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I.

Introduction and General Principles


a. Definition and concept of Taxation

Taxation- inherent power of the state to demand enforced contributions for public purposes; process by
which the sovereign, through its law-making body, raises income to defray the necessary expenses of
government.
Taxes- the enforced proportional and pecuniary contributions from persons and property levied by the
law-making body of the state having jurisdiction over the subject of the burden for the support of the
government and all public needs.
1. Theory and basis of Taxation
Life blood theory
The lifeblood theory constitutes the theory of taxation, which provides that the existence of government is
a necessity; that government cannot continue without means to pay its expenses; and that for these
means it has a right to compel its citizens and property within its limits to contribute.
Commissioner of Internal Revenue vs. Algue Inc. 158 SCRA 9
Necessity Theory
It is a necessary burden to preserve the States sovereignty and a means to give the citizenry an army to
resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public
improvements for the enjoyment of the citizenry, and those which come within the States territory and
facilities and protection which a government is supposed to provide.
Benefits-Protection Theory
This theory bases the power of the State to demand and receive taxes on the reciprocal duties of support
and protection. The citizen supports the State by paying the portion from his property that is demanded in
order that he may, by means thereof, be secured in the enjoyment of the benefits of an organized
society. Thus, the taxpayer cannot question the validity of the tax law on the ground that payment of such
tax will render him impoverished, or lessen his financial or social standing, because the obligation to pay
taxes is involuntary and compulsory, in exchange for the protection and benefits one receives from the
government. In return for his contribution, the taxpayer receives the general advantages and protection
which the government affords the taxpayer and his property. One is compensation or consideration for the
other; protection for support and support for protection.
Jurisdiction over subjects and objects
The power of taxation being legislative, all its incidents are naturally within the control of the legislature. A
state is free to select the subject of taxation. They may be persons, whether natural or judicial; property,
whether real or personal, tangible or intangible; businesses, transactions, rights or privileges.
2. Principles of a Sound Tax System
a. Fiscal adequacy- sources of revenue should be sufficient to meet the demands of
public expenditure.
b. Equality or theoretical justice- tax burden is distributed in proportion to the
taxpayers ability to pay. Similarly situated taxpayers should pay equal taxes, while
those who have more should pay more.
c. Administrative feasibility- tax laws are capable of convenient, just and effective
administration or enforcement at a reasonable cost.

By Kaye from De Leons Fundamentals of Taxation (2009) and some BAR reviewers

3. Inherent nature power of the state- inherent in sovereignty as an incident or attribute


thereof being essential to the existence of every govt. Hence, it can be exercised even if
the Consti is entirely silent on the subject.
b. Purpose of Taxation
1. Revenue Raising- provide funds to promote the general welfare and protection of its
citizens
2. Regulatory- taxation is often employed as a device for regulation by means of which
certain effects or conditions envisioned by governments may be achieved.
Tio vs. Videogram Regulatory Board 151 SCRA 208 (1987)
Philippine Health Care Providers vs Commissioner of Internal Revenue 554 SCRA 411
c. Power of Taxation compared with other powers
Authority
which
exercises power
Purpose

Use of property is
regulated
for
the
purpose of promoting
general welfare
Community or class of
individuals

Persons affected
Effect

No transfer of title;
there is restraint on the
injurious
use
of
property
No
direct
and
immediate
benefit;
maintenance
of
a
healthy
economic
standard of society

Benefits received

Amount of imposition

Relationship
Constitution

to

Police Power
Only by govt or its
political subdivisions

the

Amount
imposed
should not be more
than sufficient to cover
the cost of the license
and the necessary
expenses of police
surveillance,
examination
or
regulation
Relatively free from
constitutional limitations

Eminent Domain
govt or its political
subdivisions;
public
service companies
Property is taken for
public use or benefit

Taxation
Only by govt or its
political subdivisions

Operates on entity or
individual as the owner
of a particular property
There is transfer of the
right to property

Community or class of
individuals

Person
affected
receives the market
value of the property
taken

Persons
affected
receives the equivalent
of the tax in the form of
protection and benefits
he receives from the
govt
Generally no limit

No amount imposed;
owner is paid the
market
value
of
property taken

Subject
to
certain
constitutional
limitations;
nonimpairment of contracts

Property is taken for


the support of the govt

Money
contributed
becomes public funds

Subject
to
certain
constitutional
limitations;
nonimpairment of contracts

d. Limitations on Taxing Power


1. Public Purpose- purpose affecting the inhabitants of the state or taxing district as a
community and not merely as individuals; public money can only be spent for public

By Kaye from De Leons Fundamentals of Taxation (2009) and some BAR reviewers

purpose; for the support of the govt; for any of the recognized objects of govt; to
promote general welfare of the community.
2. Inherently legislative
Mactan Cebu International Airport Authority vs. Marcos 261 SCRA 667
Napocor vs. City of Cabanatuan G.R. No. 1491110, April 9, 2003
3. Territorial; Situs of Taxation- literally means place of taxation; the basic rule is that
the state where the subject to be taxed has a situs may rightfully levy and collect the
tax; and the situs is necessarily in the state which has jurisdiction or ehich exercises
dominion over the subject in question. A person may be subject to taxation in several
taxing jurisdictions.
a. Persons- Poll tax may be levied upon persons who are inhabitants or
residents of the state, whether citizens or not.
b. Real Property- taxable only in the state which it is located
c. Tangible personal property- taxable where it is physically located
d. Intangible personal property- generally, domicile of the owner
e. Income- exacted from persons who are residents or citizens in the taxing
jurisdiction and even from those who are neither residents nor citizens
provided the income is derived from sources within the taxing state
f. Business, occupation, transaction- where the business is done, or the
occupation is engaged in, or the transaction took place.
g. Gratuitous transfer of property- state where the transferor is a citizen or
resident, or where the property is located.
4. Exemption of government- agencies and instrumentalities of the government are
generally exempt from taxation; the govt would be taxing itself to raise money to pay
over to itself; immunity is necessary in order that the functions of the govt shall not be
unduly impeded; reduce the amount of money to be handled by the govt in its
operations. This exemption only applies to govt entities through which the govt
immediately and directly exercises its sovereign powers. GOCCs performing
proprietary functions are generally subject to tax in the absence of tax exemptions in
their charters.
5. Constitutional Limitations of Taxation
1. Article III, Section 20
Section 20. No person shall be imprisoned for debt or non-payment of a poll tax.
2. Article VI Section 28 (1)
Section 28. (1) The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
Abakada vs. Ermita 469 SCRA 1
Tolentino vs. Secretary Finance 249 SCRA 628
3. Article VI Section 28 (2)
(2) The Congress may, by law, authorize the President to fix within specified
limits, and subject to such limitations and restrictions as it may impose, tariff
rates, import and export quotas, tonnage and wharfage dues, and other duties or
imposts within the framework of the national development program of the
Government.
RMO 20-2013 (July 22,2013)
St. Paul College vs. CIR (RTC-Makati Civil Case No. 13-1268, 13-1405,
December 27, 2013)
RMO 34-2014

By Kaye from De Leons Fundamentals of Taxation (2009) and some BAR reviewers

4. Article VI Section 28 (3)


(3) Charitable institutions, churches and personages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation.
Lung Center of the Philippines 433 SCRA 119
CIR vs. CA 298 SCRA 83
CIR vs. St. Lukes Medical Center September 26, 2012
5. Article XIV Section 4 (3)
(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from
taxes and duties. Upon the dissolution or cessation of the corporate existence of
such institutions, their assets shall be disposed of in the manner provided by law.
Proprietary educational institutions, including those cooperatively owned, may
likewise be entitled to such exemptions, subject to the limitations provided by law,
including restrictions on dividends and provisions for reinvestment.
6. Article VI, Section 27(2)
(2) The President shall have the power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall not affect the item or items
to which he does not object.
7. Article VIII, Section 5 (2)(b)
Section 5. The Supreme Court shall have the following powers:
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or
the Rules of Court may provide, final judgments and orders of lower courts in:
(b) All cases involving the legality of any tax, impost, assessment, or toll, or any
penalty imposed in relation thereto.
8. Article X, Section 6
Section 6. Local government units shall have a just share, as determined by law,
in the national taxes which shall be automatically released to them.
9. Article VI Section 28 (4)
(4) No law granting any tax exemption shall be passed without the concurrence
of a majority of all the Members of the Congress.
10. Article VI, Section 29 (3)
(3) All money collected on any tax levied for a special purpose shall be treated as
a special fund and paid out for such purpose only. If the purpose for which a
special fund was created has been fulfilled or abandoned, the balance, if any,
shall be transferred to the general funds of the Government.
11. Article III, Section 1 (Due Process)
Section 1. No person shall be deprived of life, liberty, or property without due
process of law, nor shall any person be denied the equal protection of the laws.

By Kaye from De Leons Fundamentals of Taxation (2009) and some BAR reviewers

Pepsi Cola Bottling Company vs. Municipality of Tanauan 69 SCRA 460


Revenue Regulation No. 18-2013
12. Article III, Section 1 (Equal Protection)
John Hay vs. Lim 414 SCRA 356
British American Tobacco vs. Camacho 562 SCRA 511
13. Article III, Section 5 (Religious Freedom )
Section 5. No law shall be made respecting an establishment of religion, or
prohibiting the free exercise thereof. The free exercise and enjoyment of religious
profession and worship, without discrimination or preference, shall forever be
allowed. No religious test shall be required for the exercise of civil or political rights.
14. Article III, Section 10 (Non-impairment of Contracts)
Section 10. No law impairing the obligation of contracts shall be passed.

e. Doctrines in Taxation
1. Prospectivity of tax laws
General rule: tax laws or amendments thereof are prospective because the nature
and amount of tax could not be foreseen and understood by the taxpayer at the time
the transaction which the law seeks to tax was completed.
Exception: when a statute operates retroactively as expressly declared or is clearly
legislative intent.
Republic vs. Ablaza 108 PHIL 1105
2. Double Taxation
Strict sense- taxing twice, by the same taxing authority, within the same jurisdiction, for the same
purpose, in the same year or taxing period, on the same property in the territory; unconstitutional
General sense- there is a burden of 2 or more pecuniary impositions; constitutional like when there is a
tax imposed by the national govt and a local govt for the exercise of the same occupation
Commissioner of Internal Revenue vs. Solidbank Corporation 416 SCRA 436
Compania General De Tabacos vs City of Manila 8 SCRA 367
City of Baguio vs. De Leon 25 SCRA 938
3. Direct vs. Indirect Taxes
Direct- Tax which is demanded from the person who also shoulders the burden of the tax; or tax for which
the taxpayer is directly or primarily liable or which he cannot shift to another.
Indirect- Tax which is falls upon the ultimate purchaser or consumer; part of the purchase price
Asia International Auctioneers vs. Commissioner of Internal Revenue
179115, September 26, 2012)

(G.R. No.

4. Tax Exemption- The grant of an exemption rests upon the theory that such
exemption will benefit the body of the people and not upon the idea of lessening the
burden of the individual owners of property.

By Kaye from De Leons Fundamentals of Taxation (2009) and some BAR reviewers

Mere personal privilege of a grantee; cannot be assigned or


transferred without the consent of the legislature
Generally revocable

Grounds:
1. Based on contract; usually contained in the charter of the corporation to which
the exemption is granted.
2. Public policy
*equity cannot be a ground
Republic vs. Caguioa 536 SCRA 194
5. Compensation and set-off
GENERAL RULE: Taxes cannot be the subject of compensation or set-off. 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 tax cannot await the results of a lawsuit against the government.
Reasons:
a) lifeblood theory
b) taxes are not contractual obligation (absence of consent of taxpayer)
c) taxpayer and government are not mutual
debtors and creditors of each other
EXCEPTIONS:
1) Both claims already became overdue and demandable as well as fully liquidated there must have
already been an act of appropriation by the government (legislative) of funds for payment of the debt.
2) Tax overpayment (BIRs obligation to refund or set-off arises from time tax was paid)
3) If the case involves local government taxes
Commissioner of Internal Revenue vs. Gould Pumps Inc. (August 22, 2012)
Solutio Indebiti
Under Article 1145 of the New Civil Code. There is solutio indebiti where: (1) payment is made when there
exists no binding relation between the payor, who has no duty to pay, and the person who received the
payment; and (2) the payment is made through mistake, and not through liberality or some other cause
Filinvest Development Corporation vs. CIR 529 SCRA 605
Tax Amnesty
NATURE OF TAX AMNESTY
1) general or intentional overlooking by the State of its authority to impose penalties on
persons otherwise guilty of evasion or violation of a revenue or tax law
2) partakes of an absolute forgiveness or waiver of the Government of its right to collect 3)
to give tax evaders, who wish to relent & are willing to reform a chance to do so
RULES ON TAX AMNESTY
1) Tax amnesty
(a) like tax exemption, never favored nor presumed
(b) construed strictly against the taxpayer (must show complete compliance with the law)
2) Government not estopped from questioning the tax liability even if amnesty tax payments
were already received
Reason: Erroneous application and enforcement of the law by public officers do not block
subsequent correct application of the statute. The government is never estopped by
mistakes or errors of its agents.
Basis: Lifeblood Theory
3) Defense of Tax amnesty, like insanity, is a personal defense.
Reason: Relates to the circumstances of a particular accused and not the character of the
acts charged in the information

By Kaye from De Leons Fundamentals of Taxation (2009) and some BAR reviewers

6. Construction of tax statutes


Liberal Construction in favor of Taxpayers- In case of doubt, tax statutes are
construed strictly against the govt and liberally in favor of the taxpayer
Manila Railroad vs. Collector of Customs 52 Phil 950 (1929)
Philippine Health Care Providers vs Commissioner of Internal Revenue 554 SCRA
411
Commissioner of Customs vs. Hypermix Feeds G.R. No. 179579, February 1, 2012
Meralco vs. Vera 67 SCRA 352
Quezon City vs. ABS-CBN 567 SCRA 495- Stricissimi Juris (of the strictest right or
law)
Non-retroactive application (Section 246 of Tax Code)
Any revocation, modification or reversal of any of the rules and regulations promulgated in
accordance with the preceding Sections or any of the rulings or circulars promulgated by the
Commissioner shall not
be given retroactive application if the revocation, modification or reversal will be prejudicial
to the taxpayers, except in the following cases:
(a) Where the taxpayer deliberately misstates or omits material facts from his return or any
document required of him by the BIR;
(b) Where the facts subsequently gathered by the BIR are materially different from the facts
on which the ruling is based; or
(c) Where the taxpayer acted in bad faith.
PBCOM vs. CIR 302 SCRA 241
BIR Ruling No. 370-2011 October 7, 2011
7. Tax Avoidance vs. Evasion
CIR vs. Estate of Toda September 14, 2004
Tax Avoidance (Tax Minimization) tax saving device that is legally permissible
Tax Evasion (Tax Dodging) connotes fraud through the use of pretenses and forbidden
devices to lessen or defeat taxes; must be willful and intentional.

By Kaye from De Leons Fundamentals of Taxation (2009) and some BAR reviewers

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