, June i6, 1965 citing Hilado u. Collector
,,f lnternal Reuenue, et al., 100 Phil. 288; Collector of Internal Reuenue
r,. Manila Lodge No.761 of the Beneuolent & Protectiue Order of
l,lllt,s, et q.1., 105 Phil. 953). This principle is, however, subject to the
ron-retroactivity rule should it appear that the ruling reversing a
lrrevious ruling of the former Commissioner is prejudicial to the
lirxpayer pursuant to Sec. 246 of the Tax Code. More recently, the
151
r I,AW O}' I]ASIC'I'AXAl'ION IN'IIlI] PHILIPI'INITS
,I'AX I^WS N ND ITIICUI,A'IIONS

Supreme Court reiterated the rule on non-retroactivity of BIR rulinpgu ,r,l,lrl ronul rcal estate tax provides that "the total real property tax
in Commissioner of Internal Reuenue u. Court of Appeals, et al. (G.ll. ,,l,,rll rrot, exceed a maximum of three per centunl," the cityof Manila,
No. 117982, Feb.6, 1997). ,rrr,l,.r.rt,s charter, can increase the existing regular rate of one and
It would seem however, that if a subsequent ruling revokes I ,,rr,. lrrrlf'per cent to two per cent; so that t]ne 2o/o added to the 1%
prior ruling on the ground of nullity, the same being erroneous and ' ,r,rrlri il(t/o, or the maximum rate allowed trnder R'A' 5447'
contrary to existing law, there might be a basis for giving tho
,I'AX TREATIES AND INTERNATIONAL AGREEMENTS'
subsequent ruling a retroactive application.
l'ir r l.rgnties or conventions also constitute an important source
of
tir \ lirw. Tax treaties ordinarily comprehend iwo objectives. one is
LEGISLATM ADOPTION OF TAX RULINGS. There aro the income is taxed
I ,, il,,,0ir1 double taxation especially in cases where
instances where the legislature may have approved tho
interpretation of tax statutes by administrative agencies through r\\',,,: one by the countrywhere the income is earned (country of
reenactment. This is known as the the principle of legislatiue ,,,,rr|r'r') and another by the country where the subject of baxation is
appraual of aru administratiue in terpretation through reenqctment , rt lr.r'rt citizen or resiient (country of residence)' Another objective
r , I ,, r,liminate or minimize tax evasion through the adoption
of the
and may be briefly described thus: Where a statute is susceptible of countries to
, , l rr rtge of information scheme whereby the signatory
the meaning placed upon it by a ruling of the government agency ,r r

on a mutual basis
charged with its enforcement and the Iegislature thereafter reenacts r1,,. l,re-aty undertake to furnish each other
the provisions without substantial change, such action is to some ,r,l,,rrnation on the taxable income and/or activities of any of their
rr;r I ronals or residents.
extent confirmatory that the ruling carries out the legislative purpose
(Alexander Howden. and Co., Ltd. u. Collector of Internal Reuenue, ,l,he
Phiiippines has entered into a number.of tax treaties, notable
supra). ,,t rvhich are those with European countries, the united states and
It may be mentioned in this connection that Sec. 28(,{)(5) of tho \lil,lAN, or the southeast Asian nations like Indonesia, singapore,
Nl rr I rrysia, and others.
1997 NIRC now clearly provides that the 75o/o tax on branch profit
remittances shall be based on the total profits applied or earmarked lnCommissioneroflnternalReuenueu.S.C'Jahnsort'andSon,
for remittance without any deduction for the tax component thereof, tr^', et ol. (G.R. No. iZZlOf, June 26, 1999), the Supreme Court
except those activities which are registered with the Philippine ,'rlr;rustively expounded on the purpose and desired effects of tax
Economic Zone Authority (PEZA). In effect, the revocatory ruling I r |rrt,iesi
,,x
x x The purpose of these international agreements is to
issued by the Commissioner in 1982 in the Buruoughs case regarding ,,.,.oncile the national fiscal legislations of the c<lntracting parties
in
the basis for the computation of the 15% branch profits remittance ,,rrlt:r to help the taxpayer avoid simultaneous taxation in two
tax is confirmed by the legislature with the reenactment of the ,lrl'l'crent jurisdictions. More precisely, the tax conventions are
adrninistrative ruling in the 1997 Tax Code. , tr; r ['ted with a view towards the elimination
of international juridical
,l,trybl€ taxation, which is defined as the imposition of comparable
It is also settled that the reenactment of a statute substantially taxpayer in respect of the
unchanged is persuasive indication of the adoption by Congress of t;rxes in two or more States on the same
prior executive construction (ABS-CBN Broodca.stirlg Corp. u. CTA, ',;une subject matter and for identical periods' The apparent
.rrt,ionale ior doing away with double taxation is to encourage the
et q.1., G.l?. No. 52306, Oct. 12, 1981). of capital,
I,r.t,e flow of goods and services and the movement
t ,'r:hnology urrd p""rors between countries,
conditions deemed vital
DOCTRINE OF IMPLICATIONS. The doctrine of implications Foreign investments wiII
,,, .,reatiig robust and dynamic economies'
means that that which is plainly implied in the language of a statute and reasonable international
,,rrly thriie in a fairly predictable
is as much a part of it as that which is expressed (City of Manila, ,,,vlstment climate urrd-th" protection against double taxation is
et al. u. Gomez, etc., et al., L-37251, Aug. 31, 1981).
.rucial in creating such a climate'"
It was ruled that where R.4.5447 (creating the Special Education Incidentally,ontheratificationoftreaties'theConstitution
Fund, or SEF, which imposes a 1% additional tax on real property;
r.r,quires the concurring vote of at least two-thirds of all the members
now, found in Sec. 235, Local Government Code), in levying the L%

t52 153
 t,AW ()1,. uAStc .tAxA.I't0N IN'fl 1 bt i)Hlt,l t,plNUS 'I'AX I,AWS AND ITI]CULATIONS

of the Senate for validity and effectivity (Sec. 21, Art. 16 C'J'S'
1987 Constitution).
Vll, r l'rl (,r' lrrivate rights (Ex Parte Garlan'd', 18 Law Ed' 36;
,i:;,t ,\ll I ).
Despite the aforesaid constitutional requirement, ,l'lrc t:ontention that the deceased Olimpio Fernandez or his estate
our supremo
court has ruled that r.ess formar types of i"ie"rrtioruiig"u"-"nt* ,rlr,rrlrl rtot be responsible because he died in 1945 and was no longer
may be entered into by the chiei Executive and
w hen the law was enacted at a later date in 1946
becom-e binding I i ,. r r
is absolutely
1i
without the concurrelc_e of the regislative rrai r

rCi*-missioner ol ,n,rl,.,rrl merit. Fernandez died immediately before the Liberation

Internal Reue,.ue u. John Gotamco & Sons., iir.,-rt-",i.",
L_S10gZ, ,lrrl thc actual cessation of hostilities. He profited by the war;there
Feb. 27, tgSf). That being the case, the Host
ilr n{) r.cason why the incident of his death should relieve his
Ag""Lrrr"r,i'tf July 22, estate
1951 between the philippines and the world
ri""i;h o;;anizarion
(wHo) under which th_e wHo is exempt from indirect I r ,,rrr l,lre tax.

to the construction of its regional headquarters buildingtaxes rerative 'l'lre properties of Olimpio Fernandez in December 1941 and those
Philippines comes within the ratter category. The in tho ,,,,,,,,roi during the war ur" p""tr*ed conjugal' Hence' there is no
court individuals (husband and
1,,,,,,,,,1 to tax ih"* u. belonging to two
held that
said agreement is a varid and binding agreement
even without the w rlr') us so to be taxed independently of each other'
concurrence of the senatg{Ibld., citing usarrn
veterans Association
Inc. u. Treasurer of the philippiner,lAs phil. 1050)
(.()MMISSIONERoFINTERNALREVENUEv.BURRoUGHS'
l,'t't)., ET AL., G.R. NO.66653, JUNE 19' 1986
CASES to
ITAGTS: Burroughs Ltd. is a foreign corporation authorized
in the Phiiippines' In it applied
REPUBLIC v. OASAN VDA. DE FERNANDEZ, ET
AL., ',rtiirge in trade or birsiness -1979' parent
99 PHIL. 934 ,u,il, th" Central Bank for an authority to remit profits to its
, rrlrf)Brl1l abroad. Pursuant to Sec. 24(bx2xiii)
(now, Sec' 28[A][5]of
FACTS: Oiimpio Fernand.ez and his wife, Angelina
Oasan, had. rt,,' tgdT Tax Cod.e), it remitted the amount of F6'499'999'30
a net worth of p8,600 on Dec. g, 1941. Duriirg th"-Juprr"r" , ,,rrrputed, as follows:
occupation, the spouses acquired several p"opJrties and at the
time of his death of Feb. 1i, 194b, he had""ai Amount applied for remittance .""""" """"' """" fl'64?'058'00
a net worth oirgt,+gg.
The collector of Internal Revenue assessed a war profits-tax
on the Deduct: Branch profit remittance tax of l5% """""' 1'147'058'70
estate of the deceased atF2,614.60 which his
adminis;;;
to pay. The case was brought to the Court of Tax refused
6;;ir, which
sustained the validity and legality of the urr".rrri"rrtr. Net amount actually remitted...."" f6'499'999'30

administratrix of the estate appealed the decisio" to The

court. The issues raised dweli on the folrowing: trr" srpreme Consequently, the company filed a claim for refund of
iil ,rr"-q""rtion on l, I 72,058.81, as overpaid branch profit remittance tax, claiming
that
the constitutionality of the war profits tax with particular
to its retroactive nature; (2) the appiicability
reference tlrc 157o tax should be based not on P7,647'058'00' the amount
of said tr. t" the case ,rpplied for remittance, but onP6,499,999'30, or the amount actually
of olimpio Fernandez as the ru*L^i" imposed on
(3) the separate taxation of the estate of individuals; and., rcrnitted, computed as follows:
the deceasei orimpio
Fernandez apart from that of his wife's becausooii;;;e""andez " fl'147'058'70
Branch profit remittance tax paid at t|o/o of ?1 '647' 058 00
died before the law levying said tax was passed.
Less: Branch profit remittance tax as computed
974,999.89
HELD: The issue of unconstitutionality of the war profits
Tax
(t5% of P6,499'999.30) ..'.'."' """""'
Law raised by the appellant is based o, ih" prohibition F 172,058.81
the passage of ex post factolaws. This prohibition, against Total Amount Refundable
hower-"", ,pptiu.
only to criminal or penal matters, and not to laws profit
which concern
civil matters or proceedings generally, or which urru"t The issue raised in the case is: Should the 15% branch
o"'"ugulate lemittance tax in question be computed on the amount of profit

154 155
t
r t,AW OI.'BASIC TAXATION tN THE pHILtpl,lNIJS
applied to be remitted abroad (i.e., the sum ofp7,64Z,0bg.00), or tho
profit actually remitted in the amount of ?6,499,9g9.80?
HELD: The rb% branch profit tax should be based on the
amount of profit actually remitted. It should be noted that in a ruling
dated Jan. 21,1980, the BIR ruled that the 1b% remittance tax is on
the profit actually remitted abroad and not on the totai branch profits
out of which the remittance is to be made. This ruling was, however,
subsequently revoked in Mernorandum circular No. s-az *hi"h Lr"ld
that the 15% branch profit remittance tax is imposed. and collected
at source so that necessarily the tax base should be the amount
actually applied by the branch as profit to be remitted abroad.
But even inspite of this subsequent ruling, the applicable ruling
is that which was issued on Jan. 21, 1gB0 o., a."or,,.rt of the
non-retroactivity rule in sec. B27 (now, sec. 246) of the Tax code,
which provides that the reversal rulings of the commissioner are
not to be given retroactive effect ifprejudicial to the taxpayer, except
in any of the three exceptions mentioned. therein. The payment of
the overpaid remittance tax having been made on Mar. r4-, lg7g, it
follows that Memorandum circular No. 8-g2, dated Mar. 12, 19g2,
cannot be given any retroactive effect.
BANK OF AMERtrCA v. COURT OF APPEALS, ET AL., c.R.
NOS. 103092 and 10310G, JULY ZL,tgg4
FACTS: Petitioner, a foreign corporation licensed to engage in
business in the Philippines, paid the lbo/o branch remittance tax on
profits from its regular banking dnd foreign currency unit operations
totaling P1,984,250"97 based on net profits after income tax without
deducting the amount corresponding to the 1b% tax. It later filed a
clairn for refund with the BIR of that portion corresponding to the
15% branch profit remittance tax arguing that said ts% tai should
be assessed on the amount actually remitted abroad, per
sec. 2aft)(2)(ii), NIRC. The commissioner of Internal Revenue
contends otherwise, holding that the 1b% remittance tax should be
inclusive of the st:.m deemed remitted.
The CTA upheld petitioner bank's claim for refund, but said
decision was reversed by the Court ofAppeals.
HELD: Not much reliance can be placed on the ruling in
Burroughs Limited u. commissioner of Iruternal Reuenue, et al. (G.R.
No. 66653, June 19, 1986) for the conclusion reached in that case
was grounded more on non-retroactivity of rulings.
156
'l'Ax t,nws n ND ltlrciul,A'l'loNS
l,lr,, l:rx ltaid or withheld in case of ad ualorem taxes is not
t, ,lrr, t,.,1 l'rlrrr l,he tax base because the law, in defining the tax base
,,,,,1 ur 1r'ovitl ing for tax withholding, clearly speils it out' However'
rl,, ,( r;i nrrt,lring-in Sec.24(bx2)(ii), NIRC (now, Sec' 28[A][5]' 1997
,; t t;t ,^ ), which indicates that the lsYotaxon branch profit remittance
r,,,,rr llr0 l,oLaI profit to be remitted abroad' In the 15% remittance
r,r, llr,. lrrw splcifies its own tax base to be on the "profit remitted
,rl,r,,,r,l " 'l'here is absolutely nothing equivocal or uncertain about
rl,, l;rnllrilge of the provision' The tax is imposed on the amount
,, ,,1 ,,1,,.r,aJ, and the law then in force calls for nothing further.
'lV /J.: Sec" 28[A][5], 1997 NIRC, on branch profit remittance
l,r r now llrOvideS -
"15) I'ax on. Branch Profits Remittqnces'- Any profit
r,.rrritted by a branch to its head office shall be subject to a
I ;r x of fifteen percent (15%) which shall be based
on the total
or earmarked for remittance without any
1,r'o['its applied
,1,'rluction for the tax component thereof (except those
,rt'tivities which are registered with the Philippine Economic
Z,,ne Authority). The tax shall be collected and paid in the
:i;une manner as provided in Sections 57 and 58 of this Code
\xx""
t ()MMISSIONER OF INTERNAL REVENUE v" COURT OF
\ l't,trALS, ET AL., G.R. NO. 108358, JAN. 20, 1995
ttAcTs: on Aug" 22,1986, E.O. 41 was promulgated declaring a
,,rr, l,ime tax amnlsty on unpaid income taxes, and was later
,,,,r,,rrded to include estate and donor's taxes as weII as taxes on
l,rr:rrness for taxable years 1981 to 1985'
l,rivate respondent R.O.H. Auto Products, Philippines, Inc.
,rVrril€d of the amnesty in october and November 1986 by filing its
,\rrrrresty Tax Returns and paying the corresponding amnesty tax
,1,r,,. pritr to such availment, the Commissioner of Internal Revenue
, r r;cSS€d. private respondent its deficiency income and business taxes
ir
l,,r'fiscal years endld Sept.30, 1981 and Sept' 30, 1982' Private
r,'r;pondent responded that since it availed of the tax amnesty' the
lr.ll,er assessments shouid accordingly be withdrawn' The
t lornmissioner denied the request on the ground that Rev' Memo
()rder No.4-8?, dated Feb,9, 1987, implementing E'O' 41' had
,.,rnstrued the amnesty Coverage to include only assessments issued
l,y t,he BIR after the promulgation of E'o. 41 and not to assessments
t57
r LAW OF BASIC TAXATION IN THE PHILIPPINES
theretofore made. Both the crA and the court of Appeals ruled in
favor of the taxpayer.
HELD: while the authority of the secretary of Finance, in
conj,nction with the commissioner of Internal Revenue, to
promulgate all needful rules and regulations for the effectivo
enforcement of internal revenue raws cannot be controverted and
such rules and regulations as well as administrative opinions
and
rulings deserve respect by the courts, however, all such issuanceu
must not override, but must remain consistent and in harmony with,
the law they seek to apply and imprement. Administrative rules and
regulations are intended to carry out, neither to supplant nor to
modify, the law.
E.o. 41 is explicit and requires hardly anything beyond a sirnple
application of its provisions. E.o. 41, in its exclusionary clausls,
did not include the 1981 to 19gb tax liabilities already assessed.
said executive order has been designed to be in the nature of a
general grant of tax amnesty subject only to cases specifically
excepted by it.
COMMISSIONER OF INTERNAL REVENUE v. COURT OF
APPEALS, ET AL., G.R. NO. 119761, AUG. 29, 1996
FACTS: The Philippine patent office issued to private
respondent Fortune Tobacco corporation (Fortune Tobacco) separate
certificates of trademark registration for ,,Champion,,, *Hope," and.
"More" cigarettes. It was the position of the commissioner of internal
Revenue that said cigarette brands should be classified as foreign
brands since they were listed in the world robacco Directory as
belonging to foreign companies. Fortune Tobacco changed the name
of "Hope" to "Hope Luxury," and ,,More,' to *More premlum,, thereby
removing them from the foreign brand category.
R.A. 7654, amending Sec. 142(c)(1), NIRC, was enacted and
became effective on JuIy B, 1gg3. A month later, Revenue
Memorandum circular No. BZ-SB (RMC Bz-98) was issued by the
BIR categorizing "Hope," "More,,, and ,.Champion', as locally
manufactured cigarettes bearing a foreign brand subject to blo/o ad.
ualorem tax. A copy of EMC 87-93 was sent by fax to Fortune Tobacco
without being addressed to anyone in particular. on July 15, 1g98,
a certified xerox copy of RMC 37-gB was received by Fortune Tobacco.
On July 19, 1993, Fortune Tobacco wrote the BIR appellate
division for a review, reconsideration and recall of RMC gz-93, and
on the following day, the BIR assessed Fortune Tobacco an
158
,IAX I,AWS AND R!]GULATIONS
,*tl t'atlttt'(tn tax deficiency of P9,598,334.
l",,r.l rrno'I'obacco filed a petition for review with the CTA on
.\rrs. .1, l1)94. The CTA ruled in favor of Fortune Tobacco and the
,1r,, r,rrorr 1[the tax court was affirmed by respondent Court of Appeals'
t i ti L I): The Supreme Court sustained the ruling of the appe trlate
rrrrrl lrrx ctlurts.
'l'lrcrc is no doubt that the BIR has wide and ample authority in
tlr |irirrance of rulings for the effective implementation of the
t,rr'\'r;rons of the NIRC. Like any government agency, however, the
L,,lrtrssioner of Internal Revenue may not disregard the legal
1r.r1urr.('11e1ts and applicable principles in the exercise of its
,1,r,',,r lcgislative powers.
i\ reading of RMC 37-93, particularly considering the
, r , r ulstances under which it has been issued, shows that the circular
,.ilrilot be viewed simply as a corrective measure (revoking in the
t,,o(.(,ss the previous holdings of past Commissioners) or merely
as
,,,rr:;lruing Sec. 142(c)(t), NIRC (now, See. 145, 1997 NIRC)' as
rr rrrIrrderC., but has, in fact and most importantly, been made in order
1,, pltce "Hope Luxury," "Premium More" and "Champion" wit'hin
r lr,. ,:lassification of locaIIy manufactured cigarettes bearing foreign
specifically,
t, r rr rrtls and to thereby have thern covered by R.A. 7654.
tlr,. 11916r law would have its amendatory provisions applied to locally
,,, rr rrnfactured cigarettes which at the time of its effectiuily were not
,,, t'lassified as bearing foreign brands. Prior to the issuance of the
,l,rlstioned circular, "Hope Luxury," "Premium More," and
"r ,lrarnpion" cigarettes were in the category of Iocally manufactured
, ,li,rrettes nol bearing foreign brand subject to 459/o ad uy.lorem tax.
ilr.rrc€, without RMC 37-93, the enactment of R.A. 7654 would have
lr:rtl no new tax rate consequence on private respondent's products.
l,iviclently, in order to place "Hope Luxury," "Premium More," and
( hampion" cigarettes within the scope of the amendatory 1aw and
,rbject them to an increased tax rate, the disputed RMC 37-93 had
(0 be issued. In so doing, the BIR not simply interpreted the law;
vt,rily, it legislated. under its quasi-legislative authority. The due
,,lrservance of the requirements of notice, hearing and publication
r;hould not have been then ignored.
RMC 37-93 likewise infringed on uniformity of taxation.
scc. 28(2), Art. VI of the 1987 constitution mandates taxation to be
rrniform and equitable. Thus, all taxable articles or kinds of property
,r{, the same class must be taxed at the same rate and the tax must
operate with the same force and effect where the subject may be
lbund.
159
r I,AW OI.' t]ASIC'I'AXA'J'ION IN THI' PHILII'I'INES
RMC 37-93 apparently applies only to "Hope Luxury," "Premium
More," and "Champion" cigarettes, and thus suffers from lack of
uniformity of taxation. The CTA, in its decision, noted that other
cigarettes bearing foreign brands have not been similarly included
within the scope of the circular. The hastily promulgated RMC
37-93 has fallen short of a valid and effective administrative issuance.
COMMISSIONER OF INTERNAL BEVENUE v. COURT OF
APPEALS, ET AL., G.R. NO. 1t7982, FEB. 6, 1997
FACTS: The present dispute arose from the discrepancy in the
taxable base on which the excise tax is to apply on account of two
incongruous BIR rulings: (1) BIR Ruling 473-88, dated Oct. 4, 1988,
rvhich exclurled the VAT from the tax base in computing the 15%
excise tax due, purported.Ly in accordance with Sec. 127 of the Tax
Code, as amended by E.C. 273; and, (2) BIR Ruling 017-91, dated
Feb" 1l-, 1991, which included back the VAT in computing the tax
base for purposes of the 15% ad ualorem tax, pursuant to Sec. 742 of.
the T'ax Code and thereby revoking BIR Ruling 473-88.
Private respondent Alhambra Industries, Inc. (Alhambra), a
dornestic corporation engaged in the manufacture and sale of cigar
and cigarette products received on May 7, 1991 a letter dated
Apr. 26, 1991 from the Cornmissioner of Internal Revenue assessing
a deficiency ad ualorem tax of P488,396.62, inclusive of incrernents
c,n rermovals of cigarette products from place of production for the
period from Nov. 2, 1990 to Jan. 22,1991,. Alhambra protested the
assessment and requested that the same be withdrawn and cancelled.
The Llommissioner denied the protest and requested payment of the
revised arnount of P520,835.29. Without waiting for action on its
reqriest for reconsideration, Alhambra filed a petition for review with
the C'I'A orr June 19, 1991, even as petitioner, in the meanwhile,
denied its request for reconsideration on June 21, 1991. Private
resporrdent then paid under protest the disputed ad ualorern tax of
1520,835.29.
For the period from Nov. 2, 1990 to Jan. 21, 1991, private
respondent Alhambra paid F3,905,348.85 ad ualorem tax, applying
Sec. 127(b), NIRC, as interpreted by BIR Ruling 473-88. Fetitioner
then sought to apply BIR Ruling 01?-91 retroactively to Alhambra's
removals of cigarettes for said period, alleging bad faith on the part
of Aihambra, which is an exception to the rule on non-retroactivity
of BIR rulings.
The CTA ruled in t'avor of private respondent Alhambra and
ordered the Commissioner of Internal Revenue to refund F520,835.29
160
'l'Ax I,AWS ANI) ll,lt(itJl,A'l'l(JNS
r r,;rr.rrr,rrt.ing erroneously paid ad uqlorem tax. The Court of Appeals
,r tt rr rrrr,rl t,hc CTA's decision holding that there can be no retroactive
,,1,1,1rr':rl.ion of BIR Ruling 017-91 because Alhambra did not act in
l,,r,l l:rrt,lt.
Itt,)t,l): The deficiency tax assessment issued by petitioner
irt'inn:il, private respondent is without legal basis because of the
l,r,,lrrlriLion under Sec. 246 of the Tax Code against the retroactive
,r1,1,111'11[,is11 of the revocation of BIR rulings in the absence of bad
l,rrl lr orr the part of private respondent.
'l'lrt. correct computation of the excise tax on cigarettes in the
, i, ,t ;rt bar is sufficientiy addressed by BIR Ruling 017-91 dated
1,, l, I l, 1991 which'revoked BIR Ruling 473-88 dated Ott.4, 1988.
Wcll entrenched is the rule that rulings, circulars, rules and
r ,.1, i lrr bions promulgated by the Commissioner of Internal Revenue
r
,r,,rrlrl have no retroactive application if to so apply them would be
1,,, lrrrlicial to the taxpayer. Without doubt, private respondent would
1,, lrrt..1udiced by the retroactive appiication of the revocation as it
'.,,rrlrl be assessed deficiency excise tax.
As to whether private respondent falls under the third exception
,rrr,lr.r Sec.246, i.e., taxpayer who acted in bad faith, there is no
, \'r(l(,nce that Alhambra's implementation of the computation
rr .rrrrlated by BIR Ruling 473-88 is ill-motivated or attended with a
,l lronest purpose. Neither does the failure of private respondent to
,,,,,,rrrlt petiLioner rmply bad faith on the part of the former.
t ()MMISSIONER OF INTERNAL REVENUE v. COURT OF
,\l,|,EALS, ET AL., G.R. NO. 115349, APB. 18, 1997
ttACTS: Private respondent Ateneo de Manila University
r ,\lcneo), a non-stock, non-profit educational institution, through one
,,1 rt,s auxiliary units, the Institute of Philippine Culture (IPC),
, ,'n(lucts researches and studies ofsocial organizations and cultural
r;rltres. The IPC occasionally accepts sponsorships for its research
,r, tivities from international organizations, private foundations and
I'.vcrnment agencies.
Private respondent Ateneo was assessed on June 3, 1983 the
rrrrrount of P174,043.97 for alleged deficiency contractor's tax, and
,,lr .Iune 27, L983, the amount of P1,141,837 for alleged deficiency
,r(:ome tax for the fiscal year ending 1978. Ateneo denied said tax
lr;rbilities in a letter-protest and contested the validity of the
,r;sessments. The Commissioner of Internal Revenue rendered a
161
r- l,nw ot' IIASIC .t.AXA.l'l()N IN 1'1il, l,Hlt,l t,t,tNI,)S 1'AX I,NWS AND RIIGULA'I'IONS

decision canceling the deficiency income tax but modiiying t,l it

assessment for deficiencl, contractor,s tax to FlgB,+Zf,fi
unsatisfied, Ateneo requested for reconsideration of the modifi
assessment, and at the same time filed a petition for review wi
the crA. while the petition was pending therein, the commrssiorr
issued a final decision on Aug. B, lggg reducing the defici
contractor's tax to P46,b16.41, exciusive of surcharges and. inter
The crA set aside the commissioner's decision and canceled thl
assessment. The court of Appeals likewise disagreed with the
Commissioner and affirmed the CTA's ruling.
Petitioner contends that private respondent Ateneo is an
should be sufficiently
''.trt.rrr..,r lrrsti[ute of Philippine Culture,
its services for
g,,,,,,,,, llrrrt, the private resptndent is indeed selling
u 1,., ,,, 1,,,."rit of an independent business' And it is only
after
to the
t:*t.i,t,, ,:,'spondent has been found cleariy to
be subject
exemption therefrom
i,*,,,,,,,,,,,,'nf S"". 205 that the question of
.*,,,r1,1 ,,rrse. Only after such coverage is shown does the ru]'e of
i,r'1lr u('l,ron-that tax exemptions are to be strictly construed
riE,irr',1 t,he taxpayer-come into play, contrary to petitioner's
;li,rlltoll.
'l'lr.r'c is no evid'ence that private respondent Ateneo's IPC ever
I I : r :;1lrvices for a fee to anyone or was eyer engaged in a business
Ir r

independent contractor subject to the B%o tax levied under sec.221t, =rr
11,,,,t lrom and independenily of the academic
purposes of the
NIRC. Petitioner stated that since the term "independ.ent contractor,t I ll r v, r's it.Y.
is not specifically defined, any person who renders physical or mental
service for a fee is considered an independent contractor liable for l'unds received by Ateneo,s IPC are technical}y not a fee.
,|.1r..

l11r.1' rrril1,, however, be considered as gifts or donations

the 3o/o contractor's tax, and Ateneo has the burden of proof to show
erlrrr rr I r,lnal institution which are tax exempt,
its exemption from the coverage of the law.
llll{('(rrow, Sec. 101, 1997 NIRC).
HELD: Petitioner commissioner of Internal Revenue erred in
applying the principles of tax exemption without first applying the
well settled doctrine of strict interpretation in the imposition of
taxes. It is obviously both illogical and impractical to deteimine who
are exempted without first determining who are covered by the
aforesaid provision. The commissioner should have d.etermined
first if private respondent was covered by Sec. 20b, applying the
rule of strict interpretation of laws imposing taxes and otirer"burdens
on the populace, before asking Ateneo to prove its exemption
therefrom. The court takes this occasion to reiterate the hornbook
doctrine in the interpretation of tax laws that ,,(a) statute will not
be construed as imposing a tax unress it does so'crearry, expressry
and unambiguously. x x x (A) tqx cqnnot be imposed wiihout ctear
and express words for that purpose. Accordingly, the general rule of
requiring udherence to the letter in construing statutis applies with
peculiar strictness to tax loros and the provisions of a taxing act are
ruot to 6e extended by implication." parenthetically, in ariswering
the question of who is subject to tax statutes, it is basic that ,,in case
of doubt, such statutes are to be construed most strongly against
the Government and in favor of the subjects or citizeis because
burdens are not to be imposed nor presumed to be imposed beyond
what the statutes expressly and. clearly import.',
To fall under its coverage, sec. 20b of the rg77 NIRC requires
that the independent contractor be engaged in the business of sllling
its services. Hence, to impose the three percent contractor,s tax on
to an
pursuant tO Sec' 123'
I'III I,I PPINE BANK OF COMMUNICATIONS V'
( (INIMISSIONER OF INTERNAL REVENUE' ET AL'' G'R'
r't( ! I12024, JAN. 28, 1999
(PBCom)
ItAcTS: Petitioner Philippine Bank of communications
trl, rl rt,s quarterly .rrpor"iu income tax returns for the first and
profits and settled the tax due
'rr.r,n(l quarters of fgSS, reported
rl,, r (,()n of P5,0t6,954 by applying its tax credit memos'
llowever, PBCom suffered losses and when it filed its annual
sslrrrfile tax return for 1985, it declared a net loss of'fl1'317'228'
rlr,.rtby showing no income tax liability. It also reported a net loss
,'t t'14;129,602 ior 1986 and thus declared no tax payable for that
i,, ,rr. During those 2 years, however, PBCom
earned rental income
tr,rr. its leased prop"rii", with the lessees withholding and remitting
t,, t lre BIE the corresponding withholding creditable taxes'
On Aug. 7, \g87, PBCom requested the BIR for a tax credit
of
r1,,016,954 representing the overpayment of taxes for the first and
,,,.,:,,,rd'quarters of 1985: On July 25, 1988, PBCom filed a claim for
r,.t'und oicreditable taxes withheld by its lessees from rental
income
,,11n282,7g5.50andmg4,077.69for1985and1986'respectively'
l','rrding investigation, PBCom filed a petition for review on
Nov. 18, 1988 with the CTA.
The cTA rendered a decision on May 20, 1993 denying
PBCom',s
r.r;uest for tax refund or credit totaling ?5,299'749'95 for 1985 on

162 163
r- 'l'r\X LAWS ANll ltllcUl'A'l'lONS
LAW O!'tsASIC TAXATION IN THE PTIII,IPPINES

lr rr r r nr'onsistency with the provision of Sec'

230 of the 19?7 NIRC'
the ground that it was filed beyond the 2-year prescriptive pe
11, ,,, rl,rrrg, tne gtnJid not simply interpret the-law; rather' it
It also denied PBCom's claim for refund for 1986 amounting
fl,34,077.99 on the assumption that it was automatically credir l"f: r ,lrr t ,'tl guidelines contrary to the statute passed by Congress'
by PBCom against its tax assessment in the succeed.ing year. I l(,'v.rttte memorandum circulars are considered administrative
motion for reconsideration having been denied, pBCom filod *ril.rtirr(irr the sense of more specific and less general
interpretations
petition for review with the Court of Appeals which, ,,1 t,,,, l,rws) which are issued from time to time by the Commissioner
affirmed the CTA's decision. ,,1 lrrt,,r.rrul Revenue. It is widely accepted that the interpretation
officers' whose duty is to
PBCom averred that the Court of Appeals erred. in denying 1ilr,, 'l u[)on a statute by the executil'e
plea for tax refund or tax credit on the ground of prescripti -,,1,,,,,' ii,, is entitled to great respect by the courts' Nevertheless'
despite its reliance on Revenue Memorandum Circular No. T =,,, t, , ,, t,,.pretation
i, ,tot".o"tusive and will be ignored if judicially
(RMC 7-85), dated Apr. 1, 1g8b, changing the prescriptive p I*rrrrrl t,o be erroneous' Thus, courts will not countenance
e,lrrr r rr rstrative iss.tarrces that override'
instead of remaining
from 2 years to 10 years. Said circular states that overpaid in
rrrrr',r'rl*Dt and in frui*o"y with, the law they seek to apply and
taxes are not covered by the 2-year prescriptive period under
Tax Code and that taxpayers may claim refund or tax credit for irrrl,llttttltlL.
excess quarterly income tax from the BIR within 10 years purs Irr l)eople u. Lim (108 PhiI' 1091)' it was held that rules and
a law
to Art. 1144, Civil Code. Petitioner further argued that r,,t,rrl:rlions issued by administrative officiais to implement
Government is barred from asserting a position inconsistent wi , ,,',,,',,1 go beyond the terms and provisions
of the latter'
one previously taken and that BIR circulars or rulings have
I.'rrrrdamentalistherulethattheStatecannotbeputinestoppel
retroactive effect when the same would result in injustice llr,' mistakes o, urro,. of its officials and agents' RMC
7 85 issued
1,,
taxpayers. Contrarily, the Commissioner of Internal Revenue insi Revenue is an administrative
, r ,, ' Acting Commissioner of Internal
on the reckoning of the 2-year prescriptive period from the date
|
' t

,,,t,',1,.etatiin which is not in harmony with Sec' 230 of the 1977

filing the final adjusted income tax return. rlri(l :rnd should be nullified for being contrary !q the.express
Hence, his interpretation could not be given
HELD: After a review of the records and applicab t,r,'\'rrion of a statute.
.-, ,,'l't. for to do so would in effect amend the statute'
jurisprudence, the supreme court held that the relaxation of reven,
,\rlrninistrative decisions do not enjoy the level of recognition
as
regulations by RMC 7-85 is not warranted since it disregards judicial decisions
1,, r i part rrf the legal system of the country
given to
Z-year prescriptive period set by law. rr
circular of a bureau
1

,,,,1,'r-Art. 8 of the Civll Code' A memorandum

Claims for refund or tax credit should be made within the ti
1,,
',,1 could
not operate to vest a taxpayer with a shield against
fixed by Iaw because the BIR, being an administrative body e rights to speak of respecting a
to collect taxes, its functions should not be unduly delayed r,r,lr, i:rl action. There are no vested
,i ,,.I-t construction-of the law by the administrative
officials and
hampered by incidental matters.
'rrr lr wrong interpretation could
not place the Government in
Sec. 230, NIRC (now, Sec. 229, 1ggf NIRC) which provides ,. ,t,rppeI to o"""'ule ttre same' Moreover' the
the prescriptive period for filing a court proceeding for the "orr"a1--o"
,,,,,, .,,trou.tivity of rulings by the Commissioner
of Internal Revenue
was
oftax erroneously or illegally collected, states that the taxpayer n ,, rr,,t, applicabll in thisiase because the nullity of RMC 7-85 of
file a claim for refund or credit with the commissioner of Inter ,1,,lrrred by respondent courts and not by the Commissioner
of a claim for
Revenue within 2 years after payment of the tax before any suit lrrl,'r'rr&l Revenue' A .t^l* for refund is in the nature
the CTA is commenced. The 2-year prescriptive period should , ,,,"rnption and should be construed strlclissimi
juris against the
computed from the time of filing the adjustment return and I :r ", lrir|€L
payment of the tax for the year. 1997 NIRC) provides
Scc. 69 of the 1977 NiRC (now, Sec' 76 of the
When the Acting Commissioner of Internal Revenue issued R tlr;r( uny excess tf," 1"t"i quarterly payments over the actual
i
7-85 changing the prescriptive period of2 years to 10 years on clair "i in the adjustment or finai corporate income
r, {rrr)e tax computed
of excess quarterly income tax payments, such circular created r , ,: return , snitt either (a) be refundeti to the
corporation' or

165
164
 LAW OT BASIC TAXATION IN THE PHILIPPINIIS
(b) may be credited against the estimated quarterly income
liabilities for the quarters ofthe succeeding taxable year.
The corporation must signify in its annual corporate adjus
return (by marking the option box provided in the BIR form)
intention, whether to request for a refund or to claim an automl
tax credit for the succeeding taxable year. To ease the administr
of tax collection, these remedies are in the alternative, and the ch
of one precludes the other.
COMMISSIONER OF INTERNAL REVENUE v. S.C. JO
AND SON, INC., ET AL., G.R. NO. L27105, JUNE, 25, 1999,i
HELD: The purpose of these international agreements
reconcile the national fiscal legislations ofthe contracting parti
order to help the taxpayer avoid simultaneous taxation in
different jurisdictions. More precisely, the tax conventions
drafted with a view towards the elimination of international iuri
d,ouble taxation, which is defined as the imposition of com
taxes in two or more states on the same taxpayer in respect of
same subject matter and for identical periods. The apparent rati
for doing away with double taxation is to encourage the free
goods and services and the movement of capital, technology
persons between countries, conditions deemed vital in creating
and dynamic economies. Foreign investments will only thrive
fairly predictable and reasonable international investment cli
and the protection against double taxation is crucial in creating s
a climate.
Double taxation usually takes place when a person is a
of a contracting state and derives income from, or owns capital
the other contracting state and both states impose taxes on
income or capital. In order to eliminate double taxation, a tax trei
resorts to several methods. First, it sets out the respective righ
bax of the state of source or situs and of the state of residence
regard to certain classes of income or capital. In some cases,
exclusive right to tax is conferred on one of the contracting stat
however, for other items of income or capital, both states are giVi
the right to tax, although the amount of tax that may be imposed.i
the state of source is limited.
The second method for the elimination of double taxation ap
whenever the state of source is given a ful} or lirnited right to
together with the state of resi.dence. In this case, the treaties m
it incumbent upon the state of residence to allow relief in order
166
TAX LAWS AND RAGULATIONS
of relief-the
flnlrl rlouble taxation. There are two methods
the exemption method,
forlrrlrl,ion method and the credit method. In
p lrrr,:ome or capital which is taxable in the state of source or situs
A*errrrpted in the state of residence, although in some instances it
ty 6, i,aken into account in determining the rate of tax applicable
t,ho t,+rxpayer's remaining income or capital' On the other hand,
in
rrriltlit method, although the income or capital which is taxed in
,
rl,rrl,cl of source is still taxable in the state of residence, the tax
lrl irr the former is credited against the tax levied in the latter.
rs hllsic difference between the two methods is that in the
Slpnrtlt,ion method, the focus is on the income or capital itself'
lEprnrts the credit method focuses upon the tax.
In negotiating tax.treaties, the underiying rationale forreducing
part of the tax in
lhp trrx ,ut" ir that the Philippines will give up a
given up for this particular investment
ihe, *,xpectation that the tax
the petitioner correctly
it rrol"taxed by the other country. paid
Thus,
similar circumstanies"
Oplrr,,d that the phrase "royalties under
Il tlr,, most favored nation clause of the US-RP Tax Treaty
Ilpr,r,usarily contemplated "circumstances that are tax-reIated."
'l,he ultimate reason for avoiding double taxation is to encourage
frlrrign investors to invest in the Philippines-a crucial economic
g,,u I ibr developing countries. The goal of double taxation conventions
=Wilrrld
be thwarted if such treaties did not provide for effective
Iutsilsures to minimize, if not completely eliminate, the tax burden
lar,l rrpon the income or capital of the investor. Thus, if the rates of
i n x , rL lowered by the state of source, in this case, by the
Philippines,
the part of the state
lltt,rc should be a concomitant commitment on
1l' rgsidence to grant some form of tax relief, whether this be in the
fsnrr of a tax credit or exemption. Otherwise, the tax which could
Iravo been collected by the Philippine Government will simply be
r,llloc[ed by another state, defeating the object of the tax treaty since
l,hr tax burden imposed upon the investor would remain unrelieved.
!l' l,he state of residence does not grant some form of tax relief to the
Itlvostor, no benefit would redound to the Philippines, i.e" increased
Irrvcstment resulting from a favorable tax regime, should it impose
a l0wer tax rate on the royalty earnings of the investor, and it would
lu, better to impose the regular rate rather than lose much-needed
t(!venues to another countrY.
At the same time, the intention behind the adoption of the
treaties in
ltrovision on "relief from double taxation" in the two tax
ilqcstion should be consid.ered in light of the purpose behind the
rrrost favored nation clause.
L67
F
LAW O!'BASIC TAXATION IN'IIHE PHII,IPPINI'S .I'AX I,AWS AND R!]GULATIONS

The purpose of a rnost favored nation clause is to grant to tht 'I Assume for example that in 1986, in response to a legal query
contracting party treatment not less favorable than that which hal
1,,,'',.,1 lr.y a pawnshop owner, the BIR ruled that pawnshops are not
been or may be granted to the "most favored" among other countri l, rr,lrrr11 investors subject to the 5o/o tax under Sec. 116 of the Tax
The most favored nation clause is intended to establish the princi r',,r1r.. l'ursuant to this ruling, Squaredeal Pawnshop, Inc. did not
of equality of international treatment by providing that the citizont
I,i, \' ir ny lending investors tax on its business. However, in 1988 the
or subjects of the contracting nations may enjoy the privilegor ll I lt rt.versed this ruling and declared that pawnshop operators are
accorded by either party to bhose of the most favored nation. Thc (rrr:rlrle . May the BIR, therefore, in consonance with this latter
essence of the principle is to aliow the taxpayer in one state to avail r rrlrrrg, assess Squaredeal Pawnshop, Inc. for back taxes
of more liberal provisions granted in another tax treaty to which tho ,,,r r',.sponding to the period prior to the 1988 ruling? Give your
country of residence of such taxpayer is also a party provided that r (':lliol1s,
the subject matter of taxation, in this case royalty income, is tho
same as that in the tax treaty under which the taxpayer is liabk:, fr.Assume, however, that in the problem above, no ruling on
r lr,. t axability or non-taxability of pawnshop owners was ever issued,
Both Article 18 of the Rp-us rax Treaty and Article ri(zxu) of tho
RP-west Germany Tax Treaty speak of tax on royalties for the uss rl, 1,r)u think the BIR could retroactively apply the 1988 ruling and
of trademark, patent and technology. The entitlement of the 10% ,;r::(,ss pawnshop owners accordingly? Reasons'
rate by u's. firms despite the absence of a matching credit (2oo/o fot
royalties) would derogate from the design behind the most favored
nation clause to grant equality of international treatment since the
tax burden laid upon the income of the investor is not the same in
the two countries. The similarity in the circumstances of payment
of taxes is a condition for the enjoyment of the most favor"d nation
treatment precisely to underscore the need for equality of treatment.

EXERCISES

1. During the period of the deficiency but prior to assessment,

a law was passed providing that interest would be collectible on the
amount of income tax not paid. Accordingly, the commissioner of
Internal Revenue included such amount in the assessment made.
The taxpayer refused, contending that to require him to pay such
interest would be to violate the prohibition agains t ex post
fictolaws.
Decide the case with reasons. (1g72 Bar)
2. where a doubt or ambiguity arises in connection with the
imposition of a tax under a particular taxing state, what rule of
construction is applied? Discuss.
3. It is oftentimes said that our tax laws, like the law on income
tax under our National Internal Revenue code, are neither political
nor penal but they are actually civil, in nature. Discuss the
importance of this principle especially as it relates to the deductibility
of losses during wartime as the imposition of war profits taxes on
increases in net worth during the war.

168 169