General Principles of Taxation 2018-1

General Principles
of Taxation
AUGUST 2018
Definition & Characteristics
 Taxes:
• Enforced contribution
• Generally payable in money and
proportionate in character
• Levied ---
• on persons, properties, or transactions
• by the state having jurisdiction
• by the law-making body
• for public purpose
Definition & Characteristics
 Taxation:
• Process by which the sovereign through its law-
making body
• Raises income
• To defray the necessary expenses of
government
Aspects of taxation
• Levy – This involves the determination by Congress of the

objects and subjects of taxation and the requisite details
• Assessment & Collection
• Assessment is the determination or process to arrive at the
amount of tax due
• Collection is the actual means and method of implementing the
tax rules to satisfy the tax obligation
• Levy is a legislative function while assessment &
collection are functions delegated to the executive
Non-revenue (sumptuary)
objectives
• Taxation can strengthen anemic enterprises or provide incentive to
greater production through the grant of tax exemptions or the
creation of conditions conducive to their growth
• Taxes may be increased in periods of prosperity to curb spending
power and halt inflation or lowered in periods of slump to expand
business
• Taxes on imports may be increased to protect local industries
against foreign competition or decreased to encourage foreign
trade
• Taxes can discourage certain businesses such as in the case of the
high taxes imposed on alcohol and tobacco products
• Taxes can also minimize inequity by redistributing wealth
Concepts – Lifeblood theory
(Extent)
The BIR was denied its day in court by reason of the mistakes and/or negligence of
its officials and the case was submitted without evidence being offered.
Although the Government may generally be estopped, their neglect or omission as

exemplified in this case will not and should not produce that effect. Nowhere is the
aforestated rule more true than in the field of taxation. It is axiomatic that the
Government cannot and must not be estopped particularly in matters involving
taxes. Taxes are the lifeblood of the nation through which the government
agencies continue to operate and with which the State effects its functions for the
welfare of its constituents. The errors of certain administrative officers should never
be allowed to jeopardize the Government's financial position, especially in the case
at bar where the amount involves millions of pesos the collection whereof, if
justified, stands to be prejudiced just because of bureaucratic lethargy.
(CIR vs. CTA)
(Extent)
The cigarette manufacturers contend that for a long time prior to the
transactions involved in the case, the CIR had never subjected their
purchases and importations of stemmed leaf tobacco to excise taxes.
An erroneous interpretation by a BIR officer based on a misapprehension

of law will not put the government in estoppel. Prolonged practice of the
BIR in not collecting specific tax on stemmed leaf tobacco cannot
validate what is an otherwise erroneous application and enforcement of
the law. The government is never estopped from collecting legitimate
taxes because of the error committed by its agents. The BIR is not
precluded from making a new interpretation of the law, especially when
the old interpretation was flawed.
(La Suerte Cigar & Cigarette Factory vs. CIR)

(Limitation)
Petitioners questioned the revision of market values which increased tax rates.
The City used the “comparable sales approach” but the taxpayers wanted to
use the “income approach” because it is only by using this approach will the
possibility of realty taxes exceeding the rental income be prevented.
Since the approach (comparable sales) already amounts to confiscation of

property, it was deemed that the same amounted to the exercise of the
power to tax be equivalent to the power to destroy. While taxes are the
lifeblood of the government and so should be collected without unnecessary
hindrance, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself.
(Reyes vs. Almanzor)

(Limitation)
Petitioner was assessed for various taxes amounting to P4.6 billion. The assessment
was appealed to the CTA which also granted the Motion to Suspend Collection of
Tax but on the condition that Petitioner deposits an acceptable surety bond of
150% of the assessment or around P6.7 billion.
The CTA erred in requiring Petitioner to file a surety bond despite the supposedly
patent illegality of the assessment that was beyond petitioner’s net worth. It
behooved the CTA to consider other factors in imposing an absurd amount of
surety bond requirement such as whether the assessment would jeopardize the
interest of the taxpayer or whether the means adopted by the CIR were legal and
valid. The Court said that “the power of taxation is sometimes called the power to
destroy. Thus it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly,
lest the tax collector “kill the hen that lays the golden egg”.
(Tridharma Marketing Corporation vs. CTA)

Concepts – Benefits-received
(symbiotic) principle
The issue is whether the business of reinsurance gives rise to Philippine-sourced
income subject to tax in the hands of foreign entities.
The power to tax is an attribute of sovereignty. It is a power emanating from

necessity. It is a necessary burden to preserve the State's sovereignty and a
means to give the citizenry an army to resist an aggression, a navy to defend
its shores from invasion, a corps of civil servants to serve, public improvements
designed for the enjoyment of the citizenry and those which come within the
State's territory, and facilities and protection which a government is supposed
to provide. Considering that the reinsurance premiums in question were
afforded protection by the government and the recipient foreign reinsurers
exercised rights and privileges guaranteed by our laws, such reinsurance
premiums and reinsurers should share the burden of maintaining the state.
(Philippine Guaranty Co., Inc. vs. CIR)

Concepts – Benefits-received
(symbiotic) principle
A person, therefore, cannot object to or resist the payment of taxes solely

because no personal benefit to him can be pointed out as arising from the
tax or he is benefitted less than others who pay the same or smaller
amount of tax.
(Lorenzo vs. Posadas)

Concepts – Plenary power of
Congress
It is inherent in the power to tax that a state be free to select the subjects
of taxation, and it has been repeatedly held that inequalities which result
from a singling out of one particular class for taxation, or exemption
infringe no constitutional limitation
(Lutz vs. Araneta)
Congress’ power is “wide range and flexible”. The only benefit to which
the taxpayer is entitled is that derived from his enjoyment of the privileges
of living in an organized society.
(Gomez vs. Palomar)

Concepts – Plenary power of
Congress
The legislative branch is given the discretion to determine the object,
nature, rates, coverage, and exemptions.
(Tan vs. Del Rosario)
 Extent of the legislative power to tax

• Subject or objects to be taxed (includes the power to grant
exemption therefrom)
• Purpose of the tax which must be a public purpose
• The amount or rate of the tax
• Manner, means, and agencies tasked to collect taxes
Taxation, Police Power & Eminent
Domain
TAXATION POLICE POWER EMINENT DOMAIN
Purpose Support government’s Use of property or For public use of the

needs exercise of right is property
regulated
Persons affected Class or group of Class or group of Owner of the
persons persons property
Effect Money becomes No transfer of Transfer of property
public fund ownership, merely taken
regulatory
Benefits received Protection and No direct benefit Receives the market
benefits except maintenance value of the
of orderly society property
Amount Generally no limit Sufficient only to cover Market value of the
the cost of the license property
Principles of a sound tax system
 Fiscal adequacy – The sources of revenue should be sufficient to meet

the demands of public expenditure in order to avoid fiscal deficit. It also
means that the revenues should be capable of expanding or
contracting annually in response to variations in public expenditures. An
example is raising taxes to avoid the current fiscal crisis.
 Equality or theoretical justice - This is also called the ability-to-pay
principle. The tax burden should be in proportion to the taxpayer’s
ability to pay. An example is the schedular system of taxation applied in
the Philippines.
 Administrative Feasibility - Tax laws should be capable of convenient,
just and effective administration. An example would be avoiding taxing
the government to reduce collection costs and the non-imposition of
taxes on very small amounts of benefits (i.e. de minimis) given to
employees since to monitor these small amounts would be very difficult
administratively.
Principles of a sound tax system –
fiscal adequacy
Petitioner argues that the general revision of assessments of real property resulted
to an excessive increase in real property taxes by 100% to 400% on improvements,
and up to 100% on land; that any increase in the value of real property brought
about by the revision of real property values and assessments would necessarily
lead to a proportionate increase in real property taxes which would amount to a
confiscation of property repugnant to the constitutional guarantee of due process.
Without Executive Order No. 73, the basis for collection of real property taxes will still
be the 1978 revision of property values. Certainly, to continue collecting real
property taxes based on valuations arrived at several years ago, in disregard of the
increases in the value of real properties that have occurred since then, is not in
consonance with a sound tax system. Fiscal adequacy, which is one of the
characteristics of a sound tax system, requires that sources of revenues must be
adequate to meet government expenditures and their variations.
(Chavez vs. Ongpin)

administrative feasibility
Are toll fees collected by tollway operators subject to VAT?
Petitioners assert that the substantiation requirements for claiming input

VAT make the VAT on tollway operations impractical and incapable of
implementation. They cite the fact that, in order to claim input VAT, the
name, address and tax identification number of the tollway user must
be indicated in the VAT receipt or invoice. The manner by which the
BIR intends to implement the VAT — by rounding off the toll rate and
putting any excess collection in an escrow account — is also illegal,
while the alternative of giving "change" to thousands of motorists in
order to meet the exact toll rate would be a logistical nightmare. Thus,
according to them, the VAT on tollway operations is not
administratively feasible.
administrative feasibility
The assertion that the VAT imposed is not administratively

feasible given the manner by which the BIR intends to
implement the VAT (i.e., rounding off the toll rates and putting
any excess collection in an escrow account) is not enough to
invalidate the law. Non-observance of the canon of
administrative feasibility will not render a tax imposition invalid
“except to the extent that specific constitutional or statutory
limitations are impaired”.
(Diaz vs. Secretary of Finance)

Taxes in comparison
TAXES FEES
Enforced contribution assessed to Legal compensation for specific

defray public expenses services
Levied for revenue Imposed for regulation
Exercise of taxing power Exercise of police power
Imposed on persons, property, Imposed on the right to exercise a
exercise of right or privilege privilege only
Generally no limit on the amount of Amount should be limited to the
tax that may be imposed necessary expenses of inspection and
regulation
Failure to pay does not necessarily Failure to pay makes the act of
make an act or business illegal business illegal
Taxes vs. Fees cases
Is margin fee (that imposed to curb excessive demands upon

international reserve) a tax or a fee?
A margin levy on foreign exchange is a form of exchange control or

restriction designed to discourage imports and encourage exports,
and ultimately, `curtail any excessive demand upon the international
reserve' in order to stabilize the currency. It is not a tax but is in fact a
fee.
(Esso Standard Eastern, Inc. vs. CIR)

Petitioner insists that the "supervision fee" collected from rentals, being a return from
capital invested in the construction of the Farmers Market, practically operates as a
tax on income, which is one of those expressly excepted from respondent's taxing
authority, and thus beyond the latter's competence.
The fee is a license fee. Petitioner has not shown that the rate of the gross receipts
tax is so unreasonably large and excessive and so grossly disproportionate to the
costs of the regulatory service being performed by the respondent as to compel
the Court to characterize the imposition as a revenue measure exclusively. If the
purpose is primarily to regulate, then it is deemed a regulation and an exercise of
the police power of the State and the fact that incidental revenue is also obtained
does not make the imposition a tax.
(Progressive Development Corporation vs. Quezon City)

Are anchorage fee taxes or fees?
They are taxes because they have no relation to the cost of the permit.
To support the claim that the fees imposed are merely regulatory, it
was claimed that the City of Basilan is an island with mountainous
coasts and fringed by numerous coves and inland bays and islets and
may thus become a veritable haven for smugglers if the city has no
funds or means to suppress their illegal activities. The fees required
were primarily intended for revenue purposes.
(American Mail Lines vs. City of Basilan)

The issue was whether the imposition on the liquor company of both sales
tax and license fee was valid.
There was no double taxation because only one of the imposition was a
tax. Ordinance No. 3358 is clearly one that prescribes municipal license
fees for the privilege to engage in the business of selling liquor or alcoholic
beverages, having been enacted by the Municipal Board of Manila
pursuant to its charter power to fix license fees on, and regulate, the sale
of intoxicating liquors. On the other hand, it is clear that Ordinances Nos.
3634, 3301, and 3816 impose taxes on the sales of general merchandise,
wholesale or retail, and are revenue measures enacted by the Municipal
Board of Manila by virtue of its power to tax dealers for the sale of such
merchandise.
(Compania General de Tabacos de Filipinas vs. City of Manila)

Is the motor vehicle registration fee a tax or a fee and is PAL liable to
pay the same?
Following the Calalang case, the fee was considered a tax and thus
PAL, which had an “in lieu of all taxes” exemption, was not liable for
the same. They are taxes even if the same are denominated as fees.
The same was deemed taxes given 1) the legislative intent and 2) only
5% of the amount collected was set aside for the operating expenses
of the agency collecting the same.
(PAL vs. Edu)

A capital recovery component (CRC) was imposed on the domestic sales

of all fertilizer grades. The same issuance provided that the CRC “shall be
collected until adequate capital is raised to make Petitioner PPI (a private
company) viable”.
The LOI is an exercise of the power of taxation. While it is true that the
power of taxation can be used as an implement of police power, the
primary purpose of the CRC is revenue generation given that the amounts
collected were too excessive to serve a mere regulatory purpose given
that it was collectible “until adequate capital is raised to make PPI viable”.
Given its nature as a tax imposition, the fact that the ultimate beneficiary is
PPI, a private company, makes the levy invalid for not serving a public
purpose.
(Planters Products, Inc. vs. Fertiphil Corporation)

Taxes vs. Fees cases (police power
or eminent domain)
The subject regulation may be said to be similar to, but with substantial
distinctions from, price control or rate of return on investment control laws
which are traditionally regarded as police power measures. These laws
generally regulate public utilities or industries/enterprises imbued with
public interest in order to protect consumers from exorbitant or
unreasonable pricing as well as temper corporate greed by controlling the
rate of return on investment of these corporations considering that they
have a monopoly over the goods or services that they provide to the
general public. To the degree material to the resolution of this case, the
20% discount may be properly viewed as belonging to the category of
price regulatory measures which affect the profitability of establishments
subjected thereto. On its face, therefore, the subject regulation is a police
power measure.
(Manila Memorial Park, Inc. vs. Secretary of DSWD)

Taxes vs. Fees cases (police power
or eminent domain)
The law has also not been shown to be unreasonable, oppressive or
confiscatory and does not necessarily affect companies’ rates of
return since (1) not all customers are senior citizens; (2) the level of
profit margin of the goods and services offered to the public varies;
and (3) the entities’ ability to recoup the discounts through higher
mark-ups or from other products not subject to discounts.
(Manila Memorial Park, Inc. vs. Secretary of DSWD)

Taxes in comparison
TAXES TOLL
A demand of sovereignty A demand of proprietorship

Paid for the support of the government Paid for the use of another’s property
Generally no limit on the amount of Amount of toll depends upon the cost
tax that may be imposed of construction or maintenance of the
public improvement used
May be imposed only by the May be imposed by the government or
government private individuals or entities
Non payment will merit penalties and Non payment may prohibit a person
possible closure from using the facility
Taxes vs. Toll
The toll fee is not a user’s tax and thus it is permissible to impose a VAT
on the said fee. The MIAA case does not apply and the Court
emphasized that toll fees are not taxes since they are not assessed by
the BIR and do not go the general coffers of the government. Toll fees
are collected by private operators as reimbursement for their costs and
expenses with a view to a profit while taxes are imposed by the
government as an attribute of its sovereignty. Even if the toll fees were
treated as user’s tax, the VAT can not be deemed as a ‘tax on tax’
since the VAT is imposed on the tollway operator and the fact that it
might pass-on the same to the tollway user will not make the latter
directly liable for VAT since the shifted VAT simply becomes part of the
cost to use the tollways.
(Diaz vs. Secretary of Finance)

Taxes in comparison
TAXES SPECIAL ASSESSMENT
Levied on persons, property, Levied only on land

privileges, acts, etc
Personal liability Not a personal liability of the person
involved, his liability is limited only to
the land involved
Based on necessity and benefits Based wholly on benefits
Has general application Exceptional both as to the time and

place
Taxes in comparison
TAXES TARIFF
Levied by both the national and local Levied only by the national
government government
Imposed on both domestic and Generally imposed on imported
imported products products
Broadly covers impositions on Understood to be a charge on goods
persons, property, and transactions that are traded beyond borders
Collected by the BIR and local Collected by the BOC
governments
Taxes in comparison
TAXES DEBTS
Based on law Based on contract

Payable in money Can be paid in various forms
Failure to pay may result to No imprisonment for failure to pay
imprisonment
Only incurs interest when delinquent Incurs interest if delayed or stipulated
Imposed by the government May be imposed by private parties
Not subject to set-off May be subject to set-off

Prescriptive period provided by Tax Prescriptive period provided by Civil
Code Code
Classification of taxes
 As to subject matter
• Personal – imposed on persons without regard to their property or the
occupation or business in which they are engaged
• Property – Tax imposed on property, whether real or personal, in
proportion either to its value, or in accordance with some other
reasonable methods of apportionment
• Excise – Any tax which does not fall within the classification of a personal
or a property tax. It is a charge imposed upon the performance of an
act, the enjoyment of a privilege, or the engaging in an occupation,
profession or business.
 As to who bears the burden
• Direct – Demanded from the person who also shoulders the burden of
the tax; the taxpayer is directly or primarily liable, and he cannot shift
the burden to another. Incidence and burden of tax are on the same
person. (Example: income tax)
• Indirect – Demanded from one person in the expectation and intention that
he shall indemnify himself at the expense of another, falling finally upon the
ultimate purchaser or consumer. Incidence is on one person but the burden
is shifted to another. (Example: VAT)
 As to scope
• National – Tax imposed by the national government
• Local – Tax imposed by municipal corporations or local government units
 As to rate
• Progressive – The rate increases as the tax base of bracket increases
• Regressive – The rate decreases as the tax base or bracket increases
• Flat – The rate does not adjust to any factor
 As to determination of amount due

• Specific – based on a unit of measurement
• Ad valorem – based on the amount or value
 As to purpose
• Revenue or fiscal – to raise funds for public purpose
• Regulatory or sumptuary – to regulate an act
Direct vs. indirect taxes
Is PLDT, given the tax component of its franchise, exempt from paying VAT,
compensating taxes, advance sales taxes and internal revenue taxes on its
importations?
PLDT’s exemption based on the "in lieu of all taxes" clause in its franchise covers
direct taxes only since for indirect taxes to be included in the exemption, the
intention to include must be specific and unmistakable. “Direct taxes” are defined
as “those that are extracted from the very person who, it is intended or desired,
should pay them.” Thus, the incidence and burden are on one and the same
person. “Indirect taxes” are those that are “demanded, in the first instance, from, or
are paid by, one person in expectation and intention that he can shift the burden
to someone else.” Thus, the incidence of tax is initially on one person but the
burden is shifted to another.
(CIR VS. PLDT)

Limitations
 Inherent
 Public purpose
 International comity
 Non-delegability
 Exemption of government
 Territoriality
 Constitutional
Limitations – inherent (public
purpose)
Inasmuch as the land on which the projected feeder roads were to be
constructed belonged then to respondent Zulueta, the result is that
said appropriation sought a private purpose, and, hence, was null and
void. The test is whether the main beneficiary is the public. Incidental
advantage to the public or to the state, which results from the
promotion of private interests and the prosperity of private enterprises
or business, does not justify their aid by the use of public money.
(Pascual vs. Secretary of Public Works)

Limitations – inherent (non-
delegability)
The power of taxation is an essential and inherent attribute of sovereignty,
belonging as a matter of right to every independent government, without
being expressly conferred by the people. It is a power that is purely
legislative and which the central legislative body cannot delegate either
to the executive or judicial department of government without infringing
upon the theory of separation of powers. The exception, however, lies in
the case of municipal corporations, to which, said theory does not apply.
Legislative powers may be delegated to local governments in respect of
matters of local concern. This is sanctioned by immemorial. By necessary
implication, the legislative power to create political corporations for
purpose of local self-government carries with it the power to confer on
such local government agencies the power to tax. The constitutional basis
to empower LGUs to tax is Sec. 5 Art. X (“to create its own sources of
revenue”)
(Pepsi-Cola Bottling Company vs. Municipality of Tanauan)

delegability)
 Article VI, Section 28 (2) of the Constitution provides the flexible tariff
clause which states that “Congress may, by law, authorize the
President to fix within specified limits, and subject to such limitations
and restrictions as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts
within the framework of the national development program of the
Government”.
 The increase of existing rates of import duty shall not be higher than
100%
 The imposition of additional duty on all imports must not exceed 10%
ad valorem.
delegability)
There is no undue delegation of legislative power on the provision
allowing increase the VAT rate from 10% to 12% since what is
delegated is simply “the ascertainment of facts upon which the
administration and enforcement of the increase rate under the law is
contingent” (i.e., VAT collection and fiscal deficit in relation to GDP).
No discretion is exercised by the President since the term used is “shall”
(Abakada Guro Party List vs. Ermita)

Limitations – inherent (exemption of
government)
There is no point in national and local governments taxing each
other, unless a sound and compelling policy requires such
transfer of public funds from one government pocket to another
However, portions leased to private entities (such as hangars
leased to private companies) are taxable because the
beneficial use thereof are granted to taxable person. The power
to tax which was characterized by Justice Marshall as the
"power to destroy" cannot be allowed to defeat an
instrumentality or creation of the very entity which has the
inherent power to wield it.
(Manila International Airport Authority vs. City of Paranaque)

Limitations – inherent (international
comity)
The allegation that the interest paid by Atlas was remitted in full by
Mitsubishi to Eximbank, assuming the truth thereof, is too tenuous and
conjectural to support the proposition that Mitsubishi is a mere conduit.
The refund of the withholding tax was denied. Otherwise, the mere
expedient of having a Philippine corporation enter into a contract for
loans or other domestic securities with private foreign entities, which in
turn will negotiate independently with their governments, could be
availed of to take advantage of the tax exemption law under
discussion.
(CIR vs. Mitsubishi Metal Corporation)

comity)
Section 32 (B) (7) (a) of the Tax Code excludes from gross income the
following income derived by foreign government:
“Income derived from investments in the Philippines in loans, stocks,
bonds or other domestic securities, or from interest on their deposits in
banks in the Philippines by (i) foreign governments, (ii) financing
institutions owned, controlled, or enjoying refinancing from foreign
governments, and (iii) international or regional financing institutions
established by foreign governments.”
comity)
 Foreign governments, embassies, diplomatic missions, and
international organizations as employers are immune from being
withholding agents on the salaries of their employees.
 Exempted from Philippine taxes are diplomats (including family,

staff, servants if not locals/Filipinos) and employees of various
international organizations such as JICA, AUSAID, Ford Foundation,
Rockefeller Foundation, UN, UNESCO, WHO, etc. On the other hand
only non-Filipino employees of some other entities (ADB, IMF, UNICEF,
etc.) are exempt from Philippine taxes.
Limitations – inherent (territoriality)
 Situs rule is influenced by ---
• domicile
• nationality
• source
The Philippines adheres to a combination of the above factors

depending on the type of income.
Summary: Only resident citizens and domestic corporations are taxed

on worldwide income.
 Multiplicity of situs can result to double taxation which is resolved by

tax exemptions or entry into treaties
 Philippine law recognizes foreign tax credits for income tax (Section
34), estate tax (Section 86), and donor’s tax (Section 101)
 Situs rules under Income Tax
• Interest – it follows the residence of the borrower/obligor (but

only interest income and not “income assimilated to money
lent”
• Dividends – from a domestic corporation or a foreign
corporation which derives substantial income (more than
50%) from the Philippines
• Services – where the services are performed
• Rentals & Royalties – where the property is located or where
the service of the object underlying the royalty is found
• Real property – where located
• Personal property – where the sale is consummated and
perfected (except Philippine shares of stock)
 Situs rules under other taxes
• Estate and donor’s tax

• The law provides for certain properties which have
acquired situs in the Philippines
• Franchise exercised in the Philippines
• Shares of stock, etc. issued by a foreign corporation
where 85% of its business is located in the Philippines
• Only nonresident aliens are taxed only on estate and
gifts within the Philippines
• Excise tax is imposed on goods manufacture in and
imported into the Philippines (local consumption)
• VAT adheres to the destination principle
NDC opened for public bidding a project to construct and install
a modern, reliable, efficient and integrated wharf/port complex
at the Leyte Industrial Development Estate under a turn-key
contract.
While the construction and installation work were completed

within the Philippines, the evidence is clear that some pieces of
equipment and supplies were completely designed and
engineered in Japan. The two sets of ship unloader and loader,
the boats and mobile equipment for the NDC project and the
ammonia storage tanks and refrigeration units were made and
completed in Japan.
They were already finished products when shipped to the
Philippines. The other construction supplies listed under the
Offshore Portion such as the steel sheets, pipes and structures,
electrical and instrumental apparatus, these were not finished
products when shipped to the Philippines. They, however,
were likewise fabricated and manufactured by the sub-
contractors in Japan. All services for the design, fabrication,
engineering and manufacture of the materials and
equipment under Japanese Yen Portion I were made and
completed in Japan. These services were rendered outside
the taxing jurisdiction of the Philippines and are therefore not
subject to contractor's tax.
(CIR vs. Marubeni Corporation)

Limitations – Constitutional
 Uniformity and equality
 Due process clause
 Prohibition against imprisonment for non payment of tax
 Prohibition against taxation of religious, charitable institution, non-stock, non-profit
institutions, and educational entities
 Limitation on use of tax levied for public purposes
 Exemption from real property taxes
 Mandate to evolve a progressive system of taxation
 Tax exemption of certain grants, donations, and contributions
 Authority of the President to impose tariff rates
 Grant of Congress of tax exemptions
 Grant of power to LGUs to create their own sources of revenue
 Origination of revenue or tariff bills
(uniformity)
 BCDA cases
Equal protection of law provision is not violated by granting incentives to
businesses and residents within the secured area. The purpose of the law is
to accelerate conversion of military bases to productive uses and make
Subic self-sustaining industrial, commercial , financial and investment
center.
(Tiu vs. Court of Appeals)
Power to grant tax exemption is only within the powers of Congress. Thus,
an administrative order making a cross-reference to RA 7227 will not suffice
to grant exemption.
(John Hay Peoples Alternative Coalition vs. BCDA)
(Coconut Oil Refiners Association Inc. vs. BCDA)

(uniformity)
 VAT cases
Customs brokers are subject to VAT because they are not subject to LBT.
Thus valid classification. VAT is equitable because it applies only if sales
exceed P200,000 and will thus not apply to sari-sari stores.
(Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan )
Those exempted are agricultural products or other items that will benefit
end-users and is thus a valid classification. The transactions involving basic
and essential goods and services are exempted from the VAT. On the
other hand, the transactions which are subject to the VAT are those which
involve goods and services which are used or availed of mainly by higher
income groups.
(uniformity)
These include real properties held primarily for sale to customers or for
lease in the ordinary course of trade or business, the right or privilege to use
patent, copyright, and other similar property or right, the right or privilege
to use industrial, commercial or scientific equipment, motion picture films.
The contention of CREBA that there was an erroneous classification of
“poor” and “less poor” because socialized housing is exempt, was not
upheld.
Even if VAT is regressive because it is an indirect tax, it is not prohibited,
since the Constitution only says that direct taxes are preferred.
The bottom line is that state is free to choose what it will tax and exempt.
(Tolentino vs. Secretary of Finance)

(uniformity)
Reiterated that indirect taxes are not prohibited and even recognized that
“VAT is the antithesis of progressive taxation”.
(1) There is no undue delegation of legislative power on the provision
allowing increase to 12% since what is delegated is simply “the
ascertainment of facts upon which the administration and enforcement of
the increase rate under the law is contingent” (i.e., VAT collection and
fiscal deficit in relation to GDP). No discretion is exercised by the president
since the term used is “shall”.
(2) Petitioners contention that the 12% VAT rate is an “unfair and
unnecessary additional tax burden” is beyond the scope of review of the
Supreme Court as it is a “question of wisdom of legislation”.
(4) The law is equitable as it imposes safeguards/limits on VAT-taxability of
sales below P1,500,000.
(Abakada Guro Party List vs. Ermita)

(uniformity)
 Cigarette cases
BAT introduced in June 2001 its Lucky Strike cigarettes line in the market. At this
point, “new” brands (introduced after October 1, 1996) were being taxed
based on their current net retail price while old brands (sold before October 1,
1996 or the Annex “D” brands) were taxed based on their net retail price as of
October 1, 1996. BAT questioned the implementation of Section 145 and the
regulations on the ground that they discriminate against new brands of
cigarettes in violation of the equal protection and uniformity provisions of the
Constitution. While the Petition was pending, RA No. 9334 which increased
excise tax rates took effect on January 1, 2005 and retained the Annex “D”
brands. The same law also provided that those brands introduced between
the January 2, 1997 and December 31, 2003, including Lucky Strike, shall
remain in their current classification until revised by Congress – or what was
labeled the “classification freeze” provision also previously applied to Annex
“D” brands.
(uniformity)
BAT contended that the continued use of Annex “D” which include
brands such as Marlboro and Philip Morris gives undue protection to
said brands which are still taxed based on their price as of October
1996 even if they are now sold at the same or even at a higher price
than new brands like Lucky Strike. The intervenors (other cigarette
companies) commented that BAT (i) can not object considering that
they now enjoy the same status quo provision as the Annex “D” brands
and (ii) is estopped from questioning the law because it entered into
the industry knowing fully well the existing laws and regulations.
(uniformity)
The law is Constitutional since it passes ‘rational basis’ test and addresses (i)
concerns on the delegation of too much power to the DOF and BIR; (ii)
simplification of tax administration of sin products; (iii) elimination of potential
areas for abuse and corruption in tax collection; (iv) buoyant and stable
revenue generation; and (v) ease of projection of revenues. It was added that
the price is not only consideration of consumers. Even if creates undue
advantage to Marlboro and PM, not enough to declare unconstitutional since
does not show that Congress had this in mind but hat earnest desire to improve
tax administration. The law also does not violate the GATT since it uniformly
applies to all newly introduced brands and does not purport to single out
imported cigarettes in order to unduly favor locally produced ones.
(British American Tobacco vs. Camacho)

(uniformity)
R.A. 8240 took effect on January 1, 1997 and a shift from ad valorem to specific taxes on
cigarettes was implemented. The amending law separately provided that (i) the specific
tax due from any brand of cigarette within the next 3 years (i.e., the transition period)
shall not be lower than the tax due before the new law and (2) the rates of specific tax
shall be increased by 12% on January 1, 2000. The BIR then issued RR 17-99 to implement
the law increasing the rate and substantially echoed R.A. 8240 except that it
additionally stipulated that the specific tax to be paid shall not be lower than the tax
actually paid before January 1, 2000. The CIR, in defending the RR, opined that “the
adoption of the “higher tax rule” during the transition period shows the intent of Congress
not to lessen the excise tax collection”.
Is RR 17-99 valid to the extent that it carries the “higher tax rule” for the January 1, 2000
increase?
(uniformity)
NO. The “higher tax rule” clearly only applies to the transition period. As such,
the RR was deemed an invalid act of administrative legislation. The CIR can
not state that the sole purpose for the shift to specific tax was to increase
revenue since there were other reasons for the same such as to curb
corruption, simplify tax administration, etc. Likewise, the rule of uniformity was
deemed violated since brands belonging to the same category would be
imposed with different tax rates if the “higher tax rule” were to be
implemented. Finally, the Court pointed out that the rule of strictly interpreting
tax exemption laws will not apply to the instant tax refund since the refund of
the Petitioner is not premised on legislative grace but on the principle of solutio
indebiti given that the government is put in a position to unjustly enrich itself
due to a mistake in law.
(CIR vs. Fortune Tobacco Corporation)

(uniformity)
 Other cases on uniformity
BOCEA questions R.A. 9335 (Attrition Act of 2005) and states that the law
violates their rights to (1) due process; (2) equal protection of the laws; and (3)
security of tenure. They likewise claim that the same is an undue delegation of
legislative power and is a bill of attainder.
Is the law unconstitutional?

(uniformity)
No. Given the clear parameters on revenue targets, rewards, removal levels,
etc., R.A. 9335 is complete in all its essential terms and conditions and contains
sufficient standards that negate a claim of undue delegation.
BOC and BIR are both revenue-generating agencies that are both under the
DOF. Such substantial distinction Is germane and related to the purpose of the
law.
The law does not deny the BOC employees their right to be heard and they still
can not be arbitrarily removed.
It is not a bill of attainder as the same does not seek to punish without a judicial
trial as all it does is lays down the grounds for possible termination.
(BOCEA vs. Teves)

(uniformity)
The application of the gross system of taxation to compensation income earners while
the net system applied to professionals is a valid classification because compensation
earners have almost no overhead while businessmen have varying deductions.
(Sison vs. Ancheta)
Imposed taxes on theatres, vaudevilles, boxing. The same was still valid and complied
with uniformity requirement even if it did not specify other amusement places such as
race tracks, cabarets, cockpits, etc.
Eastern Theatrical Co., Inc. vs. City of Manila
There is valid classification between boarding stables for racehorses and boarding
stables for horses not for racing and hence no violation of the uniformity clause if one is
taxed and the other is not.
(Manila Race Horses Owners Association vs. de la Fuente)

(uniformity)
The contention that the ordinance is discriminatory and hostile because there is no other
person in the locality who exercises such "designation" or occupation is also without
merit, because the fact that there is no other person in the locality who exercises such a
"designation" or calling does not make the ordinance discriminatory and hostile,
inasmuch as it is and will be applicable to any person or firm who exercises such calling
or occupation named or designated as "installation manager.“
(Shell Co. of P.I. Ltd. v. Vaño)
It is inherent in the power to tax that the State be free to select the subjects of taxation
and it has been repeatedly held that inequalities which result from a singling out of one
particular class of taxation, or exemption infringe no constitutional limitation.
(CIR vs. Santos)
(uniformity)
 Cases which showed violation of the uniformity clause
An ordinance imposing a tax on centrifugal sugar produced only by a specific

sugar company and not on other companies producing the same type of
product was declared void.
(Ormoc Sugar Co. vs. Treasurer of Ormoc)
A tax on all motor vehicles registered and operating in the City of Manila
violates the rule on uniformity because it does not impose the same type of tax
for vehicles that are not registered with the city but are similarly operating
within the boundaries of the city.
(Association of Customs Brokers, Inc. vs. Municipal Board)

(uniformity)
It is violative of the uniformity clause because only agents or
consignees of dealers outside Butuan City are subject to the tax
while local dealers are exempt even if they exceed the
threshold sales. Indeed, if its purpose were merely to levy a
burden upon the sale of soft drinks or carbonated beverages,
there is no reason why sales thereof by dealers other than
agents or consignees of producers or merchants established
outside the City of Butuan should be exempt from the tax.
(Pepsi-Cola Bottling Company of the Philippines, Inc. vs. City of Butuan)

(uniformity)
Commissioner of Customs issued CMO 27-2003. Under the
Memorandum, for tariff purposes, wheat was classified according to
the following: (1) importer or consignee; (2) country of origin; and (3)
port of discharge. The regulation provided an exclusive list of
corporations, ports of discharge, commodity descriptions and countries
of origin. Depending on these factors, wheat would be classified either
as food grade or feed grade. The corresponding tariff for food grade
wheat was 3%, for feed grade, 7%.
(uniformity)
Unfortunately, CMO 27-2003 does not meet the requirements to
comply with the uniformity clause. We do not see how the quality of
wheat is affected by who imports it, where it is discharged, or which
country it came from. Thus, on the one hand, even if other millers
excluded from CMO 27-2003 have imported food grade wheat, the
product would still be declared as feed grade wheat, a classification
subjecting them to 7% tariff. On the other hand, even if the importers
listed under CMO 27-2003 have imported feed grade wheat, they
would only be made to pay 3% tariff, thus depriving the state of the
taxes due. The regulation, therefore, does not become
disadvantageous to respondent only, but even to the state.
(Commissioner of Customs v. Hypermix Feeds Corp.)

Limitations – Constitutional (due
process)
Due process in taxation requires that (i) taxation must be for public purposes; (ii) imposed
within the territorial jurisdiction; and (iii) no arbitrariness is shown in the assessment and
collection of taxes.
Due process is usually violated where the tax imposed is for a private purpose as
distinguished from a public purpose; a tax is imposed on property outside the State, i.e.,
extra-territorial application; and arbitrary or oppressive methods are used in assessing
collecting taxes.
(Pepsi-Cola of the Philippines vs. Municipality of Tanauan)
The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in
the Constitution, as where it can be shown to amount to a confiscation of property.
(Reyes vs. Almanzor)

process)
CREBA claims that the MCIT under Section 27 (E) of RA 8424 is
unconstitutional because it is highly oppressive, arbitrary and
confiscatory which amounts to deprivation of property without due
process of law. It explains that gross income as defined under said
provision only considers the cost of goods sold and other direct
expenses while other major expenditures, such as administrative and
interest expenses which are equally necessary to produce gross
income, were not taken into account. Thus, pegging the tax base of
the MCIT to a corporation's gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not
"realized gain."
process)
Statutes taxing the gross "receipts," "earnings," or "income" of particular
corporations are found in many jurisdictions. Tax thereon is generally held to be
within the power of a state to impose; or constitutional, unless it interferes with
interstate commerce or violates the requirement as to uniformity of taxation.
In sum, petitioner failed to support, by any factual or legal basis, its allegation
that the MCIT is arbitrary and confiscatory. The Court cannot strike down a law
as unconstitutional simply because of its yokes. Taxation is necessarily
burdensome because, by its nature, it adversely affects property rights. The
party alleging the law's unconstitutionality has the burden to demonstrate the
supposed violations in understandable terms.
(Chamber of Real Estate and Builders' Ass'n, Inc. v. Romulo)

process)
 Due process requirements for tax assessment
 Requirement of pre-assessment notices
 Taxpayer must be informed of the facts and the laws on which the
assessment was based
 Following rules on taxpayer’s remedies in terms of process and timing
(30-60-180-30)
 Prescriptive periods
 Waiver of the Statute of Limitations
 Collections of taxes (judicial, administrative)
process)
The input tax is not a property or a property right within the
constitutional purview of the due process clause. A VAT-registered
person's entitlement to the creditable input tax is a mere statutory
privilege. The distinction between statutory privileges and vested rights
must be borne in mind for persons have no vested rights in statutory
privileges. The state may change or take away rights, which were
created by the law of the state, although it may not take away
property, which was vested by virtue of such rights.
(Abakada Guro Party List v. Ermita)

Limitations – Constitutional (non-
impairment)
 Impairment takes place when the law that is passed substantially
alters the legal relationship between the parties by invalidating,
releasing, or extinguishing the obligations of a contract.
 Contracts cover those entered into by the State either in its
sovereign or proprietary capacity and those between private
parties.
 Tax exemptions in franchises are always subject to alteration,
amendment or repeal.
 “In lieu of all taxes” provisions in a franchise grant are not assumed
to cover both national and local taxes when granted.
 Withdrawal or modification of tax exemptions that are granted for a
clear consideration may give rise to impairment.
impairment)
Locators within Subic Economic Zone were granted tax- and duty-free
incentives under R.A. 7227. Subsequently, R.A. 9334 was passed in 2005
which stated that notwithstanding any special contrary, “importation
of cigarettes, spirits, liquors into the Philippines even if destined for tax
and duty free shops, shall be subject to all applicable taxes” and
specific reference was made to goods destined for the Subic
Economic Zone.
There is no violation of the non-impairment clause.

impairment)
There is no vested right in tax exemption and may thus be modified or
withdrawn at will by the granting authority. Tax exemptions are strictly
construed. While tax exemption may have been part of the
inducement to carry on business within the zone, this exemption is not
contractual and, as such, the non-impairment clause of the
Constitution can not be rightly invoked. Whatever rights were granted
in the certificates/licenses issued to the locators, the same must yield to
exercise of police power given that it has been repeatedly said that
taxation may be made the implement of the State’s police power.
(Republic of the Philippines vs. Caguioa)

Limitations – Constitutional (exempt
entities)
 SCHOOLS
• Non-stock, non-profit schools are exempt on revenues and assets
actually, directly and exclusively used for educational purposes
• The rationale is to avoid having schools pass-on added cost of taxes to
students
• The exemption extends to ---
• taxes and duties on importations
• grants, endowments, donations for educational purposes, subject to
conditions prescribed by law
• The source of revenue is immaterial as long as used for educational
purposes (or the utilization rule)
entities)
• All lands, buildings, and improvements actually , directly, and exclusively
used for educational purposes are exempt from real property tax
• Interest income from deposits are exempt as well as long as utilization is
supported
• Non-stock proprietary schools are subject to the preferential rate of 10%

except if more than 50% of their income is unrelated to their
educational purposes
• Proprietary --- private

• Non-profit --- no net income inures to the benefit of member or specific
person
entities)
 SECTION 3O ENTITIES
• Non-stock, non-profit association organized and operated
exclusively for charitable purposes
• Non-profit --- no net income inures to the benefit of member or specific
person
• Charitable --- provides for free goods and services to the public which
would otherwise fall on the shoulders of the government
• Organized --- its corporate form is one which no part of its income is
distributable as dividends to its members
entities)
 REAL PROPERTY EXEMPTION
• Charitable institutions, churches and parsonages, convents
appurtenant thereto, mosques, non-profit cemeteries
• All lands, buildings, and improvements
• Actually, directly, and exclusively used for religious, charitable, or
educational purposes
• The type of entity (whether for profit or non-profit) is immaterial as the
requirement is on the use
• Ownership is likewise not considered as the exemption is based on use
• The exemption extends not only to those that are indispensable to the
purposes but covers those that are incidental to and reasonably necessary
for the aforesaid purposes
• “For real property taxes, the incidental generation of income is permissible
because the test of exemption is the use of the property.”
entities)
 HOSPITALS
St. Luke’s is a non-stock, non-profit hospital which provided substantial
(65%) free services to its patients. The BIR claimed that Section 27 (B)
should apply to St. Luke’s as it is more specific and should prevail over
Section 30 which is general.
Section 27 (B) does not remove income tax exemption of non-profit

hospitals and schools as all it does is to cover the income under the last
paragraph of Section 30 by taxing it at 10% instead of 30%.
(Commissioner of Internal Revenue vs. St. Luke’s Medical Center, Inc. )

entities)
Others (ex.
Pay patients Charity patients (70%) Concessionaires
(30%) , etc.)
Income 10% Exempt 10%

Tax (St. Luke’s)
Real Exempt Exempt Subject

Property (Lung Center)
Tax
entities)
Is the income derived from rentals of real property owned by YMCA —
established as "a welfare, educational and charitable non-profit
corporation" — subject to income tax under the Tax Code and the
Constitution?
The last paragraph of Section 27, the YMCA argues, should be "subject to
the qualification that the income from the properties must arise from
activities 'conducted for profit' before it may be considered taxable." This
argument is erroneous. As previously stated, a reading of said paragraph
ineludibly shows that the income from any property of exempt
organizations, as well as that arising from any activity it conducts for profit,
is taxable. The phrase "any of their activities conducted for profit" does not
qualify the word "properties." This makes income from the property of the
organization taxable, regardless of how that income is used — whether for
profit or for lofty non-profit purposes.
entities)
As previously discussed, laws allowing tax exemption are construed
strictissimi juris. Hence, for the YMCA to be granted the exemption it
claims under the aforecited provision, it must prove with substantial
evidence that (1) it falls under the classification 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. However, the Court notes that not a scintilla of evidence was
submitted by private respondent to prove that it met the said
requisites.
(CIR vs. YMCA)

Double taxation
In order to constitute double taxation in the objectionable or
prohibited sense the same property must be taxed twice when it
should be taxed but once; both taxes must be imposed on the same
property or subject-matter, for the same purpose, by the same State,
Government, or taxing authority, within the same jurisdiction or taxing
district, during the same taxing period, and they must be the same kind
or character of tax." It has been shown that a real estate tax and the
tenement tax imposed by the ordinance, although imposed by the
same taxing authority, are not of the same kind or character.
(Villanueva vs. City of Iloilo)

Double taxation
The payment of 1/10 of 1% for incurring reserve deficiencies (under
the Central Bank Act) is a penalty as the primary purpose involved is
regulation while the payment of 1% for the same violation (under the
Tax Code) is a tax for the generation of revenue which is the primary
purpose in this instance. Petitioner's case is covered by two special
laws — one a banking law and the other, a tax law.
(Republic Bank vs. CTA)
The province may no longer tax stone quarried from private lands
because this is already subject to tax under Tax Code as the law
imposes tax on all quarry resources. The Local Government Code only
empowers LGUs to tax only those from public lands.
(Province of Bulacan vs. Court of Appeals)
Double taxation
The City of Manila sought to enforce both Sections 14 and 21 of the
Manila Revenue Code claiming that the former is a tax on
manufacturers, etc. while the latter applies to business subject to
excise, VAT or percentage tax.
There is in fact double taxation since both sections are being imposed
on the same subject matter (privilege of doing business within the city),
for the same purpose, by the same taxing authority, within the same
taxing jurisdiction, for the same taxing period, and of the same kind or
character (a local business tax imposed on gross sales or receipts). The
Court further said that the LGC provision applicable (Section 143)
clearly states that Section 143 (h) may be imposed only on businesses
that are subject to excise tax, VAT, and percentage tax “and that are
not otherwise specified in the preceding paragraphs”.
(Swedish Match Philippines, Inc. vs. Treasurer of the City of Manila)

Escape from taxation
 Shifting the tax to another party

 Tax avoidance (also called tax planning or tax minimization) is the
exploitation by the taxpayer of legally permissible alternative rates
or methods of assessing taxable property or income in order to
reduce or entirely avoid tax liability. It is the tax saving device within
the means sanctioned by law. The method should be used by the
taxpayer in good faith and at arms’ length.
 Tax evasion (or tax dodging) is the use by the taxpayer of illegal or
fraudulent means to defeat or lessen the payment of taxes.
 Tax exemption
Escape from taxation – shifting the
tax
 Only indirect taxes may be shifted and any agreement to “shift” the
tax to another party does not bind the State and is merely
contractual
 Taxes that may be shifted (for being indirect taxes):
• VAT
• Percentage tax
• Excise tax
• DST
 The liability for the tax is also known as the impact of the tax while
the burden of the tax is knowns as the incidence of the tax. When
indirect tax is passed-on what is being shifted is not the liability but
the burden.
Escape from taxation – tax evasion
& tax avoidance
Pacheco leased land to Hydro Pipes who had right of first refusal.
Subsequently, the Pachecos exchanged the same land under a tax-
deferred exchange to Delpher Trades. Hydro Pipes questioned the
exchange and said that there was effectively a sale to Delpher Trades and
as such its right of first refusal was violated.
There was no sale since only the nature of the ownership was changed
from unincorporated to incorporated given the advantage of the same
off having perpetual succession. It was expressly stated that “estate
planning” is allowed.
(Delpher Trades Corp. vs. IAC)

& tax avoidance
CIC sold Cibeles building to Altonaga for P100,000,000. Altonaga sold
the building to Royal Match Inc. for P200,000,000 on the same day. The
assessment was based on the taxable gain covered up by scheme.
The three factors in tax evasion are all present in this case --- (1) end to
be achieved (payment of less tax) (2) evil or deliberate state of mind
(not accidental) (3) a course of action which is unlawful. The two
transfers were tainted with fraud since the intermediary transfer (from
CIC to Altonaga) was prompted only by the desire to mitigate tax
liabilities and not by a business purpose.
(CIR vs. Toda)

& tax avoidance
An arm’s length transaction is one where all parties have dealt with each
other in good faith and for their respective individual benefits, and not for
the benefit of the transaction group. In order to pay a lesser amount of
tax, taxpayers may be influenced primarily (if not solely) by factors which
are purely tax motivated and thus take away the transaction from the
purview of one being at “arm’s length”.
Section 50 of the Tax Code provides that “In the case of two or more
organizations, traces or businesses (whether or not incorporated and
whether or not organized in the Philippines) owned or controlled directly or
indirectly by the same interest, the Commissioner is authorized to distribute,
apportion or allocate gross income or deductions between or among
such organization, trade or business, if he determines that such distribution,
apportionment or allocation is necessary in order to prevent evasion of
taxes or clearly to reflect the income of any such organization, trade or
business.”
Escape from taxation – tax
exemption
 Tax exemption is the grant of immunity from a
tax imposition.
 Kinds of tax exemption

• Coverage – local, national, or both
• Extent – Total or partial
• Intent – intentional or by omission
• Source – Constitution, Law, Treaty, Contractual
exemption
 Exemptions under the Constitution
• Real property exemptions
• Exemptions of educational institutions
 Exemptions under the Tax Code
• Section 30 entities
• Exclusions from gross income
• GPPs, JVs
• Certain transfers from donor’s and estate tax
• VAT exempt transactions
exemption
 Exemptions under special laws
• Special Economic zone entities
• Barangay Micro Business Enterprise
• Rural banks, SPVs, subcontractors of petroleum
companies
• Exemptions from donor’s tax (donations to UP,
National Book Development Trust, IRRI, Ramon
Magsaysay Foundation, foster care institutions,
campaign contributions, etc.)
• Tax amnesty laws
exemption
Petitioner was granted a legislative franchise and on that basis filed a case stating
that it was not liable for the local franchise tax of s since its franchise states that it is
only subject to franchise tax (now, the VAT)under the Tax Code.
Petitioner is still liable for the local franchise tax since the law does not expressly
provide what taxes Petitioner is exempt from and whether its exemption covers
national or local taxes, or both. The uncertainty of the “in lieu of all taxes” clause
must be construed strictly against Petitioner as it is in the form of a tax exemption. In
which case, Smart’s exemption is interpreted to refer only to national and not local
taxes. The Court noted that the “in lieu of all taxes” provisions has become functus
officio with the abolition of franchise tax on telecommunication companies and its
replacement with the VAT. It also discarded Smart’s argument that what it enjoys is
tax exclusion (as it pays other taxes) and not tax exemption and stated that either
situation requires a strict interpretation against the taxpayer claiming the same.
(Smart Communications, Inc. vs. City of Davao)

exemption
However, the principle that tax exemptions are strictly construed will
only apply after it is clearly shown that the entity is indeed subject to
tax. 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 determine who are exempted without
first determining who are covered by the aforesaid provision.
(CIR vs. Ateneo de Manila University )

exemption
NDC had Japanese shipbuilders build ships. NDC paid interest on
unpaid portion without withholding taxes.
Even if all related activities (signing, construction, payment) were done

in Japan, since the source of income is the Philippines, the same
(interest payment) is taxable in the Philippines. The fact that the
Secretary of Finance guaranteed the loan is not tantamount to a
waiver of collection of taxes as the same must be made expressly. Also,
the entity being taxed in this case is the Japanese shipbuilder and not
the Philippine government.
(National Development Company vs. CIR)

exemption
Petitioner withheld a 15% tax on its remittances to its head office in
Germany using as basis the Tax Code provision on BPRT. Believing that
it overpaid the BPRT since the RP-Germany provides for a lower rate of
10% on branch remittances, the Petitioner filed a refund with the BIR
and subsequently with the CTA. Both the BIR and the CTA denied
stating that the branch office should have filed a tax treaty relief
application prior to availing of the preferential treaty rate in view of the
existing doctrine in the Mirant case.
exemption
The principle of pacta sunt servanda requires the performance in good
faith of treaty obligations. Thus, to require that taxpayers must first
comply with an administrative requirement (under RMO 1-2000) is not in
consonance with the performance in good faith. The obligation to
comply with a tax treaty must take precedence over the objectives of
the said RMO. In addition, it was pointed out that the prior application
becomes illogical if the premise of the claim was an erroneous
payment since the taxpayer could not have known it would be
entitled to the refund since precisely it was using a different basis when
it paid the taxes due.
(Deutsche Bank AG Manila Branch vs. CIR)

Escape from taxation – direct &
indirect tax exemptions
The sales to NPC and VOA were being claimed exemption from taxes
since the buyers were tax exempt and “passing-on” tax would impair
that exemption.
The tax imposed by the Tax Code is a tax on the manufacturer or

producer and not a tax on the purchaser except probably in a very
remote and inconsequential sense. Accordingly its levy on the sales
made to tax-exempt entities like the NPC is permissible.
(Philippine Acetylene Co., Inc. vs. CIR)

Shell filed a claim for refund for excise taxes it paid on sales of gas and fuel
oils to various international carriers. The Court initially denied the claims but
a Motion for Reconsideration was filed.
Refund is proper. Section 135 is concerned with the exemption of the

article itself and not the ostensible exemption of the international carrier-
buyer. In addition, the failure to grant exemption will cause adverse
impact on the domestic oil industry (similar to the practice of “tankering”)
as well as result to violations of international agreements on aviation. Thus,
Respondent, as the statutory taxpayer who is directly liable to pay the
excise tax, is entitled to a refund or credit for taxes paid on products sold
to international carriers.
(CIR vs. Pilipinas Shell Petroleum Corporation)

Caltex sold fuel to PAL and included excise tax in the total price. PAL filed
for a refund of the excise tax passed-on to it by Caltex based on its
franchise and which confers upon PAL the tax exemption of purchase of
fuel including taxes passed on to it. The CTA denied using the Silkair
decision as basis.
The Court initially cited Silkair and said it was the seller (Petron) who had
personality to file. However, the Court said that the above rule does not
apply to cases where the law clearly grants the party to which the
economic burden of the tax is shifted an exemption from both direct and
indirect taxes in which it should be allowed to claim refund even if it’s not
the statutory taxpayer.
(Philippine Airlines, Inc. vs. CIR)

Other modes of satisfying tax
liability
 Compromise is where the State and the taxpayer agree to a reciprocal
concession in order to avoid litigation or to put one already commenced.
Section 204 of the Tax Code allows compromise based on doubtful validity
or financial incapacity.
 Tax amnesty is a general pardon to taxpayers of the intentional overlooking

by the State of its authority to impose penalties on persons otherwise guilty
of evasion or violation of a tax law. Tax amnesty is interpreted strictly against
the claimant. The same may only be passed by Congress as a tax
exemption measure. Tax amnesty is distinguished from tax exemption in that
it covers both criminal and civil aspects (while exemptions only excludes the
civil obligation) and has a retroactive application (while tax exemptions are
generally prospective).
Nature of tax laws
Tax laws are strictly interpreted against the State and liberally in favor
of the taxpayer. This is the rule considering that taxes, as burdens which
must be endured by the taxpayer should not be unduly exacted or
presumed to go beyond what the law expressly and clearly declares.
(CIR vs. Fortune Tobacco Corporation)
Tax exemptions must be clear and unequivocal based on the lifeblood

theory. However, as to the property of the State, exemption is the rule
and taxation is the exception.
(Maceda vs. Macaraig)

Nature of tax laws
For the purpose of safeguarding taxpayers from any unreasonable examination,
investigation or assessment, our tax law provides a statute of limitations in the collection
of taxes. Laws on prescription, being a remedial measure, should be liberally construed in
order to afford such protection.
(CIR vs. BF Goodrich, Phils., Inc.)
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.
(Lim vs. CA)
An RMC which extended the period to file a claim for refund from 2 to 10 years is a
“legislated guideline” which only Congress can pass. Thus, a BIR issuance cannot vest
taxpayers with any right if based on a wrong interpretation of the law.
(Philippine Bank of Communications vs. CIR)

Nature of tax laws
For purposes of determining the retroactivity of BIR rulings, the taxpayer

was deemed not to be in bad faith considering its reliance on an
existing BIR ruling (which stated that ad valorem tax is computed
based on selling price excluding VAT)
(CIR vs. Alhambra Industries)
Tax laws are not political in nature and thus remained in existence
during occupation.
(Hilado vs. CIR)

Nature of tax laws
Tax laws are generally prospective but a statute may nevertheless operate
retroactively provided it is expressly declared or is clearly the legislative
intent. (Lorenzo vs. Posadas) But a tax law should not be given retroactive
application when it would be harsh and oppressive for in such case the
Constitutional limitation of due process would be violated. (Republic vs.
Fernandez)
Any revocation, modification, or reversal of any of the rules and
regulations cannot be given retroactive application if such will be
prejudicial to the taxpayer except where ---
(i) the taxpayer deliberately misstates or omits material facts
(ii) the facts subsequently gathered by the BIR are materially different
from the facts on which the ruling is based
(iii) the taxpayer acted in bad faith
Nature of tax laws
CODE-NGO may not invoke the principle of non-retroactivity since Section 246 of the Tax
Code allows retroactive application of rulings in instances “where the facts subsequently
gathered by the Bureau of Internal Revenue are materially different from the facts on
which the ruling is based.” The reference was made by the BIR to the involvement of the
secondary market which fact was only subsequently gathered. It also stated that there
are no vested rights which are based on the wrong interpretation of the law. Thus, the
ruling was reversed to state that the BTr shall withhold the final tax due on interest income
derived from the PEACe Bonds prior to its payment on the date of maturity.
Further, there is ample legal authority to conclude that the non-retroactivity principle
does not apply when the ruling involved is null and void for being contrary to law, such
as the 2001 Rulings. Well-entrenched are the principles that the Government is never
estopped from collecting taxes because of mistakes and errors of its agents and there
are no vested rights in a wrong interpretation of the law.
PEACe Bonds ruling

Set-off of taxes
Taxes cannot be the subject of set-off because the government’s claim for taxes is
not a debt nor does it arise from contract. The taxpayer and the BIR are not
creditors and debtors of each other since debts are due to the government in its
corporate capacity while taxes are due it in its sovereign capacity.
(Philex Mining Corporation vs. CIR)
However, where (1) there is already an existing deficiency tax assessment against
the claimant or (2) the assessment is an incidental issue that must be resolved in
order to determine whether there should also be a refund or (3) if the issues are
intertwined, then offsetting of taxes may be allowed. In this case, however,
offsetting was not allowed because to use a claim for refund under the Tax Code
as a means to assesses a taxpayer for any deficiency VAT if the period to assess
had already prescribed would be very unfair.
CIR vs. Toledo Power Company)

Taxpayer’s suit
The Municipality of Agoo in La Union province passed a resolution authorizing its

mayor to obtain a loan from the Petitioner and mortgaging as collateral a portion
of the Agoo plaza. As additional security, the municipality assigned a portion of its
internal revenue allotment (IRA) in favor of the Petitioner. The loan proceeds were
used to construct a commercial center on the plaza which was objected to by the
local residents including the Respondent.
The two requisites for a taxpayer’s suit have been complied with. First, even if the
construction of the commercial center would be sourced from the loan proceeds
from the Petitioner, the said funds were already converted into public funds upon
receipt by the municipality and the assignment of the IRA likewise characterized
the funds as public. Second, since the plaza is for public use, the Respondent, like
all other Agoo residents, is directly affected. Besides it has been held that as long as
taxes are involved, people have a right to question government contracts even if
they are not party to the contract/s.
(Land Bank of the Philippines vs. Cacayuran)

Good luck!
+ AMDG

General Principles of Taxation 2018-1

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General Principles of Taxation 2018-1

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General Principles

• Levy – This involves the determination by Congress of the

Although the Government may generally be estopped, their neglect or omission as

An erroneous interpretation by a BIR officer based on a misapprehension

(La Suerte Cigar & Cigarette Factory vs. CIR)

Since the approach (comparable sales) already amounts to confiscation of

(Reyes vs. Almanzor)

(Tridharma Marketing Corporation vs. CTA)

The power to tax is an attribute of sovereignty. It is a power emanating from

(Philippine Guaranty Co., Inc. vs. CIR)

A person, therefore, cannot object to or resist the payment of taxes solely

(Lorenzo vs. Posadas)

(Lutz vs. Araneta)

(Gomez vs. Palomar)

(Tan vs. Del Rosario)

 Extent of the legislative power to tax

Purpose Support government’s Use of property or For public use of the

 Fiscal adequacy – The sources of revenue should be sufficient to meet

(Chavez vs. Ongpin)

Petitioners assert that the substantiation requirements for claiming input

The assertion that the VAT imposed is not administratively

(Diaz vs. Secretary of Finance)

Enforced contribution assessed to Legal compensation for specific

Is margin fee (that imposed to curb excessive demands upon

A margin levy on foreign exchange is a form of exchange control or

(Esso Standard Eastern, Inc. vs. CIR)

(Progressive Development Corporation vs. Quezon City)

Are anchorage fee taxes or fees?

(American Mail Lines vs. City of Basilan)

(Compania General de Tabacos de Filipinas vs. City of Manila)

(PAL vs. Edu)

A capital recovery component (CRC) was imposed on the domestic sales

(Planters Products, Inc. vs. Fertiphil Corporation)

(Manila Memorial Park, Inc. vs. Secretary of DSWD)

(Manila Memorial Park, Inc. vs. Secretary of DSWD)

A demand of sovereignty A demand of proprietorship

(Diaz vs. Secretary of Finance)

TAXES SPECIAL ASSESSMENT

Levied on persons, property, Levied only on land

Has general application Exceptional both as to the time and

Based on law Based on contract

Not subject to set-off May be subject to set-off

 As to determination of amount due

(CIR VS. PLDT)

(Pascual vs. Secretary of Public Works)

(Pepsi-Cola Bottling Company vs. Municipality of Tanauan)

(Abakada Guro Party List vs. Ermita)

(Manila International Airport Authority vs. City of Paranaque)

(CIR vs. Mitsubishi Metal Corporation)

 Exempted from Philippine taxes are diplomats (including family,

The Philippines adheres to a combination of the above factors

Summary: Only resident citizens and domestic corporations are taxed

 Multiplicity of situs can result to double taxation which is resolved by

• Interest – it follows the residence of the borrower/obligor (but

• Estate and donor’s tax

While the construction and installation work were completed

(CIR vs. Marubeni Corporation)

(Coconut Oil Refiners Association Inc. vs. BCDA)

(Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan )

(Tolentino vs. Secretary of Finance)

(Abakada Guro Party List vs. Ermita)

(British American Tobacco vs. Camacho)