Bar NIEL Final TAX Print

LAW ON TAXATION
I. General Principles of Taxation

DEFINITION OF TAXATION
Taxation is the inherent power of the
sovereign, exercised through the legislature,
to impose burdens upon the subjects and
objects within its jurisdiction, for the purpose
of raising revenues to carry out the
legitimate objects of the government.
TAXES
Enforced proportional contributions from
properties and persons levied by the State by
virtue its sovereignty for the support of the
government and for public needs.
B. Nature of taxation (LIS)
1. Legislative in character(Only Congress
enact laws subject to some valid delegation)
2. Inherent in sovereignty ( Can be exercised
w/o any provision of the Constitution
mandating it)
3. Subject to Constitutional and inherent
limitation (Power is limited by this
restrictions)
C. Characteristics of taxation
CHARACTERISTICS OF A TAX (P4ELS)
1. It is an enforced contribution
2. It is generally payable in money
3. It is proportionate in character
4. It is levied on persons, property, or the
exercise of a right or privilege
5. It is levied by the State which has
jurisdiction over the subject or object of
taxation
6. It is levied by the law-making body of the
State
TAXATION
To raise revenue
No limit
No special or direct benefit is

received by the taxpayer; merely
general benefit of protection
Contracts may not be impaired
7. It is levied for publics purpose or

purposes
Valid Tax : REQUISITES of a VALID TAX
[P, U, J, A, N]
1) It should be for a public purpose
2) The rule of taxation should be
uniform
3) That either the person or property
taxed be within the jurisdiction of
the taxing authority
4) That the assessment and collection
be in consonance with the due
process clause
5) The tax must not infringe on the
inherent
and
constitutional
limitations of the power of taxation
Taxes are the lifeblood of the government
and
should
be
collected
without
unnecessary hindrance. But their collection
should not be tainted with arbitrariness.
SCOPE OF TAXATION (CUPS)
1) Comprehensive
2) Unlimited
3) Plenary
4) Supreme
TOLENTINO vs. SEC. Of FINANCE
In the selection of the object or
subject of taxation the courts have
no power to inquire into the
wisdom,
objectivity,
motive,
expediency or necessity of such tax
law. (WOMEN)
D. Power of taxation compared with
other powers
1. Police power
2. Power of eminent domain
POLICE POWER
EMINENT DOMAIN
1. Purpose
To promote public welfare
through regulations
To facilitate the States need of

property for public use
1. Amount of Exaction
Limited to the cost of
regulation, issuance of the
license or surveillance
No exaction; but private

property is taken by the State
for public purpose
2. Benefits Received
No direct benefit is received; a
healthy economic standard of
society is attained
A direct benefit results in the

form of just compensation to the
property owner
4. Non-impairment of Contracts
Contracts may be impaired
Contracts may be impaired
NIEL S. DEFENSOR
University of Negros Occidental5. Transfer of Property Rights
Recoletos
2016 Tax Law Bar Exam Coverage

Coverage
Taxes paid become part of public
funds
All persons, property and excises
No transfer but only restraint in

its exercise
Transfer is effected in favor of

the State
6. Scope
All persons, property,
and privileges
Only upon a particular property
E. Purpose of taxation
1. Revenue-raising
PRIMARY: To raise revenue in order to support
the government expenses
2. Non-revenue/special or regulatory
SECONDARY (PRREP)
1) Promotion of General Welfare
2) Regulation
3) Reduction of social inequality
4) encourage the growth of local
industries
5) protect our local industries against
unfair competition
PAL vs. EDU
It is possible for an exaction to be both a tax
and a regulation. License fees and charges,
looked to as a source of revenue as well as a
means regulation. The fees may properly
regarded as taxes even though they also serve
as an instrument of regulation. If the purpose
is primarily revenue, or if revenue is at least
one of the real and substantial purposes, then
the exaction is properly called a tax.
CALTEX vs.. CIR
Taxation is no longer a measure merely to
raise revenue to support the existence of the
government. Taxes may be levied with a
regulatory purpose to provide means for
rehabilitation and stabilization of a threatened
industry which is affected with public interest
as to be within the police power of the State.
F. Principles of sound tax system (FAT)
1. Fiscal adequacy
2. Administrative feasibility
3. Theoretical justice
FISCAL ADEQUACY : VIOLATION VALID
Sources of revenue should be sufficient
to meet the demands of public
expenditure
Revenues should be elastic or capable

of expanding or contracting annually in
response to variations in public
expenditure.
Elasticity may be obtained without
creating annually any new taxes or any
new tax machinery but merely by
rights
changes in the rates applicable to

existing taxes
Even if a tax law violates the principle

of Fiscal Adequacy , in other words, the
proceeds may not be sufficient to
satisfy the needs of the government,
still the tax law is valid
ADMINISTRATIVE FEASIBILITY: VIOLATION

VALID
The tax law must be capable of
effective or efficient enforcement
Tax laws should

convenient,
just
administration
Tax laws should close-up the loopholes

for tax evasion and deter unscrupulous
officials from committing fraud
There is no law that requires

compliance with this principle, so even
if the tax law violates this principle;
such tax law is valid.
be capable of
and
effective
THEORETICAL JUSTICE: VIOLATION INVALID

This principle mandates that taxes
must be just, reasonable and fair
Taxation shall be uniform and equitable
Equitable taxation has been mandated

by our constitution, as if taxes are
unjust and unreasonable then they are
not equitable, thus invalid.
The tax burden should be in proportion

to the taxpayers ability to pay (ABILITY
TO PAY PRINCIPLE)
Aspects of Taxation (LE)

1. Levy or imposition of the tax (tax
legislation)
2. Enforcement or tax administration (tax
administration)
LIFEBLOOD DOCTRINE
Taxes are the lifeblood of the nation
Without revenue raised from taxation,

the government will not survive,
resulting in detriment to society.
Without taxes, the government would

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be paralyzed for lack of motive power

to activate and operate it. (CIR vs.
ALGUE)
Taxes are the lifeblood of the
government and there prompt and
certain availability is an imperious
need.
Taxes are the lifeblood of the nation
through which the agencies of the
government continue to operate and
with which the state effects its
functions for the benefit of its
constituents
ILLUSTRATIONS
OF
THE
LIFEBLOOD
THEORY
1) Collection of the taxes may not be
enjoined by injunction
2) Taxes could not be the subject of
compensation or set off
3) A valid tax may result in destruction of
the taxpayers property
4) Taxation is an unlimited and plenary
power
NECESSITY THEORY
Existence of a government is a necessity and
cannot continue without any means to pay
expense
BENEFITS
PROTECTION
THEORY
(Benefits-Protection / Reciprocity Theory)
Reciprocal duties of protection and

support between State and inhabitants.
Inhabitants pay taxes and in return
receive benefits and protection from
the State
Taxation is described as a symbiotic
relationship whereby in exchange of the
benefits and protection that the citizens
get from the Government, taxes are
paid. (CIR v. Algue, Inc.)
Is the Power to Tax the Power to Destroy?
1. Power to tax is the power to
destroy (Marshall Dictum) refers to the
unlimitedness and the degree or vigor with
which the taxing power may be employed
to raise revenue.
- the financial needs of the State may outrun
any human calculation, so the power to meet
those needs by taxation must not be limited
even though taxes become burdensome or
confiscatory.
2. Power to tax is not the power to
destroy while the Supreme Court sits
(Holmes Dictum) the power to tax knows no
limit except those expressly stated in the
Constitution.
NIEL S. DEFENSOR
University of Negros OccidentalMarshallRecoletos
and Holmes Dictum Reconciled
Although the power to tax is almost unlimited,
it must not be exercised in an arbitrary
manner. If the abuse is so great so as to
destroy the natural and fundamental rights of
people, it is the duty of the judiciary to hold
such an act unconstitutional.
Power of Judicial Review in Taxation
As long as the legislature, in imposing a
tax, does not violate applicable constitutional
limitations or restrictions, it is not within the
province of the courts to inquire into the
wisdom or policy of the exaction, the motives
behind it, the amount to be raised or the
persons, property or other privileges to be
taxed. The courts power in taxation is limited
only to the application and interpretation of
the law.
Note: The principle of judicial non-interference
extends.
1. Prospectivity of Tax Laws
Taxes must be imposed prospectively and not
retroactively. But if the intent of the law
makers is to apply it retroactively, such law
must clearly state that the intention is such.
Prospectivity simply means, if a tax law is
enacted to day, it has to effect tomorrow and
in the years to come...and not to affect the
past.
2. Doctrine of Imprescriptibility of taxes
General Rule: Taxes are imprescriptible
Exception: They are prescriptible if the tax
laws provide for statute of limitations
Prescriptive Periods: 1) Prescriptive periods for
the assessment and collection of taxes
a. NIRC
10 years if return is tainted with falsity
or fraud
3 years if there is no fraud
b. Tariff and customs code
It does not express any general statute of
limitation; it provided, however, that when
articles have entered and passed free of duty
or final adjustment of duties made, with
subsequent delivery, such entry and passage
free of duty or settlement of duties will, after
the expiration of one (1) year, from the date of
the final payment of duties, in the absence of
fraud or protest, be final and conclusive upon
all parties, unless the liquidation of import
entry was merely tentative. (Sec 1603,TCC)
c. Local Government Code
Local Taxes, fees, or charges shall be assessed
within five (5) years from the date they became
due. In case of fraud or intent to evade the
payment of taxes, fees or charges the same may

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NIEL S. DEFENSOR
University of Negros OccidentalRecoletos
-An excise
tax upon certain property
be assessed within ten (10) years from discovery

of the fraud or intent to evade payment. They shall and a property tax upon the same
also be collected either by administrative or
property; and
judicial action within five (5) years from date of
assessment (Sec. 194. LGC)
-A tax upon the same property
imposed by the two different same
3. DOUBLE TAXATION
states
Taxing same property twice when it
b) Broad sense
should be taxed but once. Taxing the
Indirect Double Taxation
same person twice by the same
jurisdiction over the same thing.
Not legally objectionable, happens when there
is two or more pecuniary imposition
Is double taxation prohibited in the
Philippines? (Pepsi Cola Bottling Co. v. City of
If taxes are not of the same kind, or the
Butuan, 1968)
imposition are imposed for different taxing
No. There is no constitutional prohibition
authority and this may involve the same
against double taxation in the Philippines. It is
subject matter
something not favored but is permissible,
provided
that
the
other
constitutional
Examples:
requirements is not thereby violated
-The taxpayers warehousing business although
carried on in relation to the operation of its
a) Strict sense
sugar central is a distinct and separate taxable
Direct Duplicate Taxation/Direct Double
business.
Taxation
Double taxation in the objectionable or
-A license tax may be levied upon a business
prohibited sense
or occupation although the land or property
Same property is taxed twice
used in connection therewith is subject to
property tax
Requisites: TWISSS
1. taxing twice same property or subject
-Both a license fee and a tax may be imposed
matter;
on the same business or occupation for selling
2. same purpose;
the same article and this is not in violation of
3. same taxing authority;
the rules against double taxation
4. within the same jurisdiction or taxing
district;
-When every bottle or container of intoxicating
5. in the same year or taxing period;
beverages is subject to local tax and at the
6. and same kind or character
same time the business of selling such product
is also subject to liquors license
Both Taxes must be imposed on the same
property or subject matter. (Villanueva vs. City
-A tax imposed on both on the occupation of
of Iloilo)
fishing and of the fishpond itself
Instances of Double Taxation
-A tax on mortgage as personal
property when mortgage property is
also taxed at its full value as real
estate.
-A tax upon a corporation for its
capital stock as a whole and upon
shareholders for their share.
-A tax upon corporation for its
property and upon its shareholders
for their shares;
-A tax upon depositors in a bank for
their deposits and a tax upon the
bank for the property in which such
deposits are invested.
-A local ordinance imposes a tax on the

storage of copra where it appears that the
finished products manufactured out of the
copra are subject to VAT
c) Constitutionality of double taxation
General Rule- Constitution does not prohibit
double taxation; hence is may not be invoked
as a defense against the validity of a tax law
as:
1. A tax imposed by the national government
and another by the city for the exercise of the
same occupation of business. (Tax imposed by
different taxing authority)
2. Tax imposed for engaging in the business of
leasing real estate in addition to the real
estate tax on the property leased and income

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tax on the income derived. (Tax on different

kind of object -property, income)
3. Where aside from tax, a license fee is
imposed in the exercise of police power.
Doctrines On Double Taxation
1) Direct Double Taxation (DDT) is not allowed
because it amounts to confiscation of property
without due process of law
2) You can question the validity of double
taxation if there is a violation of the Equal
protection clause or Equality or Uniformity of
Taxation
3) All doubts as to whether double taxation has
been imposed should be resolved in favor of
the taxpayer
d) Modes of eliminating double taxation
Means Employed To Avoid Double
Taxation (PETA)
1) Tax deductions
2) Tax credits
3) Provide for exemption
4) Enter into treatise with other states
5) Allowance on the principle of reciprocity
Remedies of Double Taxation
1. Tax deductions
Example: vanishing deduction under Section
86(A)(2), NIRC
Deduction
Deduction is an amount allowed by law to be
subtracted from gross income to arrive at
taxable income.
2. Tax credits
An amount allowed as a deduction of
the Philippine Income tax on account of
income taxes paid or incurred to foreign
countries. It is given to a taxpayer in order to
provide a relief from too onerous a burden of
taxation in case where the same income is
subject to a foreign income tax and the
Philippine Income tax.
Foreign income taxes may becredited
against the Phil. Income tax, subject to certain
limitations, by citizens, including members of
general professional partnerships or
beneficiaries of estates or trusts (pro rata), as
well as domestic corporations.
A tax credit is granted for estate taxes paid
to a foreign country on the estate of citizens
and resident aliens subject to certain
limitations.
The donors tax imposed upon a citizen or a
resident shall be credited with the amount of
any donors tax imposed by the authority of a
foreign country, subject to certain limitations.
NIEL S. DEFENSOR
Who Can Claim Tax Credit
1) Citizens of the Philippines
2) Domestic corporations
City of Baguio Vs. De Leon
The argument against double taxation may not
be invoked where one tax is imposed by the
state and the other imposed by the city, it
being widely recognized that there is nothing
inherently obnoxious in the requirement that
license fees or taxes be exacted with respect
to the same occupation, calling or activity by
both the state and a political subdivision
thereof. And where the statute or ordinance in
question applies equally to all persons, firms
and corporations placed in a similar situation,
there is no infringement of the rule on equality.
Villanueva Vs. City of Iloilo
An ordinance imposing a municipal tax on
tenement houses was challenged because the
owners already pay real estate taxes and also
income taxes under the NIRC. The Supreme
Court held that there was no double taxation.
The same tax may be imposed by the National
Government as well as the local government.
There is nothing inherently obnoxious in the
exaction of license fees or taxes with respect
to the same occupation, calling or activity by
both the state and a political subdivision
thereof. Further, a license tax may be levied
upon a business or occupation although the
land used in connection therewith is subject to
property tax.
Sparing Rule same dividend earned by a
NRFC within the Phil. is reduced by imposing a
lower rate of 15% (in lieu of the 35%), on the
condition that the country to which the NRFC is
domiliced shall allow a credit against the tax
due from the NRFC, taxes deemed to have
been paid in the Phil. (Sec.28 B 5b) (CIR vs
Procter & Gamble)(GR No. 66838, Dec. 2,
1991)
3. Exemption
Exemption from taxation is the grant of
immunity to particular persons or corporations
or to persons or corporations of a particular
class from a tax which others generally within
the same taxing district are obliged to pay.
4. Escape from taxation
a) Shifting of tax burden
(i) Ways of shifting the tax burden
(ii) Taxes that can be shifted
(iii) Meaning of impact and incidence of
taxation
SHIFTING
Shifting is the transfer of the burden of a tax
by the original payer or the one on whom the

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tax was assessed or imposed to someone else

Process by which such tax burden is
transferred from statutory taxpayer to another
without violating the law
*It should be borne in mind that what is
transferred is not the payment of the tax, but
the burden of the tax
*Only indirect taxes may be shifted; direct
taxes cannot be shifted
WAYS OF SHIFTING THE TAX BURDEN
1. FORWARD SHIFTING
When the burden of the tax is transferred from
a factor of production through the factors of
distribution until it finally settles on the
ultimate purchaser or consumer.
Example:Manufacturer or producer may shift
tax assessed to wholesaler, who in turn shifts
it to the retailer, who also shifts it to the final
purchaser or consumer
NIEL S. DEFENSOR
by law to
pay the tax or the one on whom the
tax is formally assessed. In short, he or she is
the subject of the tax.
In direct taxes, the statutory taxpayer

is the one who shoulders the burden of the tax
while in indirect taxes, the statutory taxpayer
is the one who pay the tax to the government
but the burden can be passed to another
person or entity.
Relationship between impact, shifting,
and incidence of a tax
The impact is the initial phenomenon, the
shifting is the intermediate process, and the
incidence is the result. Thus, the impact in a
sales tax (i.e. VAT) is on the seller
(manufacturer) who shifts the burden to the
customer who finally bears the incidence of
the tax.
Impact is the imposition of the tax; shifting is
the transfer of the tax; while incidence is the
setting or coming to rest of the tax.
2. BACKWARD SHIFTING
When the burden of the tax is transferred from
the consumer or purchaser through the factors
of distribution to the factors of production
CAPITALIZATION
Reduction is the price of the taxed object equal
to the capitalized value of future taxes on the
property sold.
Example:Consumer or purchaser may shift tax

imposed on him to retailer by purchasing only
after the price is reduced, and from the latter
to the wholesaler, or finally to the
manufacturer or producer
This is a special form of backward shifting,

where the burden of future taxes which the
buyer may have to pay is shifted back to the
seller in the form of reduction in the selling
price
3. ONWARD SHIFTINGWhen the tax is shifted two or more times

either forward or backward
TRANSFORMATION
The manufacturer in an effort to avoid

losing his customers, maintains the same
selling price and margin of profit, not by
shifting the tax burden to his customers, but
by improving his method of production and
cutting down or other production cost, thereby
transforming the tax into or earn through the
medium of production.
Example:Thus, a transfer from the seller to the

purchaser involves one shift; from the
producer to the wholesaler, then to retailer, we
have two shifts; and if the tax is transferred
again to the purchaser by the retailer, we have
three shifts in all.
Impact and Incidence of Taxation
Impact of taxation is the point on which a tax
is originally imposed. In so far as the law is
concerned, the taxpayer is the person who
must pay the tax to the government. He is also
termed as the statutory taxpayer-the one on
whom the tax is formally assessed. He is the
subject of the tax
Incidence of taxation is that point on which the
tax burden finally rests or settle down. It takes
place when shifting has been effected from the
statutory taxpayer to another.
Statutory Taxpayer
The Statutory taxpayer is the person required
b) Tax avoidance
TAX AVOIDANCE
Tax avoidance is the exploitation of the
taxpayer of legally permissible alternative tax
rates or methods of assessing taxable property
or income in order to avoid or reduce tax
liability
Also known as tax minimization
not punishable by law
DELPHERS TRADERS CORP vs. IAC (157 SCRA
349)
The Supreme Court upheld the estate planning
scheme resorted to by the Pacheco family in
converting their property to shares of stock in

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a corporation which they themselves owned

and controlled. By virtue of the deed of
exchange, the Pacheco co-owners saved on
inheritance taxes. The Supreme Court said the
records do not point anything wrong and
objectionable about this estate planning
scheme resorted to. The legal right of the
taxpayer to decrease the amount of what
otherwise could be his taxes or altogether
avoid them by means which the law permits
cannot be doubted.
Example:
Following the holding period rule in capital
gains transaction, by postponing the sale of
the capital asset until after twelve months
from date of acquisition you can reduce the
tax on the capital gains by 50%
c) Tax evasion
Tax evasion is the use by the taxpayer of
illegal or fraudulent means to defeat or lessen
the payment of tax. It is also known as tax
dodging. It is punishable by law
YUTIVO vs. CTA
Tax evasion is a term that connotes fraud
through the use of pretenses or forbidden
devices to lessen or defeat taxes
ELEMENTS OF TAX EVASION
Tax evasion connotes the integration of three
(3) factors: (EAC)
1) The end to be achieved, i.e. payment of less
than that known by the taxpayer to be legally
due, or paying no tax when it is shown that tax
is due
2) An accompanying state of mind which is
described as being evil, in bad faith,
willful, or deliberate and not accidental
3) A course of action (or failure of action)
which is unlawful
INDICIA of FRAUD IN TAX EVASION
1) Failure to declare for taxation purposes true
and actual income derived from business for
two
(2) consecutive years; or
(2) Substantial underdeclaration of income tax
returns of the taxpayer for four (4) consecutive
years coupled with unintentional
overstatement of deductions
EVIDENCE TO PROVE TAX EVASION
Since fraud is a state of mind, it need
not be proved by direct evidence but
may be proved from the circumstances
of the case.
REPUBLIC vs. GONZALES (13 SCRA
638)
NIEL S. DEFENSOR
Failure
of the taxpayer to declare for
taxation purposes his true and actual
income derived from his business for
two (2) consecutive years is an
indication of his fraudulent intent to
cheat the government of its due taxes
TAX EXEMPTION
Tax Exemption
It is the grant of immunity to particular
persons or corporations or to persons or
corporations of a particular class from a
tax which persons and corporations
generally within the same state or
taxing district are obliged to pay. It is
an immunity or privilege; it is freedom
from a financial charge or burden to
which others are subjected.
Exemption is allowed only if there is a
clear provision there for.
It is not necessarily discriminatory as
long as there is a reasonable
foundation or rational basis.
Exemptions are not presumed, but
when public property is involved,
exemption is the rule and taxation is
the exemption.
Rationale for granting tax exemptions
Its avowed purpose is some public
benefit or interests which the
lawmaking body considers sufficient to
offset the monetary loss entailed in the
grant of the exemption.
The theory behind the grant of tax
exemptions is that such act will benefit
the body of the people. It is not based
on the idea of lessening the burden of
the individual owners of property.
Grounds for granting tax exemptions
CPR
1) May be based on contract. In such a case,
the public, which is represented by the
government is supposed to receive a full
equivalent therefor, i.e. charter of a
corporation.
2) May be based on some ground of public
policy, i.e., to encourage new industries or to
foster charitable institutions. Here, the
government need not receive any
consideration in return for the tax exemption.
3) May be based on grounds of reciprocity or
to lessen the rigors of international double or
multiple taxation
Note: Equity is not a ground for tax
exemption. Exemption is allowed only if there

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is a clear provision therefor.
Nature of tax exemption (PRINN)

1) It is a mere personal privilege of the
grantee.
2) It is generally revocable by the government
unless the exemption is founded on a
contract which is contract which is
protected from impairment.
3) It implies a waiver on the part of the
government of its right to collect what
otherwise would be due to it, and so is
prejudicial thereto.
4) It is not necessarily discriminatory so long
as the exemption has a reasonable
foundation or rational basis.
5) It is not transferable except if the law
expressly provides so.
Kinds of tax exemption according to
manner of creation
1) Express or affirmative exemption
When certain persons, property or transactions
are, by express provision, exempted from all
certain taxes, either entirely or in part.
2) Implied exemption or exemption by
omission
When a tax is levied on certain classes of
persons, properties, or transactions without
mentioning the other classes.
Every tax statute makes exemptions because
of omissions.
No tax exemption by implication
It must be expressed in clear and
unmistakable language
CALTEX vs. COA
In claiming tax exemption, the burden
of proof lies upon the claimant
It cannot be created by mere
implication
It cannot be presumed that you
are entitled to tax exemption
You must prove it
RULE:
- Taxation is the rule and exemption is
the exception
PROPERTY TAX GOVERNMENT
PROPERTY
Properties owned by the government whether
in their proprietary or governmental capacity
are exempt from real estate tax
TEST:
- OWNERSHIP
Once established that it belongs to the
government, the nature of the use of the
property whether proprietary or sovereign
becomes immaterial.
NIEL S. DEFENSOR
Exemption of public property from taxation
does not extend to improvements therein
made by occupants or claimants at their own
expense.
KINDS OF TAX EXEMPTIONS
ACCORDING TO SCOPE OR EXTENT
1) TOTAL
are exempted, expressly or impliedly from all
taxes
2) PARTIAL
are exempted, expressly or impliedly from
certain taxes, either entirely or in part.
3) There can be no simultaneous exemptions
under two laws, when one grants partial
exemption while other grants total exemption.
Does provision in a statute granting exemption
from all taxes include indirect taxes?
NO. As a general rule, indirect taxes are not
included in the grant of such exemption unless
it is expressly stated.
Nature of power to grant tax exemption
1) National government
The power to grant tax exemptions is an
attribute of sovereignty for the power to
prescribe who or what persons or property
shall not be taxed.
It is inherent in the exercise of the power to
tax that the sovereign state be free to select
the subjects of taxation and to grant
exemptions therefrom.
Unless restricted by the Constitution, the
legislative power to exempt is as broad as its
power to tax.
2) Local governments
Municipal corporations are clothed with no
inherent power to tax or grant tax exemptions.
But the moment the power to impose a
particular tax is granted, they also have the
power to grant exemption therefrom unless
forbidden by some provision of the
Constitution or the law
The legislature may delegate its power to
grant tax exemptions to the same extent that
it may exercise the power to exempt.
Basco vs. PAGCOR (196 SCRA 52): The power
to tax municipal corporations must always

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yield to a legislative act which is superior,

having been passed by the State itself.
Municipal corporations are mere creatures of
Congress which has the power to create and
abolish municipal corporations due to its
general legislative powers. If Congress can
grant the power to tax, it can also provide for
exemptions or even take back the power.
Chavez v. PCGG, G.R. No. 130716, 09
Dec.1998
In a compromise agreement between the
Philippine Government, represented by the
PCGG, and the Marcos heirs, the PCGG granted
tax exemptions to the assets which will be
apportioned to the Marcos heirs. The Supreme
Court ruled that the PCGG has absolutely no
power to grant tax exemptions, even under
the cover of its authority to compromise ill
gotten wealth cases. The grant of tax
exemptions is the exclusive prerogative of the
Congress.
In fact, the Supreme Court even stated that
Congress itself cannot grant tax exemptions in
the case at bar because it will violate the equal
protection clause of the Constitution.
NIEL S. DEFENSOR
thegovernment
and its agencies
Petitioner cannot invoke the rule on stritissimi
juris with respect to the interpretation of
statutes granting tax exemptions to the NPC.
The rule on strict interpretation does not apply
in the case of exemptions in favor of a political
subdivision or instrumentality of the
government. [Maceda v. Macaraig]
Davao Gulf v. Commissioner, 293 SCRA 76
(1998)
A tax cannot be imposed unless it is supported
by the clear and express language of a statute;
on the other hand, once the tax is
unquestionably imposed, a claim of
exemption from tax payers must be clearly
shown and based on language in the law too
plain to be mistaken. Since the partial refund
authorized under Section 5, RA 1435, is in the
nature of a tax exemption, it must be
construed strictissimi juris against the grantee.
Hence, petitioners claim of refund on the
basis of the specific taxes it actually paid must
expressly be granted in a statute stated in a
language too clear to be mistaken.
Interpretation of the laws granting tax

exemptions
General rule
Exemption of the buyer does not extend to the

seller
Exemption of the principal does not extend to
the accessory
In the construction of tax statutes, exemptions

are not favored and are construed strictissimi
juris against the taxpayer. The fundamental
theory is that all taxable property should bear
its share in the cost and expense of the
government.
SURIGAO vs. COLLECTOR of CUSTOMS

Tax refunds, condonations and amnesties,
they being in the nature of tax exemptions
must be strictly construed against the
taxpayer and liberally in favor of the
government.
Taxation is the rule and exemption is the

exemption.
Tax remission or tax condonation
He who claims exemption must be able to

justify his claim or right thereto by a grant
express in terms too plain to be mistaken and
too categorical to be misinterpreted. If not
expressly mentioned in the law, it must be at
least within its purview by clear legislative
intent.
Exceptions
1) When the law itself expressly provides for a
liberal construction thereof.
The word remit means to desist or refrain

from exacting, inflicting or enforcing
something as well as to restore what has
already been taken. The remission of taxes
due and payable to the exclusion of taxes
already collected does not constitute unfair
discrimination. Such a set of taxes is a class by
itself and the law would be open to attack as
class legislation only if all taxpayers belonging
to one class were not treated alike. [Juan Luna
Subd. V. Sarmiento, 91 Phil 370]
2) In cases of exemptions granted to religious,

charitable and educational institutions or to
the government or its agencies or to public
property because the general rule is that they
are exempt from tax.
The condition of a tax liability is equivalent to

and is in the nature of a tax exemption. Thus,
it should be sustained only when expressly
provided in the law. [Surigao Consolidated
Mining v. Commissioner of Internal Revenue, 9
SCRA 728]
Strict interpretation does not apply to
CIR vs. RIO TUBA

Coverage
Law granting partial refund partakes the
nature of a tax exemption and therefore must
be strictly construed against the taxpayer
CIR vs. TOUR SPECIALIST
Gross receipts subject to tax under the tax
code do not include monies or receipts
entrusted to the taxpayer which do not belong
to it and does not redound to the taxpayers
benefit, and it is not necessary that there must
be a law or regulation which would exempt
such monies and receipts within the meaning
of gross receipts.
CONSTITUTIONAL RESTRICTION:
No law granting any tax exemption shall be
passed without the concurrence of a majority
of all members of Congress. (Sec. 28 (4) ART
VI)
PROV. OF NUEVA ECIJA vs. IMPERIAL MINING
Basis or test for real property taxation is use
and not ownership. Thus, it does not matter
who the owner of the property is even if it is
not tax exempt entity, as long as it is being
used for religious, charitable or educational
purposes, then it is tax exempt.
Conversely, even if the property taxation is
owned by the government if the beneficial use
has been granted, for consideration or
otherwise, to a taxable person, then the
property is subject to tax.
6. SET-OFF OR COMPENSATION IN
TAXATION
General rule: A tax delinquency cannot be
extinguished by legal compensation. This is so
because the government and the person
assessed with the tax are not mutually
creditors and debtors. Neither is a tax
obligation an ordinary debt. Moreover, the
collection of a tax cannot await the results of a
lawsuit against the government. Finally, taxes
are not in the nature of contracts but grow out
of the duty to, and are positive acts of the
government to the making and enforcing of
which the personal consent of the taxpayer is
not required [Francia v. IAC, 162 SCRA
622].
Philex Mining Corp. v. CIR, 294 SCRA 687
[1998]
Philex Mining Corp. wants to set-off its claims
for VAT input credit/refund for the excise taxes
due from it. The Supreme Court disallowed
such set-off or compensation.
1
0
NIEL S. DEFENSOR
Taxes cannot
be subject to compensation for
the simple reason that the government and
the taxpayer are not creditors and debtors of
each other. There is a material distinction
between a tax and a debt. Debts are due to
the government in its corporate capacity, while
taxes are due to the government in its
sovereign capacity.
Exception: The Supreme Court allowed set-off
in the case of Domingo v. Garlitos [8 SCRA
443] [in re: claim for payment of unpaid
services of a government employee vis--vis
the estate tax from his estate]. The fact that
the court having jurisdiction of the estate had
found that the claim of the estate against the
government has been appropriated for the
purpose by a corresponding law shows that
both the claim of the government for
inheritance taxes and the claim of the
intestate for services rendered have already
became overdue and demandable as well as
fully liquidated. Compensation therefore takes
place by operation of law
In the case of Republic v. Ericta, [173 SCRA
623], The SC allowed taxes due from the
taxpayer to be considered paid through the
delivery of certificates of indebtedness. It held
that: In effect, while judgment shall be
rendered in favour of the Republic against
Sampaguita for unpaid taxes, judgment ought
at the same time issue for Sampaguita
commanding payment to it by the Republic of
the same sum representing the face value of
the certificate of indebtedness assigned to it
and for recovery of which it had specifically
prayed in its counterclaim.
*This can be construed as an exemption.
In CIR v. Esso Standard, [172 SCRA 364],
the SC allowed the overpaid income tax of
1959 to be considered tax credit against the
deficiency income tax of 1960. It held that
The obligation to return the money
mistakenly paid arises from the moment the
payment is made, and not from the time that
the payee admits the obligation to reimburse.
The obligation of the payee to reimburse an
amount paid to him results from the mistake,
not from the payees confession of the mistake
or recognition of the obligation to reimburse.
Requisites of Compensation in taxation
(Domingo v. Garlitos)
1.That the tax assessed and the claim against
the government be fully liquidated.
2.That the tax assessed and the claim against the

Coverage
government is due and demandable, and
NIEL S. DEFENSOR
findings
of the audit office as confirmed by
1
1
the review office. (Sec.2, Rev. Reg. 7-2001)
3.That the government had already

appropriated funds for the payment of the
claim.
7.COMPROMISE
Definition:A contract whereby the parties, by
reciprocal concessions, avoid litigation or put
an end to one already commenced (Art. 2028,
New Civil Code).
Requisites
1. The taxpayer must have a tax liability.
2. There must be an offer (by the taxpayer of
an amount to be paid by the taxpayer)
3. There must be an acceptance (by the
Commissioner or taxpayer as the case may
be) of the offer in the settlement of the
original claim.
Officers authorized to compromise
1. The Commissioner of Internal
Revenue(CIR) with respect to criminal and
civil cases arising from violations of the Tax
Code [Secs. 7(C) and 204, 1997 NIRC]. This
power of the CIR is discretionary and once
exercised by him cannot be reviewed or
interfered with by the Courts. (Koppel,
Philippines vs. Commissioner, GR No. L-1977,
September 21, 1950)
2.By the Regional Evaluation Board
composed of:
a.the Regional Director as Chairman,
b. Assistant Regional Director,
the heads of the Legal, Assessment and
Collection Divisions, and
c. the Revenue District Officer having
jurisdiction over the taxpayer, as
members;
on assessments issued by the regional

offices involving basic taxes of P500,000 or
less, and minor criminal violations.
Cases which may be compromised

1. Delinquent accounts
2. Cases under administrative protests
3. Civil tax cases being disputed before the
courts
4. Collection cases filed in courts
5. Criminal violations, other than those
already filed in court or those involving
criminal tax fraud; and,
6. Cases covered by pre-assessment notices
but taxpayer is not agreeable to the
Exceptions
1.
2.
3.
4.
Withholding tax cases;

Criminal tax fraud cases;
Criminal violations already filed in court;
Delinquent accounts with duly approved
schedule of installment payments;
5. Cases where final reports of reinvestigation
or reconsideration have been issued
resulting to reduction in the original
assessment and the taxpayer is agreeable
to such decision.
6. Cases which become final and
executory after final judgment of a
court, where compromise is requested
on the ground of doubtful validity of the
assessment (RR. 302002);
7. Estate tax cases where compromise is
requested on the ground of financial
incapacity of the taxpayer. (RR. 30
2002)
Commissioner may compromise the
payment of any internal revenue tax
when
1. A reasonable doubt as to the validity
of the claim against the taxpayer exists;
or
a. The delinquent account or disputed
assessment is one resulting from a jeopardy
assessment.
b.The assessment seems to be arbitrary in
nature, appearing to be based on
presumptions, and there is reason to believe
that its is lacking in legal and/or factual basis;
or
c.The taxpayer failed to file an administrative
protest on account of the alleged failure to
receive notice of assessment or preliminary
assessment and there is reason to believe that
its is lacking in legal and/or factual basis; or
d.The taxpayer failed to file a request for
reinvestigation/reconsideration within 30 days
from receipt of final assessment notice and
there is reason to believe that its is lacking in
legal and/or factual basis; or
e.The taxpayer failed to elevate to the CTA an
adverse decision of the Commissioner, or his
authorized representative, in some cases,
within 30 days from receipt thereof and there
is reason to believe that its is lacking in legal
and/or factual basis; or
f.The assessment were issued on or after Jan.

Coverage
1, 1998, where the demand notice allegedly

failed to comply with the formalities prescribed
under Sec. 228 of the 1997 NIRC; or
g.Assessments made based on the Best
Evidence Obtainable Rule and there is reason
to believe that the same can be disputed by
sufficient and competent evidence.
f.The assessment was issued within the
prescriptive period for assessment as
extended by the taxpayer's execution of
Waiver of the Statute of Limitations the validity
or authenticity of which is being questioned or
at issue and there is strong reason to believe
and evidence to prove that it is not authentic.
(RR. 30 2002)
h. The assessment is based on an issue where
a court of competent jurisdiction made an
adverse decision against the Bureau, but for
which the Supreme Court has not decided
upon with finality. (RR. 08-2004).
2. The financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax [Sec. 204(A), 1997 NIRC). In
such case, the taxpayer should waive the
confidentiality privilege on bank deposits
under RA No. 1405 [Sec. 6(F)(2), NIRC].
1
2
NIEL S. DEFENSOR
except business-related
transactions) from
total assets (net of prepaid expenses, deferred
charges, pre-operating expenses, as well as
appraisal increases in fixed assets), taken from
the latest audited financial statements,
provided that in the case of an individual
taxpayer, he has no other leviable properties
under the law other than his family home;
(Sec. 3, RR. 302002).
a. The taxpayer is a compensation earner with
no other source of income and the familys
gross monthly compensation does not exceed
(P10,500/month if single; P21,000/month if
married), and that it appears that the taxpayer
possesses no other leviable/ distrainable
assets, other than his family home; or
a. The taxpayer has been granted by the SEC
or by any competent tribunal a moratorium or
suspension of payments to creditors, or
otherwise declared bankrupt or insolvent.
(Sec. 3, RR. 07-2001)
The Congressional Oversight Committee,
under Section 290 of the 1997 NIRC is
empowered to require the BIR:
Financial Incapacity. The offer to

compromise based on financial incapacity may
be accepted upon showing that:
a. The corporation ceased operation or is
already dissolved. Provided, that tax liabilities
corresponding to the Subscription Receivable
or Assets distributed/distributable to the
stockholders representing return of capital at
the time of cessation of operation or
dissolution of business shall not be considered
for compromise; or
b. The taxpayer, as reflected in its latest
Balance Sheet supposed to be filed with the
Bureau of Internal Revenue, is suffering from
surplus or earnings deficit resulting to
impairment in the original capital by at least
50%, provided that amounts payable or due to
stockholders other than business-related
transactions which are properly includible in
the regular "accounts payable" are by fiction of
law considered as part of capital and not
liability, and provided further that the taxpayer
has no sufficient liquid asset to satisfy the tax
liability; or
c.The taxpayer is suffering from a networth
deficit (total liabilities exceed total assets)
computed by deducting total liabilities (net of
deferred credits and amounts payable to
stockholders/owners reflected as liabilities,
The submission of all pertinent information,

including but not limited to industry audits,
collection performance data, status reports
on criminal actions initiated against
persons; and
The submission of taxpayer returns.
Minimum Compromise Rates (MCR) of any

tax liability
In case of financial incapacity:
MCR = 10% of the basic assessed tax
Other cases:
MCR = 40% of the basic assessed tax
[Sec. 204(A), 1997 NIRC]
Approval of the compromise by the
Evaluation Board is required when
a. the basic tax involved exceeds
P1,000,000.00, or
b. the settlement offered is less than
the MCR.
NOTE: The MCR may be less than the
prescribed rates of 10% or 40%, as the case
may be, provided it is approved by the
Evaluation Board (composed of the BIR
Commissioner and the four BIR Deputy
Commissioners).
Compromise of Criminal Violations
General Rule: All criminal violations under
the CTRP may be compromised.
Exceptions:

Coverage
1. Those already filed in court

2. Those involving fraud [Sec. 204(B), 1997
NIRC].
Extent of the Commissioners Discretion
to Compromise Criminal Violations
Before the complaint is filed with the
Prosecutors Office:The CIR has full
discretion to compromise except those
involving fraud.
After the complaint is filed with the
Prosecutors Office but before the
information is filed with the court: The CIR
can still compromise provided the prosecutor
must give consent.
After information is filed with the court:
The CIR is no longer permitted to compromise
with or without the consent of the Prosecutor.
(People vs. Magdaluyo, GR No. L-16235, April
20, 1961)
This is more so, when the court has rendered a
final judgment. As a mere agent of the
Government, the Commissioner is not
authorized to accept anything less than what
is adjudicated in favor of the Government. By
virtue of such final judgment, the Government
has already acquired a vested right.
Nature of a Compromise in Extrajudicial
Settlement of the Taxpayers Criminal
Liability for his Violation
It is consensual in character, hence, may not
be imposed on the taxpayer without his
consent. The BIR may only suggest settlement
of his tax liability through a compromise. The
extra-judicial settlement and the amount of
the suggested compromise penalty should
conform with the schedule of compromise
penalties provided under the relevant BIR
regulations or orders.
Remedy in case the taxpayer refuses or
fails to abide the tax compromise
1. Enforce the compromise
a. If it is a judicial compromise, it can be
enforced by mere execution. A judicial
compromise is one where a decision
based on the compromise agreement is
rendered by the court on request of the
parties.
b. Any other compromise is extrajudicial
and like any other contract can only be
enforced by court action.
2. Regard it as rescinded and insist upon
original demand (Art. 2041, Civil Code).
1
3
NIEL S. DEFENSOR
Compromise
Penalty
It is an amount of money that the taxpayer
pays to compromise a tax violation. This is
paid in lieu of criminal prosecution. A taxpayer
cannot be compelled to pay a compromise
penalty. If he does not want to pay, the CIR
must institute a criminal action.
8. TAX AMNESTY
Tax amnesty, being a general pardon or
intentional overlooking by the State of its
authority to impose penalties on persons
otherwise guilty of evasion or violation of a
revenue to collect what otherwise would be
due it and, in this sense, prejudicial thereto. It
is granted particularly to tax evaders who wish
to relent and are willing to reform, thus giving
them a chance to do so and thereby become a
part of the new society with a clean slate.
[Republic v. Intermediate Appellate Court, 196
SCRA 335]
Like tax exemption, tax amnesty is never
favored nor presumed in law. It is granted by
statute. The terms of the amnesty must also
be construed against the taxpayer and
liberally in favor of the government.
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 of
waiver of the government of its right to collect.
3. To give tax evaders, who wish to relent and
are willing to reform a chance to do so.
RULES ON TAX AMNESTY
1. Tax amnesty
a) like tax exemption, it is never favored nor
presumed and 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.

Coverage
Tax remission or tax condonation
The word remit means to desist or refrain
from exacting, inflicting or enforcing
something as well as to restore what has
already been taken. The remission of taxes
due and payable to the exclusion of taxes
already collected does not constitute unfair
discrimination. Such a set of taxes is a class by
itself and the law would be open to attack as
class legislation only if all taxpayers belonging
to one class were not treated alike. [Juan Luna
Subd. V. Sarmiento, 91 Phil 370]
Tax amnesty
Tax exemption
Immunity from all

criminal, civil and
administrative liabilities
arising from non
payment of taxes
Applies only to past tax
periods, hence
retroactive application
Immunity from civil

liability only
Prospective
application
Tax amnesty v. tax condonation v. tax

exemption
A tax amnesty, being a general pardon or
intentional overlooking by the Statute of its
authority to impose penalties on persons
otherwise guilty of evasion or violation of a
revenue or tax law, partakes of an absolute
forgiveness or waiver by the Government of its
right to collect what otherwise would be due it
and, in this sense, prejudicial thereto,
particularly to tax evaders who wish to relent
and are willing to reform are given a chance to
do so and therefore become a part of the
society with a clean slate.
Like a tax exemption, a tax amnesty is never
favored nor presumed in law, and is granted
by statute. The terms of the amnesty must be
strictly construed against the taxpayer and
literally in favor of the government. Unlike a
tax exemption, however, a tax amnesty has
limited applicability as to cover a particular
taxing period or transaction only.
There is a tax condonation or remission when
the State desists or refrains from exacting,
inflicting or enforcing something as well as to
reduce what has already been taken. The
condonation of a tax liability is equivalent to
and is in the nature of a tax exemption. Thus,
it should be sustained only when expressed in
the law.
Tax exemption, on the other hand, is the grant
of immunity to particular persons or
1
4
NIEL S. DEFENSOR
corporations
of a particular class from a tax of
which persons and corporations generally
within the same state or taxing district are
obliged to pay. Tax exemptions are not favored
and are construed strictissimi juris against the
taxpayer.
CONSTRUCTION AND INTERPRETATION OF
TAX LAWS
Construction of Tax Laws
1. Public purpose is always presumed.
2. If the law is clear, apply the law in
accordance to its plain and simple tenor.
3. A statute will not be construed as imposing
a tax unless it does so clearly, expressly
and unambiguously.
4. In case of doubt, it is construed most
strongly against the Government, and
liberally in favor of the taxpayer.
5. Provisions of a taxing act are not to be
extended by implication.
6. Tax laws operate prospectively unless the
purpose of the legislature to give
retrospective effect is expressly declared or
may be implied from the language used.
7. Tax laws are special laws and prevail over a
general law.
Nature of Internal revenue laws
1) Internal revenue laws are not political in
nature.
2) Tax laws are civil and not penal in nature.
Not political in nature
Internal revenue laws are not political in
nature. They are deemed to be laws of the
occupied territory and not of the occupying
enemy.
Civil Not penal in nature
Tax laws are civil and not penal in nature,
although there are penalties provided for their
violation.
The purpose of tax laws in imposing penalties
for delinquencies is to compel the timely
payment of taxes or to punish evasion or
neglect of duty in respect thereof.
9. Construction and Interpretation of Tax
Laws
(a) Tax Laws
1) General Rule:
When the language is plain
the rule of strict construction as against the
government is not applicable where the
language of statute is plain as to no doubt to
its legislative intent.
Where legislative intent must be consider
Tax statutes are to receive a reasonable

Coverage
construction with a view to carrying out their

purpose and intent.
1
5
NIEL S. DEFENSOR
I. SCOPE AND LIMITATION OF TAXATION
They should not be construed as to permit the

taxpayer easily to evade the payment of taxes.
1. Inherent Limitation
a) Public Purpose
2) Rule when there is doubt

No person or property is subject to taxation
unless within the terms or plain import of a
taxing statute. In every case of doubt, tax
statutes are construed strictly against the
government and liberally in favor of the
taxpayer.
(a) Public Purpose of Taxation

This is one of the inherent limitations on the
power to tax and is synonymous to
governmental purpose. A tax must always
be imposed for a public purpose, otherwise, it
will be declared as invalid.
Taxes, being burdens, are not to be presumed

beyond what the statute expressly and clearly
declares.
Good faith of the taxpayer is not sufficient to
justify exemption from surcharge for failing to
pay within the period required by law.
The term public purpose has no fixed

connotation. The essential point is that the
purpose of the tax affects the inhabitants as a
community and not merely as inhabitants.
It has been said that the best test of

rightful taxation is that the proceeds of
the tax must be used:
General rule
Taxation is the rule
Exemptions are highly disfavoured and not
presumed
1. For the support of the government.

2. For some of the recognized objects of the
government; or
3. To promote the welfare of the community.
Exceptions
a. when law provides for a liberal construction
Public vs. Private interest
b. exemptions granted to religious, charitable

and educational institutions or to the
government or its agencies or to public
property because the general rule is that they
are exempted from tax.
He who claims exemptions must be able to
justify his claim by the clearest grant of
organic statute by words too plain to be
mistaken. If ambiguous, there is no
exemptions.
Tax Rules and Regulations
1.They must not be contrary to law and the
Constitution.
2.They must be published in the Official
Gazette or a newspaper of general circulation.
(e)Non-retroactive Application of tax laws
General rule: Tax laws are prospective in
operation because the nature and amount to
the tax could not be foreseen and understood
by the taxpayer at the time the transactions
which the law seeks to tax was completed
Exception: While it is not favored, a statute
may nevertheless operate retroactively
provided it is expressly declared or is clearly
the legislative intent. But a tax law should not
be given retroactive application when it would
be harsh and oppressive.
In Pascual v. Sec. of Public Works 110

SCRA Phil 331, the SC held that the
appropriation for construction of feeder roads
on land belonging to a private person is not
valid, and donation to the government of the
said land made over 5 months after the
approval and effectivity of the Act for the
purpose of giving semblance of legality to the
appropriation does not cure the basic defect.
Incidental advantage to the public or to the
State, which results form the promotion of
private enterprises, does not justify the use of
public funds.
Effect of incidental benefit to private
interest
The purposes to be accomplished by
taxation need not be exclusively public.
Although, private individuals are
directly benefited, the tax would still be
valid provided such benefit is only
incidental.
The test is not as to who receives the

money, but the character of the
purpose for which it is expended; not
the immediate result of the
expenditure, but rather the ultimate
results.
The appropriation of public money to

construct a road on private land is not a
public purpose. [Pascual v. Secretary

Coverage
of Public Works. 110 Phil. 331].
(b) Inherently Legislative

General Rule
Power to tax cannot be delegated
NIEL S. DEFENSOR
inherent
power to tax. [Basco v.
1
6
PAGCOR].
Municipal corporations are mere

creations of Congress which has the
power to create and abolish municipal
corporations. Congress therefore, has
the power of control over local
government units. If Congress can
grant to a municipal corporation the
power to tax certain matters, it can also
provide for exemptions or even to take
back the power.
The power to tax is primarily vested in

the Congress, however, in our
jurisdiction, it may be exercised by local
legislative bodies, no longer merely by
virtue of a valid delegation but
pursuant to direct authority conferred
by Section 5, Article X of the 1987
Constitution, subject to guidelines and
limitations which Congress may provide
which must be consistent with the basic
policy of local autonomy, [MCIAA v.
Marcos, 261 SCRA 667].
The power of taxation, being purely legislative,

cannot be delegated by the Congress. This
limitation arises from the doctrine of
separation of powers among the three
branches of government.
Exception to the non-delegation rule
(PLA)
(a)Delegation to the President.
(b)Delegation to local government units
(c)Delegation to administrative agencies
(a)Delegation to the President
Congress may authorize, by law, the President
to fix, within specified limits and subject to
such limitations and restrictions as it may
impose:
1. Tariff rates;
2. Import and export quotas;
3. Tonnage and wharfage dues;
and
4. other duties or imposts within
the national development
program of the government.
This authorization is embodied in Sec.

401 of the Tariff and Customs Code
which is also called the flexible tariff
clause
Flexible tariff clause

In the interest of national economy,
general welfare and/or national
security, the President, upon
recommendation of the National
Economic and Development Authority,
is empowered:
1. To increase, reduce or remove
existing protective rates of
import duty, provided that the
increase should not be higher
than 100% ad valorem.
2. To establish import quota or to
ban imports of any commodity;
and
3. To impose additional duty on all
imports not exceeding 10% ad
valorem.
(b)Delegation to local government units
The power of local government units to
impose taxes and fees is always subject
to the limitations which the Congress
may provide, the former having no
(c) Delegation to administrative agencies

With the growing complexities of modern life,
and the many technical fields of government
functions, as in matters pertaining to tax
exemptions, delegation of legislative powers
has become the rule and non-delegation the
exception. The legislature may not have the
competence, let alone the interest and the
time, to provide direct and efficacious
solutions to many problems attendant upon
present day undertakings. The legislature
could not be expected to state all the detailed
situations wherein the tax exemption privilege
would be restored. The task may be assigned
to an administrative body like the Fiscal
Incentives Review Board (FIRB). [Maceda v.
Macaraig, 196 SCRA 771].
For delegation to be constitutionally

valid, the law must be complete in itself
and must set forth sufficient standards.
Certain aspects of the taxing process

that are not really legislative in nature
are vested in administrative agencies.
In these cases, there really is no
delegation, to wit:
(VAP)
1. Power to and value property;
2. Power to assess and collect
taxes;
3. Power to perform details of
computation, appraisal, or

Coverage
1
7
adjustment; among others.
NIEL S. DEFENSOR
KIND OF TAX
Personal or Community Tax
SITUS
Residence or domicile of the taxpayer
Real Property Tax

Personal Property Tax
Location of the property

TANGIBLE: where it is physically located or
permanently kept (Lex Rei Sitae)
INTANGIBLE: Subject to Sec 104 of the NIRC * and the
principle of Mobilia Sequuntur Personam **
Business Tax
Excise or Privilege Tax
Sales Tax
Income Tax
Place of Business
Where the act is performed or where occupation is
pursued
Where the sale is consummated
Consider: (1) citizenship, (2) residence,
(3) source of income (Sec 42, 23, NIRC of 1997)
Transfer Tax
Residence or citizenship of the taxpayer or location of

the property
Donors Tax
Location of the property and the citizenship of the

donor (Sec 98, NIRC 1997)
Estate Tax
Location and citizenship of the decedent.(Sec 85,

NIRC)
Franchise Tax
state which granted the franchise

* Mobilia Sequuntur Personam movables
follow the person. According to this maxim,
the situs of personal property is the domicile of
the owner. This is a merely a fiction of law
intended for convenience and not to be
controlling where justice does not demand it.
C) TERRITORIAL
i. Meaning of situs
Situs-place where a thing is considered for
taxation. It is necessary for the exercise of
dominion/authority of a state over a subject
matter.
The determination of the situs of taxation
depends on various factors including the:
1. Nature of the tax;
2.Subject matter thereof (e.g. persons,
property, act or or activity);
3.Possible protection and benefit that may
accrue both to the government and the
taxpayer;
4.Residence or citizenship of the taxpayer; and
5.Source of income.
6. Situs of excise, privilege, business, or
occupation being taxed
*Lex Rei Situs -where the property is located
** the following intangible properties are

considered as properties with a situs in the
Philippines:
a. Franchise which must be exercised in
the Philippines
b. Shares, obligations or bonds issued by
any corporation or sociedad anonima
organized or constituted in the
Philippines in accordance with its laws.
c. Shares, obligations or bonds issued by
any foreign corporation 85% of
business which is located in the
Philippines
d. Shares, obligations, or bonds issued by
any foreign corporation if such shares,
obligations or bonds have acquired a
business situs in the Philippines; and
e. Shares or rights in any partnership
business or industry established in the
Philippines.
Sec. 42, 104
CIR v. British Overseas Airway Corp.,
supra.

Coverage
Revenue derived by an of-line international

carrier without any flight from the Philippines,
from ticket sales through its local agent are
subject to tax on gross Philippine billings
CIR v. Japan Airlines, supra.
JAL made PAL its sales ticket agent in the
Philippines. For the source of income to be
considered coming from the Philippines, it is
sufficient that the income is derived from the
activities within this country regardless of the
absence of flight operations within Philippine
territory.
Wells Fargo Bank v. Collector, 70 Phil 325
(1940)The shares of stock are subject to
Philippine inheritance tax considering that the
decedent was domiciled in California
1
8
NIEL S. DEFENSOR
University of Negros Occidentaltax both Recoletos
in his place of residence and domicile
and the place where those are found.
This is, therefore, an exception to the decision
of the Supreme Court in Wells Fargo v. CIR.
This has since been incorporated in Sec. 104 of
the NIRC.
Sec. 104, NIRC- No tax shall be collected for
intangible personal property if the decedent at
time of his death was citizen and resident of a
foreign country.
Multiplicity of suits
Multiplicity of situs, or the taxation of the same
income or intangible subjects in several taxing
jurisdictions, arises from various factors:
Tan v. del Rosario, supra. All subjects of

taxation similarly situated are to be treated
alike both in privileges confirmed and liabilities
imposed.
1.The variance in the concept of domicile for

tax purposes;
2.Multiple distinct relationships that may arise
with respect to intangible personal property; or
Multiplicity of Situs, Collector v. de Lara,

102 Phil 813 (1958)
3.The use to which the property may have

been devoted all of which may receive the
protection of the laws of jurisdictions other
than the domicile of the owner thereto.
The Supreme Court did not subject to estate

and inheritance taxes the shares of stock
issued by Philippine corporations which were
left by a non-resident alien after his death.
Considering that he is a resident of a foreign
country, his estate is entitled to exemption
from inheritance tax on the intangible personal
property found in the Philippines. This
exemption is granted to non-residents to
reduce the burdens of multiple taxation, which
otherwise would subject a decedents
intangible personal property to the inheritance
4. The remedy to avoid or reduce the

consequent burden in case of multiplicity of
situs is either to:
5. Provide exemptions or allowance of
deduction or tax credit for foreign taxes; or
6. Enter into tax treaties with other States.
(d)International comity
receive any protection from the State.
Corteous, friendly agreement and interaction

between States.
Jurisdiction of the Philippine Government

to Impose Taxes
Where shares of stock left by a non-resident
alien decedent with a corporation in the
Philippines, the SC held that the actual situs of
the shares of stock is in the Philippines. The
owner, residing in California, had extended
here her activities with respect to her
intangibles so as to avail herself of the
protection and benefit of the Philippine laws.
Accordingly the Philippine government had the
jurisdiction to tax, [Wells Fargo Bank v.
Collector, 70 Phil 235].
Under International Law, property of a foreign

State may not be taxed by another State.
Reasons for exemption
1.Sovereign equality of States.
2.When one State enters the territory of
another State, there is an implied
understanding that the former does not intend
to denigrate by placing itself under the
jurisdiction of the other State.
3.Immunity from suit of a State.
Limitation of territorial jurisdiction
Tax laws cannot operate beyond a states
territorial limits.
Property outside ones jurisdiction does not
(e)Property owned by the State

Reason for exempting governmental
entities
Government will be taxing itself to raise

Coverage
money for itself;
1
9
Immunity is necessary on order that the

governmental functions will not be
impeded.
Tax exemption of property owned by the

Republic of the Philippines refers to property
owned by the government and its agencies
which do not have separate and distinct
personalities. The government does not part
with its title by reserving them, but simply
gives notice to the world that it desires them
for a certain purpose. As its title remains with
the Republic, the reserved land is clearly
covered by tax exemption.
However, the exemption does not extend to
improvements on public land. Consequently,
the warehouse constructed on the reserved
land by NDC should properly be assessed real
estate tax, as such improvement does not
appear to belong to the public, [NDC v. Cebu
City, 215 SCRA 382].
Which governmental entities are exempt
from tax?
Government Service Insurance System (GSIS)
Social Security System (SSS)
Philippine Health Insurance Corporation
(PhilHealth)
Philippine Charity Sweepstakes Office (PCSO)
Philippine Amusement and Gaming
Corporation (PAGCOR)
5. Exemption from taxation

a) Meaning of exemption from
taxation
b) Nature of tax exemption
c) Kinds of tax exemption
(i) Express
(ii) Implied
(iii) Contractual
d) Rationale/grounds for
NIEL S. DEFENSOR
NIEL S. DEFENSOR
University of Negros Occidental2
Coverage
Recoletos
0
exemption
e) Revocation of tax exemption
6. Compensation and set-off
7. Compromise
8. Tax amnesty
a)
Definition
b) Distinguished from tax exemption
9. Construction and
interpretation of:
a) Tax laws
(i) General rule
(ii) Exception
b) Tax exemption and exclusion
(i) General rule
(ii) Exception
c) Tax rules and regulations
(i) General rule only
d) Penal provisions of tax laws
e) Non-retroactive application to taxpayers
(i) Exceptions
I. Scope and limitation of taxation
1. Inherent
limitations
a) Public
purpose
b) Inherently legislative
(i) General rule
(ii) Exceptions
(a) Delegation to local governments
(b) Delegation to the President
(c) Delegation to administrative
agencies

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2
1
NIEL S. DEFENSOR
(2) From sources without the Philippines

(3) Income partly within and partly without the Philippines
(c) Situs of property taxes
(1) Taxes on real property
(2) Taxes on personal property
(d) Situs of excise tax
(1) Estate tax
(2) Donors tax
(e) Situs of business
tax
(1) Sale of real property
(2) Sale of personal property
(3) Value-Added Tax (VAT)
d) International comity
e) Exemption of government entities, agencies, and instrumentalities
2. Constitutional limitations
a) Provisions directly affecting taxation
(i) Prohibition against imprisonment for non-payment of poll tax
(ii) Uniformity and equality of taxation
(iii) Grant by Congress of authority to the president to impose tariff
rates
(iv) Prohibition against taxation of religious, charitable
entities, and educational entities
(v) Prohibition against taxation of non-stock, non-profit institutions
(vi) Majority vote of Congress for grant of tax exemption
(vii) Prohibition on use of tax levied for special purpose
(viii) Presidents veto power on appropriation, revenue, tariff bills
(ix) Non-impairment of jurisdiction of the Supreme Court
(x) Grant of power to the local government units to create its own
sources of revenue
(xi) Flexible tariff clause
(xii) Exemption from real property taxes
(xiii) No appropriation or use of public money for religious
purposes
b) Provisions indirectly affecting taxation
(i) Due process
(ii) Equal protection
(iii) Religious freedom
(iv) Non-impairment of obligations of contracts
J. Stages of
taxation
1. Levy
2. Assessment and collection
3. Payment

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2
2
NIEL S. DEFENSOR
4. Refund
K. Definition, nature, and characteristics of taxes
L. Requisites of a valid tax
M. Tax as distinguished from other forms of exactions
1. Tariff
2. Toll
3. License fee
4. Special assessment
5. Debt
N. Kinds of
taxes
1. As to object
a) Personal, capitation, or poll
tax
b) Property tax
c) Privilege tax
2. As to burden or
incidence a) Direct
b) Indirect
3. As to tax
rates
a) Specific
b) Ad valorem
c) Mixed
4. As to purposes
a) General or fiscal
b) Special, regulatory, or sumptuary
5. As to scope or authority to impose
a) National internal revenue taxes
b) Local real property tax, municipal tax
6.
As
to
graduation
a)
Progressive
b)
Regressive
c) Proportionate
II. National Internal Revenue Code (NIRC) of 1997, as amended
A. Income taxation
1. Income tax systems
a) Global tax system
b) Schedular tax system
c) Semi-schedular or semi-global tax system
2. Features of the Philippine income tax law

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2
3
NIEL S. DEFENSOR
a) Direct tax
b) Progressive
c) Comprehensive
d) Semi-schedular or semi-global tax system
3. Criteria in imposing Philippine
income tax
a) Citizenship principle
b) Residence
principle c) Source
principle
4. Types of Philippine income tax
5. Taxable period
a) Calendar
period
b) Fiscal period
c) Short period
6. Kinds of taxpayers
a) Individual taxpayers
(i) Citizens
(a) Resident citizens
(b) Non-resident citizens
(ii) Aliens
(a) Resident aliens
(b) Non-resident aliens
(1) Engaged in trade or business
(2) Not engaged in trade or business
(iii) Special class of individual employees
(a) Minimum wage
earner b) Corporations
(i) Domestic corporations
(ii) Foreign corporations
(a) Resident foreign corporations
(b) Non-resident foreign corporations
(iii) Joint venture and
consortium
c) Partnerships
d) General professional
partnerships
e) Estates and trusts
f) Co-ownerships
7. Income
taxation
a) Definition
b) Nature
c) General principles

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2
4
NIEL S. DEFENSOR
8. Income
a)
Definition
b) Nature
c) When income is taxable
(i) Existence of income
(ii) Realization of income
(a) Tests of realization
(b) Actual vis--vis constructive receipt
(iii) Recognition of income
[Exclude: Methods of accounting]
d) Tests in determining whether income is earned for tax purposes
(i) Realization test
(ii) Claim of right doctrine or doctrine of ownership, command, or
control
(iii) Economic benefit test, doctrine of proprietary interest
(iv) Severance test
(v) All events test
9. Gross
income
a)
Definition
b) Concept of income from whatever source derived
c) Gross income vis--vis net income vis--vis taxable
income
d) Classification of income as to source
(i) Gross income and taxable income from sources within the
Philippines
(ii) Gross income and taxable income from sources without the
Philippines
(iii) Income partly within or partly without the Philippines
e) Sources of income subject to tax
(i) Compensation income
(ii) Fringe benefits
(a) Special treatment of fringe benefits
(b) Definition
(c) Taxable and non-taxable fringe benefits
(iii) Professional income
(iv) Income from business
(v) Income from dealings in property
(a)
Types
of
properties
(1)
Ordinary
assets
(2)
Capital
assets
(b) Types of gains from dealings in property

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5
NIEL S. DEFENSOR
(1) Ordinary income vis--vis capital gain

(2) Actual gain vis--vis presumed gain
(3) Long term capital gain vis--vis short-term capital gain
(4) Net capital gain, net capital loss
[Exclude: Computation of the amount of gain or loss]
(5) Income tax treatment of capital loss
(a) Capital loss limitation rule (applicable to both
corporations and individuals)
(b) Net loss carry-over rule (applicable only to
individuals)
(6) Dealings in real property situated in the Philippines
(7) Dealings in shares of stock of Philippine corporations
(a) Shares listed and traded in the stock exchange
(b) Shares not listed and traded in the stock exchange
(8) Sale of principal residence
(vi) Passive investment income
(a) Interest income
(b) Dividend income
(1) Cash
dividend
(2) Stock
dividend
(3) Property dividend
(4) Liquidating dividend
(c) Royalty income
(d) Rental income
(1) Lease of personal property
(2) Lease of real property
(3) Tax treatment of
(a) Leasehold improvements by lessee
(b) VAT added to rental/paid by the lessee
(c) Advance rental/long term lease
(vii) Annuities, proceeds from life insurance or other types of
insurance
(viii) Prizes and awards
(ix) Pensions, retirement benefit, or separation pay
(x) Income from any source whatever
(a) Forgiveness of indebtedness
(b) Recovery of accounts previously written-off when
taxable/when not taxable
(c) Receipt of tax refunds or credit
(d) Income from any source whatever
(e) Source rules in determining income from within and without
(1) Interests

Coverage
2
6
NIEL S. DEFENSOR
(2)
Dividends
(3) Services
(4) Rentals
(5)
Royalties
(6) Sale of real property
(7) Sale of personal property
(8) Shares of stock of domestic corporation
(f) Situs of income taxation (see page 2 under inherent
limitations, territorial)
(g) Exclusions from gross
income
(1) Rationale for the exclusions
(2) Taxpayers who may avail of the exclusions
(3) Exclusions distinguished from deductions and tax credit
(4) Under the Constitution
(a) Income derived by the government or its political
subdivisions from the exercise of any essential
governmental function
(5) Under the Tax Code
(a) Proceeds of life insurance policies
(b) Return of premium paid
(c) Amounts received under life insurance,
endowment or annuity contracts
(d) Value of property acquired by gift, bequest,
devise or descent
(e) Amount received through accident or health insurance
(f) Income exempt under tax treaty
(g) Retirement benefits, pensions, gratuities, etc.
(h) Winnings, prizes, and awards, including those in
sports competition
(6) Under special laws
(a) Personal Equity and Retirement Account
(h) Deductions from gross
income
(1) General rules
(a) Deductions must be paid or incurred in
connection with the taxpayers trade, business
or profession
(b) Deductions must be supported by adequate
receipts or invoices (except standard
deduction)
(c) Additional requirement relating to withholding
(2) Return of capital (cost of sales or services)

Coverage
2
7
NIEL S. DEFENSOR
(a) Sale of inventory of goods by

manufacturers and dealers of properties
(b) Sale of stock in trade by a real estate dealer and
dealer in securities
(c) Sale of services
(3) Itemized deductions
(a) Expenses
(1) Requisites for deductibility
(a) Nature: ordinary and necessary
(b) Paid and incurred during taxable year
(2) Salaries, wages and other forms of
compensation for personal services actually
rendered, including the grossed-up monetary
value of the fringe benefit subjected to fringe
benefit tax which tax should have been paid
(3) Travelling/transportation expenses
(4) Cost of
materials
(5) Rentals and/or other payments for use or
possession of property
(6) Repairs and
maintenance
(7) Expenses under lease agreements
(8) Expenses for professionals
(9) Entertainment/Representation expenses
(10) Political campaign expenses
(11) Training
expenses
(b) Interest
(2) Non-deductible interest
expense
(3) Interest subject to special
rules
(a) Interest paid in advance
(b) Interest periodically amortized
(c) Interest expense incurred to acquire
property for use in
trade/business/profession
(d) Reduction of interest expense/interest
arbitrage
(c) Taxes
(2) Non-deductible
taxes
(3) Treatments of surcharges/interests/fines for
delinquency
(4) Treatment of special assessment
(5) Tax credit vis--vis deduction

Coverage
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8
NIEL S. DEFENSOR
(d) Losses
(1) Requisites for
deductibility
(2) Other types of
losses
(a) Capital
losses
(b) Securities becoming worthless
(c) Losses on wash sales of stocks or securities
(d) Wagering
losses
(e) Net Operating Loss Carry-Over
(NOLCO)
(e) Bad debts
(1) Requisites for
deductibility
(2) Effect of recovery of bad debts
(f) Depreciation
(1) Requisites for
deductibility
(2) Methods of computing depreciation allowance
(a) Straight-line
method
(b) Declining-balance method
(c) Sum-of-the-years-digit method
[Exclude: Computation of depreciation
allowance]
(g) Charitable and other contributions
(1) Requisites for
deductibility
(2) Amount that may be deducted
(h) Contributions to pension trusts
(1) Requisites for
deductibility
(i) Deductions under special laws
(4) Optional standard deduction
(a) Individuals, except non-resident aliens
(b) Corporations, except non-resident foreign corporations
(c) Partnerships
(5) Personal and additional exemption (R.A. No. 9504,
Minimum
Wage Earner Law)
(a) Basic personal exemptions
(b) Additional exemptions for taxpayer with dependents
(c) Status-at-the-end-of-the-year rule
(d) Exemptions claimed by non-resident aliens
(6) Items not
deductible
(a) General rules
(b) Personal, living or family expenses
(c) Amount paid for new buildings or for
permanent improvements (capital
expenditures)
(d) Amount expended in restoring property (major repairs)

Coverage
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9
NIEL S. DEFENSOR
(e) Premiums paid on life insurance policy covering life

or any other officer or employee financially
interested
(f) Interest expense, bad debts, and losses from
sales of property between related parties
(g) Losses from sales or exchange or property
(h) Non-deductible
interest
(i) Nondeductible
taxes
(j) Non-deductible
losses
(k) Losses from wash sales of stock or securities
(7) Exempt corporations
(a) Propriety educational institutions and
hospitals
(b)
Government-owned
or
controlled
corporations
(c) Others
10. Taxation of resident citizens, non-resident citizens, and
resident aliens
a) General rule that resident citizens are taxable on income from
all sources within and without the Philippines
(i) Non-resident citizens
b) Taxation on compensation income
(i) Inclusions
(a) Monetary compensation
(1)
Regular
salary/wage
(2) Separation pay/retirement benefit not otherwise
exempt
(3) Bonuses, 13thmonth pay, and other benefits not
exempt
(4) Directors fees
(b) Non-monetary compensation
(1) Fringe benefit not subject to
tax
(ii) Exclusions
(a) Fringe benefit subject to tax
(b) De minimis benefits
(c) 13thmonth pay and other benefits, and payments
specifically excluded from taxable compensation
income
(iii) Deductions
(a) Personal exemptions and additional exemptions
(b) Health and hospitalization insurance
(c) Taxation of compensation income of a minimum wage earner
(1) Definition of statutory minimum
wage
(2) Definition of minimum wage
earner
(3) Income also subject to tax exemption: holiday pay,
overtime pay, night-shift differential, and hazard pay
c) Taxation of business income/income from practice of

Coverage
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profession
NIEL S. DEFENSOR

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1
NIEL S. DEFENSOR
d) Taxation of passive income

(i) Passive income subject to final tax
(a) Interest income
(i) Treatment of income from long-term
deposits
(b) Royalties
(c) Dividends from domestic corporations
(d) Prizes and other winnings
(ii) Passive income not subject to
final tax
e) Taxation of capital gains
(i) Income from sale of shares of stock of a Philippine corporation
(a) Shares traded and listed in the stock exchange
(b) Shares not listed and traded in the stock exchange
(ii) Income from the sale of real property situated in the Philippines
(iii) Income from the sale, exchange, or other disposition of
other capital assets
11. Taxation of non-resident aliens engaged in trade or
business
a) General rules
b) Cash and/or property
dividends
c) Capital gains
[Exclude: non-resident aliens not engaged in trade or business]
12. Individual taxpayers exempt from
income tax
a)Senior citizens
b) Minimum wage earners
c) Exemptions granted under international agreements
13. Taxation of domestic
corporations
a)Tax payable
(i) Regular tax
(ii) Minimum Corporate Income Tax
(MCIT)
(a) Imposition of MCIT
(b) Carry forward of excess minimum tax
(c) Relief from the MCIT under certain conditions
(d) Corporations exempt from the MCIT
(e) Applicability of the MCIT where a corporation is governed
both under the regular tax system and a special income tax
system
b) Allowable deductions
(i) Itemized deductions
(ii) Optional standard
deduction
c) Taxation of passive income
(i) Passive income subject to tax

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2
NIEL S. DEFENSOR
(a) Interest from deposits and yield, or any other monetary

benefit from deposit substitutes and from trust funds and
similar arrangements and royalties
(b) Capital gains from the sale of shares of stock not traded in
the stock
exchang
e
(c) Income derived under the expanded foreign currency deposit
system
(d) Inter-corporate dividends
(e) Capital gains realized from the sale, exchange, or disposition
of lands and/or buildings
(ii) Passive income not subject to tax
d) Taxation of capital gains
(i) Income from sale of shares of stock
(ii) Income from the sale of real property situated in the Philippines
(iii) Income from the sale, exchange, or other disposition of
other capital assets
e) Tax on proprietary educational institutions and hospitals
f)Tax on government-owned or controlled corporations,
agencies or instrumentalities
14. Taxation of resident foreign
corporations
a) General rule
b) With respect to their income from sources within the
Philippines
c) Minimum Corporate Income Tax
d) Tax on certain income
(i) Interest from deposits and yield, or any other monetary
benefit from deposit substitutes, trust funds and similar
arrangements and royalties
(ii) Income derived under the expanded foreign currency deposit
system
(iii) Capital gains from sale of shares of stock not traded in
the stock exchange
(iv) Inter-corporate dividends
[Exclude:
(i) International carrier
(ii) Offshore banking units
(iii) Branch profits remittances
(iv) Regional or area headquarters and regional
operating headquarters of multinational
companies]
15. Taxation of non-resident foreign
corporations
a) General rule
b) Tax on certain income
(i) Interest on foreign loans
(ii) Inter-corporate dividends

Coverage
16.
17.
18.
19.
20.
3
3
NIEL S. DEFENSOR
(iii) Capital gains from sale of shares of stock not traded in

the stock exchange
[Exclude:
(i) Non-resident cinematographic film-owner, lessor or
distributor
(ii) Non-resident owner or lessor of vessels chartered by
Philippine nationals
(iii) Non-resident owner or lessor of aircraft machineries
and other equipment]
Improperly accumulated earnings of corporations
Exemption from tax on corporations
Taxation of partnerships
Taxation of general professional partnerships
Withholding
tax a)
Concept
b) Kinds
(i) Withholding of final tax on certain incomes
(ii) Withholding of creditable tax at
source
[Exclude:
(i) Withholding of VAT
(ii) Filing of return and payment of taxes withheld
(iii) Final withholding tax at source
(iv) Creditable withholding tax
(v) Timing of withholding]
B. Estate tax
1. Basic principles
2. Definition
3. Nature
4. Purpose or object
5. Time and transfer of properties
6. Classification of decedent
7. Gross estate vis--vis net estate
8. Determination of gross estate and net estate
9. Composition of gross estate
10. Items to be included in gross estate
11. Deductions from estate
12. Exclusions from estate
13. Tax credit for estate taxes paid in a foreign country
14. Exemption of certain acquisitions and transmissions
15. Filing of notice of death
16. Estate tax return

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4
NIEL S. DEFENSOR
C. Donors tax
1. Basic principles
2. Definition
3. Nature
4. Purpose or object
5. Requisites of valid donation
6. Transfers which may be constituted as donation
a) Sale/exchange/transfer of property for insufficient
consideration
b) Condonation/remission of debt
7. Transfer for less than adequate and full consideration
8. Classification of donor
9. Determination of gross gift
10. Composition of gross gift
11. Valuation of gifts made in property
12. Tax credit for donors taxes paid in a foreign country
13. Exemptions of gifts from donors tax
14. Person liable
15. Tax basis
D. Value-Added Tax
(VAT)
1. Concept
2. Characteristics/Elements of a VAT-Taxable transaction
3. Impact of tax
4. Incidence of tax
5. Tax credit method
6. Destination principle
7. Persons liable
8. VAT on sale of goods or properties
a) Requisites of taxability of sale of goods or properties
9. Zero-rated sales of goods or properties, and effectively zero-rated
sales of goods or properties
10. Transactions deemed sale
a) Transfer, use or consumption not in the course of business of
goods/properties originally intended for sale or use in the course of
business
b) Distribution or transfer to shareholders, investors or creditors
c) Consignment of goods if actual sale not made within 60 days
from date of consignment
d) Retirement from or cessation of business with respect to inventories
on hand
11. VAT exempt transactions
a) VAT exempt transactions, in general
12. Refund or tax credit of excess input tax
a) Who may claim for refund/apply for issuance of tax credit
certificate
b) Period to file claim/apply for issuance of tax credit
certificate
c) Manner of giving refund
d) Destination principle or cross-border doctrine

Coverage
3
5
NIEL S. DEFENSOR
[Exclude:
(i) Change or cessation of status as VAT-registered person
(ii) VAT on importation of goods
(iii) VAT on sale of service and use or lease of properties
(iv) Zero-rated sale of services
(v) Input tax and output tax, defined
(vi) Sources of input tax
(vii) Persons who can avail of input tax credit
(viii) Determination of output/input tax; VAT payable;
excess input tax credits
(ix) Substantiation of input tax credits
(x) Invoicing requirements
(xi) Filing of return and payment
(xii) Withholding of final VAT on sales to government]
E. Tax remedies under the
NIRC
1. Taxpayers
remedies
a) Assessment
(i) Concept of assessment
(a) Requisites for valid assessment
(b) Constructive methods of income determination
(c) Inventory method for income determination
(d) Jeopardy assessment
(e) Tax delinquency and tax deficiency
(ii) Power of the Commissioner to make assessments and prescribe
additional requirements for tax administration and enforcement
(a) Power of the Commissioner to obtain information,
and to summon/examine, and take testimony of
persons
(iii) When assessment is made
(a) Prescriptive period for assessment
(1) False, fraudulent, and non-filing of
returns
(b) Suspension of running of statute of limitations
(iv) General provisions on additions to
the tax
(a) Civil penalties
(b) Interest
(c) Compromise penalties
(v) Assessment process
(a) Tax audit
(b) Notice of informal conference
(c) Issuance of preliminary assessment notice
(d) Exceptions to issuance of preliminary assessment notice
(e) Reply to preliminary assessment notice

Coverage
3
6
NIEL S. DEFENSOR
(h) Issuance of formal letter of demand and assessment

notice/final assessment notice
(i) Disputed assessment
(j) Administrative decision on a disputed assessment
(vi) Protesting assessment
(a) Protest of assessment by taxpayer
(1)
Protested
assessment (2) When
to file a protest (3)
Forms of protest
(4) Content and validity of
protest
(b) Submission of documents within 60 days from filing of protest
(c) Effect of failure to protest
(d) Period provided for the protest to be acted upon
(vii) Rendition of decision by Commissioner
(a) Denial of protest
(1) Commissioners actions equivalent to denial of
protest
(a) Filing of criminal action against taxpayer
(b) Issuing a warrant of distraint and levy
(2)
Inaction
by
Commissioner
(viii) Remedies of taxpayer to action by Commissioner
(a) In case of denial of protest
(b) In case of inaction by Commissioner within 180 days from
submission of documents
(c) Effect of failure to appeal
b) Collection
(i) Requisites
(ii) Prescriptive periods
(iii) Distraint of personal property including garnishment
(a) Summary remedy of distraint of personal property
(1) Purchase by the government at sale upon
distraint
(2) Report of sale to the Bureau of Internal Revenue
(BIR)
(3) Constructive distraint to protect the interest of the
government
(iv) Summary remedy of levy on real property
(a) Advertisement and sale
(b) Redemption of property sold
(c) Final deed of purchaser
(v) Forfeiture to government for want of bidder
(a) Remedy of enforcement of forfeitures
(1) Action to contest forfeiture of
chattel
(b) Resale of real estate taken for taxes
(c) When property to be sold or destroyed
(d) Disposition of funds recovered in legal proceedings or
obtained from forfeiture
(vi) Further distraint or levy
(vii) Tax lien
(viii) Compromise
NIEL S. DEFENSOR
Coverage
Recoletos
7
(a) Authority of the Commissioner
to compromise and abate taxes
(ix) Civil and criminal actions
(a) Suit to recover tax based on false or fraudulent
returns

Coverage
3
8
NIEL S. DEFENSOR
c) Refund
(i) Grounds and requisites for refund
(ii) Requirements for refund as laid down by cases
(a) Necessity of written claim for refund
(b) Claim containing a categorical demand for reimbursement
(c) Filing of administrative claim for refund and the
suit/proceeding before the CTA within 2 years from date
of payment regardless of any supervening cause
(iii) Legal basis of tax refunds
(iv) Statutory basis for tax refund under the tax code
(a) Scope of claims for refund
(b) Necessity of proof for claim or refund
(c) Burden of proof for claim of refund
(d) Nature of erroneously-paid tax/illegally assessed collected
(e) Tax refund vis--vis tax credit
(f) Essential requisites for claim of refund
(v) Who may claim/apply for tax refund/tax credit
(a) Taxpayer/withholding agents of non-resident foreign
corporation
(vi) Prescriptive period for recovery of tax erroneously or illegally
collected
(vii) Other consideration affecting tax refunds
2. Government remedies
a) Administrative
remedies
(i) Tax lien
(ii) Levy and sale of real property
(iii) Forfeiture of real property to the government for want of bidder
(iv) Further distraint and levy
(v) Suspension of business operation
(vi) Non-availability of injunction to restrain
collection of tax
b) Judicial remedies
3. Statutory offenses and
penalties
a) Civil penalties
(i)
Surcharge
(ii)
Interest
(a) In general
(b) Deficiency interest
(c) Delinquency interest
(d) Interest on extended payment
4. Compromise and abatement of
taxes
a) Compromise
b) Abatement
F. Organization and Function of the Bureau of Internal Revenue
1. Rule-making authority of the Secretary of Finance
a) Authority of Secretary of Finance to promulgate rules and
regulations
b) Specific provisions to be contained in rules and regulations
NIEL S. DEFENSOR
Coverage
Recoletos
c) Non-retroactivity of rulings 9
2. Power of the Commissioner to suspend the business operation of a
taxpayer

Coverage
4
0
NIEL S. DEFENSOR
III. Local Government Code of 1991, as

amended
A. Local government taxation
1. Fundamental principles
2. Nature and source of taxing power
a)Grant of local taxing power under the local government
code
b)Authority to prescribe penalties for tax violations
c) Authority to grant local tax
exemptions
d) Withdrawal of exemptions
e) Authority to adjust local tax rates
f) Residual taxing power of local
governments
g) Authority to issue local tax ordinances
3. Local taxing authority
a) Power to create revenues exercised through Local
Government Units
b) Procedure for approval and effectivity of tax ordinances
4. Scope of taxing power
5. Specific taxing power of Local
Government Units
a) Taxing powers of provinces
(i)
Tax on transfer of real property
ownership
(ii)
Tax on business of printing and
publication
(iii) Franchise tax
(iv) Tax on sand, gravel and other quarry
services
(v)
Professional
tax
(vi) Amusement tax
(vii) Tax on delivery
truck/van
b) Taxing powers of cities
c) Taxing powers of municipalities
(i) Tax on various types of businesses
(ii) Ceiling on business tax impossible on municipalities within Metro
Manila
(iii) Tax on retirement on business
(iv) Rules on payment of business tax
(v) Fees and charges for regulation & licensing
(vi) Situs of tax
collected
d) Taxing powers of
barangays
e) Common revenue raising powers
(i) Service fees and charges
(ii) Public utility charges
(iii) Toll fees or
charges f) Community
tax
NIEL S. DEFENSOR
Coverage
Recoletos
1 powers of
6. Common limitations on the taxing
LGUs
7. Collection of business tax
a) Tax period and manner of
payment
b) Accrual of tax
c) Time of payment
d) Penalties on unpaid taxes, fees or charges
e) Authority of treasurer in collection and inspection of books

Coverage
4
2
NIEL S. DEFENSOR
8. Taxpayers remedies
a) Periods of assessment and collection of local taxes, fees or
charges
b) Protest of assessment
c)Claim for refund of tax credit for erroneously or illegally collected
tax, fee or charge
9. Civil remedies by the LGU for collection of revenues
a) Local governments lien for delinquent taxes, fees or
charges
b) Civil remedies, in general
(i) Administrative action
(ii) Judicial action
B. Real property taxation
1. Fundamental principles
2. Nature of real property tax
3. Imposition of real property tax
a) Power to levy real property tax
b) Exemption from real property tax
4. Appraisal and assessment of real property tax[CONCEPT ONLY]
5. Collection of real property tax
a) Date of accrual of real property tax and
special levies
b) Collection of tax
(i) Collecting authority
(ii) Duty of assessor to furnish local treasurer with assessment rolls
(iii) Notice of time for collection of tax
c) Periods within which to collect real
property tax
d) Special rules on payment
(i) Payment of real property tax in installments
(ii) Interests on unpaid real property tax
(iii) Condonation of real property tax
e) Remedies of LGUs for collection of real property tax
(i) Issuance of notice of delinquency for real property tax payment
(ii) Local governments lien
(iii) Remedies in general
(iv) Resale of real estate taken for taxes, fees or charges
(v) Further levy until full payment of amount due
6. Refund or credit of real
property tax
a) Payment under protest
b) Repayment of excessive collections
7. Taxpayers remedies
a) Contesting an assessment of value of real property
(i) Appeal to the Local Board of Assessment Appeals
(ii) Appeal to the Central Board of Assessment Appeals
(iii) Effect of payment of tax
b. Payment of real property tax under protest
(i) File protest with local treasurer
(ii) Appeal to the Local Board of Assessment
Appeals
(iii) Appeal to the Central Board of Assessment
Appeals

4
Coverage
3
(iv) Appeal to the CTA
(v) Appeal to the Supreme Court
NIEL S. DEFENSOR

Coverage
4
4
NIEL S. DEFENSOR
IV. Tariff and Customs Code of 1978, as

amended
A. Tariff and duties, defined
B. General rule: all imported articles are subject to duty.
1. Importation by the government taxable
C. Purpose for imposition
D. Flexible tariff clause
E. Requirements of importation
1. Beginning and ending of importation
2. Obligations of
importer
a) Cargo manifest
b) Import entry
c) Declaration of correct weight or
value
d) Liability for payment of duties
e) Liquidation of
duties f) Keeping of
records
F. Importation in violation of tax credit certificate
1. Smuggling
2. Other fraudulent practices
G. Classification of goods
1. Taxable importation
2. Prohibited importation
3. Conditionally-free importation
H. Classification of duties
1. Ordinary/regular duties
a) Ad valorem; methods of valuation
(i) Transaction value
(ii) Transaction value of identical
goods
(iii) Transaction value of similar
goods
(iv) Deductive value
(v) Computed value
(vi) Fallback
value
b) Specific
2. Special duties
a) Dumping duties
b) Countervailing
duties
c) Marking duties
d) Retaliatory/discriminatory
duties

Coverage
e) Safeguard
4
5
NIEL S. DEFENSOR

Coverage
4
6
NIEL S. DEFENSOR
I. Remedies
1. Government
a) Administrative/extrajudicial
(i) Search, seizure, forfeiture,
arrest
b) Judicial
(i) Rules on appeal including jurisdiction
2. Taxpayer
a) Protest
b) Abandonment
c) Abatement and refund
V. Judicial Remedies (R.A. No. 1125, as amended, and the Revised Rules of
the
Court of Tax Appeals)
A. Jurisdiction of the Court of Tax Appeals
1. Exclusive appellate jurisdiction over civil tax cases
a) Cases within the jurisdiction of the court en banc
b) Cases within the jurisdiction of the court in divisions
2. Criminal cases
a) Exclusive original jurisdiction
b) Exclusive appellate jurisdiction in criminal cases
B. Judicial procedures
1. Judicial action for collection of
taxes a) Internal revenue
taxes
b) Local taxes
(i) Prescriptive period
2. Civil cases
a) Who may appeal, mode of appeal, effect of appeal
(i) Suspension of collection of tax
a) Injunction not available to restrain collection
(ii) Taking of evidence
(iii) Motion for reconsideration or new
trial
b) Appeal to the CTA, en banc
c) Petition for review on certiorari to the Supreme Court
3. Criminal cases
a) Institution and prosecution of criminal actions
(i) Institution of civil action in criminal
action
b) Appeal and period to appeal
(i) Solicitor General as counsel for the people and government
officials sued in their official capacity
c) Petition for review on certiorari to the Supreme Court
C. Taxpayers suit impugning the validity of tax measures or acts of taxing
authorities
1. Taxpayers suit, defined
2. Distinguished from citizens suit
3. Requisites for challenging the constitutionality of a tax measure or
act of taxing authority
NIEL S. DEFENSOR
Coverage
Recoletos
7
a) Concept of locus standi as applied
in taxation
b) Doctrine of transcendental
importance c) Ripeness for judicial
determination

Coverage
4
8
NIEL S. DEFENSOR
IMPORTANT NOTES:
1. This listing of covered topics is not intended and should not be used by the law
schools as a course outline. This was drawn up for the limited purpose of ensuring
that Bar candidates are guided on the coverage of the 2016 Bar Examinations.
2. All Supreme Court decisions - pertinent to a given Bar subject and its listed topics,
and promulgated up to May 31, 2015 - are examinable materials within the
coverage of the 2016 Bar Examinations.

Bar NIEL Final TAX Print

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LAW ON TAXATION

I. General Principles of Taxation

No special or direct benefit is

7. It is levied for publics purpose or

To facilitate the States need of

No exaction; but private

A direct benefit results in the

2016 Tax Law Bar Exam Coverage

No transfer but only restraint in

Transfer is effected in favor of

Only upon a particular property

Revenues should be elastic or capable

changes in the rates applicable to

Even if a tax law violates the principle

ADMINISTRATIVE FEASIBILITY: VIOLATION

Tax laws should

Tax laws should close-up the loopholes

There is no law that requires

THEORETICAL JUSTICE: VIOLATION INVALID

Equitable taxation has been mandated

The tax burden should be in proportion

Aspects of Taxation (LE)

Without revenue raised from taxation,

2016 Tax Law Bar Exam Coverage

be paralyzed for lack of motive power

Reciprocal duties of protection and

2016 Tax Law Bar Exam Coverage

be assessed within ten (10) years from discovery

-A local ordinance imposes a tax on the

2016 Tax Law Bar Exam Coverage

tax on the income derived. (Tax on different

2016 Tax Law Bar Exam Coverage

tax was assessed or imposed to someone else

In direct taxes, the statutory taxpayer

Example:Consumer or purchaser may shift tax

This is a special form of backward shifting,

3. ONWARD SHIFTINGWhen the tax is shifted two or more times

The manufacturer in an effort to avoid

Example:Thus, a transfer from the seller to the

2016 Tax Law Bar Exam Coverage

a corporation which they themselves owned

2016 Tax Law Bar Exam Coverage

is a clear provision therefor.

Nature of tax exemption (PRINN)

2016 Tax Law Bar Exam Coverage

yield to a legislative act which is superior,

Interpretation of the laws granting tax

Exemption of the buyer does not extend to the

In the construction of tax statutes, exemptions

SURIGAO vs. COLLECTOR of CUSTOMS

Taxation is the rule and exemption is the

Tax remission or tax condonation

He who claims exemption must be able to

The word remit means to desist or refrain

2) In cases of exemptions granted to religious,

The condition of a tax liability is equivalent to

Strict interpretation does not apply to

CIR vs. RIO TUBA

2016 Tax Law Bar Exam Coverage

2016 Tax Law Bar Exam Coverage

government is due and demandable, and

the review office. (Sec.2, Rev. Reg. 7-2001)

3.That the government had already

on assessments issued by the regional