TAXATION 1
 SPUC
 Taxation is a process of the sovereign through its lawmaking bodies in order to raise
income, to defray the expenses of the government.
 Taxation is also a power according to Justice Malcom and Holmes. Basically there
are two concepts, in a stroke of a pen Justice Malcom said that power of taxation is
not a power to destroy while the court sits. Whereas, Justice Holmes said that power
of taxation is a power to destroy; he is referring to illegal tax. On the other hand, the
other statement refers to a valid tax.
 As a power, it is inherent.
 Is there a need a law for a State to exercise power of taxation?
 No, being inherent means that this power can be exercised even without a
law because the moment the State exists, this power also exists. That’s
why it is called inherent power. It’s innate in itself. (But take note, this is
only considered an inherent power if we talk about power of taxation of
the State meaning you are referring to Rep. of the Ph.)
 LGU’s Taxation Power
 Power of taxation is not inherent power but rather it is a power directly
conferred by the Constitution.
 Prior to the effectivity of 1987 Constitution, this power is merely
delegated. It is delegated because LGU have to beg from congress to grant
them a law in order for the LGU exercise the power of taxation.
 After the effectivity of the 1987 Constitution, this power is no longer
delegated power. This power is now directly conferred by the
Constitution.
Art. X sec. 5, 1987 Constitution (Local Autonomy)
“Each local government unit shall have the power to create its own sources of revenues and
levy taxes, fees, and charges subject to guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local governments.”
 So there is no need for a law, the only needed for the LGU to exercise power of
taxation is to enact ordinance.
 Power of taxation being supreme, plenary, unlimited, and comprehensive
because the power of taxation can cover all subjects and can cover all
types of taxes. Provided that they are imposed within the limits provided
under the law.
Purposes of Power of Taxation
1. Revenue purpose – primary purpose because the state is exacting money from its citizens in
order to defray the expenses of the state.
2. Non-revenue purpose
I. Promotion of General Welfare – power of taxation is also being used as an
implement of police power of a state.
E.g. Sin Tax Law – the State impose higher tax rates upon certain activities to
promote general welfare.
II. Regulation – in PAL v. EDU, there is called regulatory tax, this is intended to raise
revenue and to regulate an activity.
III. Reduction of Social Inequity – related to the concept of Progressive System of
Taxation, the imposition of taxes would be based upon the ability to pay of the
taxpayer. The higher income then a higher tax shall be imposed.
Under the Tax Code, the taxes being imposed upon the income of individual
taxpayer would depend upon the net income earned by such taxpayer. It would range
from 0 to less than 10K – the tax is 5 %, the highest amount is income of more than
Php 500K and the tax being imposed is 125k plus 32 % of the excess of 500k.
It reduces social inequity because the taxpayers who earned higher income will
contribute more for the expenses of the state. Thus, theoretically, all the citizens
would benefit.
Progressive system of taxation is akin to ability to pay principle.
IV. Encourage Economic Growth – the state encourage economic growth through the
grant of tax incentives, tax exemptions and tax deductions.
V. Protectionism – imposition of custom duties in order to protect local industries.
E.g. smuggled goods
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 3. Inherently legislative – the power of taxation can be exercised only through the lawmaking
Do you think it is proper to impose custom duties or tax on balikbayan boxes? bodies.
It depends. If for personal use then it is improper but if for business purpose then it
is right and proper to impose taxes on the items contained in balikbayan boxes. 4. Territorial in nature – means that the state cannot impose taxes beyond its jurisdiction.

5. Recognizes the restrictions of the state - the state cannot impose taxes upon itself then it
Power of taxation being power to destroy would be transferring money from one pocket to another pocket
Justice Marshall said that the power to tax is also a power to destroy. Power of
6. Limited – inherent and constitutional limitations
taxation can be used as an implement of police power; it can covers anything
notwithstanding that it can destroy or kill certain business. However, Justice Holmes
rebut this concept, the power to tax is not the power to destroy as long as the court
sits. Justice Nicoln (not sure) had mention in his book that these two concepts can be Power of taxation also involves power of eminent domain.
harmonized. When Justice Marshall said that statement he is referring to legal tax
while Justice Holmes refers to invalid tax. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

 Restrictions
- Inherent and constitutional limitations Power of Taxation as Power to Build

Importance of Taxation

- Taxation is very important because the government cannot exist without a tax. The power of taxation is considered as the power to build because according to
And that is the basic essence of the lifeblood doctrine. Supreme Court, the government must ensure that it can exercise its vital functions and of
course the government can meet social challenges through the funds raised from the exercise
Lifeblood Doctrine of the power of taxation.

- Taxes are lifeblood of the nation, without taxes the government will not
survive.
Sison v. Ancheta 130 SCRA 654
Justifications for the exercise of taxing power
Issue: Whether the imposition of a higher tax rate on taxable net income derived from business
1. Benefits-received Theory or profession than on compensation is constitutionally infirm or violation of equal protection
2. Necessity Theory clause.
3. Symbiotic Theory
Held: None. The rule of uniformity does not call for perfect uniformity or perfect equality,
Characteristics of the power of taxation: because this is hardly attainable. Equality and uniformity in taxation means that all taxable
articles or kinds of property of the same class shall be taxed at the same rate. The taxing power
1. The power of taxation is for public purpose has the authority to make reasonable and natural classifications for purposes of taxation. As
clarified, where “the differentiation” complained of “conforms to the practical dictates justice
* If the tax law was made for private purpose from the very beginning the law is void. The act and equity” it “is not discriminatory within the meaning the equal protection clause and is
of donating a part of expropriated property will not cure the defect of a law. The law is not therefore uniform.” There is quite a similarity then to the standard of equal protection for all
voidable; it is void. that is required is that the tax” applies equally to all persons, firms and corporations placed in
similar situation.”
2. The power of taxation is inherent

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Philippine Healthcare Providers Inc. v. CIR, Sept. 18, 2009
Arguments of taxpayer:
 They are not life insurance organization thus documentary stamp tax should not
apply.
 Taxpayer has only 259 M net worth but the government assessed 376 documentary
stamp tax which is highly oppressive. They are being taxed out of existence.
Argument of BIR:
 Healthcare providers are in the nature of insurance business. Thus subject to DST.
Held: Tax being assessed is invalid tax. The taxpayer is exempt from paying DST because it is
not an insurance provider. Thus if subject to tax, the tax imposed is without legal basis
resulting to invalid tax.
Principles mentioned in this case:
1) Power to tax being the power to destroy: the power of taxation is sometimes
called also the power to destroy. Therefore it should be exercised with caution to
minimize the injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the “hen that lays the golden
egg.”
2) Legitimate enterprises enjoy the constitutional protection not to be taxed out of
existence. Incurring losses because of a tax impositions may be an acceptable
consequence but killing the business of an entity is no longer acceptable especially if
the assessment of the tax is without any legal basis.
Commissioner v. Algue
Lifeblood doctrine: taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance. On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for the government itself.
Symbiotic relationship: it is said that taxes are what we pay for civilization society. Without
taxes, the government would be paralyzed for lack of the motive power to activate and operate
it. Hence, despite the natural reluctance to surrender part of one’s hard earned income to the
taxing authorities, every person who is able to must contribute his share in the running of the
government. The government for its part, is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the people and enhance their moral and
material values.
Conclusion: if the law allows tax deduction then taxpayer must avail of such deduction.
Algue claims for tax deduction because he incurred legitimate expense which arose from
inducing some investors and businessmen to invest or put a capital on his experimental
business. Such claim was disallowed by CIR. This tax deduction was however permitted under
Internal Revenue Code. Hence, CIR is wrong in disallowing the claim of Algue.
NAPOCOR v. City of Cabanatuan, April 9, 2003
Source of power to tax: a principal attribute of sovereignty, the exercise of taxing power
derives its source from the very existence of the state.
What is the theory behind the exercise of the power of to tax?
The theory behind the exercise of the power to tax emanates from necessity; without taxes,
government cannot fulfill its mandate of promoting general welfare and well-being of the
people.
Power to tax of LGU: Article X, Section 5. Each local government unit shall have the power
to create its own sources of revenue and to levy taxes, fees and charges subject to such
guidelines and limitations as the Congress may provide, consistent with the basic policy of
local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local
governments.
 Directly conferred by the Constitution; not merely delegated.
 Not inherent power by LGU since LGC conferred such power to
them. Therefore, there is a need for the enactment of an ordinance for
LGUs levy taxes.
Can the LGUs even without LGC or enabling statute exercise power of taxation? No. its
power is not inherent but directly conferred by Constitution. The Constitution expressly
provides limitations. Thus being not inherent there has to be an ordinance.
What is the reason for the enactment of LGC? LGC sets the limitations of power of
taxation by LGUs. It does not grant the power to impose and levy taxes.
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Justifications for the exercise of the taxing power
1. Benefits received theory – the government is justified to collect income taxes in
general because of the benefits that had been received by the citizens.
2. Necessity theory – the existence of the government is in necessity and in order for
the government to exist then the government needs to collect taxes in order to defray
the expenses needed for the delivery of basic services.
3. Symbiotic relationship theory- it deals with the obligation of the taxpayer
notwithstanding the natural reluctance to contribute a certain portion of his income
because in return the government also provides tangible and intangible benefits.
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Are benefits received theory and symbiotic relationship theory distinct or the same?
No. Benefits received theory states that citizens must contribute because of the benefits they
had already received. On the other hand, in symbiotic theory, the main focus of the theory is
the reciprocal obligation of both government and citizens such that the citizen must contribute
for the running of the government so that the government will provide tangible and intangible
benefits (Benefits Received Theory – past benefits v. Symbiotic Relationship Theory – future
benefits)
PAL v. Edu, 15 Aug. 1988
Revenue v. non-revenue purposes
Tax / Fee
Main argument: regulatory fees are in the nature of taxes thus PAL is not liable to pay because
it is exempt from paying taxes.
SC differentiated tax and a fee. Taxes are collected for purposes of raising revenues while fees
are collected for purposes of regulation and the amount to be collected would only be limited
to cost of services in connection of such regulation.
What is being collected in this case is motor vehicle registration fees. According to SC, motor
vehicle registration fees shall be treated as taxes because the main purpose of collection is to
raise revenue for the construction of roads even though they also serve as an instrument of
regulation.
 Test or principle in order to determine whether the exaction shall be treated as
a tax or a fee
If the purpose of exaction is primarily revenue, or if revenue is at least one of the real or
substantial purposes, then the exaction is properly regarded as a tax. Thus, even there are two
purposes such as in this case, it must be determine the real and substantial purpose of exaction.
The main reason of exaction is to raise funds for the construction of roads but as an incident, it
also regulates the registration of motor vehicles it was properly termed as regulatory taxes.
Held: What is being collected from PAL is regulatory tax which is in the nature of tax. Tax is
exempt from paying tax since it is already paying a franchise tax.
Tio v. Videogram, 151 SCRA 208
Is the imposition of 30 % tax is confiscatory and oppressive? No, because tax law do not
considered invalid just because it may be destructive to one industry.
Is the tax imposed considered merely regulatory in nature? No, because one of the purposes of
the tax law involved is also for revenue measure. In addition, the imposition of tax is for
public purpose considering proliferation of film piracy which violates intellectual property
rights.
Lutz v. Araneta, 98 Phil 148
Purpose of the imposition of tax under Sugar Adjustment Act is for the promotion, protection
and advancement of sugar industries, therefore redounds greatly to the general welfare. Hence,
power of taxation was used as an implement of police power.
CIR v. Central Luzon Drug Corporation, 15 April 2005
Subj. matter: “20 % sales discount for qualified senior citizens”
Power of eminent domain; elements:
1. Taking of private property
2. For public use
3. Just compensation
How is power of taxation being used as an implement of the power of eminent domain?
 The government took a portion of the selling price by compelling pharmacies or all
establishments listed under the law to sell per drug with 20 % discount to qualified
senior citizens. This is considered as taking of private property.
 Is the taking for public use? Yes, it is for the benefits of senior citizens.
 Is there just compensation? Yes, by way of tax credit
Tax credit – deduction from tax, meaning it will reduce the amount of the tax liability
Tax deduction – simply reduce the amount of the income
“pampabatang tabletas ni ma’am”
- 1000 pesos
- Assuming that all income shall be subjected to 3o % tax rate
e.g. tax liability is 300
tax credit is 200 (senior citizens’ discounts)
so instead of paying 300 the taxpayer will only pay 100
e.g. tax deduction ( 200 pesos) will be deducted from the income (1000 pesos)
 Under the effective law at the time of the decision of this particular case was
promulgated, the senior citizens’ discounts is treated as a tax credit.
 Under the existing law (RA 9994) concerning the senior citizens’ discounts are no
longer treated as tax credits but rather treated as tax deductions.
Bkit ginawa ng tax deductions? Ksi mas malaki ang makokolekta ng government pag tax
deductions compared sa tax credit.
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Taxation as a process
Stages:
1. Levy – it refers to the enactment of tax laws for the imposition and collection of
taxes and this particular stage can only be performed by the legislative branch of the
government.
2. Assessment – it pertains to the computation of tax liabilities and obviously this can
be performed by the executive branch of the government.
3. Collection – this is essentially administrative in nature. Therefore, it can be
performed by the executive branch of the government.
Three Principles of a SOUND TAX SYSTEM
 Fiscal adequacy – it means that there must a sufficient funds in order to defray the
expenses of the government. And as much as possible there must be no deficit or
excessive surplus. There must no excessive surplus because if any, it means that the
government is not delimiting the basic services that its citizen need.
 Fiscal means money
 Adequacy means sufficiency
 Administrative Feasibility – one of the cannons of a sound tax system. It simply
means that the tax system should be capable of being effectively administered and
enforced with least inconvenience to the taxpayer.
 Theoretical Justice – is founded on the ability to pay principle. It means that one
should pay the tax because he is able to pay the tax and taken in the broad concept of
progressive taxation, which means that the higher income, the higher tax.
 c.
Question: will the violation of any of the said principles results to unconstitutionality of a
tax law? No. because these principles are merely directive. They are guidelines and not
mandatory. However, gross violation of theoretical justice will lead to the unconstitutionality
of the law because by then the tax law became oppressive and confiscatory.
 Sec. 28 (1), Article XVI of the Constitution, “the rule of taxation shall be
uniform and equitable. The Congress shall evolve a progressive system of
taxation.
- Is the mandate of abovementioned provision of the law mandatory? No, it is not
mandatory. It means that progressive taxation is encourage while regressive
taxation is frowned upon.
- the seller from liability because taxes are personal in nature.
- E.g. happy meal in Mcdo with a 20 % VAT, this is imposed upon the
consumers. This kind of imposition of tax does not consider the ability to pay
principle that’s why this is called regressive taxation. So is the imposition
VAT considered unconstitutional? No, because the constitution does not
prohibit regressive taxation but merely frowned upon.
Diaz v. Secretary of Finance, GR. No. 193007, 19 July 2011
Argument of petitioner with regard to administrative feasibility is that the imposition of toll
fees is impracticable and incapable of administration.
Issue: whether the violation of administrative feasibility nullify the tax law.
Held: No. Non-observance of the canon, however, will bot render a tax imposition invalid
“except to the extent that specific constitutional or statutory limitations are impaired.” Thus,
even if the imposition of VAT on tollways operations may seem burdensome to implement, it
is not necessarily invalid unless some aspect of it shown to violate ant law or the constitution.
The concept and characteristics of taxes
a. Enforced – taxes are mandatory in nature
 Is payment of poll taxes mandatory? Yes.
Const’l guaranty: Non-imprisonment of non-payment of poll taxes (this will not negate the
characteristic of taxes being enforced)
b. Proportionate contribution – ability to pay principle or progressive tax system
Levied by law-making body – inherently legislative therefore the congress has the
power to tax except those provided by law (e.g. President’s power to tax under
flexible tariff clause.)
d. Administrative in nature – power to tax is purely administrative in nature because
this power may be delegated or performed by the executive branch of the
government.
e. Having territorial jurisdiction – principle of territoriality must be related to tax situs
or place of taxation.
f. Personal in nature – one cannot make another person liable for his own tax.
Is VAT considered personal in nature? Yes, tax burden is transferable but
tax liability is not. As such, the seller may transfer its tax burden to seller’s
consumers. However, non-payment of taxes by the buyer will not relieve
e.g. Mcdonad shifted the tax to consumers but Macdonald remains to be
the statutory taxpayer.
tax burden - transmissible
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 tax liability- non- transmissible
 Stipulation between seller and buyer. Both agreed upon the price and
stipulated that buyer will pay the tax. But the buyer did not pay. ---- can
this be used as a defense? No, taxes are purely personal in nature. It is rest
upon the statutory taxpayer and cannot be shifted to another individual.
 Estate of the deceased – can a donee be held liable for the tax upon the
estate of the deceased? Yes, but only up to the extent of his or her
inheritance.
g. Purpose – raising money and other public needs
Inherent limitations
I. Public purpose – it has been said that the test of rightful taxation is that the proceeds
of tax must be used for the support of the government or some recognized objects of
the government and or to promote the general welfare of the community.
Pascual v. Secretary of Public Works, 110 Phil 331
 RA 920 entitled “ An Act Appropriating Funds for Public Works”
 A certain funds was allocated for public works. And such public works
pertains to the construction of Pasig feeder road terminals which happened
to be constructed on a private property. This project feeder road do not
connect to any government property or any important premises to the main
highway. Also, the property belong to Zulueta, who was a member of the
senate of the Philippines at the time of the approval of the said act
 Zulueta offer to donate the said property to the government but at the time
of the donation the government has not yet accepted the said donation.
Is appropriation for public purpose? No, at the time of the enactment of the law, the property
on which the project is to be constructed is considered as private property thus it is deemed
that the appropriation is for private purpose.
Is the donation material in the determination of the validity of the law? No. the acceptance of
the donation of the government does not cure the basic defect at the time of the enactment of
the law because in the first place a.) At the time of enactment the property is private, and b.)
The appropriation is not for public purpose. Therefore the tax law is null and void.
Lutz v. Araneta, 98 Phil 148
Is the funds allocated exclusively for sugar industries is for public purpose? Yes. The
government desires to stabilize sugar industries because of the fact that sugar industries
provides employment to a great number of citizens.
Gomez v. Palomar, 25 SCRA 827
 The tax imposition is to raise funds for the Philippine Tuberculosis
Society
 Petitioner argues that the tax in question is invalid because it is not for
public purpose as no special benefits accrue to mail users as taxpayers.
- Petitioner is wrong. The eradication of a dreaded disease is a public purpose
because it is a benefit to a taxpayer as a return to what he pays is derived from
the enjoyment of the privileges of living in an organized society. The
eradication of dreaded disease is promotion of common good.
II. Inherently legislative – general rule the power to make tax laws cannot be delegated
to other branches of the government. In addition, the congress has the power to
determine the coverage of taxation (what to tax), object of taxation (purpose of the
tax), nature of the tax (kinds of tax), extent of the tax ( tax rate), situs of taxation (
refers to taxing authority that can impose tax).
 Can SC interferes with the tax laws enacted by the congress? No. principle
of judicial non-interference. (The courts cannot determine the wisdom of
the law unless arbitrary.)
Pepsi Cola v. Municipality of Tanauan, 69 SCRA 460
Issue: a) Whether or not there is undue delegation of taxing power
b) Whether there is double taxation
Held: a.) none, while it is true that power of taxation is inherently legislative, there is an
exceptions and one of the exceptions is the taxing power of the LGUs.
b.) no double taxation. The two ordinances in question covered different subject matter.
Will the tax law considered unconstitutional because of double taxation?
- SC in this case held that there is no prohibition on double taxation found under
our fundamental laws. The only time that it will be prohibited when double
taxation becomes obnoxious. By being obnoxious it violates due process clause
under the constitution and that is the time it becomes unconstitutional not
because of double taxation but because of violation of due process clause.
Double taxation exists if same subject matter is being tax during the same taxable period and
by the same taxing authority.
Two concepts of double taxation
1. Indirect double taxation
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 - The same kind of tax is being imposed upon same subject matter by different  Taxes on properties
taxing authorities.  Real properties: where it is located
 Personal properties:
e.g. manny paquiao  Tangible: where it is located
- same subject matter is being tax  Intangible: mobilia suquitur persona or movables
- with same kind of tax ( income tax) follows the domicile of the owner.
- by different taxing authorities ( US and RP) 
 Eclectic Theory – tax laws cannot extend outside the territorial
2. Direct double taxation jurisdiction of the state.
- If same kind of tax is being imposed on the same subject matter by the same e.g. Kris is a Filipino citizen residing in Japan. He owned a condominium in Japan and he
taxing authority. leases his property to X for 30 000 pesos for a month. May the RP government impose a tax
e. g. sale of real property subject to capital gains tax and income tax by the national upon Kris’ property? No. Ecclectic theory. May the RP government impose a tax upon the
government. The SC held that this imposition of taxes is obnoxious because one income of Kris? Yes, notwithstanding that Kris is a non-resident citizen of the RP. (citizenship
impose 6 % of tax and the other 20 % of tax. The law is held unconstitutional not principle)
because of direct double taxation but for violating due process clause.
However, at the present time congress can only impose a tax upon the income of resident
Pepsi v. City of Butuan, 24 SCRA 789 citizen regardless of the source. So, if taxpayer is classified as non-resident citizen, only the
income earned within the RP shall be subject to tax.
Facts: Under ordinance 110 the tax being imposed upon the dealers engaged in selling
carbonated drinks or soft drinks while ordinance 112 the tax is imposed upon the agents or May the congress impose a tax upon the income earned by a resident alien outside the RP?
consignees. No. Under the amended tax code, the income of a resident alien is subject to tax only if the
income is source from within.
Issue: is there double taxation?
Held: none. The subject matter of two ordinances is different. Also, double taxation is not Does it involve a right? If it involved a right, tax situs is the source of income or follow the
prohibited under the law not unless it becomes obnoxious. citizenship principle or residence principle.

 Flexible tariff clause ( section 28 (2) Article VI of the Constitution

- The Congress may, by law, authorize the President to fix within the specified
limits, and subject to such limitations and restrictions as it may impose, tariff IV. International comity – courteous recognition and friendly interactions between two
rates, import and export quotas, tonnage and wharfage dues, and other duties or sovereign states.
imposts within the framework of the national development program of the
Government.
III. Territoriality – US government entered into a contract of loan with Private Corporation. The source
 Related to the concept of tax situs depending on the subject matter such as of that income is from the RP. Can a RP government impose a tax upon the income
right, real property or personal property. earned by US government? No, because it will be a violation of international
 Principles: comity i.e. courteous recognition and friendly interactions between two sovereign
1. Source Principle – State can impose tax to an income if such income states that any income of certain sovereign state derived from another state will not
has been earned in that State be subject to tax.
2. Citizenship Principle – tax is imposed to the income of all residents
of a state. US Embassy. Is it subject to real property taxes in the RP?
3. Residence Principle  No. International comity
What about tax exemptions granted under treaties?
No. Pacta sunt servanda and international comity.
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 e.g. Pacquiao is a Filipino citizen who is also being given an income by other states
during his competitions. Is his income subject to tax? Yes, regardless of the source
of income, because of his citizenship.
 Withholding tax – there is constituted withholding agent that will remit a
portion of money earned by the payor to the government.
- Income earned by the employee
- The payor is the withholding agent while the employer serves as the collector
of the government.
Illustration:
Many Paquiao is being paid an income by Las Vegas. Can this income be subject to
withholdin tax? No. it would be a violation of international comity. The RP cannot constitute
the foreign corporation or Top Rank Corp. as a withholding agent, since the corporation has
no business in the RP. Paquiao then have to declare the income for income tax.
V. Tax exemption of the government – Tax exemption of the government pertains only
to the state. It could not cover GOCC.
GR: GOCC is subject to tax because they are generally engaged in proprietary
function.
Ex: charter provides for tax exemptions.
LRTAA v. CBAA, 12 Oct. 2000
 LRTA’s argument is that its property should be considered as public roads
because they are immovably attached to the national roads.
 SC ruled that petitioner’s property are not public roads because the
carriageways and passenger terminal stations were merely elevated and
only serve as improvements. Also, the said properties are not exclusively
accessible to the public.
Is LRTA performing a governmental function?
- No. LRTA’s services is commercial in nature because its services are offered
only to those who paid fare and not to everyone.
Is LRTA a GOCC thus exempt from paying taxes?
SC ruled that LRTA is a GOCC but not exempt from paying real property taxes because under
its charter it is not exempt from real property taxes. The charter merely provides for an
exemption from direct and indirect tax but does not indicate real property taxes.
“Though the creation of the LRTA was impelled by public service i.e. to provide mass
transportation to alleviate the traffic and transportation situation in Metro Manila, its operation
undeniably partakes of ordinary business. Petitioner is clothed with corporate status and
corporate powers in the furtherance of its proprietary objectives. Indeed, it operates much like
any private corporation engaged in the mass transport industry. Given that it is engaged in the
service-oriented commercial endeavor, its carriageways and terminal stations are patrimonial
property subject to tax, notwithstanding its claim of being a GOCC.
MCIAA v. Marcos, 11 Sept. 1996
Is MCIAA a GOCC?
- Yes. It’s a GOCC. Originally it is exempt from paying real property taxes but
such tax exemption was later withdrawn under section 193 of LGC. Meaning
all tax exemptions granted to GOCC prior to the effectivity of LGC will be
considered as withdrawn. Hence, it becomes taxable person.
 However, MCIAA case, June 15, 2015
- MCIAA is no longer a GOCC and is now considered government
instrumentality
- In 2006, MIAA case was decided and SC considered it as an instrumentality,
subject to tax exemption
- MCIAA filed petition to the court alleging that it has the same functions with
MIAA and must also be exempted from real property taxes. SC granted the
petition.
MIAA v. Parańaque, GR no. 155650, 20 July 2006
Is MIAA a GOCC?
 SC considered MIAA as government instrumentality because MIAA is
neither stock corporation nor non-stock corporation.
 GOCC refers to any agency organized as a stock or non-stock corporation,
vested with functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government directly or through its
instrumentalities either wholly, or, to the extent of at least 51 % percent of
its capital stock.
 Instrumentality refers to any agency of the National Government, not
integrated within the department framework, vested with special functions
or jurisdiction by law, endowed with some if not all corporate powers,
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 administering special funds, and enjoying operational autonomy, usually
through a charter.
 Under LGC, no local taxes shall be imposed to government
instrumentality.
MIAA v. Pasay City, GR no. 163072, 02 April 2009
What is the effect of classifying MIAA as instrumentality? MIAA is under the law exempt from
paying taxes. No need to see the charter.
 Section 133 of LGC states that “unless otherwise provided” in the Code,
local governments cannot tax national government instrumentalities.
 Not all properties of MIAA are exempt from taxation because some
portion of its property is being leased by taxable person.

 Section 234 of LGC, properties of the Republic of the Philippines and its
political subdivision and instrumentalities are exempt from real property
taxes except if the beneficial use of its properties has been transferred to a
taxable entity.
 notwithstanding of losses incurred.
GR: government instrumentality is exempt from taxation
Ex: if the property is leased to a taxable entity
Constitutional Limitations
I. Due process clause
 Two aspects of due process
1. Procedural due process – before taking of property as payment of
the tax, there must first be an opportunity to be heard. This is why
under Tax Code, before a warrant of restraint shall be served upon
the taxpayer there must first be notices upon the taxpayer and be
given an opportunity to file protest.
2. Substantial due process – before a tax can be collected, law must
first be enacted. No law, no tax can be imposed.
CREBA v. Exec. Sec. Romulo, March 9, 2010
Facts: Arguments of petitioner: the imposition of MCIT is confiscatory and arbitrary thus
constitutes a violation of due process because they are mandated by law to pay MCIT
notwithstanding of the fact that they incurred losses and they are being tax despite of the
income of business entity is not yet realized.
 Gross sales - amount received without considering the cost
 Cost of sale – capital
 Gross income – gross sales minus cost of sale
 Expenses – incidental to business. E.g. fare
 Net income – difference of gross income and expenses
 SC expound the aphorism that taxation is purely legislative in
nature therefore the congress has the power to determine the
coverage, object, nature, extent and situs of taxation.
 SC ruled that the imposition of MCIT is not confiscatory
because it is not additional tax imposition.
Arguments of petitioner with regard to the imposition of CWT: the petitioner insist that the
imposition of CWT is confiscatory and arbitrary because according to them CWT is based on
the fair market value or gross selling price of the real property and notwithstanding that they
are not assured of any gain. The imposition of CWT upon the sold real property is confiscation
SC ruled that there is no violation of due process because the imposition of CWT do not
considered as confiscation because CWT works as an advance payment of income tax in favor
of the government.
What if the business suffered losses, the government had already collected CWT, is there tax
liability? There would be none. What happens to the advance payment? According to SC this
can be used to reduce or satisfy the tax liability for the succeeding taxable year.
Also, the law provides that taxpayer may avail tax refund.
Therefore this will be consumed and utilized by the taxpayer. Hence, there would be no
confiscation.
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City of Manila v. Coca Cola Bottlers Philippines, GR no. 181845, 4 August 2009
Is there direct double taxation? No direct double taxation because the subject matter is
different.
 Direct double taxation will not render the tax law unconstitutional unless it
becomes obnoxious.
Double taxation becomes obnoxious when there is direct duplicate taxation.
Villegas vs. Pao ho
>is the ordinance constitutional? No its not. They needed to pay 50 pesos for practice fee. The
ordinance is unconstitutional because it violates the right to due process and equal protection
clause; there is no significant difference as to an alien and Filipino citizen doing business here
in the Philippines, there was no substantial classification as to aliens and Filipino citizens
practicing their profession.
>: elements for reasonable classification:
1) there must be substantial distinction
2) it must be germane to the purpose of the law
3) it must be limited to existing or present provisions
4) it must be applied to all members of the same class
SC: in this particular case class there was no substantial distinction between an alien and
Filipino citizens their profession, there is the reason why there is a violation of the equal
protection clause. Power of taxation is essentially legislative, so granting a power of taxation
to a mayor without any guideline or without any limitation would constitute undue delegation
of the power of taxation.
City of Baguio vs. De Leon
>double taxation in general is not violative of the constitution, because it is permissible for
national government to impose a tax which can also be imposed by the local government.
>there is double taxation in this case, but it is an indirect double taxation which is permissible
by law.
>SC: Double taxation is not prohibited by the constitution, there was no constitutional
provision that proscribes double taxation, however, in the case of City of Manila vs Coca cola
bottlers, if the taxation is a direct duplicate taxation such that the taxing measure becomes
obnoxious, then the taxing measure shall be considered as unconstitutional because of the
violation of the due process clause.
Sison vs Ancheta
>instances when there can be a violation of due process clause:
1) when taxing measure becomes arbitrary or oppressive
2) if the taxing measure imposes a tax beyond its jurisdiction(violation of territoriality)
3) if the taxing measure is not for public purpose
4) if the taxing measure is retroactive. (provisions of such statute will have retroactive
application which is harsh and unreasonable)
CIR vs CA and Fortune
>Two types of administrative issuances
1) Legislative rule (subordinate legislation, designed to implement a primary legislation, it has
to comply with notice, publication and hearing for it to become valid)
2) Interpretative rule (merely provides the guide line for the enforcement of the law, merely
interprets the provision of the law, does not need to comply with NPH mere issuance will
suffice)
>did the memorandum circular increase the burden of the tax payers? Yes, since it adds a
burden to the tax payers it is a legislative rule, thus it must comply with the Notice,
Publication and Hearing. The administrative issuance was merely sent to the tax payers, thus,
such act did not comply with the requirement of NPH. The Administrative Issuance is
unconstitutional because it violates PROCEDURAL Due Process.
>an administrative issuance cannot go beyond to the mandate of the primary legislation.
>unconstitutional when it violates the constitution, illegal when it violates a law
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CIR vs MJ Lhuiller Pawnshop, inc.
>administrative issuance imposed 5% tax on pawnshop owners, seeks to implement a primary
legislation, but the primary legislation explicitly provides that the 5% tax shall be imposed
upon lending investors. The administrative issuance is illegal because it went beyond the
dictates of the primary legislation. There must be compliance to Notice, Publication and
Hearing. The Administrative issuance supplanted details to the primary legislation, then it
should be treated not as interpretative rule but as a legislative rule.
>provision as to the taxing power shall be construed in favor of taxpayers, while provision as
to tax exemptions shall be strictly construed against tax payers.
II. Equal protection clause and the rule on uniformity of taxation
Equal protection > all persons subject of legislation under similar circumstances shall be
treated alike both in privileges conferred and liabilities imposed.
ABAKADA GURO partylist vs. Purisima
>Rational Basis test rational basis test states that there can only be a valid classification if
there is a reasonable foundation of the classification, and such classification was not made
arbitrary.
>there is a substantial distinction between employees of BIR and employees of other
Government agencies, because BIR deals with financial matters and basically there functions
deals with propping up the States income. There is compliance to the rational basis test, thus
no violation of the equal protection clause.
Shell vs. Vano
 Ordinance imposing a tax on installation managers, mag-isang installation manager
sa munisipyo. Is the ordinance constitutional? Yes, inequalities resulting from
singling out of a particular class is not a violation of the equal protection clause of
the constitution, this classification has substantial distinction, it is germane to the
purpose of the law, it is not limited to the existing condition such that the ordinance
will still apply to all installation managers that will practice their profession within
the same locality, and it applies to all same class.
Ormoc Sugar Central vs. Ormoc Treasurer
 A tax has been imposed upon Ormoc Sugar Company. Was the Ormoc singled out?
Yes, plus the ordinace did not comply with future conditions because the ordinance
will only be applied to Ormoc Sugar Company, thus it violates the equal protection
clause.
Kapatiran v. Tan, 30 June 1988
 Uniformity – tax is uniform when it operates with the same force and
effect in every place where the subject may be found. In terms of
uniformity, what matters is a tax statute must apply equally to all persons,
firm, and corporations placed in similar situation.
SC: VAT is uniform because it is being imposed to all goods and services except those exempt
from VAT at the constant of rate 0 % and 10 %. However, at the present time, VAT is already
pegged at either 0% or 12 %. So the rate of 10 % has already been increased.
Likewise with respect to equitability, VAT is still considered as equitable because:
1. It will not be impose to individuals or entities whose gross receipts or gross sales do
not exceed the threshold amount.
 At the time this case has been promulgated, the threshold amount was
pegged at P 200, 000. Meaning if the taxpayer’s gross receipts is equal to
P 200, 000 or less then it will not be subject to VAT.
 However, at the present time, the threshold amount has been increased to
P 1, 919, 500.
2. The provisions of the law had considered the small owners of sari- sari store are
exempt from VAT, since their income is only for daily sustenance and even sale of
farms and marine products exempt from the coverage of VAT.
Tan v. Del Rosario, 3 October 1994
Main issue: petitioner assails the tax treatment of the income derived from profession by
individuals and income derived by corporations and partnerships.
 Corporation and partnership cannot be used interchangeably. Also, rules
on the exercise of corporate powers are different from the rules governing
partnership’s functions. However, under the tax parlance, corporations and
partnerships are treated as corporate taxpayers. Hence, under tax parlance,
they are the same.
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  According to petitioner since there is a disparity between the tax treatments, there is
a violation of equal protection clause.
Issue: is there a substantial distinctions between an individual taxpayer and corporate
taxpayer?
Held: Yes, there is. Therefore, no violation of equal protection clause.
Individual Taxpayer
Subject to schedule tax rates 5 % to 32 %
Schedular system of taxation
 Scheduler tax rates
- The income tax rates would
vary depending upon the
income earned by the taxpayer
 Under the present tax
code, we still adopt the
scheduler tax rate with
respect to income earned
by the individual
taxpayer. Such that, if the
individual taxpayer
earned a net income of 0
to 10, 000, the net
income tax shall be
subjected to 5% tax rate
and the graphic goes on
until it reaches a net
income of more than
P500, 000. If the net
income is more than
P500, 000, the tax to be
imposed is P125, 000
plus 32 % of the excess
of P500, 000.
 This is schedular tax rate
because the tax rates
would vary depending
upon the income bracket.
Question: if the income on a taxpayer is subject to scheduler tax rate, does it mean it is
covered by a scheduler tax system?
No. if we talk about scheduler tax system, it means that the tax treatment would depend on the
nature of the income. On the other hand, global tax system, there is one tax treatment for all
types of income. So if we talk about a tax systems, it does not speak of tax rates rather it
speaks of the tax treatments of the different types of income.
Illustration:
Corporation / Partnerships
Subject to fixed rate of 30 %  Under present Tax Code, if the taxpayer earned income from business the income
Global tax system will be subject to the schedular rate of 5% to 32 %. But, if the individual earned a
 Fixed rate means one tax prize, then the income shall be subject to 20 % final withholding tax.
rate to be applied
 Are these incomes different in nature?
 Under present tax code,
- Yes, income profession is subject to normal tax while individual earned prize
this applies to corporate
taxpayers. RA 8424, as is subject to a withholding tax
amended by RA 9504,  Is this schedular tax system or global tax system? Schedular tax system
the net income of because the tax treatment would depend on the nature of the income.
corporate taxpayers shall
be subjected to 30 %.  On the other hand, under present tax code, if a corporation earned income from
 So regardless of the
business the income shall be subject to 30 % tax rate, and if corporation earned a
amount of net income,
the tax rate would be prize, the prize shall be subject to 30 % tax rate.
pegged at 30 %.  Did we apply one tax treatment regardless of the nature of the income?
Yes.
 All kinds of income are
combined. ( e.g corporate 1st Question: is it possible that the state will adopt schedular tax system but shall impose a
income and prizes will be fixed rate? Yes, it’s possible because the income earned by an individual from business will be
both based on fixed rate subject to a fixed rate of 20 %. ( eto na daw yun pinapasa sa congress sbi ni ma’am na may
0f 30 % )
fixed rate of 20 % pag income from prizes or any passive income 20 % final withholding tax)
2nd Question: is this still considered schedular tax system?
- Did we classify the kind of income? Yes. ( income earned from business and
prize)
- Did we consider one tax treatment for two different income types? Yes. One is
20 % normal tax while the other is 20 % withholding tax. ( yun pinalitan lng is
rates)
Answer in 2nd question: yes, notwithstanding that the state had imposed a fixed rate upon the
income earned from the business because the 20 % is not in the nature of a final withholding
tax.
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Another illustration: if an individual taxpayer earns an income from business it will be
subject to a normal tax of 30 %, if the individual taxpayer earns an income in the nature of
passive income such as prize, winnings, interest income, the income shall be subject to 20 %
final withholding tax.
- Did we classify the type of the income? Yes.
- Did we consider one tax treatment for both types of income? No. they have
different tax treatments.
Question: is this schedular tax system? Yes, but did the state adopt schedular tax rate? No.
fixed rate yan.
Is it also possible that there is global tax system with a schedular tax rate? Yes.
Philreca v. DILG, 10 June 2003
Facts:
 Philreca is a cooperative registered under PD 269 and Philreca wants to
avail real property tax exemption provided under Section 234, LGC.
Apparently, cannot capitalize on such provision because such provisions
speaks merely of cooperatives registered under RA 6938. Philreca is not
cooperative registered under RA 6938.
 Philreca averred that this is a violation of equal protection clause because
only cooperatives registered under RA 6938 had been granted real
property tax exemption.
Issue: is there a substantial distinction between cooperative registered under PD 269 and
cooperatives registered under RA 6938?
Distinctions:
PD 269
 As to contributions, cooperatives registered under PD 269 are not required
to provide reasonable contributions. They are required to pay a
membership fee of P500 only which is refundable once the cooperative
decided to withdraw its membership from NEA ( National Electrification
Authority)
 Cooperatives are directly monitored and supervised by the government.
RA 6938
 As to contributions, cooperatives registered under RA 6938 are required to
provide a capital contribution of 25 % of the authorized capital
contribution and 25% of the subscribed capital contribution as have been
paid.
 Cooperatives exercises the principle of subsidiarity meaning these
cooperatives control their own operations with less supervision from the
government.
Held: There is substantial distinction. Therefore, no violation of equal protection clause.
Hence, Philreca is liable to pay real property taxes because it is not exempt under Sec 234 of
LGC.
Judy Anne Santos v. People, GR no. 173176, 17 February 1968
Facts:
 Regine’s case for tax evasion was dismissed.
 Judy Anne’s case for tax evasion was not dismissed.
 Judy argued that since complaint against Regine’s case was dismissed then
the case filed against her should also be dismissed. Otherwise, there would
be violation of equal protection clause.
Held: the factual circumstances of Regine’s case is different from the factual matters of Judy
Ann’s case. Well-entrenched principle that the prosecution of one guilty person while others
equally guilty are not prosecuted is not a violation of equal protection clause.
 If a statute has valid classification or its uniform on its face notwithstanding the fact
that there is unequal application of such law then still there is no violation of equal
protection clause. There will only be a violation of equal protection clause if the
application is clearly tainted with undue discrimination with respect to the
enforcement of laws.
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 III. Freedom of religion
 Two aspects:
1. Free exercise clause – religious institutions and organizations must have the
right to exercise and share their beliefs without prior restraint by the
government.
2. Non-establishment clause – the government must not favor a particular
religion. In taxation, simply means that the government must not appropriate
funds for a particular religions.
American Bible Society v. City of Manila, 101 Phil 386
Facts:
 American Bible Society deals with a license fee.
 License fee shall be imposed prior to the conduct of an activity. Meaning
without paying the license fee and not securing a permit then an entity
cannot conduct its activity.
 American Bible Society is engaged in the selling of bibles. The
municipality impose a license fee upon the activity of selling the bibles.
 According to American Bible Society, the imposition of license fee upon
its activity shall constitute a violation of free exercise clause.
Held: there is violation of free exercise clause of the Constitution because knowing that the
license fee shall be imposed prior to the conduct of activity then this would mean that the
imposition of the tax constitutes a prior restraint because ABS cannot sell its bibles without
securing a permit and paying the necessary fee.
What if the income earned by ABS shall be subject to VAT? Will there be a violation of free
exercise clause? None. The imposition of Vat does not constitute a prior restraint.
Tolentino v. Sec. of Finance
Facts:
 Tolentino involves the imposition of VAT
 VAT is impose after the sale or after the conduct of activity
IV. Uniformity, equitability and progressive taxation
Tolentino v. Sec. of Finance
 Progressivity
Facts: the imposition of VAT which is a regressive tax and indirect tax is a violation of
progressivity because VAT being regressive tax does not consider the ability to pay principle
and in which constitutes a violation of section 28, Article VI of 1987 Constitution which
provides that the Congress shall evolve a progressive taxation
Held: petitioner is wrong because what is required is evolution of progressive taxation which
means that progressive taxation is encourage and regressive taxation is frowned upon. The
said provision does not proscribed the imposition of regressive taxes.
V. Non- imprisonment for non-payment of poll taxes
Is there a possibility that a person be indicted for non-payment of poll
taxes? No. Unless committed falsification of information containing in the
community certificate.
VI. Non-impairment clause
 No law shall be passed abridging the obligations of the contract
 Applicable only if the government exercises its proprietary function but if
the government exercises it governmental function then the non-
impairment clause cannot be invoked.
Cassanova v. Hord, 8 Phil 125
Facts:
 In this case there was a contract between a taxpayer and a government
granted tax incentive in favor of the taxpayer.
Issue: is non-impairment clause be invoked?
Held: yes, because there is a contract and when the government entered into a contract with
the taxpayer, the former exercises proprietary function.
Cagayan Power and Light Co. v. CIR, GR no. 60126, 25 September 1985
Facts:
 Cagayan Power was granted a legislative franchise (public franchise) and
was granted a preferential tax of 3 %. It means that Cagayan Power will
be exempt from all taxes provided that it shall pay a 3 % franchise tax.
 After the passage of its charter, Congress enacted Internal Revenue Code.
 Under Internal Revenue Code, all corporate taxpayers shall be subject to
income tax. Thus, Cagayan Power shall pay 3% franchise tax plus income
tax.
 Because of the passage of Internal Revenue Code, Cagayan Power
requested for the amendment of its charter which was successfully done.
Thus, it had merely paid 3% franchise tax.
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Issue: whether or not Cagayan Power shall be liable for income taxes after the effectivity of
Internal Revenue Code up to the effectivity of the amendment charter?
 According to petitioner, if it held be liable for income taxes then there is violation of
non-impairment clause.
VII. Section 28 (3), Article VI of the Constitution
“Charitable institutions, churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from taxation.

Held: Petitioner is wrong. Under the Constitution with respect to public franchises, public  Real Property Tax
franchise are legislative franchise is subject to amendment, alteration or appeal. In this case,
grant of legislative franchise was made in the exercise of governmental function. Therefore,
non-impairment clause cannot be invoked.

Meralco v. Province of Laguna, GR no. 131359, 5 May 1999

SC: if a tax exemption is in the nature of contractual tax exemption where there is mutual
consideration between a taxpayer and the government, the non-impairment clause can be
invoked.

Legislative franchise is not contractual tax exemption. Thus, non-impairment clause cannot be
invoked.

e.g. government bonds

RCPI v. Provincial Assessor of South Cotabato, GR no. 1444861

 it involves withdrawal of tax exemption (sect. 193 of LGC)

 RCPI has been granted a legislative franchise. The legislative franchise
indicates that it shall be exempt from taxes including local taxes.
 After effectivity of LGC, no longer exempted from taxes
 Non- impairment clause cannot be invoked because the government
exercises governmental function

Smart Communications v. City of Davao, 16 September 2008

:. The Mall was used for commercial purposes, thus, not exempted from real
 Legislative franchise property tax.
:. The 3M income of the Church is in the form of excise tax, thus not covered
Quezon City v. ABS-CBN Broadcasting, 6 October 2008
by the exemption provided under section 28(3) Article VI of the
Constitution.

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 LLadoc v. CIR

 Corporation gave P 10, 000 donation in favor of Diocess for

the construction of the church.
 Corporation was taxed for donor’s tax while diocess was
taxed for donee’s tax.( the law effective at the time of this
case, the law imposes donor’s and donee’s tax. )
 Donee’s tax is excise tax; not propety tax. therefore, not
covered by the Constitition.
 Donee’s tax is excise tax. hence, not covered by the
Floors not used for educational purposes are taxable Constitution.

Non-impairment clause
 A law was enacte RA XXXX which provides that any
enterprise infusing an investment of 10 million pesos and
employing atleast 100 individuals shall enjoy the income tax
holiday ( exemption) for 5 years.
 Corp. X infused direct investment of 10 million pesos in the
RP and employed 300 individuals. As such, it has been
granted of income tax holiday of 5 yrs.
 After two years of operation, the Congress enacted RA YYYY
which provides that the income holiday under RA XXXX shall
be reduced to # yrs.

Question: can X corp. raise the defense of non-impairment clause in order

for the continuance of its income tax holiday for 5 years?
The lease was proprietary in nature, thus such act is a commercial one and
not exempted from tax.
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Answer: no. the government exercises governmental function. Hence, non-
impairment clause can be invoked. Moreover, privilege is revocable at any
time.
Abra Valley Colleg v. Aquino, 15 June 1988
 Old cemetery and vegetable garden are constitutionally
exempt from taxation because it is for incidental use of the
church. ( no longer applicable in the present time because
under the Lung Center Phil case, actually, directly and
exclusively means solely use for R, E,C purpose)

Lung Center of Phil. Case

 The fact of accpeting paying patients will not derogate its
character as being charitable institution.

:. The old rule exempts property incidental to the use

Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil 352
:. The leased private clinics are not exempted from tax.
:. The orchid’s garden was not for charitable purpose, hence taxable.
:. The idle lot is taxable, unless used for parking lot (for free)

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