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CHAPTER 2

DOCTRINES IN TAXATION

I. Doctrine of Prospectivity of Tax Laws

1. What is the “Doctrine of


Prospectivity of Tax Laws”?

As a general rule, tax laws are


prospective in operation,1 unless the legislative
intent that statute should operate
retrospectively is distinctly expressed or
necessarily implied.2

Where a statute amending a tax law is


silent as to whether it operates retroactively,
the amendment will not be given a retroactive
effect so as to subject to tax past transactions
not subject to tax under the original act.
Every case of doubt must be resolved against
its retroactive effect.3

1
Because taxes are burdens and should not be
imposed without due process of law. Belle Corp. v. CIR,
G.R.181298, Jan. 10, 2011
2
Lorenzo v. Posadas, 64 Phil. 353; CIR. v. Filipinas
Cia. de Seguros, 107 Phil. 1055
3
CIR v. Marubeni Corporation, 372 SCRA 576
(2001)
II. Doctrine of Imprescriptibility

2. What is the “Doctrine of


Imprescriptibility”?

Considering that taxes are the


lifeblood of the government, it may be stated
that the assessment and collection of taxes are
imprescriptible unless otherwise provided by
the tax law itself.4 Thus, if the tax law itself is
silent on prescription, the right of the
government to assess and collect taxes will not
prescribe.

In criminal cases involving tax offenses


punishable under the Tax Code, it would
indeed seem that tax cases are practically
imprescriptible for as long as the period from
the discovery and institution of judicial
proceedings for its investigation and
punishment, up to the filing of the information
in court does not exceed five (5) years.

4
CIR v. Ayala Securities Corp., 101 SCRA 231
As the provision5 of the law stands in
the statute book (and to this day it has
remained unchanged), prescription is a matter
of defense and the information does not need
to anticipate and meet it. The defendant could,
at most, object to the introduction of evidence
to defeat his claim of prescription. Anyway,
the law says that prescription begins to run
from ... "the institution of judicial proceedings
for its ... punishment."

Unless amended by the legislature,


this provision stays in the Tax Code as it was
written during the days of the Commonwealth.
And as it is, must be applied regardless of its
apparent one-sidedness in favor of the
Government. In criminal cases, statutes of
limitations are acts of grace, a surrendering by
the sovereign of its right to prosecute. They
receive a strict construction in favor of the
Government and limitations in such cases will
not be presumed in the absence of clear
legislation. 6

III. Double Taxation

5
Sec. 281, NIRC
6
Emilio E. Lim, Sr., v. CA, GR Nos. L-48134-37,
Oct. 18, 1990
3. What is the meaning of double
taxation? BQ2015, 2014, 2013, 2012

“Double taxation” means taxing the


same property / person / activity twice when
it should be taxed only once; that is, taxing
the same property/person/activity twice by the
same jurisdiction, during the same taxing
period for the same purpose and for the same
kind of tax by the same taxing authority when
it should only be taxed but once.7

4. What are the kinds of double taxation?


BQ2015, 2014, 2012

(a) In the Strict Sense - Double


taxation in the strict or prohibited sense is
called “direct double taxation” which is
objectionable because it is a violation of the
substantive due process under the Constitution
since the same property or subject matter is
taxed twice when it should be taxed once; it is
tantamount to taxing the same person twice
by the same jurisdiction for the same thing.

7
Nursery Care Corp v. City of Manila, GR 180651,
July 30, 2014
Otherwise described as “direct
duplicate taxation,” the following are the
elements of direct double taxation:

The two taxes must be


imposed:

(1) on the same person,


property or subject matter,
(2) for the same purpose,
(3) by the same taxing
authority,
(4) within the same territory
or taxing jurisdiction,
(5) during the same taxing
period; and
(6) the taxes must be of the
same kind or character.8

(b) In the Broad Sense - Double


taxation in the broad sense is called “indirect
double taxation” or “indirect duplicate
taxation” which extends to all cases in which

8
Swedish Match Phils. Inc. v. The Treasurer of the City
of Manila, G.R. 181277, July 3, 2013 (700 SCRA 428)
Ibid; Nursery Care Corp. v. Anthony Acevedo & the
City of Manila, GR 180651, July 30, 2014.
there are two or more pecuniary impositions,
but the ABSENCE OF ONE OR MORE of the
above-mentioned elements makes the
double taxation indirect. The Constitution
does NOT prohibit the imposition of double
taxation in the broad sense because it does
not violate the substantive due process since
no actual double taxation occurred.

5. What are the kinds of indirect


duplicate taxation? BQ2013

There are two kinds of indirect


duplicate taxation, namely:

(1 ) Domestic double taxation. -


This arises when the same taxes are imposed
by the local or national government within the
same State.

Double taxation may not be invoked


where one tax is imposed by the national
government and the other by a local
government, being widely recognized that
there is nothing inherently obnoxious in the
requirement that licenses or taxes be exacted
with respect to the same occupation, calling or
activity by both the state and its political
subdivision.9 Thus, double taxation does not
exist when a corporation is assessed with local
business tax as a manufacturer, and at the
same time, VAT as a person selling goods in
the course of trade or business.

(2) International juridical double


taxation – It refers to the imposition of
comparable taxes in two or more states on the
same taxpayer in respect of the same subject
matter and for identical periods.10

When an item of income is taxed in


the Philippines and the same income is taxed
in another country, there is a case of double
taxation but it is only a case of indirect
duplicate taxation, which is called
“international juridical double taxation,” which
is not legally prohibited because the taxes are
imposed by different taxing authorities.

6. Is double taxation allowed in our


Constitution?

9
Punzalan v. Mun. Board of Manila, 95 Phils. 46
(1994); City of Baguio v. De Leon, 25 SCRA 38 (1968)
10
CIR v. SC Johnson and Son., Inc. 309 SCRA 87
(1999)
The Supreme Court held that there is
no constitutional prohibition against double
taxation in the Philippines.11 Therefore, it is
not a valid defense against the validity of a tax
measure.12 However, it is not favored but the
same is permissible, provided some other
constitutional requirements are not thereby
violated.13 For example, double taxation
becomes obnoxious only where the taxpayer is
taxed twice for the benefit of the same
governmental entity14 or by the same
jurisdiction for the same purpose, 15 but not in
a case where one tax is imposed by the State
and the other by a province, city or
municipality.16

7. Is double taxation a valid defense


against the legality of a tax measure?

11
Villanueva v. Iloilo, 26 SCRA 578, Dec. 28, 1968
12
Pepsi Cola v. Mun. of Tanauan, GR L-31156,
Feb. 27, 1976 (69 SCRA 460)
13
Pepsi Cola Bottling Co. v. City of Butuan, GR L-
22814, Aug. 28, 1968
14
CIR v. Lednicky GR L-18169, July 31, 1964 (11
SCRA 609)
15
SMB, Inc. v. City of Cebu, GR L-20312, Feb. 26,
1972 (43 SCRA 280)
16
Punzalan v. Mun. Board of City of Manila, 50
OG 2485
No. Double taxation standing alone
and not being forbidden by our fundamental
law is not a valid defense against the legality
of a tax measure.17 However, if double
taxation amounts to a direct duplicate
taxation, that the same subject is taxed twice
when it should be taxed but once, in a fashion
that both taxes are imposed for the same
purpose by the same taxing authority, within
the same jurisdiction or taxing district, for the
same taxable period and for the same kind or
character of a tax, then it becomes legally
objectionable for being oppressive and
inequitable.

8. Can a court impose local business


tax on manufacturers of liquors, distilled
spirits, whins and other article of commerce.

8. Is there double taxation where a


lessor of a property pays real estate tax
on the premises being leased, a real
estate dealer’s tax based on rental
receipts and income tax on the rentals?

17
Pepsi Cola v. Mun. of Tanauan, GR L-31156,
Feb. 27, 1976 (69 SCRA 460)
No. There is no double taxation here
in the prohibited sense. Double taxation in the
prohibited sense means (1) taxing for the
same tax period, (2) the same thing or activity
twice, (3) when it should be taxed
but once, (4) by the same taxing authority, (5)
for the same purpose, and
(6) with the same kind or character of tax.

The real estate tax is a property tax.

On the other hand, the real estate


dealer's tax is a tax on the privilege to engage
in business of real estate dealership.

While the income tax is a tax on the


privilege to earn an income.

These taxes are imposed by different


taxing authorities and are essentially of
different kinds and character. 18

9. Is there double taxation when the


interest income of a bank derived from
its bank deposits in another bank is
subjected to tax and it will again be

18
Villanueva v. City of Iloilo, 26 SCRA 578
subjected to the 5% gross receipts tax
on its interest income from its loan
transactions? BQ2012

No. There is no double taxation when


the interest income of a bank from its bank
deposits in another bank had been subjected
to the 20% final withholding tax (which is a
passive income and a direct tax), and at the
same time, its interest income on loan
transactions to its debtors-customers is
subjected to the 5% gross receipts tax (which
is considered as active income and indirect
tax) because the first tax is income tax, while
the second tax is business tax.

10. Can a municipal mayor refuse to sign


an ordinance which requires that all
establishments selling liquor should pay
a fixed annual fee and at the same time
imposing a sales tax equivalent to 5% of
the amount paid for the purchase or
consumption of liquor in the said
establishments on the ground that it
would constitute double taxation?

No. The refusal of the mayor is not


justified. The impositions are of different
nature and character. The fixed annual fee is
in the nature of a license fee imposed through
the exercise of police power while the 5% tax
on purchase or consumption is a local tax
imposed through the exercise of taxing
powers. Both a license fee and a tax may be
imposed on the same business or occupation,
or for selling the same article and this is not in
violation of the rule against double taxation. 19

11. Is there double taxation in the


imposition of local business tax based on
gross revenue in the case of a taxpayer
whose method of accounting is on the
accrual basis?

Yes. In petitioner's case, its audited


financial statements reflect income or revenue
which accrued to it during the taxable period
although not yet actually constructively
received or paid. This is because petitioner
uses the accrual method of accounting, where
income is reportable when all the events have
occurred that fix the taxpayer's right to receive
the income, and the amount can be

19
Compania General de Tabacos de Filipinas v.
City of Manila, 8 SCRA 367 (1963)
determined with reasonable accuracy; the
right to receive income, and not the actual
receipt, determines when to include the
amount in gross income. The imposition of
local business tax based on petitioner's gross
revenue will inevitably result in the
constitutionally proscribed double taxation -
taxing of the same person twice by the same
jurisdiction for the same thing -- inasmuch as
petitioner's revenue or income for a taxable
year will definitely include its gross receipts
already reported during the previous year and
for which local business tax has already been
paid. Thus, respondent committed a palpable
error when it assessed petitioner's local
business tax based on its gross revenue as
reported in its audited financial statements, as
Sec. 143 of the LGC and Sec. 22(e) of the
Pasig Revenue Code clearly provide that the
tax should be computed based on gross
receipts.20

12. What are the modes of


avoiding/eliminating double taxation?

20
Ericsson Telecom vs. City of Pasig, GR 176667,
Nov. 22, 2007( 538 SCRA 99)
The usual methods of avoiding the
occurrence of double taxation are:

(a) Entering into tax treaties with


other states. - Double or multiple taxation is
avoided by means of allowing reciprocal
exemptions, which may be done either by
statute or by treaty.

(b) Application of the principle of


reciprocity - Exemption from taxation by
treaty are generally granted on grounds of
reciprocity21 and to lessen the rigors of
international double or multiple taxation.

(c ) Allowance of deduction/tax
credit for foreign taxes paid - The rigors of
international double taxation may also be
lessened by the allowance of deduction or tax
credit taxes paid to foreign countries. 22
Example: A resident Filipino citizen has the
option to either claim the amount of income

21
Reciprocity is used to denote the relation between
two states when each of them, by their respective laws or by
treaty, gives the citizens or nationals of the other State certain
privileges, as in the practice of a profession, on condition that its
own citizens or nationals shall enjoy similar privileges in the
latter state. Sison v. Board of Accountancy, 85 Phil. 276 (1949)
22
Sec. 34(C), NIRC
tax withheld abroad as a deduction from his
gross income in the Philippines or to claim it as
a tax credit23 provided that he includes the
subject income in the computation of his
worldwide gross income considering that he is
a resident Filipino citizen. A resident Filipino
citizen is subject to tax on his income derived
from within and without the Philippines or his
worldwide income.

(d) Using the Tax Sparing Rule – A


non-resident foreign corporation (NRFC) who
earned cash and/or property intercorporate
dividends from a domestic corporation is taxed
on a reduced rate of 15% tax on dividends (in
lieu of the 30% corporate income tax), which
represents the difference between the regular
income tax of 30% and the 15% tax on
dividends on the condition that the country of
residence of the NRFC shall allow a credit
against the tax due from the NRFC, taxes
deemed to have been paid in the Philippines. 24

The apparent rationale for doing away


with double taxation is to encourage the free

23
Sec. 34(C)(1)(B), NIRC
24
Sec. 28(B)(5)(b), NIRC; CIR v. PGMC, GR
66838, Dec. 2, 1991
flow of goods and services and the movement
of capital, technology and persons between
countries, conditions deemed vital in creating
robust and dynamic economies. 25

IV. Escape from Taxation

13. What are the forms of escape from


taxation?

Taxpayers escape paying their taxes


thru the following modes, although the modes
used may not necessarily be legal, and
therefore, sanctionable.

(a) Shifting the tax burden to another


taxpayer.
(b) Tax avoidance.
(c ) Tax evasion.

A. Shifting of Tax Burden

14. What is the meaning of the term


“shifting of tax burden”?

25
CIR v. SC Johnson and Son, Inc., 309 SCRA 87
(1999)
“Shifting of tax burden” simply
means that the imposition of tax is transferred
from the statutory taxpayer, or the person
who is required by law to pay the tax, to
another person who shall bear the burden of
the tax without violating the law. Only the
payment of indirect taxes may be shifted to
another taxpayer, but not direct taxes.
Example: Under the VAT system, the seller
can shift the burden of the VAT to the buyer,
the said tax (VAT) being an indirect tax.

15. What are the ways of shifting the


burden of tax to another taxpayer?

The ways of shifting the burden of tax


to another taxpayer are as follows:

(1) Forward shifting – refers to the


transfer of tax burden from the producer to
distributor until it finally reaches the ultimate
purchasers or end consumers. Example: The
producer shifts its VAT to the distributor, and
the distributor shifts its VAT to the final
consumer.

(2) Backward shifting – refers to


the reverse of forward shifting, meaning, the
burden of the tax is transferred from the end
consumer through the factors of distribution to
the factor of production. Example: The end
consumer may shift the tax imposed on him to
the distributor by buying the goods only after
the price of the goods is reduced by the
amount of the tax, and lastly, the
manufacturer agrees to buy the distributor’s
products only if the price is also reduced by
the amount of tax.

(3) Onward shifting – the tax


burden is shifted twice or more either forward
or backward.

16. What are the taxes which can be


shifted to another taxpayer?

Under the National Internal Revenue


Code, the national taxes which can be shifted
to another taxpayers are the indirect taxes,
such as the VAT, Other percentage taxes,
excise tax on excisable articles and
documentary stamp taxes.

In the case of VAT, the seller, who is


the statutory taxpayer, is given the right by
law to shift the burden of tax to the buyer,
which tax shall become part of the cost of the
goods or services sold if the buyer is the end
consumer.

17. What are the taxes which cannot be


shifted to another taxpayer?

Under the National Internal Revenue


Code, all taxes which are the direct tax
liabilities of the taxpayers are the taxes which
cannot be shifted to another taxpayer, such as
income tax, estate tax and donor’s tax.

18. Why does the law allow the shifting


of the burden of tax to another person?

When the law allows that the burden


of tax may be shifted to another person, this is
one form of escape from taxation which does
not result to any loss on the part of the
Government, hence, not objectionable.

19. What is the meaning of “impact” and


“incidence” of taxation?

The term "impact of taxation"


refers to the point on which the tax is
originally imposed or the person/taxpayer who
is required by law to pay the tax or the
taxpayer on whom the tax can be formally
assessed. Example: VAT is originally assessed
against the VAT-registered SELLER who is
required to pay the said tax. (This is the so-
called "impact of taxation.")

On the other hand, "incidence of


taxation" refers to the point on which the tax
burden finally rests or settles down. It takes
place when shifting has been effected from the
statutory taxpayer to another. Hence, VAT,
being an indirect tax, the burden of paying the
tax is actually shifted or passed on to the
BUYER. (This is the so-called "incidence of
taxation.")

20. What is the relationship between


Impact, Shifting, and Incidence of a tax?

The”impact of taxation,” which is


the imposition of the tax to the statutory
taxpayer, is the initial phenomenon; the
“shifting of the tax,” which is the passing on
of the tax to the buyer, is the intermediate
event, while the “incidence of the tax”
which is the final point of the transaction
makes the end consumer finally shouldering or
bearing the burden of the tax, which is the
resultant effect.

B. Tax Avoidance

21. What is the meaning of “tax


avoidance”? BQ2014

"Tax avoidance" is the other term


for "tax minimization." It is a legal tax
saving device within the means sanctioned by
law the object of which is merely to minimize
the payment of taxes. This method should be
used by the taxpayer in good faith and at
arm's length.

A taxpayer has the legal right to


decrease the amount of what otherwise would
be his taxes or altogether avoid them by
means which the law permits. A taxpayer may
therefore perform an act that he honestly
believes to be sufficient to decrease his tax
liability or to exempt him from taxes. He does
not incur fraud thereby even if the act is
thereafter found to be insufficient. 26

26
Yutivo Sons Hardware Co. v. CTA, 1 SCRA 160
(1961); Heng Tong Textiles Co., Inc. v. CIR, 24 SCRA 767
(1968)
C. Tax Evasion

22. What is the meaning of “tax


evasion”?

"Tax evasion" is the other term for


“tax dodging.” It is the use of the taxpayer
of illegal means to avoid or defeat the
payment of the tax. It is a scheme used
outside of those lawful means and when
availed of is punishable by law because its
main purpose is to entirely escape the
payment of taxes thru illegal means. It usually
subjects the taxpayer to further or additional
civil or criminal liabilities.27

Tax evasion connotes fraud through


the use of pretenses and forbidden devices to
lessen or defeat the payment of correct taxes.
Mere understatement of tax in itself does not
prove fraud. Fraud is never imputed and
courts never sustain findings of fraud upon
circumstances which create only suspicion; it
must be willful and intentional .

27
CIR v. CA, 327 Phil. 1
23. Distinguish "tax avoidance" from
"tax evasion." BQ2014

Tax Avoidance T
“Tax avoidance” is a tax saving device “Tax evasion
wherein the taxpayer uses legal means means to avo
to reduce tax liability within the means of the tax.
sanctioned by law, hence legal.28
It is used by the taxpayer in good faith It connotes f
and at arm's length. pretenses an
lessen or defe
taxes.
Taxpayer is not subjected to civil or When availed
criminal liabilities because it is a legal taxpayer to a
tax saving device. liabilities.
It is “tax minimization”. It is “tax dod

24. What are the factors that constitute


“tax evasion”?

To constitute "tax evasion," there


must be an integration of three factors,
namely:

28
Heng Tong Textiles Co., Inc. v. CIR, 24 SCRA
767 (1968)
(1) The end to be achieved, i.e.,
payment of an amount of tax less than what is
known by the taxpayer to be legally due;

(2) An accompanying state of mind


which is described as being evil, in bad faith,
willful or deliberate and not merely accidental;
and

(3) A course of action or failure of


action which is unlawful.

The second and third factors are not


present in tax avoidance, hence there can be
no tax evasion if what was committed is just
tax avoidance.29

Example: When a tax consultant


advised the taxpayer to execute two deeds of
sale with the intent to evade the payment of
the correct tax, both the tax consultant and
the taxpayer shall be criminally liable for tax
evasion considering that the above-stated
three requisite factors to constitute tax evasion
are present.

29
CIR v. The Estate of Benigno P. Toda, Jr.,
G.R.147188, Sept. 14, 2004. (48SCRA 290)
25. When is tax evasion deemed
complete?

The Supreme Court ruled that tax


evasion is deemed complete when the violator
has knowingly and willfully filed a fraudulent
return with intent to evade and defeat a part
or all of the tax.30

V. Exemption from Taxation

26. What is the meaning of the term


“exemption from taxation"?

Tax exemption is an immunity or


privilege from a charge or burden to which
others are subject. It is the grant of immunity,
express or implied, to particular persons or
corporations of a particular class, from the
obligation to pay taxes generally within the
same state or taxing district to which others
are obliged to pay. 31

30
Ungab v. Judge Cusi, Jr., 186 Phil. 604 (1980)
31
Greenfield v. Meer, 77 Phil 394
27. What is the nature of tax
exemption?

(a) The tax exemptions provided in


the Constitution are self-executing and need
no legislation to enforce them.

(b) The grant of tax exemption is a


matter of legislative policy that is within the
exclusive prerogative of Congress.32

(c) Exemption from taxes is personal


in nature and covers only taxes for which the
taxpayer-grantee is directly liable. In any
case, it cannot be transferred or assigned by
the person to whom it is given without the
consent of the State. He who claims tax
exemption should prove by convincing proof
that he is exempted. Therefore, an exemption
granted to a corporation does not apply to its
stockholders.33

(d) Tax exemptions are not


presumed, but when public property is

32
Diaz v. Sec. of Finance, 654 SCRA 96 (2011)
33
Manila Gas Corp. v. Collector, 71 Phil. 513
involved, tax exemption is the rule, and
taxation, the exception.

(e) There can be no simultaneous tax


exemptions under two laws, one partial and
the other total.

(f) It is an ancient rule that


exemptions from taxation are construed in
strictissimi juris against the taxpayer and
liberally in favor of the taxing authority. Tax
exemptions are looked upon with disfavor and
may almost be said to be odious to the law.34

(g) He who claims that he is


exempted from tax must be able to justify his
claim by the clearest grant of organic or
statute law by words to plain to be mistaken.
If ambiguous, there is no tax exemption.

28. What are the kinds of tax


exemption?

The kinds of tax exemptions are as


follows:

34
MERALCO v. Vera, 67 SCRA 351; Phil.
Petroleum Corp. v. Mun. of Pililla, Rizal, 198 SCRA 82 (1991)
(1) Express tax exemption (or
affirmative exemption) – This is the tax
exemption which expressly and affirmatively
exempts from taxation certain persons,
properties or transactions, either entirely or in
part. It may be created by express provisions
of the Constitution, statute, treaty or
ordinance.

(2) Implied tax exemption (or


exemption by omission) – This is the tax
exemption which may be either accidental or
intentional, as where the tax is laid on certain
classes of persons, properties or transactions
without mentioning other classes. All subjects
for which taxation is not provided are
exempted, and the subjects selected are alone
taxable. Tax exemptions are not presumed,
but when public property is involved,
exemption is the rule, and taxation, the
exception

(3) Contractual tax exemption -


Contractual tax exemption, in the real sense of
the term and where the non-impairment
clause of the Constitution can rightly be
invoked, is one which is agreed to by the
taxing authority in contracts, such as the one
contained in government bonds or debentures,
lawfully entered into under enabling laws in
which the government, acting in its private
capacity, sheds its cloak of authority and
waives its governmental immunity.35 This
exemption must not be confused with the tax
exemption granted under a franchise, which is
not a contract within the context of non-
impairment clause of the Constitution. 36

In general, tax exemptions granted by


contract are not assignable. However,
Congress may authorize a transfer of the tax
exemption either by the original act or by a
subsequent statute. A contractual tax
exemption may also be transferred where the
original grant includes the successors and
assigns of the grantee.37

Statutory exemptions are generally


granted on the basis of contract and on
grounds of public policy.

35
PAGCOR v. BIR, John Doe & Jane Doe, GR
172087, March 15, 2011
36
Cagayan Electronic Co. v. CIR, 138 SCA 629
37
PAL v. Commissioner of Customs, BTA No.184,
Sept. 10, 1954
29. What is the rationale for the grant
of tax exemption?

The rationale for the grant of tax


exemption is some kind of public benefit or
interest which the law-making body considers
sufficient to offset the monetary loss entailed
in the grant of tax exemptions.

30. What are the grounds for tax


exemption?

(1) The power of the Legislature to


exempt taxpayers from taxation, although of
wide scope, is not unlimited. Exemptions from
taxation, when properly made, must be
determined in the legislative discretion, which
must not, however, be arbitrary; there must
underlie in its exercise some principles of
public policy that can support a presumption
that the public interest will be subserved by
the exemption allowed.38

38
Art. 17(4), Art. VIII, 1987 Phil. Constitution; CIR
v. Botelho Shipping Corp., L-21633-34, June 29, 1967 (20
SCRA 487)
(2) The purpose of the grant is some
public benefit or interest which the law-
making body considers sufficient to offset the
monetary loss entailed in the grant of tax
exemptions.

(3) Tax exemptions in tax treaties are


created on grounds of reciprocity or to
lessen the rigors of the international
double or multiple taxation.

31. May tax exemption be granted on the


ground of equity?

No. Tax exemption cannot be


recognized on grounds of equity. The long
range objective of all tax measures is the
accomplishment of social order. Although the
variant forms of taxation may sometimes
produce individual hardships, a too stilted
interpretation of tax laws for the benefit of one
particular taxpayer may result in the loss of
revenue at the expense of the government and
operate to the disadvantage of the others
contributing to its support. A tax exemption
claimed merely on the ground that another
person similarly situated has not paid similar
taxes is unjustifiable and should be ignored. 39

32. May tax exemptions be revoked?

Yes. As a general rule, grants of tax


exemption are revocable. The Congressional
power to grant an exemption necessarily
carries with it the consequent power to revoke
the same. In the case of franchises to
operate public utilities, the Constitution
provides that no franchise shall be granted
unless subject to the condition that it shall be
subject to repeal or amendment. Therefore,
any exemption granted under a franchise may
be revoked by Congress.

Exception: On the other hand, there


is a recognized exception as regards
contractual exemptions, on the theory that
revocation without the consent of the grantee
would impair the obligation of contract. There
is no vested right in a tax exemption, more so
when the latest expression of legislative intent
renders its continuance doubtful. Being a
mere statutory privilege, a tax exemption may

39
BPI v. Trinidad, 45 Phil. 384
be modified or withdrawn at will by the
granting authority. To state otherwise is to
limit the taxing power of the State, which is
unlimited, plenary, comprehensive and
supreme. The power to impose taxes is one
so unlimited in force and so searching in
extent, it is subject only to restrictions which
rest on the discretion of the authority
exercising it.40

VI. Tax Refund

33. What is the nature of a claim for


refund?

Since an action for a tax refund


partakes of the nature of tax exemption,
which cannot be allowed unless granted in the
most explicit and categorical language, it is
strictly construed against the claimant who
must discharge such burden most
convincingly.41

34. Will the fact that a taxpayer is under


audit by the BIR or that there is a

40
Republic v. Caguioa, GR 168584, Oct. 15, 2007
41
South African Airways v. CIR, 612 SCRA 665
deficiency tax assessment and it has a
potential tax liability be a bar to a claim
for tax refund?

No. As a general rule, a deficiency tax


assessment is not a bar to a claim for tax
refund or tax credit of a taxpayer. The BIR has
no valid justification if it will not grant the
refund or to withhold the issuance of the Tax
Credit Certificate (TCC). Offsetting the
amount of TCC against a potential tax liability
is not allowed, because both obligations are
not yet fully liquidated. While the amount of
the TCC has been determined, the amount of
deficiency tax is yet to be determined through
the completion of the audit. To reopen the
claim for TCC or Tax Refund in order to give
way to the introduction of evidence of a
deficiency assessment will lead to an endless
litigation, which is not allowed.42

However, if the deficiency tax


assessment is already final, the CIR should
not grant the claim for refund unless the
taxpayer pays the deficiency tax. Likewise, no

42
CIR v. Citytrust Banking Corp., 499 SCRA 477
(2006)
tax refund or tax credit will be granted as long
as there is a pending deficiency tax
assessment for the same taxable period.
To award a tax refund or tax credit despite the
existence of deficiency assessment for the
same taxable period is an absurdity and a
polarity in conceptual effects. A taxpayer
cannot be entitled to a refund and at the same
time be liable for a tax deficiency assessment.
In order to avoid multiplicity of suits, it is
logically necessary and legally appropriate that
the issue of deficiency tax assessment be
resolved jointly with the taxpayer’s claim for
tax refund, to determine once and for all in a
single proceeding the true and correct amount
of the tax due or refundable.43

35. May a taxpayer who has pending


claims for refund of excess VAT input tax
refund or set off said claims against his
other tax liabilities?

No. Taxes and claims for refund


cannot be the subject of set-off for the simple
reason that the government and the taxpayer

43
CIR v. CA, Citytrust Banking Corp. and CTA, 234
SCRA 348 (1994)
are not creditors and debtors of each other.
There is a material distinction between a tax
and a claim for refund. Claims for refunds just
like debts are due from the government in its
corporate capacity, while taxes are due to the
government in its sovereign capacity.

However, compromise or set-off may


be available but only if both obligations are
liquidated and demandable. Liquidated
debts are those where the exact amounts have
already been determined. In the instant case,
the claim of the taxpayer for VAT refund is still
pending and the amount has still to be
determined. Thus, the liquidated obligation of
the taxpayer to the government cannot be set-
off against the unliquidated claim which the
taxpayer conceived to exist in his favor.44

VII. Compromise

36. When is compromise agreement?

A compromise agreement is a
contract whereby the parties, by making
reciprocal concessions, avoid a litigation or put

44
Philex Mining v. CIR, GR 125704, Aug. 29, 1998
an end to one already commenced.45 It
involves a reduction of a person’s tax liability.
Accordingly, a compromise is either judicial, if
the objective is to put an end to a pending
litigation, or extrajudicial, if the objective is
to avoid a litigation.46

Its validity is dependent upon the


fulfillment of the requisites and principles of
contracts dictated by law; and its terms and
conditions must not be contrary to law,
morals, good customs, public policy, and public
order.

When given judicial approval, a


compromise agreement becomes more than a
contract binding upon the parties. Having been
sanctioned by the court, it is entered as a
determination of a controversy and has the
force and effect of a judgment. It is
immediately executory and not appealable,
except for vices of consent or forgery. The
nonfulfillment of its terms and conditions
justifies the issuance of a writ of execution; in

45
Art, 2928, New Civil Code
46
Malvar v. Kraft Food Phils., Inc., 705 SCRA 242
(2013)
such an instance, execution becomes a
ministerial duty of the court.47

A compromise is generally allowed and


enforceable under the law when the subject
matter thereof is not prohibited from being
compromised and the person entering such
compromise is duly authorized to do so.

VIII. Doctrine of Compensation and Set-


Off

37. Discuss the “Doctrine of


Compensation and Set-Off.” May taxes
be the subject of set-off or
compensation?

General Rule: The Doctrine of


Compensation and Set-off states that taxes are
NOT subject to set-off or legal compensation
because the government and the taxpayer are
not mutual creditor and debtor of each other. 48

47
Magbanua v. Uy, 497 Phil. 511 (2005) cited in
Metro Manila Shopping Mecca Corp. v. City
Treasurer of Manila, GR 190818, Nov. 10, 2014
48
Republic v. Mambulao Lumber Co., 6 SCRA 522;
Caltex Phils v. COA, 208 SCRA 726
It is settled that a taxpayer may not
offset taxes due from the claims that he may
have against the government for the following
reasons:

(1) A claim for taxes is not such a


debt, demand, contract or judgment as is
allowed to be set-off.

(2) Taxes are of such distinct kind,


essence and nature, and these impositions
cannot be classed in merely the same category
as ordinary obligations. Taxes and debts are of
different nature and character; hence, no set-
off or compensation between these two
different classes of obligations is allowed.

(3) The taxes assessed are the


obligations of the taxpayer arising from law,
while the money judgment against the
government is an obligation arising from
contract, whether express or implied.
(4) Debts are due to the Government
in its corporate capacity, while taxes are due
to the Government in its sovereign capacity. 49

(5) Inasmuch that taxes are not


debts, it follows that the two obligations are
not susceptible to set-off or legal
compensation.

(6) There can be no off-setting of


taxes against the claims that the taxpayer may
have against the government. A person cannot
refuse to pay a tax on the ground that the
government owes him an amount equal to or
greater than the tax being collected. The
collection of a tax cannot await the results of a
lawsuit against the government.50

Examples:

(a) An assessment for a local tax


cannot be the subject of set-off or
compensation against a final
judgment for a sum of money

49
South African Airways v. CIR, 612 SCRA 665
(2010)
50
Francia v. IAC, GR L- 76749, June 28, 1988 (162
SCRA 753)
obtained by the taxpayer against
the local government unit that
made the assessment.

(b) A taxpayer who has pending


claims for VAT input credit or
refund cannot set off said claims
against his other tax liabilities.

(c) The income tax liability of a


taxpayer cannot be compensated
with the amount owed by the
Government as just compensation
for his property which had been
expropriated.

Exception: However, if the


obligation to pay taxes and the taxpayer’s
claim against the government have already
become both due, and demandable, as well as
fully liquidated, compensation takes place
by operation of law51 and both obligations
are extinguished to their concurrent
amounts.52

51
Art. 1200, in relation to Arts. 1279 and 1290, NCC
52
Domingo v. Garlitos, 8 SCRA 443 (1963)
A debt is liquidated when its existence
and amount are determined. A debt is
considered liquidated, not only when it is
expressed already in definite figures which do
not require verification, but also when the
determination of the exact amount depends
only on a simple arithmetical operation. 53

IX. Doctrine of Equitable Recoupment

38. What is the meaning of the term


“Doctrine of Equitable Recoupment”?
BQ2009

The doctrine of “equitable


recoupment” arose from common law origin
allowing the offsetting of a prescribed claim for
refund against a tax liability arising from the
same transaction on which an overpayment is
made on one hand and underpayment is due
on the other hand. In other words, when the
refund of a tax supposedly due to the taxpayer
has already been barred by prescription, and
the same taxpayer is assessed with a tax at
present, the two taxes may be set-off with

53
Philex Mining Corp. v. CIR, GR 125704, Aug.
29, 1998;.Montemayor v. Millora, 654 SCRA 580 (2011)
each other. It allows a taxpayer whose claim
for refund has prescribed to offset tax liabilities
with his claim of overpayment.

But this doctrine of equitable


recoupment is allowed only in common law
countries, but NOT in the Philippines. It finds
no application to cases where the taxes
involved are totally unrelated, and although it
seems equitable, IT IS NOT ALLOWED IN OUR
JURISDICTION because of the doctrine of no
set-off or compromise.54

X. Tax Amnesty

39. What is the meaning of “tax


amnesty”?

“Tax amnesty” is a general grant of


pardon or the intentional overlooking by the
State of its authority to impose penalties on
persons otherwise guilty of violation of a tax
law. It partakes of an absolute waiver by the
government of its right to collect what
otherwise would be due it and to give tax
evaders who wish to relent a chance to start

54
Collector v. UST, 104 Phil. 1062 (1958)
with a clean slate. A tax amnesty, much like a
tax exemption, is never favored nor presumed
in law and if granted by statute, the terms of
the amnesty like that of a tax exemption must
be construed strictly against the taxpayer and
liberally in favor of the taxing authority. 55 It
also gives the government a chance to collect
uncollected tax from tax evaders without
having to go through the tedious process of a
tax case. 56

“Tax amnesty” refers to the


articulation of the absolute waiver by a
sovereign of its right to collect taxes and
power to impose penalties on persons or
entities guilty of violating a tax law. Tax
amnesty aims to grant a general reprieve to
tax evaders who wish to come clean by giving
them an opportunity to straighten out their
records.57

55
CIR v. Gonzalez, 633 SCRA 139 (2010)
56
ING Bank N.V., Manila Branch v. CIR, GR
167679, July 22, 2015
57
MBTC v. CIR, G.R. 178797, Aug. 4, 2009 (595
SCRA 234) cited in CS Garment, Inc. v. CIR, GR 182399,
March 12, 2014
40. Distinguish "tax amnesty" from
"tax exemption."

Tax Amnesty Ta
Tax amnesty is an immunity from all Tax exemptio
criminal, civil and administrative the civil liab
liabilities arising from non- immunity or p
payment of taxes. It is a general a charge or bu
pardon given to all taxpayers. subjected.
It applies only to past tax periods, It is generally
hence of retroactive application.58 application.
In a tax amnesty, however, there will In tax exempt
be a revenue loss since there was revenue loss
actually taxes due but the collection actual taxes d
was just waived by the Government. transaction is
exemption.

41. How should tax amnesty be


construed?

While tax amnesty, similar to a tax


exemption, must be construed strictly against
the taxpayer and liberally in favor of the taxing
authority, it is also a well-settled doctrine that
the rule-making power of administrative
agencies cannot be extended to amend or

58
People v. Castaneda, GR L46881, Sept. 15, 1988
expand statutory requirements or to embrace
matters not originally encompassed by the
law. Administrative regulations should always
be in accord with the provisions of the statute
they seek to carry into effect, and any
resulting inconsistency shall be resolved in
favor of the basic law.59

42. May the creditable withholding taxes


be the subject of tax amnesty?

No. Just like in the compromise


settlement of tax liability of a taxpayer,
withholding taxes cannot fall within the
coverage of tax amnesty because the same is
not one of the taxes for which a taxpayer is
directly liable. Withholding tax is just a mode
of collecting the tax and the tax that is being
withheld is treated as a trust fund which
should be remitted to the government because
it is not a personal tax liability of the
withholding agent, but that of the payor,
which should have been remitted to the
government when the same was withheld from
the taxpayer.60

59
CS Garment, Inc. v. CIR , G.R. 182399, March
12, 2014
60
RMC 61-2014 (July 30, 2014)
XI. Tax Pyramiding

43. What is the meaning of "tax


pyramiding"? What is its basis in law?
BQ2006

“Tax pyramiding” refers to the


imposition of a tax upon a tax. This occurs
when some or all of the stages of distribution
of goods or services are taxed, with the
accumulation borne by the final consumer.
There is tax pyramiding when sales taxes are
applied to both inputs and outputs, thus
shifting all the tax burden to the end
consumer. It has no basis whether in fact or
in law because it violates the principle of
uniformity and neutrality in taxation. Tax
pyramiding has, since 1922, been rejected by
the Supreme Court, the legislature, and our
tax authorities.61

XII. Doctrine of Piercing the Veil of


Corporate Fiction

61
CIR v. American Rubber Co., 18 SCRA 842
(1966); Pp. v. Sandiganayan, 467 SCRA 137 (2005)
44. What is the “Doctrine of Piercing the
Veil of Corporate Fiction”? BQ2013

Under the “doctrine of piercing the veil


of corporate fiction,” the court looks at the
corporation as a mere collection of individuals
or an aggregation of person undertaking
business as a group, disregarding the separate
juridical personality of the corporation unifying
the group.62 Another formulation of this
doctrine is that when two business enterprises
are owned, conducted and controlled by the
same parties, both law and equity will, when
necessary to protect the rights of third parties,
disregard the legal fiction that two
corporations are distinct entities and treat
them as identical or as one and the same. 63

It was held that while a corporation


may exist for any lawful purpose, the law will
regard it as an association of persons or, in
case of two corporations, merge them into
one, when its corporate legal entity is used as
a cloak for fraud or illegality. The doctrine

62
Kukan International Corp. v. Reyes, 631 SCRA
596 (2010)
63
Pantranco Employees Association v. NLRC, GR
L-10689, March 17, 2009 (581 SCRA 598 )
applies only when such corporate fiction is
used to defeat public convenience, justify
wrong, protect fraud, or defend crime, or
when it is made as a shield to confuse the
legitimate issues, or where a corporation is the
mere alter ego or business conduit of a
person, or where the corporation is so
organized and controlled and its affairs are so
conducted as to make it merely an
instrumentality, agency, conduit or adjunct of
another corporation.

45. May the stockholders be held


personally liable for the unpaid taxes of a
dissolved corporation?

A corporation, upon coming into


existence, is invested by law with a personality
separate and distinct from those of the
persons composing it as well as from any other
legal entity to which it may be related. For this
reason, a stockholder is generally not made to
answer for the acts or liabilities of the
corporation, and vice versa. The separate and
distinct personality of the corporation is,
however, a mere fiction established by law for
convenience and to promote the ends of
justice. It may not be used or invoked for ends
that subvert the policy and purpose behind its
establishment, or intended by law to which the
corporation owes its being. This is true
particularly when the fiction is used to defeat
public convenience, to justify wrong, to protect
fraud, to defend crime, to confuse legitimate
legal or judicial issues, to perpetrate deception
or otherwise to circumvent the law. This is
likewise true where the corporate entity is
being used as an alter ego,64 adjunct, or
business conduit for the sole benefit of the
stockholders or of another corporate entity. In
such instances, the veil of corporate entity will
be pierced or disregarded with reference to
the particular transaction involved. 65

Thus, as a general rule, stockholders


cannot be held personally liable for the unpaid
taxes of a dissolved corporation. The rule
prevailing under our jurisdiction is that a
corporation is vested by law with a personality

64
In applying the "instrumentality" or" alter ego"
doctrine, the courts are concerned with reality, not form, and
with how the corporation operated and the individual defendant's
relationship to the operation.
65
Land Bank of the Philippines v. Court of Appeals,
G.R. 127181, Sept.. 4, 2001 (364 SCRA 375) cited in
Commissioner of Customs v. Oilink International Corp., GR
161759, July 2, 2014
that is separate and distinct from those of the
persons composing it.66

However, stockholders may be held


liable for the unpaid taxes of a dissolved
corporation if it appears that the corporate
assets have passed into their hands. 67
Likewise, when stockholders have unpaid
subscriptions to the capital of the corporation,
they can be made liable for unpaid taxes of
the corporation to the extent of their unpaid
subscription.

XIII. Doctrine of Usage

46. What is the “Doctrine of Usage”?

This is the test of exemption on real


property tax provided in the 1987 Constitution
which mandates that such real properties of
non-stock non-profit educational institutions
shall be exempt from the real property tax if
the said properties are actually, directly and
exclusively USED for religious, charitable
or educational purpose. The gauge of

66
Sunio v. NLRC, 127 SCRA 390 (1984)
67
Tan Tiong Bio v. CIR, 4 SCRA 986 (1962)
exemption is the USE of the property, NOT
the ownership, and in accordance with the
enabling law under Sec. 23468 of the Local
Government Code of 1991.

XIV. Marshall Dictum

68
SEC. 234. Exemptions from Real Property Tax. -
The following are exempted from payment of the real property
tax:
(a) Real property owned by the Republic of the
Philippines or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or
convents appurtenant thereto, mosques, nonprofit or religious
cemeteries and all lands, buildings, and improvements actually,
directly, and exclusively used for religious, charitable or
educational purposes;
(c) All machineries and equipment that are actually,
directly and exclusively used by local water districts and
government-owned or -controlled corporations engaged in the
supply and distribution of water and/or generation and
transmission of electric power;
(d) All real property owned by duly registered
cooperatives as provided for under R. A. No. 6938 (now RA
9520); and
(e) Machinery and equipment used for pollution
control and environmental protection.
Except as provided herein, any exemption from
payment of real property tax previously granted to, or presently
enjoyed by, all persons, whether natural or juridical, including
all government-owned or -controlled corporations are hereby
withdrawn upon the effectivity of this Code. (Local Government
Code)
47. What does the “Marshall Dictum”
state?

The Marshall Dictum69 states that


“the power to tax is the power to
destroy”, which refers to the unlimitedness
and the degree or vigor with which the taxing
power may be employed to raise revenue.
The financial needs of the State may outrun
any human calculation, so the power to meet
those needs by taxation must not be limited
even though taxes become burdensome or
confiscatory.

However, Marshall Dictum has no


application to a lawful tax. This may be true
only if the Legislature has no power to tax. It
has no relation to a case where such right
exists, because the power to destroy may be a
consequence of taxation but it cannot and
should not tax to the point of being
confiscatory.

XV. Holmes Doctrine

69
(Marshall Dictum) U.S. Chief Justice Marshall
in McCulloch v. Maryland, 17 U.S. 316, 4 Wheat, 316, 4 L Ed.
579 (1819)
48. What does the “Holmes Doctrine”
state?

The Holmes Doctrine,70 on the other


hand, states that “the power to tax is not
the power to destroy while the Supreme
Court sits.” The power to tax knows no limit
except those expressly stated in the
Constitution.It only means that in the exercise
of the taxing power, the authority should not
violate the Constitutional, inherent and
contractual limitations of taxation, otherwise
the court has the primordial duty to declare
the same void and unconstitutional, thereby
preventing the destructive nature of the power
of taxation.

XVI. Doctrine of Estoppel

49. How is the "Doctrine of Estoppel"


applied in taxation? Is there any
exception?

70
Panhandle Oil Co. v. Mississipi ex rel Knox 277
U.S. 233 (1928) (Justice Oliver Wendell Holmes, Jr.)
General Rule: It is rule in taxation
that estoppel does not apply to the
government, especially on matters of taxation.
It does not prevent the government from
collecting taxes; it is not bound by the mistake
or negligence of its agents. The rule is based
on the political law concept “the king can do
no wrong,”71 which likens a state to a king; it
does not commit mistakes, and it does not
sleep on its rights. The analogy fosters
inequality between the taxpayer and the
government, with the balance tilting in favor of
the latter. This concept finds justification in the
theory and reality that government is
necessary, and it must therefore collect taxes
if it is to survive. Thus, the mistake or
negligence of government officials should not
bind the state, lest it bring harm to the
government and ultimately the people, in
whom sovereignty resides. 72 Upon taxation
depends the ability of the government to serve
the people for whose benefit taxes are
collected. To safeguard such interest, neglect

71
Eric R. Recalde, A Treatise on Tax Principles and
Remedies, p. 33 (2009)
72
CIR v. Procter & Gamble PMC, GR L-66838,
April 15, 1988 (160 SCRA 560), cited in CIR v. Raul M.
Gonzales, G.R. 177279, Oct. 13, 2010
or omission of government officials entrusted
with the collection of taxes should not be
allowed to bring harm or detriment to the
people."73

Taxes are the nation’s lifeblood


through which government agencies continue
to operate and with which the State discharges
its functions for the welfare of its
constituents.74

Exception: However, while the State


in the performance of governmental function is
not estopped by the neglect or omission of its
agents, and nowhere is this truer than in the
field of taxation, yet this principle cannot be
applied to work injustice against an innocent
party.

In one case, the Court held that


"admittedly the government is not estopped
from collecting taxes legally due because of
mistakes or errors of its agents, but like other
principles of law, this admits of exceptions in

73
Visayas Geothermal Power Company v. CIR, G.R.
197525, June 4, 2014 (725 SCRA 130) cited in CIR v. Nippon
Express (Phils) Corp., GR 212920, Sept. 16, 2015
74
CIR v. Petron Corp., 668 SCRA 735 (2012)
the interest of justice and fair play, as where
injustice will result to the taxpayer by keeping
the latter in the dark for so long, as to whether
it is liable for the tax and, if so, for how
much." 75

XVII. Presumption Regarding the


Constitutionality
or Validity of Tax Laws

50. What is the meaning of


“Presumption regarding the
constitutionality or validity of tax
laws”?

The constitutionality or validity of tax


laws, orders, or such other rules with the force
of law cannot be attacked collaterally. There
is a legal presumption of validity of these laws
and rules, and unless a law or rule is annulled
in a direct proceeding, the legal presumption
of its validity stands.76

75
Republic v. Ker & Co., 124 Phil. 822 (1966); CIR
v. Gonzalez, 633 SCRA 139 (2010)
76
Chevron Phils., Inc. v. Commissioner of Customs,
561 SCRA 710 (2008)
Every presumption must be indulged
in favor of the constitutionality of a statute.
The burden of proving the unconstitutionality
of a law rests on the party assailing the law.
In passing upon the validity of an act of a co-
equal and coordinate branch of the
government, courts must ever be mindful of
the time-honored principle that a statute is
presumed to be valid.77

XVIII. Presumption of Regularity in the


Performance of Official Duty & Doctrine
of Good Faith

51. What is the meaning of “presumption


of regularity in the performance of
official duty”?

The presumption of regularity in the


performance of official duty cannot by itself
overcome the presumption of innocence nor
constitute proof of guilt beyond reasonable
doubt.78

77
Republic v. Caguioa, GR 168584, Oct. 15,
2007(536 SCRA 193)
78
Valdez v. People, GR 170180, Nov. 23, 2007 (538
SCRA 611)
52. What is the presumption regarding
the assessments made by the
Commissioner or by his duly authorized
representatives?

Tax assessments made by the CIR or


by his duly authorized representative shall be
prima facie presumed correct and made in
good faith, and all presumptions are in favor of
the correctness of a tax assessment unless
proven otherwise.79 The taxpayer has the
burden of proof of showing the incorrectness
or inaccuracy of such assessment or its details
lies with the taxpayer. In the absence of proof
of any irregularities in the performance of
duties, an assessment duly made by a Bureau
of Internal Revenue examiner and approved
by his superior officers will not be disturbed.
Even an assessment based on estimates is
prima facie valid and lawful where it does not
appear to have been arrived at arbitrarily or
capriciously. The burden of proof is upon the
complaining party to show clearly that the
assessment is erroneous. Failure to present
proof of error in the assessment will justify the
judicial affirmance of said assessment. All

79
CIR v. Gonzalez, 633 SCRA 139 (2010)
presumptions are in favor of the
correctness of tax assessments. 80

53. What is the meaning of “Doctrine of


Good Faith”?

“Good faith” is that state of mind


denoting honesty of intention and freedom
from knowledge of circumstances which ought
to put the holder upon inquiry; an honest
intention to abstain from taking any
unconscientious advantage of another, even
through technicalities of law, together with
absence of all information, notice, or benefit or
belief of facts which render transaction
unconscientious.81

XIX. Doctrine of Exhaustion of


Administrative Remedies

54. What is the meaning of “Doctrine of


Exhaustion of Administrative Remedies”?

80
CIR v. Kudos Metal Corp., G.R. 178087. May 5,
2010; CIR v. Traders Royal Bank, G.R. L-167134, March 18,
2015
81
Civil Service Commission v. Maala, G.R. 165523,
Aug. 18, 2005 (467 SCRA 390)
It is settled that the premature
invocation of the court's intervention is fatal to
one's cause of action -- if a remedy within the
administrative machinery can still be resorted
to by giving the administrative officer every
opportunity to decide on a matter that comes
within his jurisdiction then such remedy must
first be exhausted before the court's power of
judicial review can be sought.

The party with an administrative


remedy must not only initiate the prescribed
administrative procedure to obtain relief but
also pursue it to its appropriate conclusion
before seeking judicial intervention in order to
give the administrative agency an opportunity
to decide the matter itself correctly and
prevent unnecessary and premature resort to
the court.82

Nonetheless, jurisprudence allows


certain exceptions to the rule on exhaustion of
administrative remedies. The doctrine of
exhaustion of administrative remedies is a
relative one and its flexibility is called upon by
the peculiarity and uniqueness of the factual

82
RCBC v. CIR, G.R.L-170257, Sept. 7, 2011
and circumstantial settings of a case. Hence, it
is disregarded

(1) when there is a violation of due


process,
(2) when the issue involved is purely a
legal question,
(3) when the administrative action is
patently illegal amounting to lack or excess of
jurisdiction,
(4) when there is estoppel on the part
of the administrative agency concerned,
(5) when there is irreparable injury,
(6) when the respondent is a
department secretary whose acts as an alter
ego of the President bears the implied and
assumed approval of the latter,
(7) when to require exhaustion of
administrative remedies would be
unreasonable,
(8) when it would amount to a
nullification of a claim,
(9) when the subject matter is a
private land in land case proceedings,
(10) when the rule does not provide a
plain, speedy and adequate remedy,
(11) when there are circumstances
indicating the urgency of judicial intervention,
and
(12) when the exhaustion will result
in an exercise in futility.83

XX. Doctrine of Operative Fact

55. What is the “Doctrine of Operative


Fact”?

The GENERAL RULE is that a void law


or administrative act cannot be the source of
legal rights or duties. Article 7 of the Civil
Code enunciates this general rule, as well as
its exception. “Laws are repealed only by
subsequent ones, and their violation or non-
observance shall not be excused by disuse, or
custom or practice to the contrary. When the
courts declared a law to be inconsistent with
the Constitution, the former shall be void and
the latter shall govern. Administrative or
executive acts, orders and regulations shall be
valid only when they are not contrary to the
laws or the Constitution.”

83
Commissioner of Customs v. Oilink Intl. Corp.,
GR 161759, July 2, 2014’ Banco De Oro v. RP & CIR, G.R.
198756, Jan. 13, 2015
The “doctrine of operative fact” is,
however, an EXCEPTION to that general rule,
such that it recognizes that a judicial
declaration of invalidity may not necessarily
obliterate all the effects and consequences of a
void act prior to such declaration.84 A
legislative or executive act, prior to its being
declared as unconstitutional by the courts, is
valid and must be complied with. This
doctrine is in fact incorporated in Section 246
of the Tax Code which provides that taxpayers
may rely upon a rule or ruling issued by the
Commissioner from the time the rule or ruling
is issued up to its reversal by the
Commissioner or by the Court. The reversal is
not given retroactive effect. This, in essence is
the doctrine of operative fact. There must,
however, be a rule or ruling issued by the
Commissioner or by the judiciary that is relied
upon by the taxpayer in good faith. A mere
administrative practice, not formalized into a
rule or ruling, will not suffice because such a
mere administrative practice may not be
uniformly and consistently applied. An

84
Republic v. CA, GR 79732, Nov. 8, 1993 (227
SCRA 509)
administrative practice, if not formalized as a
rule or ruling, will not be known to the general
public and can be availed of only by those with
informal contacts with the government
agency.85

XXI. Principle of “Pacta Sunt Servanda”

56. What is the principle of “Pacta Sunt


Servanda”?

The Philippine Constitution provides


for adherence to the general principles of
international law as part of the law of the land.
The time honored international principle of
‘pacta sunt servanda’ demands the
performance in good faith of treaty obligations
on the part of the states that enter into the
agreement. In this jurisdiction, treaties have
the force and effect of law.86

XXII. Doctrine of “Stare Decisis”

85
CIR v. San Roque Power Corp., GR 187485, Oct.
8, 2013; CIR v. Puregold Duty Free, Inc., GR 202789, June 22,
2015
86
Deutsche Bank AG Manila Branch v. CIR, cited
in CBK Power Co. Ltd. v. CIR/CIR v. CBK Power Co. Ltd. v.
CIR,, G.R. 193383-84/G.R. 193407-08, Jan. 14, 2015
57. What is the Doctrine of “Stare
Decisis”?

Time and again, the Court has held


that it is a very desirable and necessary
judicial practice that when a court has laid
down a principle of law as applicable to a
certain state of facts, it will adhere to that
principle and apply it to all future cases in
which the facts are substantially the same.
Stare decisis et non quieta movere. Stand by
the decisions and disturb not what is settled.
Stare decisis simply means that for the sake of
certainty, a conclusion reached in one case
should be applied to those that follow if the
facts are substantially the same, even though
the parties may be different. It proceeds from
the first principle of justice that, absent any
powerful countervailing considerations, like
cases ought to be decided alike. Thus, where
the same questions relating to the same event
have been put forward by the parties similarly
situated as in a previous case litigated and
decided by a competent court, the rule of stare
decisis is a bar to any attempt to relitigate the
same issue.87

XXIII. Principle of Good Governance

58. How should the principle of good


governance be applied?

The principle of good governance


cannot, should not, be trivialized nor
oversimplified by tenuous whimpering and
individualism intended to detract from the
urgent need to cleanse the Republic from a
mainstream culture of unabated corruption,
perpetuated with impunity and sense of self-
entitlement. The issue at hand is not about
who, but what; it is not about individual loss,
but about national gain. Whether from the
birth pains of reform, this nation can gain a
foothold, nay, a stride into restoring this nation
into its prideful place from the clutches of a
“kleptocratic mafia” that had gained a

87
Fort Bonifacio Devt. Corp. v. CIR, G.R. Nos.
175707 / 180035 / 181092, Nov. 19, 2014; RP, represented by
the Bureau of Customs v. Pilipinas Shell Petroleum Corp., GR
209324, Dec. 9, 2015
strangehold into one of the nation’s primary
sources of revenue.88

XXIV. Doctrine of Primary Administative


Jurisdiction

59. What is the “Doctrine of Primary


Administrative Jurisdiction”?

The Doctrine of Primary Administrative


Jurisdiction states that “courts will not
determine a controversy where the issue for
resolution demand the exercise of sound
administrative discretion requiring the special
knowledge, experience and service of the
administrative tribunal to determine technical
and intricate matters of fact.”89

88
DOF v. Judge Marino M. de la Cruz, Jr., GR
209331, Aug. 24, 2015
89
Nestle Phils, Inc. v. Uniwide Sales, Inc. 634
SCRA 232 (2010)