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TAXATION LAW REVIEW (CONCISE VERSION – PART I)

I. GENERAL PRINCIPLES
A. Classification of Taxes
1. Different Classifications
a. Separate Opinion of Justice Bersamin in CIR vs. Pilipinas Shell, GR No. 188497 dated February 19, 2014
Taxes are classified, according to subject matter or object, into three groups, to wit: (1) personal,
capitation or poll taxes; (2) property taxes; and (3) excise or license taxes. Personal, capitation or poll
taxes are fixed amounts imposed upon residents or persons of a certain class without regard to their
property or business, an example of which is the basic community tax. Property taxes are assessed on
property or things of a certain class, whether real or personal, in proportion to their value or other
reasonable method of apportionment, such as the real estate tax. Excise or license taxes are imposed
upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation,
profession or business. Income tax, value-added tax, estate and donor’s tax fall under the third group.
Excise tax, as a classification of tax according to object, must not be confused with the excise tax under
Title VI of the NIRC. The term "excise tax" under Title VI of the 1997 NIRC derives its definition from the
1986 NIRC, and relates to taxes applied to goods manufactured or produced in the Philippines for
domestic sale or consumption or for any other disposition and to things imported. In contrast, an excise
tax that is imposed directly on certain specified goods – goods manufactured or produced in the
Philippines, or things imported – is undoubtedly a tax on property.

B. Fees vs. Charges vs. Taxes


1. Angeles University Foundation vs. City of Angeles, GR No. 18999 dated June 27, 2012
Facts: AUF is an educational institution that was converted into a non-stock, non-profit education
foundation under the provisions of RA 6055. Sometime in 2005, AUF filed an application for a building
permit for the construction of its building. AUF pointed out that the Local Government Code of 1991
provides in Sec. 193 that non-stock and non-profit educational institutions like petitioner retained the
tax exemptions or incentives which have been granted to them. Under Sec. 8 of R.A. No. 6055 and
applicable jurisprudence and DOJ rulings, petitioner is clearly exempt from the payment of building
permit fees.
AUF stresses that the tax exemption granted to educational stock corporations which have converted
into non-profit foundations was broadened to include any other charges imposed by the Government as
one of the incentives for such conversion. These incentives necessarily included exemption from
payment of building permit and related fees as otherwise there would have been no incentives for
educational foundations if the privilege were only limited to exemption from taxation, which is already
provided under the Constitution.
Issue: whether petitioner is exempt from the payment of building permit and related fees imposed under
the National Building Code

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Ruling: No. Since building permit fees are not charges on property, they are not impositions from which
AUF is exempt.
Exempted from the payment of building permit fees are: (1) public buildings and (2) traditional
indigenous family dwellings. Not being expressly included in the enumeration of structures to which the
building permit fees do not apply, petitioner’s claim for exemption rests solely on its interpretation of
the term "other charges imposed by the National Government" in the tax exemption clause of R.A. No.
6055.
A "charge" is broadly defined as the "price of, or rate for, something," while the word "fee" pertains to
a "charge fixed by law for services of public officers or for use of a privilege under control of
government." As used in the Local Government Code of 1991 (R.A. No. 7160), charges refers to pecuniary
liability, as rents or fees against persons or property, while fee means a charge fixed by law or ordinance
for the regulation or inspection of a business or activity.
That "charges" in its ordinary meaning appears to be a general term which could cover a specific "fee"
does not support petitioner’s position that building permit fees are among those "other charges" from
which it was expressly exempted. Note that the "other charges" mentioned in Sec. 8 of R.A. No. 6055 is
qualified by the words "imposed by the Government on all x x x property used exclusively for the
educational activities of the foundation." Building permit fees are not impositions on property but on
the activity subject of government regulation. While it may be argued that the fees relate to particular
properties, i.e., buildings and structures, they are actually imposed on certain activities the owner may
conduct either to build such structures or to repair, alter, renovate or demolish the same.

C. Are taxes subject to set-off?


1. Francia vs. IAC, GR No. 67649 dated June 28, 1988
Facts: Francia is the registered owner of a residential lot and a two-story house built upon it. In 1977, a
125 sm portion of Francia’s property was expropriated by the Republic of the Philippines. Since 1963 up
to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property was
sold at public auction. Francia filed a complaint to annul the auction sale.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He
claims that the government owed him P4,116.00 when a portion of his land was expropriated on October
15, 1977. Hence, his tax obligation had been set-off by operation of law as of October 15, 1977.
Issue: WON Francia’s obligation to pay the tax delinquency was set-off by the amount that the
Government owes him
Ruling: No.
We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer
may have against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The collection of a
tax cannot await the results of a lawsuit against the government.
A taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim against
the governmental body not included in the tax levy.

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This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "... internal
revenue taxes cannot be the subject of compensation: Reason: government and taxpayer are not
mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes
is not such a debt, demand, contract or judgment as is allowed to be set-off."
2. Philex Mining vs. CIR, GR No. 125704 dated August 28, 1988
Facts: On August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax liabilities in 1991 and
1992. Philex protested the demand for payment of the tax liabilities stating that it has pending claims
for VAT input credit/refund for the taxes it paid for the years 1989 to 1991. Therefore these claims for
tax credit/refund should be applied against the tax liabilities.
In reply, the BIR, in a letter dated September 7, 1992, found no merit in Philex's position. Since these
pending claims have not yet been established or determined with certainty, it follows that no legal
compensation can take place. Hence, the BIR reiterated its demand that Philex settle the amount plus
interest within 30 days from the receipt of the letter.
In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund against its excise
tax obligation, Philex raised the issue to the Court of Tax Appeals on November 6, 1992. In the course
of the proceedings, the BIR issued Tax Credit Certificate which, applied to the total tax liabilities of Philex;
effectively lowered the latter's tax obligation.
Philex appealed the case before the CA. A few days after the denial of its motion for reconsideration,
Philex was able to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also
for 1992 and 1994.
In view of the grant of its VAT input credit/refund, Philex now contends that the same should, ipso jure,
off-set its excise tax liabilities since both had already become "due and demandable, as well as fully
liquidated;" hence, legal compensation can properly take place.
Issue: WON Philex’s VAT input credit/refund should off-set its excise tax liabilities.
Ruling: No.
In several instances prior to the instant case, the SC have already made the pronouncement that 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 debt. Debts are
due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign
capacity. We find no cogent reason to deviate from the aforementioned distinction.
The SC cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending
tax claim for refund or credit against the government which has not yet been granted. It must be noted
that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. Hence, a tax
does not depend upon the consent of the taxpayer. If any taxpayer can defer the payment of taxes by
raising the defense that it still has a pending claim for refund or credit, this would adversely affect the
government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply
because he has a claim against the government or that the collection of the tax is contingent on the
result of the lawsuit it filed against the government. Moreover, Philex's theory that would automatically
apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and abuse,

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depriving the government of authority over the manner by which taxpayers credit and offset their tax
liabilities.
Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the government is
immaterial for the imposition of charges and penalties prescribed under Section 248 and 249 of the Tax
Code of 1977. The payment of the surcharge is mandatory and the BIR is not vested with any authority
to waive the collection thereof.
3. Domingo vs. Garlitos, GR No. L-18994 dated June 29, 1963
Facts: In Domingo vs Moscoso, the SC ordered the payment by the estate of the estate and inheritance
taxes, charges and penalties. In order to enforce the claims against the estate, the fiscal presented a
petition for judgement; however, the court held that the execution is not justifiable as the Government
is indebted to the estate under administration.
Issue: Whether petitioner has no clear right to execute the judgment for taxes against the estate of the
deceased Walter Scott Price

Ruling: Yes.
The court having jurisdiction of the estate had found that the claim of the estate against the Government
has been recognized and an amount of P262,200 has already been appropriated for the purpose by a
corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of the
Government for inheritance taxes and the claim of the intestate for services rendered have already
become overdue and demandable is well as fully liquidated. Compensation, therefore, takes place by
operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and both
debts are extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes effect by
operation of law, and extinguished both debts to the concurrent amount, even though the creditors and
debtors are not aware of the compensation.
4. Air Canada vs. CIR, GR No. 169507 dated January 11, 2016 (set-off issue only)
Facts: Air Canada is a "foreign corporation organized and existing under the laws of Canada. In 2000, it
was granted an authority to operate as an offline carrier by the Civil Aeronautics Board. As an off-line
carrier, Air Canada does not have flights originating from or coming to the Philippines and does not
operate any airplane in the Philippines.
Air Canada engaged the services of Aerotel as its general sales agent in the Philippines. Aerotel "sells Air
Canada’s passage documents in the Philippines."
Air Canada filed a claim for refund of alleged erroneously paid Gross Philippine Billings tax on the ground
that it is subject to income tax under Section 28(A)(1) of the National Internal Revenue Code.
When the case was raised before the CTA, it ruled that Air Canada is subject to tax as a resident foreign
corporation doing business in the Philippines since it sold airline tickets in the Philippines.
Issue: WON the internal revenue taxes be subject to set-off or compensation
Ruling: No.

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A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the
statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in
an action or any indebtedness of the state or municipality to one who is liable to the state or municipality
for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or
transaction sued on. * * *. (80 C.J.S. 73–74.)
The general rule, based on grounds of public policy is well-settled that no set-off is admissible against
demands for taxes levied for general or local governmental purposes. The reason on which the general
rule is based, is that taxes are not in the nature of contracts between the party and party but grow out
of a duty to, and are the positive acts of the government, to the making and enforcing of which, the
personal consent of individual taxpayers is not required. * * * If the taxpayer can properly refuse to pay
his tax when called upon by the Collector, because he has a claim against the governmental body which
is not included in the tax levy, it is plain that some legitimate and necessary expenditure must be
curtailed. If the taxpayer’s claim is disputed, the collection of the tax must await and abide the result of
a lawsuit, and meanwhile the financial affairs of the government will be thrown into great confusion. (47
Am. Jur. 766–767.)135 (Emphasis supplied)
Here, what is involved is a denial of a taxpayer’s refund claim on account of the Court of Tax Appeals’
finding of its liability for another tax in lieu of the Gross Philippine Billings tax that was allegedly
erroneously paid.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated
therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to
and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by
itself and without unquestionable evidence, cannot be the basis for the grant of the refund.
Petitioner's tax refund claim assumes that the tax return that it filed was correct. Given, however, the
finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable
under Sec. 28(A)(l), the correctness of the return filed by petitioner is now put in doubt. As such, we
cannot grant the prayer for a refund.

D. Double Taxation
Double taxation is defined as taxing the same property twice when it should be taxed but once. It has also been
defined as taxing the same person twice by the same jurisdiction over the same thing. It is sometimes known as
“duplicate taxation.”
1. Kinds
Double taxation may be direct (strict sense) or indirect (broad sense).
In the strict sense, double taxation means direct double taxation. This means that the same property is taxed
twice when it should be taxed only once and that both taxes are imposed on the same subject matter for the
same purpose, by the same taxing authority within the same jurisdiction during the same taxing period and
covering the same kind of tax.
In the broad sense, double taxation means indirect double taxation. Double taxation is indirect where some
elements of direct double taxation are absent. It applies to all cases in which there are two or more pecuniary
impositions.
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2. Modes of eliminating double taxation
The usual methods of avoiding the occurrence of double taxation are:
1. Allowing reciprocal exemption either by law or by treaty
2. Allowance of tax credit for foreign taxes paid
3. Allowance of deduction for foreign taxes paid; and
4. Reduction of the Philippine tax rate.

3. CIR vs. Solidbank, GR No. 148191 dated November 25, 2003


Facts: Respondent seasonably filed its Quarterly percentage Tax Returns reflecting gross receipts. It
alleges that the total gross receipts from passive income was already subject to 20% final withholding
tax.
The CTA held the 20% final withholding tax on a bank’s interest income should not form part of it taxable
gross receipts for purposes of computing the gross receipts tax.

The CA held that the 20% FWT on a bank’s interest income did not form part of the taxable gross receipts
in computing the 5% GRT, because the FWT was not actually received by the bank but was directly
remitted to the government.
We have repeatedly said that the two taxes, subject of this litigation, are different from each other. The
basis of their imposition may be the same, but their natures are different, thus leading us to a final point.
Is there double taxation?
No.
Double taxation means taxing the same property twice when it should be taxed only once; that is, "x x x
taxing the same person twice by the same jurisdiction for the same thing." It is obnoxious when the
taxpayer is taxed twice, when it should be but once. Otherwise described as "direct duplicate taxation,"
the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing
authority, within the same jurisdiction, during the same taxing period; and they must be of the same
kind or character.
First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT is
the passive income generated in the form of interest on deposits and yield on deposit substitutes, while
the subject matter of the GRT is the privilege of engaging in the business of banking.
A tax based on receipts is a tax on business rather than on the property; hence, it is an excise rather than
a property tax. It is not an income tax, unlike the FWT. In fact, we have already held that one can be
taxed for engaging in business and further taxed differently for the income derived therefrom. Akin to
our ruling in Velilla v. Posadas, these two taxes are entirely distinct and are assessed under different
provisions.
Second, although both taxes are national in scope because they are imposed by the same taxing
authority -- the national government under the Tax Code -- and operate within the same Philippine
jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different. The

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FWT is deducted and withheld as soon as the income is earned, and is paid after every calendar quarter
in which it is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only after
every taxable quarter in which it is earned.
Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to
withholding, while the GRT is a percentage tax not subject to withholding.
In short, there is no double taxation, because there is no taxing twice, by the same taxing authority,
within the same jurisdiction, for the same purpose, in different taxing periods, some of the property in
the territory. Subjecting interest income to a 20% FWT and including it in the computation of the 5% GRT
is clearly not double taxation.

4. Nursery Care Corporation vs. Acevedo, GR No. 180651 dated July 30, 2014
Facts: The City of Manila assessed and collected taxes from the individual petitioners pursuant to Section
15 (Tax on Wholesalers, Distributors, or Dealers) and Section 17 (Tax on Retailers) of the Revenue Code
of Manila. At the same time, the City of Manila imposed additional taxes upon the petitioners pursuant
to Section 21 of the Revenue Code of Manila, as amended, as a condition for the renewal of their
respective business licenses for the year 1999.
The petitioners point out that although Section 21 of the Revenue Code of Manila was not itself
unconstitutional or invalid, its enforcement against the petitioners constituted double taxation because
the local business taxes under Section 15 and Section 17 of the Revenue Code of Manila were already
being paid by them. They contend that the proviso in Section 21 exempted all registered businesses in
the City of Manila from paying the tax imposed under Section 21; and that the exemption was more in
accord with Section 143 of the Local Government Code, the law that vested in the municipal and city
governments the power to impose business taxes.
The respondents counter, however, that double taxation did not occur from the imposition and
collection of the tax pursuant to Section 21 of the Revenue Code of Manila; that the taxes imposed
pursuant to Section 21 were in the concept of indirect taxes upon the consumers of the goods and
services sold by a business establishment; and that the petitioners did not exhaust their administrative
remedies by first appealing to the Secretary of Justice to challenge the constitutionality or legality of the
tax ordinance.
Issue: WON there is double taxation
Ruling: YES. Collection of taxes pursuant to Section 21 of the Revenue Code of Manila constituted double
taxation.
Double taxation means taxing the same property twice when it should be taxed only once; that is, "taxing
the same person twice by the same jurisdiction for the same thing." It is obnoxious when the taxpayer
is taxed twice, when it should be but once. Otherwise described as "direct duplicate taxation," the two
taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority,
within the same jurisdiction, during the same taxing period; and the taxes must be of the same kind or
character.

Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is
subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being
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imposed: (1) on the same subject matter – the privilege of doing business in the City of Manila; (2) for
the same purpose – to make persons conducting business within the City of Manila contribute to city
revenues; (3) by the same taxing authority – petitioner City of Manila; (4) within the same taxing
jurisdiction – within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods – per
calendar year; and (6) of the same kind or character – a local business tax imposed on gross sales or
receipts of the business.
The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax
Ordinance No. 7794 is specious. The Court revisits Section 143 of the LGC, the very source of the power
of municipalities and cities to impose a local business tax, and to which any local business tax imposed
by Petitioner City of Manila must conform. It is apparent from a perusal thereof that when a municipality
or city has already imposed a business tax on manufacturers, etc. of liquors, distilled spirits, wines, and
any other article of commerce, pursuant to Section 143(a) of the LGC, said municipality or city may no
longer subject the same manufacturers, etc.to a business tax under Section 143(h) of the same Code.
Section 143(h) may be imposed only on businesses that are subject to excise tax, VAT, or percentage tax
under the NIRC, and that are "not otherwise specified in preceding paragraphs." In the same way,
businesses such as respondent’s, already subject to a local business tax under Section 14 of Tax
Ordinance No. 7794 [which is based on Section 143(a) of the LGC], can no longer be made liable for local
business tax under Section 21 of the same Tax Ordinance [which is based on Section 143(h) of the LGC].
Based on the foregoing reasons, petitioner should not have been subjected to taxes under Section 21 of
the Manila Revenue Code for the fourth quarter of 2001, considering that it had already been paying
local business tax under Section 14 of the same ordinance.

5. CIR vs. S.C. Johnson and Sons, Inc., GR No. 127105 dated June 25, 1999
Facts: Respondent, a domestic corporation organized and operating under the Philippine laws, entered
into a license agreement with SC Johnson and Son, United States of America (USA), a non-resident
foreign corporation based in the U.S.A. pursuant to which the respondent was granted the right to use
the trademark, patents and technology owned by the latter including the right to manufacture, package
and distribute the products covered by the Agreement and secure assistance in management, marketing
and production from SC Johnson and Son, U. S. A.
For the use of the trademark or technology, respondent was obliged to pay SC Johnson and Son, USA
royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty
payments which respondent paid for the period covering July 1992 to May 1993.
On October 29, 1993, respondent filed with the International Tax Affairs Division (ITAD) of the BIR a claim
for refund of overpaid withholding tax on royalties.
The CTA, which was affirmed by the CA, rendered its decision in favor of S.C. Johnson and ordered the
Commissioner of Internal Revenue to issue a tax credit certificate in the amount of P963,266.00
representing overpaid withholding tax on royalty payments, beginning July, 1992 to May, 1993.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the "most
favored nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties derived
by a resident of the United States from sources within the Philippines only if the circumstances of the
resident of the United States are similar to those of the resident of West Germany. Since the RP-US Tax
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Treaty contains no "matching credit" provision as that provided under Article 24 of the RP-West Germany
Tax Treaty, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as
those obtaining in the RP-West Germany Tax Treaty.
Issue: WON private respondent is entitled to the 10% rate granted under the RP-West Germnay Tax
Treaty
Ruling: No. The RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to
the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent
cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that
there is no payment of taxes on royalties under similar circumstances. This is so because, the RP-US and
the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting.
(Lengthy discussion on methods for eliminating double taxation)
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into
for the avoidance of double taxation. The purpose of these international agreements is to reconcile the
national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous
taxation in two different jurisdictions. More precisely, the tax conventions are drafted with a view
towards the elimination of international juridical double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and
for identical periods.
Double taxation usually takes place when a person is resident of a contracting state and derives income
from, or owns capital in, the other contracting state and both states impose tax on that income or capital.
In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the
respective rights to tax of the state of source or situs and of the state of residence with regard to certain
classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting
states; however, for other items of income or capital, both states are given the right to tax, although the
amount of tax that may be imposed by the state of source is limited.
The second method for the elimination of double taxation applies whenever the state of source is given
a full or limited right to tax together with the state of residence. In this case, the treaties make it
incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two
methods of relief — the exemption method and the credit method. In the exemption method, the
income or capital which is taxable in the state of source or situs is exempted in the state of residence,
although in some instances it may be taken into account in determining the rate of tax applicable to the
taxpayer's remaining income or capital. On the other hand, in the credit method, although the income
or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the
former is credited against the tax levied in the latter. The basic difference between the two methods is
that in the exemption method, the focus is on the income or capital itself, whereas the credit method
focuses upon the tax. 15
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will
give up a part of the tax in the expectation that the tax given up for this particular investment is not
taxed by the other country.
Furthermore, the method employed to give relief from double taxation is the allowance of a tax credit
to citizens or residents of the United States (in an appropriate amount based upon the taxes paid or

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accrued to the Philippines) against the United States tax, but such amount shall not exceed the
limitations provided by United States law for the taxable year.
“Favored Nation Clause”
The purpose of a most favored nation clause is to grant to the contracting party treatment not less
favorable than that which has been or may be granted to the "most favored" among other countries.
The most favored nation clause is intended to establish the principle of equality of international
treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges
accorded by either party to those of the most favored nation. The essence of the principle is to allow the
taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the
country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this
case royalty income, is the same as that in the tax treaty under which the taxpayer is liable.

6. Deutsche Bank AG Manila Branch vs. CIR GR No. 188660 dated August 19, 2013

Facts: In accordance with Section 28(A)(5) of the National Internal Revenue Code (NIRC) of 1997,
petitioner withheld and remitted to respondent on 21 October 2003 the amount of PHP 67,688,553.51,
which represented the fifteen percent (15%) branch profit remittance tax (BPRT) on its regular banking
unit (RBU) net income remitted to Deutsche Bank Germany (DB Germany) for 2002 and prior taxable
years.
Believing that it made an overpayment of the BPRT, petitioner filed with the BIR an administrative claim
for refund or issuance of its tax credit certificate in the total amount of PHP 22,562,851.17. On the same
date, petitioner requested from the International Tax Affairs Division (ITAD) a confirmation of its
entitlement to the preferential tax rate of 10% under the RP-Germany Tax Treaty.
Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for Review with the
CTA on 18 October 2005. Petitioner reiterated its claim for the refund or issuance of its tax credit
certificate representing the alleged excess BPRT paid on branch profits remittance to DB Germany.
The CTA however denied the claim of petitioner stating that before the benefits of the tax treaty may be
extended to a foreign corporation wishing to avail itself thereof, the latter should first invoke the
provisions of the tax treaty and prove that they indeed apply to the corporation (tax relief under RMO
N0. 1-2000).
Issue: Whether the failure to comply with the tax treaty relief is fatal to the taxpayer’s availment of the
preferential tax rate.
Ruling: No. The period of application for the availment of tax treaty relief as required by RMO No. 1-2000
should not operate to divest entitlement to the relief as it would constitute a violation of the duty
required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the
failure of a taxpayer to apply within the prescribed period under the administrative issuance would
impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR should
merely operate to confirm the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000.
Logically, noncompliance with tax treaties has negative implications on international relations, and
unduly discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-
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2000 involve an administrative procedure, these may be remedied through other system management
processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those who are entitled
to the benefit of a treaty for failure to strictly comply with an administrative issuance requiring prior
application for tax treaty relief.
The underlying principle of prior application with the BIR becomes moot in refund cases, such as the
present case, where the very basis of the claim is erroneous or there is excessive payment arising from
non-availment of a tax treaty relief at the first instance. In this case, petitioner should not be faulted for
not complying with RMO No. 1-2000 prior to the transaction. It could not have applied for a tax treaty
relief within the period prescribed, or 15 days prior to the payment of its BPRT, precisely because it
erroneously paid the BPRT not on the basis of the preferential tax rate under the RP-Germany Tax Treaty,
but on the regular rate as prescribed by the NIRC. Therefore, the fact that petitioner invoked the
provisions of the RP-Germany Tax Treaty when it requested for a confirmation from the ITAD before
filing an administrative claim for a refund should be deemed substantial compliance with RMO No. 1-
2000.
(additional discussion)
Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and,
in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions."CIR v. S.C. Johnson
and Son, Inc. further clarifies that "tax conventions are drafted with a view towards the elimination of
international juridical double taxation, which is defined as the imposition of comparable taxes in two or
more states on the same taxpayer in respect of the same subject matter and for identical periods. The
apparent rationale for doing away with double taxation is to encourage the free flow of goods and
services and the movement of capital, technology and persons between countries, conditions deemed
vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly
predictable and reasonable international investment climate and the protection against double taxation
is crucial in creating such a climate."
Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of international
juridical double taxation, which is why they are also known as double tax treaty or double tax
agreements.
7. CBK Power Company Limited vs. CIR, GR No. 193383-84 dated January 14, 2015 (Perlas-Bernabe)
Facts: CBK Power is a limited partnership duly organized and existing under the laws of the Philippines,
and primarily engaged in the development and operation of the Caliraya, Botocan, and Kalayaan hydro
electric power generating plants in Laguna (CBK Project). It is registered with the Board of Investments
(BOI) as engaged in a preferred pioneer area of investment under the Omnibus Investment Code of 1987.
In February 2001, CBK Power borrowed money from several banks. It allegedly withheld final taxes from
said payments based on the following rates, and paid the same to the Revenue District Office No. 55 of
the Bureau of Internal Revenue (BIR): (a) fifteen percent (15%) for Fortis-Belgium, Fortis-Netherlands,
and Raiffesen Bank; and (b) twenty percent (20%) for Industrial Bank of Japan and Mizuho Bank.
However, according to CBK Power, under the relevant tax treaties between the Philippines and the
respective countries in which each of the banks is a resident, the interest income derived by the
aforementioned banks are subject only to a preferential tax rate of 10%.

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Accordingly, on April 14, 2003, CBK Power filed a claim for refund of its excess final withholding taxes
allegedly erroneously withheld and collected for the years 2001 and 2002 with the BIR Revenue Region
No. 9. The claim for refund of excess final withholding taxes in 2003 was subsequently filed on March 4,
2005.
Issue: whether or not an ITAD ruling is required before it can avail of the preferential tax rate.
(RMO 1-2000: Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form
No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction
i.e. payment of dividends, royalties, etc., accompanied by supporting documents justifying the relief.)
Ruling: No.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000.
Logically, noncompliance with tax treaties has negative implications on international relations, and
unduly discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-
2000 involve an administrative procedure, these may be remedied through other system management
processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those who are entitled
to the benefit of a treaty for failure to strictly comply with an administrative issuance requiring prior
application for tax treaty relief.44
The objective of RMO No. 1-2000 in requiring the application for treaty relief with the ITAD before a
party’s availment of the preferential rate under a tax treaty is to avert the consequences of any
erroneous interpretation and/or application of treaty provisions, such as claims for refund/credit for
overpayment of taxes, or deficiency tax liabilities for underpayment. However, as pointed out in
Deutsche Bank, the underlying principle of prior application with the BIR becomes moot in refund cases–
as in the present case – where the very basis of the claim is erroneous or there is excessive payment
arising from the non-availment of a tax treaty relief at the first instance. Just as Deutsche Bank was not
faulted by the Court for not complying with RMO No. 1-2000 prior to the transaction, so should CBK
Power. In parallel, CBK Power could not have applied for a tax treaty relief 15 days prior to its payment
of the final withholding tax on the interest paid to its lenders precisely because it erroneously paid said
tax on the basis of the regular rate as prescribed by the NIRC, and not on the preferential tax rate
provided under the different treaties. As stressed by the Court, the prior application requirement under
RMO No. 1-2000 then becomes illogical.
It bears reiterating that the application for a tax treaty relief from the BIR should merely operate to
confirm the entitlement of the taxpayer to the relief. Since CBK Power had requested for confirmation
from the ITAD on June 8, 2001 and October 28, 2002 before it filed on April 14, 2003 its administrative
claim for refund of its excess final withholding taxes, the same should be deemed substantial compliance
with RMO No. 1-2000, as in Deutsche Bank. To rule otherwise would defeat the purpose of Section 229
of the NIRC in providing the taxpayer a remedy for erroneously paid tax solely on the ground of failure
to make prior application for tax treaty relief. As the Court exhorted in Republic v. GST Philippines, Inc.,
while the taxpayer has an obligation to honestly pay the right taxes, the government has a corollary duty
to implement tax laws in good faith; to discharge its duty to collect what is due to it; and to justly return
what has been erroneously and excessively given to it.

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E. Taxpayer’s suit
1. Mamba vs. Lara, GR No. 165109 dated December 14, 2009
Doctrine:
Decision to entertain a taxpayer’s suit is discretionary upon the Court. When the issue hinges on
the illegal disbursement of public funds, a liberal approach should be preferred as it is more in keeping
with truth and justice.
Facts:
The Sangguniang Panlalawigan of Cagayan passed a resolution authorizing Governor Edgar R.
Lara to engage the services of and appoint Preferred Ventures Corporation as financial advisor or
consultant for the issuance and flotation of bonds to fund the priority projects of the governor without
cost and commitment. It also ratified the Memorandum of Agreement (MOA) entered into by Gov. Lara
and Preferred Ventures Corporation which provides that the provincial government of Cagayan shall pay
Preferred Ventures Corporation a one-time fee of 3% of the amount of bonds floated. In addition, the
Sangguniang Panlalawigan, authorized Gov. Lara to negotiate, sign and execute contracts or agreements
pertinent to the flotation of the bonds of the provincial government in an amount not to exceed P500
million for the construction and improvement of his priority projects, including the construction of the
New Cagayan Town Center, to be approved by the Sangguniang Panlalawigan. Subsequently, Lara issued
the Notice of Award to Asset Builders Corporation, giving to the latter the planning, design, construction
and site development of the town center project.
Petitioners Manuel N. Mamba, Raymund P. Guzman and Leonides N. Fausto filed a Petition for
Annulment of Contracts and Injunction with prayer for a Temporary Restraining Order/Writ of
Preliminary Injunction against the respondents (Gov. Lara et al.). The RTC, however, dismissed their
petition on the grounds that the (1) petitioners have no locus standi to file a case as they are not party
to the contract and (2) that the controversy is in the nature of a political question, thus, the court can’t
take cognizance of it.
Issues: Whether or not the petitioners have locus standi to sue as taxpayers
Ruling: Yes, the petitioners have legal standing to sue as taxpayers.
A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that the
public money is being deflected to any improper purpose, or that there is wastage of public funds
through the enforcement of an invalid or unconstitutional law.
For a taxpayer’s suit to prosper, two requisites must be met: (1) public funds derived from taxation are
disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some
irregularity is committed and (2) the petitioner is directly affected by the alleged act.
In the case at bar, although the construction of the town center would be primarily sourced from the
proceeds of the bonds, which respondents insist are not taxpayers’ money, a government support in the
amount of P187 million would still be spent for paying the interest of the bonds. The governor requested
the Sangguniang Panlalawigan to appropriate an amount of P25 million for the interest of the bond. So
clearly, the first requisite has been met.

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As to the second requisite, the Supreme Court explained that the court, in recent cases, has relaxed the
stringent direct injury test bearing in mind that locus standi is a procedural technicality. By invoking
transcendental importance, paramount public interest, or far-reaching implications, ordinary citizens
and taxpayers were allowed to sue even if they failed to show direct injury. In cases where serious legal
issues were raised or where public expenditures of millions of pesos were involved, the court did not
hesitate to give standing to taxpayers.
It argued that, to protect the interest of the people and to prevent taxes from being squandered or
wasted under the guise of government projects, a liberal approach must be adopted in determining locus
standi in public suits.
2. Land Bank of the Philippines vs. Cacayuran, GR No. 191667 dated April 17, 2013 (Perlas-Bernabe)
Facts: From 2005 to 2006, the Municipality’s Sangguniang Bayan (SB) passed certain resolutions to
implement a multi-phased plan (Redevelopment Plan) to redevelop the Agoo Public Plaza (Agoo Plaza)
where the Imelda Garden and Jose Rizal Monument were situated. In order to finance the said plan, two
loans were granted in favor of the Municipality by Land Bank.
The construction of the commercial center at the Agoo Plaza was vehemently objected to by some
residents of the Municipality. Led by respondent Cacayuran, they claimed that the conversion of the
Agoo Plaza into a commercial center as funded by the proceeds from the loans were highly irregular,
violative of the law, and detrimental to public interests, and will result to wanton desecration of the said
historical and public park.
Cacayuran, invoking his right as a taxpayer, filed a Complaint against the Implicated Officers and Land
Bank, assailing, among others, the validity of the Subject Loans on the ground that the Plaza Lot used as
collateral thereof is property of public dominion and therefore, beyond the commerce of man.
Issue: WON Cacayuran has standing to sue
Ruling: Yes.
It is hornbook principle that a taxpayer is allowed to sue where there is a claim that public funds are
illegally disbursed, or that public money is being deflected to any improper purpose, or that there is
wastage of public funds through the enforcement of an invalid or unconstitutional law. A person suing
as a taxpayer, however, must show that the act complained of directly involves the illegal disbursement
of public funds derived from taxation. In other words, for a taxpayer’s suit to prosper, two requisites
must be met namely, (1) public funds derived from taxation are disbursed by a political subdivision or
instrumentality and in doing so, a law is violated or some irregularity is committed; and (2) the petitioner
is directly affected by the alleged act.
Records reveal that the foregoing requisites are present in the instant case.
First, although the construction of the APC would be primarily sourced from the proceeds of the Subject
Loans, which Land Bank insists are not taxpayer’s money, there is no denying that public funds derived
from taxation are bound to be expended as the Municipality assigned a portion of its IRA as a security
for the foregoing loans. Needless to state, the Municipality’s IRA, which serves as the local government
unit’s just share in the national taxes, is in the nature of public funds derived from taxation. The Court
believes, however, that although these funds may be posted as a security, its collateralization should

14 | T A X A T I O N R E V I E W
only be deemed effective during the incumbency of the public officers who approved the same, else
those who succeed them be effectively deprived of its use.
In any event, it is observed that the proceeds from the Subject Loans had already been converted into
public funds by the Municipality’s receipt thereof. Funds coming from private sources become impressed
with the characteristics of public funds when they are under official custody.
Accordingly, the first requisite has been clearly met.
Second, as a resident-taxpayer of the Municipality, Cacayuran is directly affected by the conversion of
the Agoo Plaza which was funded by the proceeds of the Subject Loans. It is well-settled that public
plazas are properties for public use and therefore, belongs to the public dominion. As such, it can be
used by anybody and no one can exercise over it the rights of a private owner. In this light, Cacayuran
had a direct interest in ensuring that the Agoo Plaza would not be exploited for commercial purposes
through the APC’s construction. Moreover, Cacayuran need not be privy to the Subject Loans in order to
proffer his objections thereto. In Mamba v. Lara, it has been held that a taxpayer need not be a party to
the contract to challenge its validity; as long as taxes are involved, people have a right to question
contracts entered into by the government.
Therefore, as the above-stated requisites obtain in this case, Cacayuran has standing to file the instant
suit.

F. Law vs. Regulation


1. Secretary of Finance vs. Philippine Tobacco Institute, Inc., GR No. 210251 dated April 17, 2017
Facts: On 20 December 2012, President Benigno S. Aquino III signed Republic Act No. 103515 (RA 10351),
otherwise known as the Sin Tax Reform Law. RA 10351 restructured the excise tax on alcohol and
tobacco products by amending pertinent provisions of Republic Act No. 8424, 6 known as the Tax Reform
Act of 1997 or the National Internal Revenue Code of 1997 (NIRC).
Section 5 of RA 10351, which amended Section 145(C) of the NIRC, increased the excise tax rate of cigars
and cigarettes and allowed cigarettes packed by machine to be packed in other packaging combinations
of not more than 20.
On 21 December 2012, the Secretary of Finance, upon the recommendation of the Commissioner of
Internal Revenue (CIR), issued RR 17-2012. Section 11 of RR 17-2012 imposes an excise tax on individual
cigarette pouches of 5's and l0's even if they are bundled or packed in packaging combinations not
exceeding 20 cigarettes.
PMFTC, Inc., a member of respondent Philippine Tobacco Institute, Inc. (PTI), paid the excise taxes
required under RA 10351, RR 17-2012, and RMC 90-2012 in order to withdraw cigarettes from its
manufacturing facilities. However, on 16 January 2012, PMFTC wrote the CIR prior to the payment of the
excise taxes stating that payment was being made under protest and without prejudice to its right to
question said issuances through remedies available under the law.
The RTC declared portions of Revenue Regulation 17-2012 and Revenue Memorandum Circular 90-2012
null and void.

15 | T A X A T I O N R E V I E W
Issue: WON the RTC erred in nullifying Section 11of RR17-2012 andAnnex"D-1"of RMC 90-2012 in
imposing excise tax to packaging combinations of 5's, l0's, etc. not exceeding 20 cigarette sticks packed
by machine.
Ruling: No. Excise tax on cigarettes packed by machine shall be imposed on the packaging combination
of 20 cigarette sticks as a whole and not to individual packaging combinations or pouches of 5's, 10's,etc.
Section 145(C) of the NIRC is clear that the excise tax on cigarettes packed by machine is imposed per
pack. "Per pack" was not given a clear definition by the NIRC. However, a "pack" would normally refer
to a number of individual components packaged as a unit.[10] Under the same provision, cigarette
manufacturers are permitted to bundle cigarettes packed by machine in the maximum number of 20
sticks and aside from 20's, the law also allows packaging combinations of not more than 20's - it can be
4 pouches of 5 cigarette sticks in a pack (4 x 5's), 2 pouches of 10 cigarette sticks in a pack (2 x 10's), etc.
The RTC, in its Decision dated 7 October 2013, ruled in favor of PTI and declared that RA 10351 intends
to tax the packs of 20's as a whole, regardless of whether they are further repacked by 10's or 5's, as
long as they total 20 sticks in all. The RTC added "that the fact the law allows 'packaging combinations,'
as long as they will not exceed a total of 20 sticks, is indicative of the lawmakers' foresight that these
combinations shall be sold at retail individually. Yet, the lawmakers did not specify in the law that the
tax rate shall be imposed on each packaging combination." Thus, the RTC concluded that the
interpretation made by the Secretary of Finance and the CIR has no basis in the law.
The SC agrees.
The lawmakers intended to impose the excise tax on every pack of cigarettes that come in 20 sticks.
Individual pouches or packaging combinations of 5's and 10's for retail purposes are allowed and will be
subjected to the same excise tax rate as long as they are bundled together by not more than 20 sticks.
Thus, by issuing Section 11 of RR 17-2012 and Annex "D-1" on Cigarettes Packed by Machine of RMC 90-
2012, the BIR went beyond the express provisions of RA 10351.
It is an elementary rule in administrative law that administrative rules and regulations enacted by
administrative bodies to implement the law which they are entrusted to enforce have the force of law
and are entitled to great weight and respect. However, these implementations of the law must not
override, supplant, or modify the law but must remain consistent with the law they intend to implement.
It is only Congress which has the power to repeal or amend the law.
G. Inherent Limitations
What are the inherent limitations on the power to tax?
The inherent limitations are those limitations which exist despite the absence of an express
constitutional provision thereon.
1. Enumeration
The inherent limitations are:
1. Public purpose – the revenues collected from taxation should be devoted to a public purpose.

 Tax is considered for public purpose if:

1. It is for the welfare of the nation and/or for greater portion of the population;

16 | T A X A T I O N R E V I E W
2. It affects the area as a community rather than as individuals;
3. It is designed to support the services of the government for some of its recognized objects.

 Principles relative to public purpose


1. Tax revenue must not be used for purely private purposes or for the exclusive benefit of private
persons.
2. Inequalities resulting from the singling out of one particular class for taxation or exemption
infringe no constitutional limitation because the legislature is free to select the subjects of
taxation.

NOTE: Legislature is not required to adopt a policy of ‘all or none’ for the Congress has the power
to select the object of taxation (Lutz v. Araneta, G.R. No. L-7859, 22 December 1955).
3. An individual taxpayer need not derive direct benefits from the tax.
4. Public purpose is continually expanding. Areas formerly left to private initiative now lose their
boundaries and may be undertaken by the government if it is to meet the increasing social
challenges of the times.
5. The public purpose of the tax law must exist at the time of its enactment (Pascual v. Secretary
of Public Works, G.R. No. L-10405. 29 December 1960).
2. Inherently legislative or non-delegability of the taxing power – Only the legislature can exercise the
power of taxes unless the same is delegated by the constitution or through a law which does not violate
the constitution.

 The powers which Congress is prohibited from delegating are those which are strictly, or inherently
and exclusively, legislative. Purely legislative power, which can never be delegated, has been
described as the authority to make a complete law, complete as to the time when it shall take effect
and as to whom it shall be applicable; and to determine the expediency of its enactment (Abakada
Guro Party List v. Hon. Exec. Sec., G.R. No. 168056, September 1, 2005). It cannot be delegated
without infringing upon the theory of separation of powers (Pepsi-Cola Bottling Company of the Phil.
v. Mun. of Tanauan, 69 SCRA 460, February 27, 1976).
 Exceptions:
1. Delegation to Local Government – Refers to the power of local government units to create its own
sources of revenue and to levy taxes, fees and charges (Art. X,
Sec. 5, 1987 Constitution).
NOTE: Section 5, Article X of the Constitution does not change the doctrine that municipal
corporations do not possess inherent powers of taxation; what it does is to confer municipal
corporations a general power to levy taxes and otherwise create sources of revenue and they no
longer have to wait for a statutory grant of these powers and the power of the legislative authority
relative to the fiscal powers of local governments has been reduced to the authority to impose
limitations on municipal powers. Thus, in interpreting statutory provisions on municipal fiscal
powers, doubts will be resolved in favor of municipal corporations (Quezon City et al. v. ABS-CBN
Broadcasting Corporation, G.R. No. 162015, March 6, 2006).

17 | T A X A T I O N R E V I E W
2. Delegation to the President – The authority of the President to fix tariff rates, import or export
quotas, tonnage and wharfage dues or other duties and imposts (Art. VI, Sec. 28(2), 1987
Constitution).

NOTE: When Congress tasks the President or his/her alter egos to impose safeguard measures under
the delineated conditions, the President or the alter egos may be properly deemed as agents of
Congress to perform an act that inherently belongs as a matter of right to the legislature. It is basic
agency law that the agent may not act beyond the specifically delegated powers or disregard the
restrictions imposed by the principal (Southern Cross Cement Corporation v. Cement Manufacturers
Association of the Phil., G.R. No. 158540, August 3, 2005).

3. Delegation to administrative agencies – When the delegation relates merely to administrative


implementation that calls for some degree of discretionary powers under sufficient standards
expressed by law or implied from the policy and purposes of the Act.

a. Authority of the Secretary of Finance to promulgate the necessary rules and regulations for the
effective enforcement of the provisions of the law (Sec. 244, R.A. 8424).
b. The Secretary of Finance may, upon the recommendation of the Commissioner, require the
withholding of a tax on the items of income payable (Sec. 57, R.A. 8424).
3. Territoriality or situs of taxation – the taxing power should be exercised only within the territorial
jurisdiction of the taxing authority.
Limitation on the power to tax
GR: The taxing power of a country is limited to persons and property within and subject to its
jurisdiction.
Reasons:
1. Taxation is an act of sovereignty which could only be exercised within a country’s territorial
limits.
2. This is based on the theory that taxes are paid for the protection and services provided by the
taxing authority which could not be provided outside the territorial boundaries of the taxing
State.
XPNs:
1. Where tax laws operate outside territorial jurisdiction – i.e. Taxation of resident citizens on
their incomes derived abroad.
2. Where tax laws do not operate within the territorial jurisdiction of the State.
a. When exempted by treaty obligations; or
b. When exempted by international comity.

18 | T A X A T I O N R E V I E W
4. Principle of Comity – Comity is respect accorded by nation to each other’s as co-equals. As taxation is
an act of sovereignty, such power should be imposed upon equals out of respect.
International comity refers to the respect accorded by nations to each other because they are
sovereign equals. Thus, the property or income of a foreign state may not be the subject of
taxation by another State.
Explain international comity as a limitation on the power to tax
The property or income of a foreign state or government may not be the subject of taxation by
another.
As held in TANADA V. ANGARA [272 SCRA 18], by their voluntary act, nations may surrender some
aspects of their state power in exchange for greater benefits granted or derived from a
convention of pact. The underlying consideration in this partial surrender of sovereignty is the
reciprocal commitment of the other contracting states in granting the same privilege and
immunities to the Philippines, its officials and its citizens. The point is that a portion of
sovereignty may be waived without violating the Constitution, based on the rationale that the
Philippines "adopts the generally accepted principles of international law as part of the law of
the land and adheres to the policy of . . . cooperation and amity with all nations."
5. Tax exemption of the State
Q: Is the State subject to tax?
Generally, the State may not be subject to taxation. However, while this may be so, sovereignty
being absolute and taxation being an act of high sovereignty, the State may tax itself including its
political subdivisions.
Q: Are GOCCs subject to local government taxes?
Yes. Exemptions of GOCCs from local government taxes have been withdrawn by the Local
Government Code.
Q: Can local governments tax the national government, its agencies, and instrumentalities?
No. In MIAA v. CA [495 SCRA 591], the Supreme Court, in resolving the issue on whether the lands
and buildings owned by the Manila International Airport Authority were subject to real property
tax, ruled in the negative. The Supreme Court opined that since MIAA is not a GOCC but instead
as government instrumentality vested with corporate powers or a government corporate entity,
it is exempt from real property tax. By express provision of the Local Government Code, local
governments cannot levy taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities.
Furthermore, the said lands and buildings are property of the public dominion and therefore
owned by the State. They are devoted to public use. Thus, they cannot be auctioned as they are
outside the commerce of man. However, the portions of the property leased to private entities
are subject to real property tax.
Note: The inherent limitations on the power of taxation is also known as the elements, tenets or
characteristics of taxation.

19 | T A X A T I O N R E V I E W
2. Delegation to Local Government Units
Q: Do local governments have the power to tax?
Yes. The power to tax is no longer vested exclusively on Congress. The local governments are now given
direct authority to levy taxes, fees and other charges pursuant to Section 5, Article X, of the 1987
Constitution. NAPOCOR V. CITY OF CABANATUAN [G.R. NO. 149110, APRIL 9, 2003].
a. Pepsi Cola Bottling Co. of the Phils. vs. Municipality of Tanauan, GR No. L-31156 dated February 27, 1976
Facts: On February 14, 1963, Pepsi commenced a complaint for the court to declare Section 2 of Republic
Act No. 2264, otherwise known as the Local Autonomy Act, unconstitutional as an undue delegation of
taxing authority as well as to declare Ordinances Nos. 23 and 27, series of 1962, of the municipality of
Tanauan, Leyte, null and void.
According to Pepsi, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the
production tax rates imposed therein are practically the same.
Municipal Ordinance No. 23 levies and collects "from soft drinks producers and manufacturers a tai of
one-sixteenth (1/16) of a centavo for every bottle of soft drink corked." For the purpose of computing
the taxes due, the person, firm, company or corporation producing soft drinks shall submit to the
Municipal Treasurer a monthly report, of the total number of bottles produced and corked during the
month.
On the other hand, Municipal Ordinance No. 27, levies and collects "on soft drinks produced or
manufactured within the territorial jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on
each gallon (128 fluid ounces, U.S.) of volume capacity." 4 For the purpose of computing the taxes due,
the person, fun company, partnership, corporation or plant producing soft drinks shall submit to the
Municipal Treasurer a monthly report of the total number of gallons produced or manufactured during
the month.
Issue: WON section 2, RA 2264 an undue delegation of power, confiscatory and oppressive
Ruling: No.
The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right
to every independent government, without being expressly conferred by the people. It is a power that
is purely legislative and which the central legislative body cannot delegate either to the executive or
judicial department of the government without infringing upon the theory of separation of powers. The
exception, however, lies in the case of municipal corporations, to which, said theory does not apply.
Legislative powers may be delegated to local governments in respect of matters of local concern.
By necessary implication, the legislative power to create political corporations for purposes of local self-
government carries with it the power to confer on such local governmental agencies the power to tax.
Under the New Constitution, local governments are granted the autonomous authority to create their
own sources of revenue and to levy taxes. Section 5, Article XI provides: "Each local government unit
shall have the power to create its sources of revenue and to levy taxes, subject to such limitations as
may be provided by law." Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated
from beyond the sphere of the legislative power to enact and vest in local governments the power of
local taxation.

20 | T A X A T I O N R E V I E W
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would
not suffice to invalidate the said law as confiscatory and oppressive. When it is said that the taxing power
may be delegated to municipalities and the like, it is meant that there may be delegated such measure
of power to impose and collect taxes as the legislature may deem expedient. Thus, municipalities may
be permitted to tax subjects which for reasons of public policy the State has not deemed wise to tax for
more general purposes.

3. Delegation to the President


a. Sec. 28(2) Article VI of the Constitution
The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations
and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the national development program of the Government.
b. Flexible Tariff Clause – Sec. 1608 of the Customs Modernization and Tariff Act

Section 1608. Flexible Clause.—(a) In the interest of the general welfare and national security, and, subject to
the limitations prescribed under this Act, the President, upon the recommendation of the NEDA, is hereby
empowered to:
(1) Increase, reduce, or remove existing rates of import duty including any necessary change in classification.
The existing rates may be increased or decreased to any level, in one or several stages, but in no case shall the
increased rate of import duty be higher than a maximum of one hundred percent (100%) ad valorem;
(2) Establish import quotas or ban imports of any commodity, as may be necessary; and
(3) Impose an additional duty on all imports not exceeding ten percent (10%) ad valorem whenever necessary:
Provided, That upon periodic investigations by the Commission and recommendation of the NEDA, the President
may cause a gradual reduction of rates of import duty granted in Section 1611 of this Act, including those
subsequently granted pursuant to this section.
(b) Before any recommendation is submitted to the President by the NEDA pursuant to the provisions of this
section, except in the imposition of an additional duty not exceeding ten percent (10%) ad valorem, the
Commission shall conduct an investigation and shall hold public hearings wherein interested parties shall be
afforded reasonable opportunity to be present, to produce evidence and to be heard. The Commission shall also
hear the views and recommendations of any government office, agency, or instrumentality. The Commission
shall submit its findings and recommendations to the NEDA within thirty (30) days after the termination of the
public hearings.
(c) The power of the President to increase or decrease rates of import duty within the limits fixed in subsection
(a) hereof shall include the authority to modify the form of duty. In modifying the form of duty, the
corresponding ad valorem or specific equivalents of the duty with respect to imports from the principal
competing foreign country for the most recent representative period shall be used as basis.
(d) Any order issued by the President pursuant to the provisions of this section shall take effect thirty (30) days
after promulgation, except in the imposition of additional duty not exceeding ten percent (10%) ad valorem
which shall take effect at the discretion of the President.

21 | T A X A T I O N R E V I E W
(e) The power delegated to the President as provided for in this section shall be exercised only when Congress
is not in session.
(f) The power herein delegated may be withdrawn or terminated by Congress through a joint resolution.
The NEDA shall promulgate rules and regulations necessary to carry out the provisions of this section.

c. Abakada Guro Party List vs. Executive Secretary, GR No. 168056 dated September 1, 2005
Facts: ABAKADA GURO Party List, et al., filed a petition for prohibition. They question the
constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goods
and properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6 imposes a 10% VAT
on sale of services and use or lease of properties. These questioned provisions contain a uniform proviso
authorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT rate to
12%.

Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its
exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine
Constitution.
Petitioners ABAKADA GURO Party List, et al contend in common that Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108, respectively, of the NIRC giving the President the stand-by
authority to raise the VAT rate from 10% to 12% when a certain condition is met, constitutes undue
delegation of the legislative power to tax.
Issue: WON there was undue delegation of the legislative power to tax
Ruling: No.
The case before the Court is not a delegation of legislative power. It is simply a delegation of
ascertainment of facts upon which enforcement and administration of the increase rate under the law
is contingent. The legislature has made the operation of the 12% rate effective January 1, 2006,
contingent upon a specified fact or condition. It leaves the entire operation or non-operation of the 12%
rate upon factual matters outside of the control of the executive.
No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that
the word shall is used in the common proviso. The use of the word shall connotes a mandatory order. Its
use in a statute denotes an imperative obligation and is inconsistent with the idea of discretion. Where
the law is clear and unambiguous, it must be taken to mean exactly what it says, and courts have no
choice but to see to it that the mandate is obeyed.
Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence
of any of the conditions specified by Congress. This is a duty which cannot be evaded by the President.
Inasmuch as the law specifically uses the word shall, the exercise of discretion by the President does not
come into play. It is a clear directive to impose the 12% VAT rate when the specified conditions are
present. The time of taking into effect of the 12% VAT rate is based on the happening of a certain
specified contingency, or upon the ascertainment of certain facts or conditions by a person or body other
than the legislature itself.

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The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law
effectively nullified the President’s power of control over the Secretary of Finance by mandating the
fixing of the tax rate by the President upon the recommendation of the Secretary of Finance.

H. Constitutional Limitations
1. Enumeration
a. Provisions directly affecting taxation
i. Prohibition against imprisonment for non-payment of poll tax (Sec.20, Art. III)
ii. Uniformity and equality of taxation (Sec.28, Art. VI)
iii. Grant by Congress of authority to the president to impose tariff rates (Sec.28, Art. VI)
iv. Prohibition against taxation of religious, charitable entities, and educational entities (Sec.28, Art. VI)
v. Prohibition against taxation of non-stock, non-profit institutions (Sec.4, Art. IX)
vi. Majority vote of Congress for grant of tax exemption (Sec.28, Art. VI)
vii. Prohibition on use of tax levied for special purpose (Sec.29, Art. VI)
viii. President’s veto power on appropriation, revenue, tariff bills (Sec.27, Art. VI)
ix. Non-impairment of jurisdiction of the Supreme Court (Sec.30, Art. VI)
x. Grant of power to the local government units to create its own sources of revenue (Sec.5, Art. IX)
xi. Flexible tariff clause (Sec.24, Art. VI)
xii. Exemption from real property taxes (Sec. 9, Chapter II, Presidential Decree No. 464)
xiii. No appropriation or use of public money for religious purposes (Sec.28, Art. VI)

b. Provisions indirectly affecting taxation (Article III, 1987 Constitution)


i. Due process (Sec.1)
ii. Equal protection (Sec.1)
iii. Religious freedom (Sec.5)
iv. Non-impairment of obligations of contracts (Sec.10)

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2. Due Process and Equal Protection
a. PAGCOR vs. The BIR, GR No. 172087 dated March 15, 2011
Facts: PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A2 on January 1, 1977.
Simultaneous to its creation, P.D. No. 1067-B (supplementing P.D. No. 1067-A) was issued exempting
PAGCOR from the payment of any type of tax, except a franchise tax of five percent (5%) of the gross
revenue. Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's
exemption.
To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 18696 was issued.
On January 1, 1998, R.A. No. 8424, otherwise known as the National Internal Revenue Code of 1997,
took effect. Section 27 (c) of R.A. No. 8424 provides that government-owned and controlled corporations
(GOCCs) shall pay corporate income tax, except petitioner PAGCOR, the Government Service and
Insurance Corporation, the Social Security System, the Philippine Health Insurance Corporation, and the
Philippine Charity Sweepstakes Office.

With the enactment of R.A. No. 933710 on May 24, 2005, certain sections of the National Internal
Revenue Code of 1997 were amended. The particular amendment that is at issue in this case is Section
1 of R.A. No. 9337, which amended Section 27 (c) of the National Internal Revenue Code of 1997 by
excluding PAGCOR from the enumeration of GOCCs that are exempt from payment of corporate income
tax.
Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue Code of
1977, petitioner is no longer exempt from corporate income tax as it has been effectively omitted from
the list of GOCCs that are exempt from it. Petitioner argues that such omission is unconstitutional, as it
is violative of its right to equal protection of the laws under Section 1, Article III of the Constitution.
Issue: WON the exemption of PAGCOR is unconstitutional as it is violative of its right to equal protection
of the laws.
Ruling: In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate income
tax, considering that Section 1 of R.A. No. 9337 amended Section 27 (c) of the National Internal Revenue
Code of 1997 by omitting PAGCOR from the exemption. The legislative intent, as shown by the
discussions in the Bicameral Conference Meeting, is to require PAGCOR to pay corporate income tax;
hence, the omission or removal of PAGCOR from exemption from the payment of corporate income tax.
It is a basic precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius.
Thus, the express mention of the GOCCs exempted from payment of corporate income tax excludes all
others. Not being excepted, petitioner PAGCOR must be regarded as coming within the purview of the
general rule that GOCCs shall pay corporate income tax, expressed in the maxim: exceptio firmat regulam
in casibus non exceptis.
PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records
of the Bicameral Conference Meeting dated October 27, 1997, of the Committee on Ways and Means,
show that PAGCOR’s exemption from payment of corporate income tax, as provided in Section 27 (c) of
R.A. No. 8424, or the National Internal Revenue Code of 1997, was not made pursuant to a valid
classification based on substantial distinctions and the other requirements of a reasonable classification
by legislative bodies, so that the law may operate only on some, and not all, without violating the equal
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protection clause. The legislative records show that the basis of the grant of exemption to PAGCOR from
corporate income tax was PAGCOR’s own request to be exempted.

3. Non-impairment of obligation of contracts / Grant of Franchise


a. Sec. 10 Art. III of the Constitution
No law impairing the obligation of contracts shall be passed.
b. Sec. 11 Art. XII of the Constitution
No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or associations organized under the laws of the
Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any
such franchise or right be granted except under the condition that it shall be subject to amendment, alteration,
or repeal by the Congress when the common good so requires. The State shall encourage equity participation
in public utilities by the general public. The participation of foreign investors in the governing body of any public
utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing
officers of such corporation or association must be citizens of the Philippines.

c. Meralco vs. Province of Laguna, GR No. 131359 dated May 5, 1999


Facts: Certain municipalities of the Province of Laguna, by virtue of existing laws then in effect, issued
resolutions through their respective municipal councils granting franchise in favor of petitioner Manila
Electric Company ("MERALCO") for the supply of electric light, heat and power within their concerned
areas. On 19 January 1983, MERALCO was likewise granted a franchise by the National Electrification
Administration to operate an electric light and power service in the Municipality of Calamba, Laguna.
Respondent province enacted Laguna Provincial Ordinance No. 01-92. On the basis of the above
ordinance, respondent Provincial Treasurer sent a demand letter to MERALCO for the corresponding tax
payment. Petitioner MERALCO paid the tax under protest. A formal claim for refund was thereafter sent
by MERALCO to the Provincial Treasurer of Laguna claiming that the franchise tax it had paid and
continued to pay to the National Government pursuant to P.D. 551 already included the franchise tax
imposed by the Provincial Tax Ordinance. MERALCO, contended that the imposition of a franchise tax
under Section 2.09 of Laguna Provincial Ordinance No. 01-92, insofar as it concerned MERALCO,
contravened the provisions of Section 1 of P.D. 551.
Issue: Whether the imposition of a franchise tax under Section 2.09 of Laguna Provincial Ordinance No.
01-92, insofar as petitioner is concerned, is violative of the non-impairment clause of the Constitution
and Section 1 of Presidential Decree No. 551.
Ruling:
While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as
being in the nature of contracts and a part of the inducement for carrying on the franchise, these
exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions,
in the real sense of the term and where the non-impairment clause of the Constitution can rightly be
25 | T A X A T I O N R E V I E W
invoked, are those agreed to by the taxing authority in contracts, such as those contained in government
bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting
in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax
exemptions of this kind may not be revoked without impairing the obligations of contracts. These
contractual tax exemptions, however, are not to be confused with tax exemptions granted under
franchises. A franchise partakes the nature of a grant which is beyond the purview of the non-
impairment clause of the Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution, like its
precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no franchise for the
operation of a public utility shall be granted except under the condition that such privilege shall be
subject to amendment, alteration or repeal by Congress as and when the common good so requires.
d. Smart Communications, Inc. vs. City of Davao, GR No. 155491 dated September 16, 2008
Facts: On February 18, 2002, Smart filed a special civil action for declaratory relief for the ascertainment of its
rights and obligations under the Tax Code of the City of Davao, which imposes a franchise tax on businesses
enjoying a franchise within the territorial jurisdiction of Davao. Smart avers that its telecenter in Davao City is
exempt from payment of franchise tax to the City.
Issue: WON the imposition of a local franchise tax on Smart would violate the constitutional prohibition against
impairment of the obligation of contracts.
Ruling: No.
Aside from the national franchise tax, the franchisee is still liable to pay the local franchise tax, unless it is
expressly and unequivocally exempted from the payment thereof under its legislative franchise. The "in lieu of
all taxes" clause in a legislative franchise should categorically state that the exemption applies to both local and
national taxes; otherwise, the exemption claimed should be strictly construed against the taxpayer and liberally
in favor of the taxing authority.
Republic Act No. 7716, otherwise known as the "Expanded VAT Law," did not remove or abolish the payment of
local franchise tax. It merely replaced the national franchise tax that was previously paid by telecommunications
franchise holders and in its stead imposed a ten percent (10%) VAT in accordance with Section 108 of the Tax
Code. VAT replaced the national franchise tax, but it did not prohibit nor abolish the imposition of local franchise
tax by cities or municipaties.
The power to tax by local government units emanates from Section 5, Article X of the Constitution which
empowers them to create their own sources of revenues and to levy taxes, fees and charges subject to such
guidelines and limitations as the Congress may provide. The imposition of local franchise tax is not inconsistent
with the advent of the VAT, which renders functus officio the franchise tax paid to the national government.
VAT inures to the benefit of the national government, while a local franchise tax is a revenue of the local
government unit.

4. Infringement of Religious Freedom


a. Sec. 5 Art. III of the Constitution
No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. The free
exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever
be allowed. No religious test shall be required for the exercise of civil or political rights.
26 | T A X A T I O N R E V I E W
b. American Bible Society vs. City of Manila, GR No. L-9637 dated April 30, 1957
Facts: Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary corporation duly registered and
doing business in the Philippines through its Philippine agency established in Manila in November, 1898, with
its principal office at 636 Isaac Peral in said City. The defendant appellee is a municipal corporation with powers
that are to be exercised in conformity with the provisions of Republic Act No. 409, known as the Revised Charter
of the City of Manila.
In the course of its ministry, plaintiff's Philippine agency has been distributing and selling bibles and/or gospel
portions thereof throughout the Philippines and translating the same into several Philippine dialects. On May
29 1953, the acting City Treasurer of the City of Manila informed plaintiff that it was conducting the business of
general merchandise since November, 1945, without providing itself with the necessary Mayor's permit and
municipal license and required plaintiff to secure, within three days, the corresponding permit and license fees,
together with compromise.
Plaintiff-appellant contends that Ordinances Nos. 2529 and 3000, as respectively amended, are unconstitutional
and illegal in so far as its society is concerned, because they provide for religious censorship and restrain the
free exercise and enjoyment of its religious profession, to wit: the distribution and sale of bibles and other
religious literature to the people of the Philippines.
Issue: WON Ordinances Nos. 2529 and 3000 are unconstitutional because it restrains the free exercise and
enjoyment of the religious profession and worship.
Ruling:
Before entering into a discussion of the constitutional aspect of the case, the SC shall first consider the provisions
of the questioned ordinances in relation to their application to the sale of bibles, etc. by appellant. The records,
show that by letter of May 29, 1953 (Annex A), the City Treasurer required plaintiff to secure a Mayor's permit
in connection with the society's alleged business of distributing and selling bibles, etc. and to pay permit dues
in the sum of P35 for the period covered in this litigation, plus the sum of P35 for compromise on account of
plaintiff's failure to secure the permit required by Ordinance No. 3000 of the City of Manila, as amended. This
Ordinance is of general application and not particularly directed against institutions like the plaintiff, and it does
not contain any provisions whatever prescribing religious censorship nor restraining the free exercise and
enjoyment of any religious profession.
It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was in some
instances a little bit higher than the actual cost of the same but this cannot mean that appellant was engaged
in the business or occupation of selling said "merchandise" for profit. For this reason the SC believes that the
provisions of City of Manila Ordinance No. 2529, as amended, cannot be applied to appellant, for in doing so it
would impair its free exercise and enjoyment of its religious profession and worship as well as its rights of
dissemination of religious beliefs.
With respect to Ordinance No. 3000, as amended, which requires the obtention the Mayor's permit before any
person can engage in any of the businesses, trades or occupations enumerated therein, the SC do not find that
it imposes any charge upon the enjoyment of a right granted by the Constitution, nor tax the exercise of religious
practices.

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c. Tolentino vs. Secretary of Finance, GR No. 115455 dated August 25, 1994 and October 30, 1995 (motion for
reconsideration)

5. Infringement of Press Freedom


a. Sec. 4 Art. III of the Constitution
No law shall be passed abridging the freedom of speech, of expression, or of the press, or the right of the people
peaceably to assemble and petition the government for redress of grievances.
b. Tolentino vs. Secretary of Finance, GR No. 115455 dated August 25, 1994 and October 30, 1995 (motion for
reconsideration)
Facts (August 25, 1994): The Philippine Press Institute (PPI), petitioner in G.R. No. 115544, is a non-profit
organization of newspaper publishers established for the improvement of journalism in the Philippines.
On the other hand, petitioner in G.R. No. 115781, the Philippine Bible Society (PBS), is a non-profit
organization engaged in the printing and distribution of bibles and other religious articles. Both
petitioners claim violations of their rights under § § 4 and 5 of the Bill of Rights as a result of the
enactment of the VAT Law.
The PPI questions the law insofar as it has withdrawn the exemption previously granted to the press
under § 103 (f) of the NIRC. Although the exemption was subsequently restored by administrative
regulation with respect to the circulation income of newspapers, the PPI presses its claim because of the
possibility that the exemption may still be removed by mere revocation of the regulation of the Secretary
of Finance. On the other hand, the PBS goes so far as to question the Secretary's power to grant
exemption for two reasons: (1) The Secretary of Finance has no power to grant tax exemption because
this is vested in Congress and requires for its exercise the vote of a majority of all its members 26 and
(2) the Secretary's duty is to execute the law.
Republic Act No. 7716 amended § 103 by deleting ¶ (f) with the result that print media became subject
to the VAT with respect to all aspects of their operations. Later, however, based on a memorandum of
the Secretary of Justice, respondent Secretary of Finance issued Revenue Regulations No. 11-94, dated
June 27, 1994, exempting the "circulation income of print media pursuant to § 4 Article III of the 1987
Philippine Constitution guaranteeing against abridgment of freedom of the press, among others." The
exemption of "circulation income" has left income from advertisements still subject to the VAT.
Issue: WON Republic Act No. 7716 on the ground that it offends the free speech, press and freedom of
religion guarantees of the Constitution.
Ruling: No.
The SC found the attack on Republic Act No. 7716 on the ground that it offends the free speech, press
and freedom of religion guarantees of the Constitution to be without merit. For the same reasons, the
claim of the Philippine Educational Publishers Association (PEPA) in G.R. No. 115931 that the increase in
the price of books and other educational materials as a result of the VAT would violate the constitutional
mandate to the government to give priority to education, science and technology (Art. II, § 17) to be
untenable.

28 | T A X A T I O N R E V I E W
PPI contends is that by withdrawing the exemption previously granted to print media transactions
involving printing, publication, importation or sale of newspapers, Republic Act No. 7716 has singled out
the press for discriminatory treatment and that within the class of mass media the law discriminates
against print media by giving broadcast media favored treatment.
If the press is now required to pay a value-added tax on its transactions, it is not because it is being
singled out, much less targeted, for special treatment but only because of the removal of the exemption
previously granted to it by law. The withdrawal of exemption is all that is involved in these cases. Other
transactions, likewise previously granted exemption, have been delisted as part of the scheme to expand
the base and the scope of the VAT system. The law would perhaps be open to the charge of
discriminatory treatment if the only privilege withdrawn had been that granted to the press. But that is
not the case.
October 30, 1995 (motion for reconsideration):
We have held that, as a general proposition, the press is not exempt from the taxing power of the State
and that what the constitutional guarantee of free press prohibits are laws which single out the press or
target a group belonging to the press for special treatment or which in any way discriminate against the
press on the basis of the content of the publication, and R.A. No. 7716 is none of these.
Now it is contended by the PPI that by removing the exemption of the press from the VAT while
maintaining those granted to others, the law discriminates against the press. At any rate, it is averred,
"even non-discriminatory taxation of constitutionally guaranteed freedom is unconstitutional."
With respect to the first contention, it would suffice to say that since the law granted the press a
privilege, the law could take back the privilege anytime without offense to the Constitution. The reason
is simple: by granting exemptions, the State does not forever waive the exercise of its sovereign
prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to
which other businesses have long ago been subject.
The PPI says that the discriminatory treatment of the press is highlighted by the fact that transactions,
which are profit oriented, continue to enjoy exemption under R.A. No. 7716. An enumeration of some
of these transactions will suffice to show that by and large this is not so and that the exemptions are
granted for a purpose.

I. Tax Rulings
1. Definition
Tax rulings are defined as the official positions of the BIR on a taxpayer’s inquiries clarifying specific Tax Code
provisions or their implementation. Simply put, a taxpayer may seek guidance from the BIR in the form of a
ruling to pay the correct taxes, to be exempt from certain taxes, or to follow the correct compliance procedures.
2. Revenue Regulations (“RR”) No. 5-2012 dated April 2, 2012
Section 1. Background - Republic Act No. 8424, or The Tax Reform Act of 1997 (hereinafter referred to as the
Tax Code of 1997), which was approved on December 11, 1997 has put in place the last phase of the
comprehensive reform package on tax laws which took effect on January 1, 1998. Pursuant to Section 244, in
29 | T A X A T I O N R E V I E W
relation to Section 4 of the Tax Code of 1997, these Regulations are being promulgated to establish the policy
on the binding effect of rulings issued prior to the effectivity of the Tax Code of 1997 on January 1, 1998.
Section 2. Coverage. – All rulings issued prior to January 1, 1998 will no longer have any binding effect.
Consequently, these rulings cannot be invoked as basis for any current business transaction/s. Neither can these
rulings be used as basis for securing legal tax opinions/rulings.
Section 3. Repealing Clause. – All existing rules and regulations or parts thereof which are inconsistent with the
provisions of these regulations are hereby amended, repealed or revoked accordingly.
3. Commissioner’s Ruling (Sec. 7(B) of the NIRC)
The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau.
4. Power of the CIR to Interpret /Review/Appeal to Sec. of Finance (Sec. 4 of the NIRC)
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The power to interpret the
provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof
administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive
appellate jurisdiction of the Court of Tax Appeals.

a. Honda Cars Philippines, Inc. vs. Honda Cars Technical Specialist Supervisors Union, GR No. 204142 dated
November 19, 2014
Facts: Petitioner Honda Cars Philippines, Inc., (company) and respondent Honda Cars Technical
Specialists and Supervisory Union (union), the exclusive collective bargaining representative of the
company’s supervisors and technical specialists, entered into a collective bargaining agreement (CBA).
The company and the union entered into a MOA, converting the transportation allowance into a monthly
gasoline allowance. The company claimed that the grant of the gasoline allowance is tied up to a similar
company policy for managers and assistant vice-presidents (AVPs), which provides that in the event the
amount of gasoline is not fully consumed, the gasoline not used may be converted into cash, subject to
whatever tax may be applicable. Since the cash conversion is paid in the monthly payroll as an excess
gas allowance, the company considers the amount as part of the managers’ and AVPs’ compensation
that is subject to income tax on compensation.
Accordingly, the company deducted from the union members’ salaries the withholding tax
corresponding to the conversion to cash of their unused gasoline allowance.
The union, on the other hand, argued that the gasoline allowance for its members is a "negotiated item"
under Article XV, Section 15 of the new CBA on fringe benefits. It thus opposed the company’s practice
of treating the gasoline allowance that, when converted into cash, is considered as compensation
income that is subject to withholding tax.
On February 6, 2009, the Panel of Voluntary Arbitrators rendered a decision/award declaring that the
cash conversion of the unused gasoline allowance enjoyed by the members of the union is a fringe

30 | T A X A T I O N R E V I E W
benefit subject to the fringe benefit tax, not to income tax. The panel held that the deductions made by
the company shall be considered as advances subject to refund in future remittances of withholding
taxes
Issue: WON the Voluntary Arbitrator has jurisdiction to settle tax matters
Ruling: No.
The Labor Code vests the Voluntary Arbitrator original and exclusive jurisdiction to hear and decide all
unresolved grievances arising from the interpretation or implementation of the Collective Bargaining
Agreement and those arising from the interpretation or enforcement of company personnel policies.
Upon agreement of the parties, the Voluntary Arbitrator shall also hear and decide all other labor
disputes, including unfair labor practices and bargaining deadlocks.
In short, the Voluntary Arbitrator’s jurisdiction is limited to labor disputes.
The issues raised before the Panel of Voluntary Arbitrators are: (1) whether the cash conversion of the
gasoline allowance shall be subject to fringe benefit tax or the graduated income tax rate on
compensation; and (2) whether the company wrongfully withheld income tax on the converted gas
allowance.
The Voluntary Arbitrator has no competence to rule on the taxability of the gas allowance and on the
propriety of the withholding of tax. These issues are clearly tax matters, and do not involve labor
disputes. To be exact, they involve tax issues within a labor relations setting as they pertain to questions
of law on the application of Section 33 (A) of the NIRC. They do not require the application of the Labor
Code or the interpretation of the MOA and/or company personnel policies. Furthermore, the company
and the union cannot agree or compromise on the taxability of the gas allowance. Taxation is the State’s
inherent power; its imposition cannot be subject to the will of the parties.
Under paragraph 1, Section 4 of the NIRC, the CIR shall have the exclusive and original jurisdiction to
interpret the provisions of the NIRC and other tax laws, subject to review by the Secretary of Finance.
Consequently, if the company and/or the union desire/s to seek clarification of these issues, it/they
should have requested for a tax ruling from the Bureau of Internal Revenue (BIR). Any revocation,
modification or reversal of the CIR’s ruling shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers, except in the following cases:
(a) Where the taxpayer deliberately misstates or omits material facts from his return or any document
required of him by the BIR;
(b) Where the facts subsequently gathered by the BIR are materially different from the facts on which
the ruling is based; or
(c) Where the taxpayer acted in bad faith.
On the other hand, if the union disputes the withholding of tax and desires a refund of the withheld tax,
it should have filed an administrative claim for refund with the CIR. Paragraph 2, Section 4 of the NIRC
expressly vests the CIR original jurisdiction over refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other tax matters.

31 | T A X A T I O N R E V I E W
b. Banco De Oro vs. Republic, GR No. 198756 dated January 13, 2015
The case involves the proper tax treatment of the discount or interest income arising from the ₱35 billion
worth of 10-year zero-coupon treasury bonds issued by the Bureau of Treasury on October 18, 2001
(denominated as the Poverty Eradication and Alleviation Certificates or the PEACe Bonds by the Caucus
of Development NGO Networks).
On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-20111 (2011 BIR
Ruling), declaring that the PEACe Bonds being deposit substitutes are subject to the 20% final
withholding tax. Pursuant to this ruling, the Secretary of Finance directed the Bureau of Treasury to
withhold a 20% final tax from the face value of the PEACe Bonds upon their payment at maturity on
October 18, 2011.
Ruling:
Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are reviewable by
the Secretary of Finance.

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. -The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance.
Thus, it was held that "[i]f superior administrative officers [can] grant the relief prayed for, [then] special
civil actions are generally not entertained." The remedy within the administrative machinery must be
resorted to first and pursued to its appropriate conclusion before the court’s judicial power can be
sought.
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative
remedies:
[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility is called upon
by the peculiarity and uniqueness of the factual and circumstantial settings of a case. Hence, it is
disregarded (1) when there is a violation of due process, (2) when the issue involved is purely a legal
question, (3) when the administrative action is patently illegal amounting to lack or excess of
jurisdiction,(4) when there is estoppel on the part of the administrative agency concerned,(5) when there
is irreparable injury, (6) when the respondent is a department secretary whose acts as an alter ego of
the President bears the implied and assumed approval of the latter, (7) when to require exhaustion of
administrative remedies would be unreasonable, (8) when it would amount to a nullification of a claim,
(9) when the subject matter is a private land in land case proceedings, (10) when the rule does not
provide a plain, speedy and adequate remedy, (11) when there are circumstances indicating the urgency
of judicial intervention. The rule on exhaustion of administrative remedies also finds no application when
the exhaustion will result in an exercise in futility.
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would be a futile
exercise because it was upon the request of the Secretary of Finance that the 2011 BIR Ruling was issued
by the Bureau of Internal Revenue. It appears that the Secretary of Finance adopted the Commissioner
of Internal Revenue’s opinions as his own.

We agree with respondents that the jurisdiction to review the rulings of the Commissioner of Internal
Revenue pertains to the Court of Tax Appeals. The questioned BIR Ruling Nos. 370-2011 and DA 378-

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2011 were issued in connection with the implementation of the 1997 National Internal Revenue Code
on the taxability of the interest income from zero-coupon bonds issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act
No. 9282,160such rulings of the Commissioner of Internal Revenue are appealable to that court.
In Commissioner of Internal Revenue v. Leal, citing Rodriguez v. Blaquera, this court emphasized the
jurisdiction of the Court of Tax Appeals over rulings of the Bureau of Internal Revenue, thus:
While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be
stressed that the jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to
the Court of Tax Appeals, not to the RTC.

c. Confederation for Unity, Recognition and Advancement of Government Employees vs. Commissioner - BIR,
GR No. 213446 dated July 3, 2018
Facts: Petitioners filed a Petition for Prohibition and Mandamus imputing grave abuse of discretion on
the part of respondent CIR in issuing RMO No. 23-2014. According to petitioners, RMO No. 23-2014
classified as taxable compensation, the following allowances, bonuses, compensation for services
granted to government employees, which they alleged to be considered by law as non-taxable fringe
and de minimis benefits.
Petitioners are seeking to nullify RMO No. 23-2014 on the following grounds: (1) respondent CIR is bereft
of any authority to issue the assailed RMO. The NIRC of 1997, as amended, expressly vests to the
Secretary of Finance the authority to promulgate all needful rules and regulations for the effective
enforcement of tax provisions; and (2) respondent CIR committed grave abuse of discretion amounting
to lack or excess of jurisdiction in the issuance of RMO No. 23-2014 when it subjected to withholding tax
benefits and allowances of court employees which are tax-exempt.
Issue: (non-exhaustion of administrative remedies and hierarchy of courts)
Ruling:
It is an unquestioned rule in this jurisdiction that certiorari under Rule 65 will only lie if there is no appeal,
or any other plain, speedy and adequate remedy in the ordinary course of law against the assailed
issuance of the CIR. The plain, speedy and adequate remedy expressly provided by law is an appeal of
the assailed RMO with the Secretary of Finance under Section 4 of the NIRC of 1997, as amended, to wit:
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. – The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions
thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.

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The CIR's exercise of its power to interpret tax laws comes in the form of revenue issuances, which
include RMOs that provide "directives or instructions; prescribe guidelines; and outline processes,
operations, activities, workflows, methods and procedures necessary in the implementation of stated
policies, goals, objectives, plans and programs of the Bureau in all areas of operations, except auditing."
These revenue issuances are subject to the review of the Secretary of Finance. In relation thereto,
Department of Finance Department Order No. 007-02 issued by the Secretary of Finance laid down the
procedure and requirements for filing an appeal from the adverse ruling of the CIR to the said office. A
taxpayer is granted a period of thirty (30) days from receipt of the adverse ruling of the CIR to file with
the Office of the Secretary of Finance a request for review in writing and under oath.
Moreover, petitioners violated the rule on hierarchy of courts as the petitions should have been initially
filed with the CTA, having the exclusive appellate jurisdiction to determine the constitutionality or
validity of revenue issuances.
In The Philippine American Life and General Insurance Co. v. Secretary of Finance, the Court held that
rulings of the Secretary of Finance in its exercise of its power of review under Section 4 of the NIRC of
1997, as amended, are appealable to the CTA. The Court explained that while there is no law which
explicitly provides where rulings of the Secretary of Finance under the adverted to NIRC provision are
appealable, Section 7(a) of RA No. 1125, the law creating the CTA, is nonetheless sufficient, albeit
impliedly, to include appeals from the Secretary's review under Section 4 of the NIRC of 1997, as
amended.
Subsequently, in Banco de Oro v. Republic, the Court, sitting En Banc, further held that the CTA has
exclusive appellate jurisdiction to review, on certiorari, the constitutionality or validity of revenue
issuances, even without a prior issuance of an assessment.
The Court of Tax Appeals has undoubted jurisdiction to pass upon the constitutionality or validity of a
tax law or regulation when raised by the taxpayer as a defense in disputing or contesting an assessment
or claiming a refund. It is only in the lawful exercise of its power to pass upon all matters brought before
it, as sanctioned by Section 7 of Republic Act No. 1125, as amended.
This Court, however, declares that the Court of Tax Appeals may likewise take cognizance of cases
directly challenging the constitutionality or validity of a tax law or regulation or administrative issuance
(revenue orders, revenue memorandum circulars, rulings).
Section 7 of Republic Act No. 1125, as amended, is explicit that, except for local taxes, appeals from the
decisions of quasi-judicial agencies (Commissioner of Internal Revenue, Commissioner of Customs,
Secretary of Finance, Central Board of Assessment Appeals, Secretary of Trade and Industry) on tax-
related problems must be brought exclusively to the Court of Tax Appeals.
In other words, within the judicial system, the law intends the Court of Tax Appeals to have exclusive
jurisdiction to resolve all tax problems. Petitions for writs of certiorari against the acts and omissions of
the said quasi-judicial agencies should, thus, be filed before the Court of Tax Appeals.
Furthermore, with respect to administrative issuances (revenue orders, revenue memorandum circulars,
or rulings), these are issued by the Commissioner under its power to make rulings or opinions in
connection with the implementation of the provisions of internal revenue laws. Tax rulings, on the other
hand, are official positions of the Bureau on inquiries of taxpayers who request clarification on certain
provisions of the National Internal Revenue Code, other tax laws, or their implementing regulations.

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Hence, the determination of the validity of these issuances clearly falls within the exclusive appellate
jurisdiction of the Court of Tax Appeals under Section 7(1) of Republic Act No. 1125, as amended, subject
to prior review by the Secretary of Finance, as required under Republic Act No. 8424.

5. Non-Retroactivity of Rulings (Sec. 246 of the NIRC)


a. CIR vs. Phil. Healthcare Providers, GR No. 168129 dated April 24, 2007
Facts: The Philippine Health Care Providers, Inc., herein respondent, is a corporation organized and
existing under the laws of the Republic of the Philippines. Pursuant to its Articles of Incorporation.
President Corazon C. Aquino issued Executive Order (E.O.) No. 273, amending the National Internal
Revenue Code of 1977 (Presidential Decree No. 1158) by imposing Value-Added Tax (VAT) on the sale of
goods and services.
Petitioner CIR, through the VAT Review Committee of the Bureau of Internal Revenue (BIR), issued VAT
Ruling No. 231-88 stating that respondent, as a provider of medical services, is exempt from the VAT
coverage.
The BIR sent respondent a Preliminary Assessment Notice for deficiency in its payment of the VAT. On
October 20, 1999, respondent filed a protest with the BIR. Petitioner CIR did not take any action on
respondent's protests. Hence, on September 21, 2000, respondent filed with the Court of Tax Appeals
(CTA) a petition for review.
CTA ruling: We are in accord with the view of petitioner that it is entitled to the benefit of non-
retroactivity of rulings guaranteed under Section 246 of the Tax Code, in the absence of showing of bad
faith on its part.
Clearly, undue prejudice will be caused to petitioner if the revocation of VAT Ruling No. 231-88 will be
retroactively applied to its case. This court is convinced that petitioner's reliance on the said ruling is
premised on good faith. The facts of the case do not show that petitioner deliberately committed
mistakes or omitted material facts when it obtained the said ruling from the Bureau of Internal Revenue.
Thus, in the absence of such proof, this court upholds the application of Section 246 of the Tax Code.
Consequently, the pronouncement made by the BIR in VAT Ruling No. 231-88 as to the VAT exemption
of petitioner should be upheld.
Issue: whether VAT Ruling No. 231-88 exempting respondent from payment of VAT has retroactive
application.
Ruling: Yes.
Section 246 of the 1997 Tax Code, as amended, provides that rulings, circulars, rules and regulations
promulgated by the Commissioner of Internal Revenue have no retroactive application if to apply them
would prejudice the taxpayer. The exceptions to this rule are: (1) where the taxpayer deliberately
misstates or omits material facts from his return or in any document required of him by the Bureau of
Internal Revenue; (2) where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based, or (3) where the taxpayer acted in bad
faith.

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The SC has consistently reaffirmed its ruling in Commissioner of Internal Revenue v. Borroughs, Ltd., the
rule is that the BIR rulings have no retroactive effect where a grossly unfair deal would result to the
prejudice of the taxpayer, as in this case.
Respondent, in the case at bar, acted in good faith. There is no showing that respondent "deliberately
committed mistakes or omitted material facts" when it obtained VAT Ruling No. 231-88 from the BIR.
Respondent's letter which served as the basis for the VAT ruling "sufficiently described" its business and
"there is no way the BIR could be misled by the said representation as to the real nature" of said business.
The SC found that "the failure of respondent to refer to itself as a health maintenance organization is
not an indication of bad faith or a deliberate attempt to make false representations.” As "the term health
maintenance organization did not as yet have any particular significance for tax purposes," respondent's
failure "to include a term that has yet to acquire its present definition and significance cannot be equated
with bad faith."

b. CIR vs. Burmeister and Wain, GR No. 153205 dated Jaunary22, 2007
c. CIR vs. CA, GR No. 117982 dated February 6, 1997 [read also concurring opinion of Justice Vitug]
Facts: ALHAMBRA INDUSTRIES, INC., is a domestic corporation engaged in the manufacture and sale of
cigar and cigarette products. On 7 May 1991 private respondent received a letter dated 26 April 1991
from the Commissioner of Internal Revenue assessing it deficiency Ad Valorem Tax.
Private respondent thru counsel filed a protest against the proposed assessment with a request that the
same be withdrawn and cancelled.
The CTA ordered petitioner to refund to private respondent the erroneously paid ad valorem tax for the
period 2 November 1990 to 22 January 1991. BIR Circular 473-88 was issued to Insular-Yebana Tobacco
Corporation allowing the latter to exclude the value-added tax (VAT) in the determination of the gross
selling price for purposes of computing the ad valorem tax of its cigar and cigarette products in
accordance with Sec. 127 of the Tax Code.
Thereafter, petitioner issued BIR Ruling 017-91 to Insular-Yebana Tobacco Corporation revoking BIR
Ruling 473-88 for being violative of Sec. 142 of the Tax Code. It included back the VAT to the gross selling
price in determining the tax base for computing the ad valorem tax on cigarettes.
Petitioner sought to apply the revocation retroactively to private respondent's removals of cigarettes for
the period starting 2 November 1990 to 22 January 1991 on the ground that private respondent allegedly
acted in bad faith which is an exception to the rule on non-retroactivity of BIR Rulings.
On appeal, the CA affirmed the CTAs holding that the retroactive application of BIR Ruling 017-91 cannot
be allowed since private respondent did not act in bad faith; private respondent's computation under
BIR Ruling 473-88 was not shown to be motivated by ill will or dishonesty partaking the nature of fraud;
hence, this petition.
Petitioner contends that BIR Ruling 473-88 being an erroneous interpretation of Sec. 142 (b) of the Tax
Code does not confer any vested right to private respondent as to exempt it from the retroactive
application of BIR Ruling 017-91.

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Issue: whether private respondent's reliance on a void BIR ruling conferred upon the latter a vested right
to apply the same in the computation of its ad valorem tax and claim for tax refund.
Ruling:
The deficiency tax assessment issued by petitioner against private respondent is without legal basis
because of the prohibition against the retroactive application of the revocation of BIR rulings in the
absence of bad faith on the part of private respondent.
The question as to the correct computation of the excise tax on cigarettes in the case at bar has been
sufficiently addressed by BIR Ruling 017-91 dated 11 February 1991 which revoked BIR Ruling 473-88.
Private respondent did not question the correctness of the above BIR ruling. In fact, upon knowledge of
the effectivity of BIR Ruling No. 017-91, private respondent immediately implemented the method of
computation mandated therein by restoring the VAT in computing the tax base for purposes of the 15%
ad valorem tax.
However, well-entrenched is the rule that rulings and circulars, rules and regulations promulgated by
the Commissioner of Internal Revenue would have no retroactive application if to so apply them would
be prejudicial to the taxpayers.
Without doubt, private respondent would be prejudiced by the retroactive application of the revocation
as it would be assessed deficiency excise tax.
What is left to be resolved is petitioner's claim that private respondent falls under the third exception in
Sec. 246, i.e., that the taxpayer has acted in bad faith.
Bad faith imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It partakes
of the nature of fraud; a breach of a known duty through some motive of interest or ill will. We find no
convincing evidence that private respondent's implementation of the computation mandated by BIR
Ruling 473-88 was ill-motivated or attended with a dishonest purpose. To the contrary, as a sign of good
faith, private respondent immediately reverted to the computation mandated by BIR Ruling 017-91 upon
knowledge of its issuance.
As regards petitioner's argument that private respondent should have made consultations with it before
private respondent used the computation mandated by BIR Ruling 473-88, suffice it to state that the
aforesaid BIR Ruling was clear and categorical thus leaving no room for interpretation. The failure of
private respondent to consult petitioner does not imply bad faith on the part of the former.

d. CIR vs. Filinvest Development Corporation, GR Nos. 163653 and 167689 dated July 19, 2011
In its appeal before the CA, the CIR argued that the foregoing ruling was later modified in BIR Ruling No.
108-99 dated 15 July 1999, which opined that inter-office memos evidencing lendings or borrowings
extended by a corporation to its affiliates are akin to promissory notes, hence, subject to documentary
stamp taxes. In brushing aside the foregoing argument, however, the CA applied Section 246 of the 1993
NIRC from which proceeds the settled principle that rulings, circulars, rules and regulations promulgated
by the BIR have no retroactive application if to so apply them would be prejudicial to the taxpayers.
Admittedly, this rule does not apply: (a) where the taxpayer deliberately misstates or omits material
facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where

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the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the
facts on which the ruling is based; or (c) where the taxpayer acted in bad faith. Not being the taxpayer
who, in the first instance, sought a ruling from the CIR, however, FDC cannot invoke the foregoing
principle on non-retroactivity of BIR rulings.
e. CIR vs. San Roque Power, GR No. 187485 dated February 12, 2013 and other cases
f. CIR vs. San Roque Power, GR No. 187485 dated October8, 2013
San Roque prays that the rule established in our 12 February 2013 Decision be given only a prospective
effect, arguing that “the manner by which the Bureau of Internal Revenue (BIR) and the Court of Tax
Appeals (CTA) actually treated the 120 + 30 day periods constitutes an operative fact the effects and
consequences of which cannot be erased or undone.”
San Roque’s argument must, therefore, fail. The doctrine of operative fact is an argument for the
application of equity and fair play. In the present case, we applied the doctrine of operative fact when
we recognized simultaneous filing during the period between 10 December 2003, when BIR Ruling No.
DA-489-03 was issued, and 6 October 2010, when this Court promulgated Aichi declaring the 120+30
day periods mandatory and jurisdictional, thus reversing BIR Ruling No. DA-489-03.
The doctrine of operative fact is in fact incorporated in Section 246 of the Tax Code, which provides:
SEC. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the
rules and regulations promulgated in accordance with the preceding Sections or any of the rulings
or circulars promulgated by the Commissioner shall not be given retroactive application if the
revocation, modification or reversal will be prejudicial to the taxpayers, except in the following
cases:
(a) Where the taxpayer deliberately misstates or omits material facts from his return or any
document required of him by the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith.
Under Section 246, taxpayers may rely upon a rule or ruling issued by the Commissioner from the time
the rule or ruling is issued up to its reversal by the Commissioner or this Court. The reversal is not given
retroactive effect. This, in essence, is the doctrine of operative fact. There must, however, be a rule or
ruling issued by the Commissioner that is relied upon by the taxpayer in good faith. A mere
administrative practice, not formalized into a rule or ruling, will not suffice because such a mere
administrative practice may not be uniformly and consistently applied. An administrative practice, if not
formalized as a rule or ruling, will not be known to the general public and can be availed of only by those
with informal contacts with the government agency.
Since the law has already prescribed in Section 246 of the Tax Code how the doctrine of operative fact
should be applied, there can be no invocation of the doctrine of operative fact other than what the law
has specifically provided in Section 246. In the present case, the rule or ruling subject of the operative
fact doctrine is BIR Ruling No. DA-489-03 dated 10 December 2003. Prior to this date, there is no such
rule or ruling calling for the application of the operative fact doctrine in Section 246. Section 246, being

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an exemption to statutory taxation, must be applied strictly against the taxpayer claiming such
exemption.

g. Banco De Oro vs. Republic, GR No. 198756 dated August 16, 2016 – resolution on the Motion for
Reconsideration
6. Appeal of Rulings – RTC or CTA?
a. Banco De Oro vs. Republic, GR No. 198756, January 13, 2015 and resolution on the Motion for
reconsideration, GR No. 198756 dated August 16, 2016
b. Confederation for Unity, Recognition and Advancement of Government Employees vs. Commissioner - BIR,
GR No. 213446 dated July 3, 2018
c. Compare with CIR vs. CTA and Petron, GR No. 207843 dated July 15, 2015 (Perlas-Bernabe)
Facts: Petron, which is engaged in the manufacture and marketing of petroleum products, imports alkylate as a
raw material or blending component for the manufacture of ethanol-blended motor gasoline. For the period
January 2009 to August 2011, as well as for the month of April 2012, Petron transacted an aggregate of 22
separate importations for which petitioner the CIR issued Authorities to Release Imported Goods (ATRIGs),
categorically stating that Petron's importation of alkylate is exempt from the payment of the excise tax because
it was not among those articles enumerated as subject to excise tax under Title VI of Republic Act No. (RA) 8424,
as amended, or the 1997 NIRC.
In June 2012, Petron imported 12,802,660 liters of alkylate and paid value-added tax (VAT). Based on the Final
Computation, said importation was subjected to excise taxes of ₱4.35 per liter, or in the aggregate amount of
₱55,691,571.00, and consequently, to an additional VAT of 12% on the imposed excise tax in the amount of
₱6,682,989.00. The imposition of the excise tax was supposedly premised on Customs Memorandum Circular
(CMC) No. 164-2012.
In view of the CIR's assessment, Petron filed before the CTA a petition for review, raising the issue of whether
its importation of alkylate as a blending component is subject to excise tax as contemplated under Section 148
(e) of the NIRC.
Aggrieved, the CIR sought immediate recourse to the Court, through the instant petition, alleging that the CTA
committed grave abuse of discretion when it assumed authority to take cognizance of the case despite its lack
of jurisdiction to do so.
Issue: whether or not the CTA properly assumed jurisdiction over the petition assailing the imposition of excise
tax on Petron's importation of alkylate based on Section 148 (e) of the NIRC.
Ruling: No. Petron prematurely invoked the jurisdiction of the CTA.
In this case, Petron's tax liability was premised on the COC's issuance of CMC No. 164-2012, which gave effect
to the CIR's Letter interpreting Section 148 (e) of the NIRC as to include alkyl ate among the articles subject to
customs duties, hence, Petron's petition before the CTA ultimately challenging the legality and constitutionality
of the CIR's aforesaid interpretation of a tax provision. In line with the foregoing discussion, however, the CIR
correctly argues that the CT A had no jurisdiction to take cognizance of the petition as its resolution would
necessarily involve a declaration of the validity or constitutionality of the CIR's interpretation of Section 148 (e)

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of the NIRC, which is subject to the exclusive review by the Secretary of Finance and ultimately by the regular
courts.
The CTA is a court of special jurisdiction, with power to review by appeal decisions involving tax disputes
rendered by either the CIR or the COC. Conversely, it has no jurisdiction to determine the validity of a ruling
issued by the CIR or the COC in the exercise of their quasi-legislative powers to interpret tax laws.
As the CIR aptly pointed out, the phrase "other matters arising under this Code," as stated in the second
paragraph of Section 4 of the NIRC, should be understood as pertaining to those matters directly related to the
preceding phrase "disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto" and must therefore not be taken in isolation to invoke the jurisdiction of the CTA.
In other words, the subject phrase should be used only in reference to cases that are, to begin with, subject to
the exclusive appellate jurisdiction of the CTA, i.e., those controversies over which the CIR had exercised her
quasi-judicial functions or her power to decide disputed assessments, refunds or internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, not to those that involved the CIR's exercise of quasi-
legislative powers.
Hence, as the CIR's interpretation of a tax provision involves an exercise of her quasi-legislative functions, the
proper recourse against the subject tax ruling expressed in CMC No. 164-2012 is a review by the Secretary of
Finance and ultimately the regular courts.
Besides, Petron prematurely invoked the jurisdiction of the CT A. Under Section 7 of RA 1125, as amended by
RA 9282, what is appealable to the CT A is the decision of the COC over a customs collector's adverse ruling on
a taxpayer's protest.
Petron admitted to not having filed a protest of the assessment before the customs collector and elevating a
possible adverse ruling therein to the COC, reasoning that such a procedure would be costly and impractical,
and would unjustly delay the resolution of the issues which, being purely legal in nature anyway, were also
beyond the authority of the customs collector to resolve with finality. This admission is at once decisive of the
issue of the CTA's jurisdiction over the petition. There being no protest ruling by the customs collector that was
appealed to the COC, the filing of the petition before the CTA was premature as there was nothing yet to review.
Verily, the fact that there is no decision by the COC to appeal from highlights Petron's failure to exhaust
administrative remedies prescribed by law. Before a party is allowed to seek the intervention of the courts, it is
a pre-condition that he avail of all administrative processes afforded him, such that if a remedy within the
administrative machinery can be resorted to by giving the administrative officer every opportunity to decide on
a matter that comes within his jurisdiction, then such remedy must be exhausted first before the court's power
of judicial review can be sought, otherwise, the premature resort to the court is fatal to one's cause of action.
While there are exceptions to the principle of exhaustion of administrative remedies, it has not been sufficiently
shown that the present case falls under any of the exceptions.

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