Taxation 101

Part 1 – General Principles

A. Taxation, defined
 Taxation is the act of laying a tax, i.e., the process or means by which the sovereign, through its law-making
body, raises income to defray the necessary expenses of government. It is merely a way of apportioning the
cost of government among those who in some measure are privileged to enjoy its benefits and, therefore,
must bear its burdens.
 As a power, taxation refers to the inherent power of the state to demand enforced contributions for public
purpose or purposes.
 Taxes – enforced proportional contributions from persons and property levied by the lawmaking body of the
State by virtue of its sovereignty for the support of government and for all public needs.

B. Nature of the power of taxation

1. Inherent prerogative of the sovereignty – an incident or attribute of sovereignty, being essential to the
existence of every government. It exists apart from constitutions and without being expressly conferred by
the people. Hence, it can be exercised by the government even if the Constitution is entirely silent on the
subject.
2. Legislative in character – peculiarly and exclusively legislative and cannot be exercised by the executive
or judicial branch of the government. Only Congress can impose taxes. Local legislative bodies can also
impose taxes but subject to limitations provided by law.
3. Subject to constitutional and inherent limitations – not absolute; subject to certain limitations or
restrictions. The power to tax is said to be the strongest of all the powers of government. It is unlimited,
plenary, comprehensive and supreme, in the absence of constitutional restrictions, the principal check on its
abuse resting in the responsibility of members of Congress to their constituents.

C. Basis of taxation
1. Necessity to serve the people
2. Necessity to protect the people
3. (correlate with the lifeblood doctrine)

D. Importance of taxes
Lifeblood doctrine – the existence of government is a necessity; it cannot exist nor endure without the means
to pay its expenses; and for those means, the government has the right to compel all its citizens and property
within its limits to contribute in the form of taxes.

E. Theory of taxation
 Benefits received or compensation theory – Despite the natural reluctance to surrender part of the
taxpayer’s hard-earned income to the government, every person who is able to must contribute his share in
the running of the government. The government, for its part, is expected to respond in the form of tangible
and intangible benefits intended to improve the lives of the people and enhance their moral and material
values.
 Symbiotic relationship
1. Support by the taxpayers
2. Protection and benefits by the government

F.Purpose and Objectives of Taxation

1. Primary: revenue raising
2. Secondary: non-revenue raising
a.Regulation – e.g. protect local industries against unfair competition
Involves the power to destroy – should be exercised with caution to minimize the injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector
kill the “hen that lays the golden egg.”
Does not involve the power to destroy as long as the SC sits – the two limitations on the power of
taxation are the inherent and constitutional limitations which are intended to prevent abuse on the
exercise of the otherwise plenary and unlimited power. It is the Court’s role to see to it that the exercise
of the power does not transgress these limitations.
b. Promotion of general welfare – implementation of the police power
 c. Reduction of social inequality – progressive system of taxation prevents the undue concentration of
wealth in the hands of a few individuals. Progressivity is keystoned on the principle that those who are
able to pay shoulder the bigger portion of the tax burden.
d. Encourage economic growth – by granting incentives and exemptions
e.Protectionism – to protect local industries from foreign competition.

G. Scope of taxation
1. Unlimited
2. Comprehensive
3. Plenary
4. Supreme

H. Scope of the legislative taxing power

1. Determination of purpose(s) – must be for a public purpose. The courts can inquire into whether the
purpose is really public or private. Judicial action is limited only to a review where it involves: (a) the
determination of the validity of the tax in relation to constitutional precepts or provisions; or (b) the
determination in an appropriate case of the application of a tax law.
2. Determination of the subjects and objects of taxation (within its jurisdiction) – refer to the coverage
and the kind or nature of the tax. They may be persons, (natural/juridical); property (real/personal,
tangible/intangible); businesses, transactions, rights, or privileges. Inequalities which result from a singling
out of one particular class for taxation or exemption infringe no constitutional limitation so long as such
exemption is reasonable and not arbitrary.
3. Determination of the amount and rate of tax – As a general, the legislature may levy a tax of any
amount or rate it sees fit. If the taxes are oppressive or unjust, the only remedy is the ballot box and the
election of new representatives. Constitutionally, “the rule of taxation shall be uniform and equitable.”
4. Determination of the kind of tax to be collected

5. Determination of apportionment of the tax

6. Determination of the manner and mode of enforcement & collection

7. Determination of the situs of taxation – In determining the situs of taxation, you have to consider the
nature of the taxes. Example: Community tax - Residence of the taxpayer; Real property tax - Location of the
property. We can only impose property tax on the properties of a person whose residence is in the
Philippines.

I. Aspects of taxation
1. Levy or imposition (legislation) – refers to the enactment of a law by Congress, imposing a tax
2. Administration (tax administration) – administration and implementation of the tax law by the
executive department through administrative agencies; assessment and collection.
Agencies involved:
a.Bureau of Internal Revenue
b. Bureau of Customs
c. Provincial, City and Municipal Assessors and Treasurers

J. Basic principles of a sound tax system

1. Fiscal adequacy – means that the sources of revenue, that is, receipts therefrom, taken as whole, should
be sufficient to meet the demands of public expenditure. It means also that the revenues should be elastic
or capable of expanding or contracting annually in response to variations in public expenditures.
2. Theoretical justice or equality (ability-to-pay doctrine) – means that the tax burden should be
distributed in proportion to the taxpayer’s ability to pay. Similarly situated taxpayers should pay equal taxes,
while those who have more should pay more. Taxation should be uniform as well as equitable.
3. Administrative feasibility – means that tax laws should be capable of convenient, just and effective
administration.
4. Economic efficiency

K. Taxation distinguished from police power and eminent domain

Taxation Eminent Domain Police Power
As to purpose The property (generally The property is “taken” The use of the property is
 money) is taken for the for public use; it must be “regulated” for the
support of the compensated purpose of promoting the
government. general welfare; it is not
compensable.
As to compensation It is assumed that the He receives the market The person affected
individual receives the value of the property receives indirect benefits
equivalent of the tax in taken from him. as may arise from the
the form of protection maintenance of a healthy
and benefits he receives economic standard of
from the government. society.
As to persons affected Operates upon Operates on an individual Operates upon
(1) A community; or as the owner of a (1) A community; or
(2) Class of individuals. particular property. (2)Class of individuals.
As to the authority May be exercised only by May be: May be exercised only by
which exercises the the government or its (1) Exercised by the the government or its
power political subdivisions. government or its political subdivisions.
political subdivisions;
(2) Granted to public
service companies or
public utilities.
As to the amount of Generally, there is no No amount imposed but Amount imposed should
imposition limit on the amount of rather the owner is paid not be more than
tax that may be imposed. the market value of sufficient to cover the
property taken. cost of the license and
necessary expenses.
As to the relationship Is subject to certain Inferior to the Relatively free from
to the Constitutions constitutional limitations.
impairment prohibition; constitutional limitations.
government cannot
expropriate private
property, which under a
contract it had previously
bound itself to purchase
from the other
contracting party.
Effect Including the prohibition There is a transfer of the Is superior to the
against impairment of the right to property. impairment of contract
obligation of contracts. provision.

L. Taxes, defined
1. Internal revenue taxes – refers to taxes imposed by the legislature other than duties on imports and
exports.
2. Local/Municipal taxes – taxes imposed by municipal corporations or local government units.
3. Tariff and Customs duties – the name given to taxes on the importation and exportation of
commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a foreign country.
4. Taxes and tax incentives under special laws

M. Essential characteristics and attributes of taxation

1. Enforced contribution – A tax is not a voluntary payment or donation and its imposition is in no way
dependent upon the will or assent, open or implied, or the person taxed.
2. Generally payable in money – unless qualified by law, “taxes” of “tax” is usually understood to be a
pecuniary burden – an exaction to be discharged alone in the form of money which must be in legal tender.
3. Proportionate in character – ordinarily based on ability to pay – some people pay very high taxes,
others, very small amounts or none at all.
4. Levied on persons, property or the exercise of a right or privilege – in each case, only a person pays the
tax. The property is resorted to for the purpose of ascertaining the amount of tax that must be paid and of
enforcing payment in case of default of the taxpayer. But not all who pay a tax shoulder the burden of the
tax.
5. Levied by the state which has jurisdiction over the subject or object of taxation – the object to be
taxed must be subject to the jurisdiction of the taxing state for taxes to be enforced. Although a state can
 tax all persons subject to its jurisdiction, yet its taxing power necessarily stops at the state boundary lines. It
cannot reach over into another jurisdiction to seize upon person or property for purposes of taxation.
6. Levied by the lawmaking body of the state – under the Constitution, Congress can exercise through the
enactment of tax statutes; and, local legislative bodies are now given direct authority to levy taxes, fees, and
other charges subject to such guidelines and limitations as may be provided by law.
7. Levied for public purpose(s) – imposed to provide income for the support of the government, the
administration of the law, or the payment of public expenses, not for the exclusive benefit of private
persons.
N. Classification of taxes
1. As to subject matter or object:
a.Personal, poll or capitation – tax of a fixed amount imposed on persons residing within a specified
territory, whether citizens or not, without regard to their property or the occupation or business in which
they may be engaged. Taxes of a specified amount imposed upon each person performing a certain act or
engaging in certain business or profession are not, however, poll taxes. (community tax)
b. Property excise – tax imposed on property, whether real or personal, in proportion either to its value, or
in accordance with some other reasonable methods of apportionment. The obligation to pay the tax is
absolute and unavoidable and is not based upon the voluntary action of the person assessed. (real estate
tax)
2. As to who bears the burden:
a.Direct – tax which is demanded from the person who also shoulders the burden of the tax; or tax for
which the taxpayer is directly or primarily liable or which he cannot shift to another. (corporate or
individual income taxes; community tax; estate tax; donor’s tax)
b. Indirect – tax which is demanded from one person in the expectation and intention that he shall
indemnify himself at the expense of another, falling finally upon the ultimate purchaser or consumer; or
tax who ultimately pays for it not as tax but as part of the purchase price. (VAT; percentage taxes; excise
taxes on certain specific goods; customs duties)
3. As to the determination of amount:
a.Specific – tax of a fixed amount imposed by the head or number, or by some standard of weight or
measurement; it requires no assessment (valuation) other than a listing or classification of the objects to
be taxed. (taxes on distilled spirits, wines, and fermented liquors; cigars and cigarettes, and others)
b. Ad valorem (according to value) – tax of a fixed proportion of the value of the property with respect to
which the tax is assessed; it requires the intervention of assessors or appraisers to estimate the value of
such property before the amount due from each taxpayer can be determined. (real estate tax; excise taxes
on automobiles, non-essential goods such as jewelry and perfumes, and others; customs duties [except
cinematographic films])
4. As to purpose:
a.General, fiscal or revenue – tax imposed for the general purposes of the government, i.e., to raise
revenue for governmental needs. (income tax; VAT; and almost all taxes)
b. Special or regulatory – tax imposed for a special purpose, i.e., to achieve some social or economic and
irrespective of whether revenue is actually generated raised or not. (protective tariffs or custom duties on
imported goods to enable similar products manufactured locally to compete with such imports in the
domestic market. Tariff duties intended mainly as a source of revenue are relatively low so as not to
discourage imports.)
5. As to the scope or authority imposing the tax:
a.National – tax imposed by the national government. (national internal revenue taxes; customs duties; and
national taxes imposed by special laws)
b. Municipal or Local – tax imposed by municipal corporations or local government units. (real estate tax;
professional tax)
6. As to graduation or rate:
a.Proportional (flat or uniform tax) – tax based on a fixed percentage of the amount of the property,
receipts, or other basis to be taxed. The rate of the tax remains constant for all levels of the tax base or
any given income level. (real estate taxes; VAT; and other percentage taxes)
b. Progressive – tax the rate of which increases as the tax base or bracket increases. (income tax; estate
tax; donor’s tax)
c. Regressive – tax the rate of which decreases as the tax base or bracket increases, i.e., the tax rate and the
tax base move in opposite directions. We have no regressive taxes.

O. Taxes distinguished from other impositions

1. License or permit fee
 Tax License Fee
Purpose Imposed for revenue purposes Imposed for regulatory purposes
Basis Imposed under the power of Imposed under the police power of
taxation the State
Amount No limit as to the amount of tax Amount of license fee that can be
collected is limited to the cost of
the license and the expenses of
police surveillance and regulation
Time of payment Normally paid after the start of Normally paid before the
business commencement of the business
Effect of non-payment Failure to pay the tax does not Failure to pay a license fee makes
make the business illegal the business illegal
Surrender Taxes, being the lifeblood of the License fee may with or without
State, cannot be surrendered consideration
excepts for lawful considerations
2. Toll fee
Tax Toll
Definition Enforced proportional contributions from A sum of money for the use of something,
persons and property a consideration which is paid for the use of
a property which is of a public nature; e.g.,
road, bridge
Basis A demand of sovereignty A demand of proprietorship
Amount No limit as to the amount Amount of toll depends upon the cost of
construction or maintenance of the public
improvement used
Authority May imposed only by the government May be imposed by the government or
private individuals or entities
3. Compromise penalty
Tax Penalty
Definition Enforced proportional contributions from Sanction imposed as a punishment for
persons and property violation of a law or acts deemed
injurious; violation of tax laws may give
rise to imposition of penalty
Purpose Intended to raise revenue Designed to regulate conduct
Authority May be imposed only by the government May be imposed by:
(a)Government; or
(b) Private individuals or entities
4. Special assessment-ordinance
Tax Special Assessment
Definition Enforced proportional contributions from An enforced proportional contribution
persons and property from owners of lands especially benefited
by public improvements
Basis Based on necessity Based wholly on benefits
Subject Levied on: Levied only on land
(a) Persons;
(b) Property; or
(c)Acts.
Scope Has general application It is exceptional both to the time and
place
Person Liable It is a personal liability of the taxpayer Not a personal liability of the person
assessed; his liability is limited only to the
land involved
5. Debt
Tax Debt
Basis Based on law Based on contract or judgement
Effect of non-payment Taxpayer may be imprisoned for his No imprisonment for failure to pay a
failure to pay the tax (except poll tax) debt
 Mode of payment Generally payable in money May be payable in money, property or
services
Assignability Not assignable Can be assigned
Interest Does not draw interest unless Draws interest if stipulated or delayed
delinquent
Authority Imposed by public authority Can be imposed by private individuals
Prescription Prescriptive periods for tax are Civil code governs the prescriptive
determined under the NIRC period of debts
Are taxes subject of a set-off or compensation?
Taxes for debts – cannot be subject legal compensation or set-off, reason: the government and taxpayer are
not mutually creditors and debtors of each other. Obligations in the nature of debts are due to the
government in its corporate capacity, while taxes are due to the government in its sovereign capacity.
Taxes for taxes – general rule: not allowed to set-off excess taxes against other taxes payable to the
government. The Commissioner of Internal Revenue, however, is authorized by law to grant refund or credit
of taxes erroneously or illegally paid.
6. Subsidy – a pecuniary aid directly granted by the government to an individual or private commercial
enterprise deemed beneficial to the public; not a tax although a tax may be imposed to pay it.
7. Revenue – refers to all the funds or income derived by the government, whether from tax or from
whatever source and whatever manner; refers to the amount collected, tax refers to the amount imposed.
8. Internal revenue – refers to taxes imposed by the legislature other than duties on imports and exports.
9. Customs duties – taxes imposed on goods exported from or imported into a country. “Taxes” is broader
in scope as it includes “customs duties.”
10. Tariff – used interchangeably with “customs duties” in the Tariff and Customs Code. The term may be
used in one of three senses:
a.As a book of rates drawn usually in alphabetical order containing the names of several kinds of
merchandise with the corresponding duties to be paid for the same;
b. As the duties payable on goods imported or exported; or
c. As the system or principle of imposing duties on the importation (or exportation) of goods.

P. Limitations on the power of taxation

1. Inherent limitations – those which exist despite the absence of an express constitutional provision
thereon.
a.Public purpose – can only be used in aid of a public object, an object which is within the purpose for which
government is established. It cannot be exercised in aid of enterprises strictly private, for the benefit of
individuals, though in a remote or collateral way, the public may be benefited thereby. Tax proceeds must
be used –
1. for the support of the government; or
2. for any of the recognized objects of government; or
3. to promote the welfare of the community.
b. Non-delegation of the legislative power of tax – Congress cannot delegate the power to the other
branches of government. Exception:
1. Delegation to the President – for practicality and expediency, our Constitution expressly allows a
Congress “to authorize the President to fix within specified limits, and subject to such limitations and
restrictions as it may impose, tariff rates, import or export quotas, tonnage and wharfage dues and
other duties or imposts.
2. Delegation to LGUs – under the Constitution, each LGU is now expressly given the power to
create its own source of revenue and to levy taxes, subject to such limitation as may be provided by law.
3. Delegation to administrative agencies – certain aspects of the taxing process that are not
legislative may be vested in an administrative agency:
a.The power to value property for purposes of taxation pursuant to fixed rules;
b. The power to assess and collect the taxes; and
c. The power to perform any of the innumerable details of computation, appraisement, and adjustment,
and the delegation of such details.
The powers which cannot be delegated include the determination of the subjects to be taxed, the
purpose of the tax, the amount or rate of the tax, the manner, means, and agencies of collection, and
the prescribing of the necessary rules with respect thereto.
c. Exemption from taxation of government entities – reasons: to levy a tax upon public property would
render necessary new taxes on other public property for the payment of the tax so laid and thus, the
government would be taxing itself to raise money to pay over itself; in order that the functions of
 government shall not be unduly impeded; to reduce the amount of money that has to be handled by the
government in the course of its operations. The exemption applies only to government entities through
which the government immediately and directly exercises its sovereign powers. GICCs performing
proprietary functions are generally subject to tax in the absence of tax exemption provisions in their
charters or the special laws creating them.
d. International comity – the property of a foreign state or government may not be taxed by another. This
principle is based on any of the following grounds:
1. Sovereign equality among states – under international law by virtue of which one state cannot
exercise it sovereign powers over another.
2. Usage among states – when one enters the territory of another, there is an implied
understanding that the former does not intend to degrade its dignity by placing itself under the
jurisdiction of the latter.
3. A foreign government may not be sued without its consent – it is useless to assess a tax since
anyway it cannot be collected.
e.Territorial jurisdiction – A state may not tax property lying outside its border or lay an excise or privilege
tax upon the exercise or enjoyment of a right or privilege derived from the laws of another state and
therein exercised. Persons, properties, businesses, activities, and other transactions within the territorial
boundary of the State, which, and persons outside it, who, received benefits and protection from the
government, are subject to tax.
2. Constitutional limitations
Direct
a.Revenue bill must originate exclusively in the House but the Senate may propose with amendments
(Art. 6, Sec. 24)
b. Concurrence by a majority of all members of Congress for the passage of a law granting tax exemption
– “No law granting any tax exemption shall be passed without the concurrence of a majority of all the
member of the Congress.” (Art. 6, Sec. 28[4]); “majority of all the members of the Congress” means at
least one-half plus one of all the members thereof, voting separately.
c. Rule of uniformity and equity in taxation:
(1) Uniformity: it implies that “all taxable articles or properties of the same class shall be taxed at the
same rate.”
(2) Equity: uniformity in taxation is effected through the apportionment of the tax burden among the
taxpayers which under the Constitution must be equitable; based on the ability of the taxpayer to pay
the tax.
d. Progressive system of taxation – tax laws shall place emphasis on direct rather than indirect taxation,
with ability to pay as the principal criterion. As income increases, so as the tax rate.
e.Exemption of religious, charitable & educational entities, non-profit cemeteries, & churches from
property taxation – covers only property taxes and not other taxes; it is the use of the property that is
exempt, not the ownership; property must be used actually, directly, and exclusively for religious,
charitable, or educational purposes; exemption extends to facilities which are incidental to or necessary
for the accomplishment of said purposes; self-executing provision of the Constitution (Art. 6, Sec. 28[31])
f. Exemption of non-stock, non-profit EDUCATIONAL institutions from taxation – covers income, property,
and donor’s taxes, and customs duties; the revenue, assets, property or donations must be used actually,
directly, and exclusively for educational purposes; lands, buildings, and improvements actually, directly,
and exclusively used for educational purposes are exempt from property tax whether the educational
institution is proprietary or non-profit; self-executing provision of the Constitution (Art. 14, Sec. 4[3,4])
g.Non- impairment of the jurisdiction of the SC in tax cases – Congress cannot take away from the SC the
power given to it by the Constitution the power given to it by the Constitution as the final arbiter of tax
cases (Art. 8, Sec. 2, Sec 5[2,b])
Property Tax Income Tax Donor’s Tax Customs Duties
religious, charitable &
educational entities, √
non-profit cemeteries,
& churches (RCE NP-CC)
non-stock, non-profit
EDUCATIONAL √ √ √ √
institutions (NS-NP-EI)

Power of judicial review

 Courts can determine public purpose, constitutionality or legality of a tax
  Court cannot inquire into the wisdom of a taxing act/legislation
Indirect
a.Due process of law – “No person shall be deprived of life, liberty, or property without due process of law x
x x” (Art. 3, Sec. 1); deprivation of life, liberty, or property is with due process if done with:
1. Substantive due process – under the authority of a law that is valid; and
2. Procedural due process – after compliance with fair and reasonable methods of procedure
prescribed by law.
b. Equal protection of the laws – “x x x nor shall any person be denied the equal protection of the laws.”
(Art. 3, Sec. 1); all persons subject to legislation shall be treated alike under like circumstances and
conditions both in the privileges conferred and liabilities imposed; a violation of the inherent limitations
on taxation would contravene the constitutional injunction against deprivation of property without due
process of law.
c. Non-impairment of the obligation of contracts – the obligation of a contract is impaired when its terms or
conditions are changed by law, executive orders and instructions from the President, administrative
orders or circulars, or ordinances, or by a party without the consent of the other, thereby weakening the
position or rights of the latter;
d. Non-infringement of religious freedom – “No law shall be made respecting the establishment of
religion, or prohibiting the free exercise thereof. The free exercise of and enjoyment of religious
profession and worship, without discrimination or preference, shall forever be allowed x x x.” (Art. 3, Sec.
5); the Constitution does not prohibit imposing a generally applicable tax on the sale of religious materials
by a religious organization.
e.No appropriation for religious purposes – “No public money or property shall be appropriated, applied,
paid, or employed, directly or indirectly, for the use, benefit, or support of any sect, church,
denomination, sectarian institution, or system of religion, or of any priest, preacher, minister or other
religious teacher or dignitary as such, except when such priest, preacher, minister, or dignitary, is assigned
to the armed forces, or to any penal institution, or government orphanage or leprosarium.” (Art. 6, Sec.
29[2]); taxes can only be levied for public purposes.
f. Non-infringement of the freedom of the press - The press is not exempt from taxation; the sale of
magazines or newspapers, maybe the subject of taxation; what is not allowed is to impose tax on the
exercise of an activity which has a connection with freedom of the press (license fee); if we impose tax on
persons before they can deliver or broadcast a particular news or information, that is the one which
cannot be taxed.
TOLENTINO vs. SEC. OF FINANCE
What is prohibited by the constitutional guarantee of free press are laws which single out the press or
target a group belonging to the press for special treatment or which in any way discriminates against the
press on the basis of the content of the publication.
g.Power of the President to veto any particular item or items in a revenue or tariff bill – “The President
shall have the power to veto any particular item or items in an appropriate, revenue or tariff bill, but the
veto shall not affect the item or items to which he does not object.” (Art. 6, Sec 27[2]); the items vetoed
by the President shall not be given effect.

Q. Situs of taxation
1. Meaning of situs of taxation – literally means place of taxation; basic rule: the state where the subject
to be taxed has a situs may rightfully levy and collect the tax; the situs is necessarily in the state which has
jurisdiction or which exercises dominion over the subject in question; a person may be subject to taxation in
several taxing jurisdictions.
2. Situs of subjects of taxation – depends upon various factors including the nature of the tax and the
subject matter thereof (person, property, act, or activity), the possible protection and benefit that may
accrue both to the government and the taxpayer, the residence or the citizenship of the taxpayer, and
source of income.
a.Persons – poll tax levied upon persons who are inhabitants or residents of the state
b. Real property – subject to taxation in the state in which it is located whether the owner is a resident or
not and is taxable only there
c. Tangible personal property – taxable in the state where it has actual situs – where is physically located –
although the owner resides in another jurisdiction; in the Philippines: “Real property as well as personal
property is subject to the law of the country where it is situated.” (Art. 16, NCC); lex rei sitae
d. Intangible personal property – for purposes of property taxation, general rule: at the domicile of the
owner; in accordance with the principle mobilia sequuntur personam – that the situs of personal property
is the domicile of the owner. The principle ,however, is not controlling when it is inconsistent with express
 provisions of statute, or when justice does not demand that it be, as where the property has in fact a situs
elsewhere. (exc: section 104, ra 8424)
e.Income – Income tax may properly be exacted form persons who are residents or citizens in the taxing
jurisdiction and even from those who are neither residents nor citizens provided the income is derived
from sources within the taxing state.
f. Business, occupation, and transaction – general rule: the power to levy an excise tax depends upon the
place where the business is done, or the occupation is engaged in, or the transaction took place.
g.Gratuitous transfer of property – may be subject to taxation in the state where the transferor is (was) a
citizen or resident, or where the property is located.
3. Multiplicity of situs
a.Effect – due to the variance in the concept of “domicile” for tax purposes, and considering the multiple
distinct relationships that may arise with respect to intangible personal property (e.g., debtor, creditor,
trustee, etc.) and the use to which the property may have been devoted, all of which may receive the
protection of the laws of jurisdiction other than the domicile of the owner thereto, the same income or
intangible may be subject to taxation in several taxing jurisdictions.
b. Remedy – to avoid this or at least to reduce the consequent burden, the taxing jurisdiction may:
1. provide for exemptions or allowance of deduction or tax credit for foreign taxes; or
2. enter into treaties with other states

R. Double taxation
1. Meaning of double taxation
a.Strict sense (direct duplicate taxation/direct double taxation) – (a) taxing twice, (b) by the same taxing
authority, (c) within the same jurisdiction or taxing district, (d) for the same purpose, (e) in the same year
[or taxing period], (f) some of the property in the territory. Both taxes must be imposed on the same
property or subject matter.
b. Broad sense (indirect duplicate taxation/indirect double taxation) – taxation other than direct
duplicate. It extends to all cases in which there is a burden of two or more pecuniary impositions.
2. Instances of double taxation:
a.A tax on a mortgage as personal property when the mortgaged property is also taxed at its full value as
real estate;
b. A tax upon a corporation for its property and upon its shareholders for their shares;
c. A tax upon a corporation for its capital stock as a whole and upon the shareholders for their shares;
d. 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;
e.An excise tax upon certain use of property and a property tax upon the same property; and
f. A tax upon the same property imposed by two different states.
3. Constitutionality of double taxation
a.General rule: not prohibited by the Constitution, hence, it may not be invoked as a defense against the
validity of a tax law.
b. Exception: though not forbidden, it is not favored. Such taxation, it has been held, should, whenever
possible, be avoided and prevented.
1. Doubts as to whether double taxation has been imposed should be resolved in favor of the
taxpayer to avoid injustice or unfairness.
2. Where double taxation (in its narrow sense) occurs, the taxpayer may seek relief under the
uniformity rule or the equal protection guarantee.

S.Forms of escape from taxation

1. Six (6) basic forms – (1) shifting, (2) capitalization, (3) transformation, (4) evasion, (5) avoidance, and (6)
exemption.
2. Definition of terms
a.Shifting, in general – the transfer of the burden of a tax by the original payer or the one on whom the tax
was assessed or imposed to another or someone else.
1. Impact of taxation – that 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; also termed as
statutory taxpayer – the one on whom the tax is formally assessed.
2. Incidence of taxation – that point on which the tax burden finally rests or settles down. It takes
place when shifting has been effected from the statutory taxpayer to another or someone else who
cannot pass the burden further. But there may be incidence without shifting, as in transformation.
 3. Relations among impact, shifting and incidence – the impact, the shifting, and the incidence of a
tax corresponds respectively to the imposition, the transfer, and the settling or coming to rest, of the
tax. The impact is the initial phenomenon, the shifting is the intermediate process, and the incidence is
the result. Thus, the impact of sale tax is on the seller (manufacturer) who shifts the burden to the
customer who finally bears the incidence of the tax.
Forward shifting – takes place 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; from
manufacturer/producer to wholesaler, then to the retailer and finally to the consumer.
Backward shifting – effected when the burden of the tax is transferred from the consumer or purchaser
through the factors of distribution to the factor of production.
Onward shifting – occurs when the tax is shifted two or more time either forward or backward. Thus, a
transfer form producer to consumer or from seller to purchaser involves one shift; from producer to
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.
b. Capitalization – the reduction in the price of the taxed object equal to the capitalized value of future
taxes which the purchaser expects to be called upon to pay; (special form of backward shifting) occurs
when the tax falls on an income-producing property (e.g., commercial building). The buyer naturally takes
into account the taxes that he will be paying on the property when he becomes the owner thereof in
determining whether the price is reasonable or not. The burden of the tax rests on the present owner
(seller) if he reduces the price because of the tax; may be considered as a special form of backward
shifting except that while the latter involves the throwing back of a whole series of taxes (e.g., real estate
taxes which are payable every year) and takes place before any of them, with the exception of the first is
paid.
c. Transformation – the method of escape from taxation whereby the manufacturer or producer upon whom
the tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax
and endeavors to recoup himself by improving his process of production thereby turning out his units of
products at a lower cost. In such a case, the loss occasioned by the tax may be offset by the gains resulting
from the economics of production; the taxpayer escapes, not by shifting but by transforming the tax into a
gain through the medium of production.
d. Exemption – 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; an immunity or privilege; freedom from a financial charge or burden to which
others are subjected. Double nexus rule;
e.Tax avoidance (tax planning or tax minimization) – the use by the taxpayer of legally permissible
alternative tax rate or methods of assessing taxable property or income, in order to avoid or reduce tax
liability. Here, the taxpayer uses tax saving device or means sanctioned or allowed by law, so no law is
violated in any way. (tax minimization)
f. Tax evasion (tax dodging) – the use by the taxpayer of illegal or fraudulent means to defeat or lessen the
payment of a tax; punishable by law, subjecting the taxpayer to civil and criminal liabilities.
3. Distinction between tax evasion and tax avoidance
Tax Evasion Tax Avoidance
The escape from taxation accomplished by breaking Covers escape accomplished by legal procedures or
the letter of the tax law – deliberate omission to means which may be contrary to the intent of the
report a taxable item for example. sponsors of the tax law but nevertheless violate the
letter of the law.

4. Elements of tax evasion

a.The end to be achieved – the payment of less than that known by the taxpayer to be legally due, or in
paying no tax when it is shown that a tax is due;
b. An accompanying state of mind which described as being “evil,” “in bad faith,” “willful,” or “deliberate
and not accidental;” and
c. A course of action (or failure of action) which is unlawful.

5. Evidence to prove tax evasion

Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the
circumstances of the case. Thus:
 a.The failure of the taxpayer to declare for taxation purposes his true and actual income derived from his
business for two (2) consecutive years has been held as an indication of his fraudulent intent to cheat the
government of its due taxes. (Republic v. Gonzales, 13 SCRA 633, April 30, 1965)
b. The substantial under declaration of income in the income tax returns of the taxpayer for four (4)
consecutive year coupled with his intentional overstatement of deductions justifies the finding of fraud.
(Perez v. CTA, 103 Phil 1167 [1958])

T. Exemption from taxation

1. Exemption, defined
Exemption from taxation is defined as 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; an immunity or privilege; freedom from a financial charge or
burden to which others are subjected.
2. Nature of tax exemption
a.Personal privilege – cannot be transferred or assigned by the person to whom it is granted without the
consent of the legislature.
b. Generally revocable – unless the exemption is founded on a contract which is protected form
impairment; but the contract must contain the essential elements of other contracts, such as, for example,
a valid cause or consideration.
c. Waiver on the part of the government – the right to collect what is due to it. Hence, it exists only by
virtue of an express grant and must be strictly construed.
d. Not necessarily discriminatory – so long as the exemption has a reasonable foundation or rational basis.
Where, however, no valid distinction exists, the exemption may be challenged as violative of the equal
protection guarantee or the uniformity rule.
3. Nature of the power to grant tax exemption
a.National government – Like the inherent power to tax, the power to exempt from taxation is an attribute
of sovereignty for the power to prescribe who or what property shall be taxed implies the power to
prescribe who or what 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.
b. Local governments – unlike a sovereign state, they are clothed with no inherent power to tax. Hence,
they have also no inherent power to exempt from taxation. But the moment the power to impose
particular tax is granted, they have also the power to grant exemption therefrom unless forbidden by
some provision of the Constitution or law; the legislature may delegate its power to exempt from taxation
to the same extent that it may itself exercise the power to exempt.
4. Rationale of tax exemption
a.Principle of public policy that can support a presumption that the public interest will be subserved by the
exemption allowed; rests upon the theory that such exemption will benefit the body of the people, and
not upon any idea of lessening the burden of the individual owners of property.
b. Its avowed purpose is some public benefit or interest, which the lawmaking body considers sufficient to
offset the monetary loss entailed in the grant of exemption.
Thus, where the exemption serves the public, and not a private interest, it cannot be regarded as a gift or
donation of public funds to, or in aid of, the individual, association, or corporation in whose favor the
exemption is declared.
5. Grounds for tax exemption
a.Contract – where the public is represented by the government, and suppose to receive a full equivalent
therefor. Ordinarily, the provisions of a contract of exemption from taxation are contained in the charter
of the corporation to which the exemption is granted.
b. Public policy – for example, to encourage new and necessary industries, or foster charitable and other
benevolent institutions; or such as, at least makes the public at large interested in encouraging or favoring
the class or interest in whose behalf the exemption is made. In this case, the government need not receive
any consideration in return for the tax exemption.
c. Reciprocity – may be created by treaty to lessen the rigors of international double or multiple taxation
which occurs where there are many taxing jurisdictions, as in the taxation of income and intangible
personal property.
6. Kinds of tax exemption
a.As to manner of creation
 1. Express or affirmative exemption – when certain persons, property, or transactions are, by
express provision, exempted from all or certain taxes, either entirely or in part; may be made by
provisions of the Constitution, statutes, treaties, ordinances, franchises, or contracts; and
2. Implied exemption or exemption by omission – occurs when a tax is levied on certain classes of
persons, properties, or transactions without mentioning the other classes. Every tax statute, in a very
real sense, makes exemptions since all those not mentioned are deemed exempted. The omission may
be either accidental or intentional.
Exemptions are not presumed, but when public property is involved, exemption is the rule, and taxation,
the exception.
b. As to scope or extent
1. Total exemption – only direct taxes. when certain persons, property, or transactions are
exempted, expressly or impliedly, form all taxes; and
2. Partial exemption – when certain persons, property, or transactions are exempted expressly or
impliedly, from certain taxes, wither entirely or in part. , certain tax only
c. As to object
1. Personal – those granted directly in favor of such persons as are within the contemplation of the
law granting the exemption; and
2. Impersonal – those granted directly in favor of a certain class of property.
There can be no simultaneous exemptions under two laws, where one grants partial exemption while the
other grants total exemption.
7. Examples of tax exemptions
a.As provided for in the Constitution
1. From property tax – “charitable institutions, churches and personages or convents appurtenant
thereto, mosques, and non-profit cemeteries, and all lands, buildings, and improvements actually,
directly, and exclusively used for religious, charitable, or educational purposes” (Art, 6, Sec. 28[31]); and
2. From taxes and duties – “all revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational purposes,” and, “subject to conditions
prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and
exclusively for educational purposes.” (Art.14, Sec. 4[3,4])
b. As provided for the tax code (see p. 77, De Leon)
1. From income tax (tax on net or gross income realized during a certain period)
2. From estate tax (tax on the privilege of a deceased person to transmit his property to his heirs or
beneficiaries)
3. From donor’s tax (tax on the privilege of an owner to transfer his property without
consideration)
c. As provided for under special laws
1. From income tax
2. From donor’s tax
3. From estate tax
4. From real property tax
8. Construction of tax exemption statutes
a.General rule: exemptions are not favored and construed strictly (strictissimi juris = by the most strict right
or law) against the taxpayer; cannot be permitted to exist upon vague implication or inference. Taxation is
the rule and exemption, the exception, and, therefore, he who claims exemption must be able to justify
his claim or right thereto, by a grant expressed in terms “too plain to be mistaken and too categorical to
be misinterpreted.”
b. Exceptions:
1. when the law itself expressly provides for a liberal construction, that is, in case of doubt, it shall
be resolved in favor of exemption; and
2. when the exemption is in favor of the government itself or its agencies, or of religious, charitable,
and educational institutions because the general rule is that they are exempt from tax.
If there is an express mention or if the taxpayer falls within the purview of the exemption by clear
legislative intent, the rule on strict construction does not apply.
9. Tax amnesty, defined
A general pardon or intentional overlooking by the State of its authority to impose penalties on persons
otherwise guilty of tax 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 is due it and to give tax evaders who wish to relent a
chance to start a clean slate; not favored nor presumed in law; if granted by statute, terms of the amnesty
must be construed strictly against the taxpayer and liberally in favor of the government.
 10. Tax remission or tax condonation, defined
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]; 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]
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.

U. Nature, construction, application of tax laws

1. Nature of internal revenue law
a.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. Thus, our tax laws continued in force during the
Japanese occupation. (Hilado v. Collector, 100 Phil. 288); It is well known that our internal revenue laws
are not political in nature and, as such, continued in force during the period of enemy occupation and in
effect were actually enforced by the occupation government. Income tax returns that were filed during
that period and income tax payments made were considered valid and legal. Such tax laws are deemed to
be the laws of the occupied territory and not of the occupying enemy.
b. 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. (Republic v. Oasan,
99 Phil 934); The war profits tax is not subject to the prohibition on ex post facto laws as the latter applies
only to criminal or penal matters. Tax laws are civil in nature.
2. Construction of tax laws
a.Rule when legislative intent is clear: Tax statutes are to receive a reasonable construction with a view to
carrying out their purpose and intent.They should not be construed as to permit the taxpayer easily to
evade the payment of taxes.
b. 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. Taxes,being burdens, are not to be presumed beyond
what the statute expressly and clearly declares.
c. Where language is plain: the words employed are to be given their ordinary meaning
d. Provisions granting tax exemptions: Such provisions are construed strictly against the taxpayer claiming
tax exemption.
3. Application of tax laws
a.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
b. 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.
4. Mandatory and directory provisions of tax laws
a.Directory provisions – are those designed merely for the information or direction of office or to secure
methodical and systematic modes of proceedings.
b. Mandatory provisions – are those intended for the security of the citizens or which are designed to
ensure equality of taxation or certainty as to the nature and amount of each person’s tax.
The omission to follow mandatory provisions renders invalid the act or proceeding to which it relates while
the omission to follow directory provisions does not involve such consequence. (Roxas v. Rafferty, 37 Phil
958)
5. Authority of the Secretary of Finance to promulgate rules and regulations
Sec. 244, NIRC – the Sec. of Finance, upon recommendation of the Commissioner of Internal Revenue, shall
promulgate all needed rules and regulations for the effective enforcement of the provisions of the Tax Code.
Revenue Regulations – pronouncement by the DoF; define rules for the effective enforcement of the Tax
Code and related statutes.
 BIR rulings – state the official position of the BIR to queries raised by a taxpayer or on certain specific issues
of law or administration in relation to the provisions of the Tax Code, relevant laws and other issuances of
the BIR, clarifying or interpreting them.
The power to recommend the promulgation of internal revenue rules and regulations by the Sec. of Finance
is given only to the Commissioner. He is not allowed by law to delegate such power to any of his
subordinates.
6. Nature of power to make regulations
Not the power to legislate, but only to be exercised for the purpose of implementing the law or putting it
into effect; statutes being administered may not be altered or added to by the exercise of a power to make
regulations therunder. Such regulations cannot increase or decrease the requirements of the law, nor
embrace matters not covered or intended to be covered by the statute, otherwise, they are invalid for being
in conflict with the law.
7. Necessity and function of regulations
Regulations are deemed necessary to the proper enforcement and execution of laws; they are intended to
clarify or explain the law and carry into effect its general provisions by providing the details of
administration and procedure; through rules and regulations, an administrative body, like the BIR, may
implement broad policies laid down in a statute it is entrusted to enforce, by “filling in” the details which the
legislature, may neither have the time nor expertise to provide.
8. Requisites for validity and effectivity of regulations
a.Requisites:
1. not contrary to law and the Constitution; and
2. published in the Official Gazette
b. Effectivity - Fifteen (15) days from the date of filing of three (3) certified copies in the UP Law Center,
unless a different date is fixed by law, or specified in the rule in cases of eminent danger to public health,
safety and welfare, the existence of which must be expressed in a statement accompanying the rule.
9. Force and effect of regulations
Regulations established and found to be in consonance with the general purposes and objects of the law
have the force and effect of law. It’s as if it has been written in the law itself. In case of conflict with the law,
rules and regulations are null and void. They are invalidated only when the conflict is clear and unequivocal.
10. Administrative rulings and opinions
The power to interpret the provisions of the Tax Code and other tax laws is under the exclusive and original
jurisdiction of the Commissioner of Internal Revenue subject to review by the Sec. of Finance. Rulings in the
form of “opinion” on tax questions are also given by the Sec. of Justice who is the chief legal officer of the
government. These rulings or opinions take on the character of substantive rules and are generally binding
and effective if not otherwise contrary to law and the Constitution.
11. Administrative interpretation and the courts
Administrative interpretations by executive officers are entitled to great respect but not conclusive and will
be ignored if judicially found to be erroneous.
12. Power of the Sec. of Finance to revoke the rulings of his predecessors
The Sec. of Finance has the power to revoke, repeal or abrogate the acts or previous rulings of his
predecessors in office if the former becomes satisfied that a different construction should be given.
13. Non-retroactivity of repeal regulations or rulings, and its exceptions
No retroactivity if the repeal, revocation, modification or reversal of regulations or rulings is prejudicial to
the taxpayer.
Exception:
a.Where the taxpayer deliberately misstates or omits material facts from his return or in any document
required of him by the BIR;
b. Where the facts subsequently gathered by the BIR are materially different from the facts on
which the ruling is based; and
c. Where the taxpayer acted in bad faith.
14. Decisions of the Supreme Court and Court of Tax Appeals
Decisions of the SC applying and interpreting tax laws have the force and effect of laws. They are what the
law means. Decisions of the CTA are the same as that of the SC but subject to review by latter by way of
certiorari.

V. Sources of tax laws

1. Constitution
2. Legislations/statutes (RA,PD, EO on taxation & tax ordinances)
3. Administrative rules and regulations, rulings or opinions of tax officials (Commissioner of Internal
Revenue & Sec. of Justice)
4. Judicial decisions
5. Tax treaties or agreements – have the force and effect as statutes; entered into for the avoidance of
double taxation.