BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION

ABELARDO T. DOMONDON from page 180 onwards

SITUS OF TAXATION- place/authority that has the right to 6. Levied by the legislature exacted pursuant to
impose and collect taxes legislative authority in the exercise of the power of
• Tax laws basically operate only within the territory taxation
of the tax authority because it is only within the 7. Levied and collected for a public purpose
territorial boundaries of a tax authority where it 8. Paid at regular periods/intervals
could provide protection to the taxpayer.
XPNs: REQUISITES FOR A VALID TAX:
o Where tax laws operate outside territorial 1. For public purpose
jurisdiction 2. Uniform (rule of taxation)
§ Taxation of resident citizens on their incomes 3. The person/property taxed be within the jurisdiction
derived from abroad of the taxing authority
o … do not operate within the territorial jurisdiction 4. Assessment and collection of certain kinds of
of the state taxes guarantees against injustice to individuals,
§ Exempted by treaty obligations esp. by way or notice and opportunity for hearing
§ Exempted by international comity be provided
STAGES OF TAXATION 5. Must not impinge on inherent and Constitutional
1. LEVY- imposition of tax limitations on the power of taxation
2. ASSESSMENT AND COLLECTION- determination
of tax to be paid and the implementation of tax law TAX AS DISTINGUISHED FROM OTHER KINDS OF
a. Collection- means, process and method EXACTIONS
of implementing the tax law for the
purpose of satisfying the tax obligation; TAX TARIFF
actual effort in obtaining payment of tax; All embracing term to A kind of tax imposed on
actual effort exerted by the govt to effect include various kinds of articles which are traded
the exaction of what is due from the enforced contributions internationally/taxes
taxpayer imposed upon persons for imposed on articles that are
3. PAYMENT- compliance/payment by the taxpayer the attainment of public imported into or exported
with the tax laws, including whatever remedies that purposes from a country
are available to him under the law May be levied by natl Always levied by the national
4. REFUND- process for the return to the taxpayer of govt/LGUs govt
previous erroneous, excessive or illegal collection May be levied upon Generally imposed only upon
of taxes domestic/imported products imported/exported articles
Usually collected by Collected by BOC
TAX- an enforced contribution, generally payable in money, BIR/LGU
proportionate in character, levied on persons, property or
exercise of a right or privilege by the state having TAX TOLL
jurisdiction, through its legislature, for public purpose and NOT TAX
paid at regular periods/intervals VAT on Tollway operations
cannot be deemed a tax
NATURE OF TAXES: due to the nature of VAT
1. Imposition is inherent in the state, as indirect tax. Once
2. Made only by legislative department shifted, the VAT ceases to
3. While the imposition is plenary and unlimited, it is be a tax and simply
subj to the inherent and constitutional limitations becomes a part of the
cost the buyer must pay in
ELEMENTS OF TAX: order to purchase the
1. Forced charge, imposition/contribution good, property or service.
a. No way dependent upon the PURPOSE
will/contractual assent, express/implied,
Raising revenues to fund Collected by private tollway
of the person taxed public expenditures operators as
2. Generally payable in money; pecuniary burden
reimbursement for the
though the law may provide for payment in kind costs and expenses
3. Proportionate in character
incurred in construction
4. Levied on persons, property/exercise of a
maintenance and
right/privilege operation of tollways and
5. Levied by the State having jurisdiction
to assure them a

/YCP 1
BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION
ABELARDO T. DOMONDON from page 180 onwards

reasonable margin of license and the expenses of

income police surveillance and
regulation
May also be collected by TIME OF PAYMENT
govt to obtain Normally after Before
reimbursement of the commencement of a
expenditures for the business
construction of certain EFFECT OF NON-
infrastructure PAYMENT Makes business illegal
BASIS Does not make business
Imposed under power of Under general principles of illegal
taxation no unjust enrichment SURRENDER
SUBJECT AND OBJECT Cannot be surrendered May be surrendered w/ or
Covers all subjects and Only to actual users of the except for lawful w/o consideration
objects facility consideration
AMOUNT EXEMPTION
Unlimited Limited to recovery of LGU may grant exemptions LGU cannot provide for
expenditures incurred for from the payment of taxes exemptions from payment of
construction of facility license fees
used
IMPOSING AUTHORITY
Imposed by sovereign May be imposed by private HOW TO DETERMINE IF TAX/IMPOSITION UNDER POLICE
entity POWER:
TIME OF PAYMENT A. Primary Purpose: Generating of Revenue; Merely
After commencement of Either before/after use of Incidental: Regulation= TAX
business facility B. Primary Purpose: Regulation: Merely Incidental:
EFFECT OF NON-PAYMENT Revenue Obtained= NOT TAX
Does not prohibit person from May prohibit a person from
continuing with his business using the facility • Exemption from taxes does not include exemption
although the state may from license fees.
impose suspension/closure • Some limitations apply only to one and not to the
as penalty for failure to pay other.
SURRENDER • Always determine it by its purpose and effect
Being lifeblood of the May be waived • The lack of any standard for such imposition
government, cannot be with/without consideration creates the presumption that it is a TAX.
surrendered except for lawful
consideration Smart Communications, Inc. v. Munic. of Malvar,
EXEMPTIONS Batangas GR No. 204429, Feb 18, 2014
There are differences between the exemptions from taxes
and exemptions from toll fees. The designation given by the municipal authorities does
not decide whether the imposition is properly a license
TAX LICENSE FEE tax or a license fee. The determining factors are the
DEFINITION purpose and effect of the imposition as may be
An imposition/exaction on apparent from the provisions of the ordinance.
the right to use/dispose of
property, to pursue a TAX SPECIAL ASSESSMENTS/
business, occupation, or SPECIAL LEVY
calling, or to exercise a DEFINITION
privilege A local imposition upon
PURPOSE property for the payment of
Imposed for revenue/for Collected for regulatory the cost of public
general public purpose purposes improvements in its
BASIS immediate vicinity and levied
Power of Taxation Police Power with reference to special
AMOUNT benefits to the property
Practically unlimited Limited to the cost of the assessed

/YCP 2
BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION
ABELARDO T. DOMONDON from page 180 onwards

SUBJECT Provided for under NIRC and Provided under CC

Levied on land, persons, Levied on land other tax laws
property, income business, DUE TO THE GOVERNMENT
etc. In its sovereign capacity In its corporate capacity
AMOUNT
Practically unlimited Limited only to the recovery Philex Mining Corporation v. CIR, 356 Phil 189
of the expenditures for
improvement It must be noted that a distinguishing feature of a
LIABILITY tax is that it is compulsory rather than a matter of bargain.
Personal liability of the In some states, cannot be Hence, a tax does not depend upon the consent of the
taxpayer made a personal liability of taxpayer. If any tax payer can defer the payment of taxes
the person assessed by raising the defense that it still has a pending claim for
BASIS refund or credit, this would adversely affect the government
Necessity and partially on Based solely on benefits revenue system. A taxpayer cannot refuse to pay his taxes
benefits when they fall due simply because he has a claim against
APPLICATION the government or that the collection of the tax is
General Application Special Application only as contingent on the result of the lawsuit if filed against the
to particular time and place government.
SURRENDER
Cannot be surrendered May be surrendered with or • Merely be in keeping with the basic policy on
except for lawful without consideration prompt collection of taxes as the lifeblood of the
consideration government

TAX DEBT INSTANCES WHERE A TAX MAY BE CONSIDERED AS A

BASIS
Law
FAILURE TO PAY
May result to imprisonment
other than poll tax
MODE OF PAYMENT
Generally payable in money
ASSIGNABILITY
Not assignable
COMPENSATION AND SET-
OFF
Unless it becomes a debt is
not subject for
compensation/set-off
No compensation and set-off between tax and a debt.
INTEREST
Does not draw interest
unless delinquent
AUTHORITY
By public authority
PRESCRIPTION
/YCP
DEFINITION
Embraces not merely money
due by contract, but
whatever one is bound to
render to another, either for
contract/the requirements of
the law, such as a tax where
the law imposes a personal
liability therefor
Contract/Judgment
No imprisonment for non-
payment of debt
May be payable in money,
property/service
Assignable
May be a subject
Draws interest if
stipulated/delayed
Can be imposed by private
individuals
DEBT
1. As to remedies for collection
a. Enforceable by judicial action upon failure
to pay within the reglementary period
2. Taxes secured by bonds
a. Period of Prescription- governed by Law
on Contracts
3. For the purpose of deducting the interest paid for
delinquencies in the payment of business taxes
KINDS OF TAXES
CLASSIFICATION OF TAX:
1. OBJECT OR SUBJECT:
a. PERSONAL, CAPITATION/POLL TAX- tax
imposed uniformly on all residents,
whether citizen/not (e.g. Community Tax)
b. PROPERTY TAX- tax imposed on property
(e.g. Real Property Tax)
c. PRIVILEGE/EXCISE- tax imposed upon the
performance of an act; the enjoyment of a
privilege/the engaging in an occupation
(e.g. Income Tax, Estate Tax, etc.)
i. Excise taxes are essentially taxes
on property because they are
levied on certain specific goods
or articles manufactured or
produced in the PH for domestic
sale or consumption or for any
other disposition, and on goods
imported.
3
BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION
ABELARDO T. DOMONDON
ii. NATURE: tax on the production,
sale, or consumption of a specific
commodity in a country.
iii. ON PETROLEUM PRODUCTS
Any excise tax paid by statutory
taxpayer on petroleum products
sold to any of the
entitles/agencies named in Sec.
135 of NIRC exempt from excise
tax= illegal/erroneous and should
be credited/refunded to the payor
pursuant to Sec. 204, NIRC.
1. Exemption granted under Sec. 135 of the NIRC
must be construed in favor of the property itself,
that is, the petroleum products.
iv. SECTION 110, 1986 TAX CODE—
“excise taxes on domestic
products shall be paid by the
manufacturer/producer before the
removal of those products from
the place of production. It does
not matter to what use the articles
subject to tax is put; the excise
taxes are still due, even though
the articles are removed merely
for storage in some other place
and are not actually
sold/consumed.
2. AS TO BURDEN/INCIDENCE
a. DIRECT- those that are extracted from the
very person who, it is intended or desired,
should pay them; impositions for which a
taxpayer is directly liable on the
transaction/business he is engaged in.
i. e.g. Income, Estate and Donor
Taxes
b. INDIRECT
i. those wherein the liability for the
payment of the tax falls on one
person but the burden thereof can
be shifted to another person;
ii. those that are demanded in the
first instance, from, or are paid
by, one person in the expectation
and intention that he can shift the
burden to someone else, not as a
tax but as part of the purchase
price.
iii. Taxes wherein the liability for the
payment of the tax falls on one
person but the burden thereof can
be shifted/passed on to another
person
iv. e.g. Tax is imposed upon goods
before reaching the consumer
who ultimately pays for it. When
the seller passes on the tax to his
/YCP
from page 180 onwards
buyer, he, in effect, shifts the
burden, not the liability to pay it,
to the purchaser as part of the
price of the goods sold or
services rendered. (Statutory
taxpayer is still the supplier even if
the purchaser actually shoulders
the burden of tax because what is
shifted is not the tax per se but
the addtl cost of the goods sold.)
v. e.g.
1. VAT (because it may be shifted or passed on to
the buyer, transferee to lessee of the goods,
properties/services
a. should be understood in terms of its nature
as tax on consumption)
b. main object is the transaction itself
c. A VAT exempt seller sells to a Non-VAT
exempt purchaser. The purchaser is subject
to VAT because VAT is merely added as part
of the purchase price and not as ta because
the burden is merely shifted.
2. Contractor’s Tax (a direct tax but in reality an
indirect tax because owner of the building that
shoulder’s the same)
3. Excise Tax- liability for the payment of which may
fall on a person other than whoever actually bears
the burden of tax. The Statutory taxpayer may
shift the economic burden of the excise tax
payment to another, usually the buyer.
a. GR: It is the statutory taxpayer, not the party
who bears the economic burden, who is
entitled to claim the tax refund or tax credit.
b. XPN: Where the law grants an exemption to
the party to whom the economic burden of
tax is shifted by virtue of an exemption from
both direct and indirect taxes. Such party
must be allowed to claim the tax refund or
tax credit even if it is not considered as
statutory taxpayer under the law.
INDIRECT TAXES WITHHOLDING TAXES
The incidence of taxation The incidence and burden of
falls on one person taxation fall on the same
entity, the statutory taxpayer.
but the burden thereof can Burden of taxation is not
be shifted or passed on to shifted to withholding agent
another person, such as who merely collect, by
when the tax is imposed withholding, the tax due from
upon goods before income payments to entities
reaching the consumer arising from certain
who ultimately pays for it. transacations and remits the
same to the government.
DIRECT TAX INDIRECT TAX
4
BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION
ABELARDO T. DOMONDON
BURDEN
Falls directly upon the The burden of taxation may be
taxpayer and may not be shifted/transferred to others
shifted to others
Usually personal taxes Usually business taxes due
due from natural persons from juridical persons such as
e.g. income tax, donor’s VAT, Doc stamp Tax, etc.
tax, estate tax, etc.
TAX PYRAMIDING- practice of imposing a tax upon another
tax; some or all of the stages of distribution of
goods/services are taxed, with the accumulation borne by
the final consumer.
• There is tax pyramiding when sales taxes are
applied to both inputs and outputs, thus shifting
the tax burden to the ultimate consumer.
• PROHIBITED as a taxpayer cannot be compelled to
pay a tax on the tax itself
• Violates the principle of uniformity and neutrality in
taxation
3. AS TO TAX RATES/DETERMINATION OF AMOUNT
a. SPECIFIC- excise tax based on weight,
volume capacity, or any other physical unit
of measurement
b. AD VALOREM- based on a specific
proportion of the value fixed by law/as
appraised; based on selling price/other
specified value
c. MIXED- both specific and ad valorem
d. ALTERNATIVE- those that imposes either
of the 2 kinds (ad valorem/specific)
usually whichever is the higher between the
2.
4. AS TO PURPOSES
a. GENERAL/FISCAL/REVENUE- revenue
purpose; taxes imposed for the purpose of
raising public funds for the service of the
government
b. SPECIAL/REGULATORY/SUMPTUARY-
imposed primarily for the regulation of
useful or non-useful
occupation/enterprises, to promote the
general welfare in the protection of health,
safety or morals, and secondarily only for
the raising of public funds
5. AS TO SCOPE/AUTHORITY TO IMPOSE
a. NATIONAL- Internal Revenue Taxes
i. Taxes levied by Congress that find
application throught the PH
b. LOCAL-Real property Tax, Municipal Tax,
Local Business Tax
/YCP
from page 180 onwards
i. Taxes levied by the LGUs that are
applied and enforced only within
the territorial boundaries of the
imposing LGU.
6. AS TO GRADUATION/RATE
a. FLAT/PROPORTIONAL- increase/decrease
in relation to the tax bracket
i. tax liability increases at the same
rate as the increase in the tax
base
ii. proportional tax results from the
application of a flat raate to a
variable base because the liability
must always be the same
percentage to the base
b. GRADUATED- tax rate where the rate
changes with the tax base
i. PROGRESSIVE- increases as the
income of the taxpayer increases
ii. REGRESSIVE- tax rate system
where the rates decrease as the
tax base increases
Statutes granting tax exemptions must be construed in
strictissimi juris against the taxpayer and liberally in favor of
the taxing authority, and if an exemption is found to exist, it
must not be enlarged by construction.
SOURCES OF TAX LAWS:
1. 1987 Constitution of the PH
a. Self-executing provisions on certain tax
exemptions
2. Statutes which contain the existing laws of the
Philippines
a. National Tax Laws
i. National Internal Revenue Code
ii. Customs Modernization and Tariff Act
b. Local Tax Laws
i. Local Tax Ordinances under authority of the
provisions of the Local Government Code
c. Miscellaneous Tax Laws- provisions of various
laws creating various agencies imposing
regulatory taxes
i. LTO
ii. Videogram Regulatory Board
ACCOUNTING- an act/system of making up or settling
accounts, consisting of a statement of account with debits
and credits arising from relationship of parties
MAJOR ACCTG METHODS:
1. Cash basis
2. Accrual basis
The principles under financial/business acctg, in theory and
application, are not necessarily interchangeable with those
5
BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION
ABELARDO T. DOMONDON
in tax acctg. Tax and accounting do not mutually exclude
each other.
PROVISIONS OF THE TAX CODE PREVAILS OVER
ACCOUNTING PRINCIPLES.
• All returns required to be filed by the Tax Code
shall be prepared always in conformity with the
provisions of the Tax Code, and the rules and
regulations implementing said Tax Code.
• Tax Code and Rules & Regulations issued
implementing Tax Code> Generally Accepted
Accounting Principles and Generally Accepted
Accounting Standards
INTERPRETATION OF LAWS IMPOSING TAXES (different
from Exemption of Taxes)
• In case of doubt, tax laws must be construed
strictly against the State and liberally in favor of the
taxpayer.
o because burdens are not to be imposed/presumed
to be imposed beyond what statutes expressly and
clearly import
o because as burdens, taxes should not be unduly
exacted nor assumed beyond the plain meaning of
the tax laws
• Only construed as imposing a tax if it does so
CLEARLY, EXPRESSLY AND UNAMBIGUOUSLY. It
cannot be imposed without clear and express
words for that purpose.
• Not to be extended by implication beyond clear
import of their language, nor their operation
enlarged so as to embrace matters not specifically
provided
• No liberal interpretation of revenue laws because
taxes are the lifeblood of the government and the
price we pay for civilization
• The Court emphasized that tax administrators are
not allowed to expand/contract the legislative
mandate and that the “plain meaning rule” or
verba legis in statutory construction should be
applied such that where the words of the stature
are clear, plain, and free from ambiguity, it must
be given its literal meaning and applied without
attempted interpretation.
• Rule-making power cannot be extended to
amend/expand the statutory requirements or to
embrace matters not covered by the statute.
Admin regulations must always be in harmony with
the provisions of the law because any resulting
discrepancy between the 2 will always be resolved
in favor of the basic law.
RATIONALE FOR STRICT INTERPRETATION AGAINST THE
GOVT AND LIBERAL IN FAVOR OF TAXPAYER
o because of Presumption of validity of tax laws
/YCP
from page 180 onwards
o because no person/property is subject to taxation
unless they fall within the terms/plain import of a
taxing statute
o because taxation is a destructive power which
interferes with the personal and property
WHEN AMBIGUOUS
• When it is capable of being understood by
reasonably well-informed persons in either of
2/more senses
• When the law admits of different interpretations is
the best evidence that it is vague and ambiguous
STATUTORY CONSTRUCTION, TAX LAWS:
• Court can only interpret, and not look into the
wisdom of the law.
o Determining its wisdom/policy is beyond the realm
of judicial power.
o Its primary duty is interpreting and applying the
law.
o Court is without authority to modify the same as it
is the exclusive province of the law-making body
to do so.
o Cannot, despite doubts about its wisdom,
amend/repeal it
o Have no right to encroach on the prerogative of
lawmakers, as long as it has not been shown that
they have acted with grave abuse of discretion
o Duty does not include the discretion to correct by
reading into the law what is not written therein
o When the law is clear and unambiguous, the law
must be taken as it is devoid of judicial
addition/subtraction.
OTHER GUIDELINES IN INTERPRETING LAWS
GRAMMATICAL READING
• The grammatical reading of a statute must be
presumed to yield its correct sense. Courts cannot
presume that the law-making body does not know
the meaning of words and rules of grammar.
CONSTRUED AS A WHOLE
• Must be read/construed as a whole/in its entirety—
consistent with ut res magis valeat quam pereat (A
law should be interpreted with a view to upholding
rather than destroying it; we choose the
interpretation which gives effect to the whole of the
statute- its every word)
o No word, clause, sentence, provision/part of a
statute shall be considered surplusage or
superfluous, meaningless, void and insignificant.
HARMONIZED WITH OTHER STATUTES
• Interpretare et concordare legibus est optimus
interpretandi- every statute must be so construed
and harmonized with other statutes as to form a
uniform system of jurisprudence
6
BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION
ABELARDO T. DOMONDON
STATEMENTS BY INDIV MEMBERS OF CONGRESS
• Statements made by individual members of
Congress in the consideration of a bill doesn’t
necessarily reflect the sense of that body and are
consequently, not controlling in the interpretation of
the law.
o Congressional will ultimately be determined by the
language of the law that the lawmakers voted
upon
PRINCIPLE OF SEPARABILITY IN THE NULLIFICATION
OF A LAW
• Where a part of a statute is void, while the other
part is valid= valid portion, if susceptible to being
separated from the invalid, may stand and be
enforced
• When the parts of a statute are so mutually
dependent and connected as conditions,
considerations, or compensations for each other
as to warrant them a belief that the legislature
intended them as a whole= nullity of one part will
vitiate the rest
SPECIAL LAW> GENERAL LAW lex specialis derogant
generali
• Vinzons-Chato v. Fortune Tobacco Corporation- A
general law and a special law on the same subject
are statutes in pari materia and should, accordingly,
be read together and harmonized, if possible, with
a view to giving effect to both. The rule is that
where there are 2 acts, one of which is special and
particular and the other general which, if standing
alone, would include the same matter and thus
conflict with the special act, the special law must
prevail since it evinces the legislative intent more
clearly than that of a general statute and must not
be taken as intended to affect the more particular
and specific provisions of the earlier act, unless it is
absolutely necessary so to construe it in order to
give its words any meaning at all.
• Circumstance that the special law is passed
before/after the general act does not change the
principle.
• A special law cannot be modified by a general law.
INCLUSIO UNIUS EST EXCLUSIO ALTERIUS
EJUSDEM GENERIS- where a general word/phrase
follows an enumeration of particular and specific words
of the same class or where the latter follow the former,
the general word or phrase is to be construed to
include, or to be restricted to persons, things or cases
akin to, resembling, or of the same kind/class as those
specifically mentioned.
• Purpose: to give effect to both the particular
and general words, by treating the particular
words as indicating the class and the general
words as including all that is embraced in the
said class, although not specifically named by
the particular words.
/YCP
from page 180 onwards
• If the lawmaking body intended the general
terms to be used in their unrestricted sense, it
would have not made an enumeration of
particular subjects but would have used only
general terms
DOUBT RESOLVED IN FAVOR OF CONSTITUTIONALITY OF
A STATUTE
• All reasonable doubts should be resolved in favor
of the constitutionality of a statute
INTERPRETATION OF TAX INTERPRETATION OF TAX
LAWS EXEMPTION
Cannot be imposed unless Claim of tax exemption
supported by clear and must be clearly shown
express language of a based on the language in
statute the law too plain to be
mistaken
Construed strictly against Strictly against the taxpayer
the State and liberally in and liberally in favor of the
favor of the taxpayer State
XPN: If taxpayer falls within
the purview of the
exemption by clear
legislative intent= rule of
liberal interpretation applies
in favor of the grantee and
against the government
INTERPRETATION OF PRESCRIPTION IN CIVIL CASES
• Strictly against the government and liberally in
favor of the taxpayer for the purposes of
safeguarding taxpayers from any unreasonable
examination, investigation or assessment
• Precludes government from exercising its power to
assess and collect taxes beyond the prescribed
period
• Strictly applied; otherwise, both the procedural and
substantive rights of taxpayer would be violated
• Prescription is a substantive defense that may be
invoked to prevent stale claims from being
resurrected causing inconvenience and uncertainty
to a person who has long enjoyed the exercise
• WAIVER OF STATUTE OF LIMITATIONS NOT A
WAIVER OF PRESCRIPTIVE PERIOD
• Beneficial to both Government and to its citizens
o Government- because tax officers would
be obliged to act promptly in the making
of assessment
o Citizens- after the lapse of the period of
prescription, citizens would have a feeling
of security against unscrupulous tax
agents who will always find an excuse to
inspect the books of taxpayers, not to
determine the latter’s real liability, but to
take advantage of every opportunity to
molest peaceful, law-abiding citizens.
7
BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION
ABELARDO T. DOMONDON
Without such legal defense, taxpayers
would furthermore be under obligation to
always keep their books and keep them
open for inspection subject to harassment
by unscrupulous tax agents
STRICTISSIMI JURIS/DOCTRINE OF STRICT
INTERPRETATION
GR: Statutes granting tax exemptions are construed
strictissimi juris against the taxpayer and liberally in favor of
the taxing authority
XPNs:
• Statute granting exemption provides for liberal
construction thereof
• In case of special taxes relating to special cases
and affecting only special classes of persons
• Exemptions refer to public property
• Cases of exemptions granted to charitable and
educational institutions of their property
• Exemptions in favor of a government political
subdivision/instrumentality
• Tax refund based on solutio indebiti (unduly
delivered through mistake)
o Government is not exempt from the application
of solution indebiti
o government must refund without any
unreasonable delay what it has erroneously
collected
o If the State expects its taxpayers to observe
fairness and honesty in paying their taxes, it
must hold itself against the same standard in
refunding excess (or erroneous) payments of
such taxes
o Only preponderance of evidence needed
WHY EXEMPTIONS ARE NOT STRICTLY CONSTRUED
AGAINST THE GOVERNMENT:
• Principal effect of an exemption is merely to
reduce the amount of money that has to be
handled by the government in the course of its
operation
• As to the property of the State, exemption is the
rule and taxation the exception
PURPOSES:
• to minimize differential treatment and foster
impartiality, fairness and equality of treatment
among taxpayers
• Lifeblood Theory; taxes are what we pay for
civilized society
• Taxation is a high prerogative of sovereignty whose
relinquishment is never presumed
ALSO APPLIES TO
• claim for tax refund;
• condonation (construed as tax exemption); and,
• tax amnesty
• While there is no tax exemption by implication,
there may be accidental tax exemption
/YCP
from page 180 onwards
• License fees are not taxes because they are
imposed under police power and not under
taxation; hence, if there is an exemption for
payment of all taxes, license fees must still be paid
• The law looks with disfavor on tax exemptions and
he who seeks to be thus privileged must justify it by
words too plain to be mistaken and too categorical
to be misinterpreted
• Tax exemptions are NOT CONSIDERED
TRASNFERABLE IN CHARACTER
RULES AND REGULATIONS INTERPRETING TAX CODE
AND PROMULGATED BY SEC OF FINANCE
• Sec of Finance has been granted authority by Sec
244, NIRC
• Its interpretation and promulgations deserve to be
given weight and respect by the courts in view of
the rule-making authority given to those who
formulate them and their specific expertise in their
respective fields—these regulations are the
consequences of a delegated power to issue legal
provisions that have the effect of law
• XPN: Not conclusive upon courts if erroneous.
Courts will not countenance administrative
issuances that override, instead of remaining
consistent with the law they seek to apply and
implement.
o Administrative rules and regulations are
intended to carry out, neither to supplant
nor to modify, the law.
BIR Ruling interpreting a law as exempting a taxpayer may
be reversed. (Lincoln Philippine Life Insurance Company,
Inc., etc. v. CA, et. al. 293 SCRA 92,99)
• BIR Ruling favorable to taxpayer does not create a
perpetual exemption in his favor
• GR: Govt never estopped from collecting taxes
because of mistakes/errors on the part of its
agents
o XPN: If it will cause injustice against an innocent
party
REVENUE REGULATIONS
• Binding on courts as long as the procedure fixed
for its promulgation is followed
REQUISITES FOR REVENUE REGULATION TO BE BINDING
UPON A COURT:
1. Regulation must be germane to the object and
purpose of the law;
2. Not contradict, but conform to the standards the
law prescribes; and,
3. Be issued for the sole purpose of carrying to effect
the general provisions of our tax laws
PRINCIPLE OF LEGISLATIVE APPROVAL OF
ADMINISTRATIVE RULES BY ENACTMENT
8
BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION
ABELARDO T. DOMONDON from page 180 onwards

• Where a statute is susceptible of the meaning c. TAX AVOIDANCE

placed upon it by a ruling of the government
agency charged with its enforcement and the
d. TAX ABATEMENT
Legislature thereafter re-enacts the provisions 6. EXEMPTION FROM TAXATION
without substantial change, such action is to some 7. DOCTRINE OF EQUITABLE
extent confirmatory that the ruling carries out the
legislative purpose.
RECOUPMENT
• Thus, there is tacit approval of a prior executive 8. COMPENSATION AND SET-OFF
construction of a stature which was re-enacted 9. COMPROMISE AND TAX AMNESTY
with no substantial changes
10. TAXPAYER’S SUIT
CRIMINAL CASES INVOLVING TAX OFFENSES
(PRESCRIPTION)
1. PROSPECTIVITY OF TAX LAWS
• Prescription construed strictly in favor of the 2. IMPRESCRIPTIBILITY OF TAXES- because the very
government
existence of the state depends upon the exercise of
• Will not be presumed in the absence of clear
this power
legislation
XPN: statutes may provide for prescriptive periods
for the collection of particular kinds of taxes
NON-RETROACTIVE APPLICATION TO TAXPAYERS
3. DOUBLE TAXATION/ DIRECT DUPLICATE
• Tax laws have no retroactive application even if TAXATION violates equal protection clause
favorable to the taxpayer because tax laws are not
Elements:
considered as part of criminal law
a. The same object/property is taxed twice;
• Previously assessed and demanded tax may still
(WHAT)
be collected because the repeal is to be construed
b. By same taxing authority; (WHO)
as an exemption that must be strictly construed
c. For the same taxing purpose; (WHY)
• GR: Tax laws, including rules and regulations,
d. During the same tax period; (WHEN)
operate prospectively unless otherwise legislatively
e. Taxing all the objects or property within the
intended by express terms or by necessary
same territory for the first time without
implication
taxing all of them for the second time
• XPNs:
(WHERE; UNTIL WHEN)
o Taxpayer deliberately misstates/omits
Garbage fee not a tax; therefore, its imposition is
material facts from his return/any
not double taxation
document required of him by BIR;
No specific provision in Constitution prohibiting
o Facts subsequently gathered by the BIR
double taxation but it is a violation of the
are materially different from the facts on
constitutional precepts of equal protection and
which the ruling is based;
uniformity in taxation.
o Taxpayer acted in bad faith
• If only 1st element is present (a.)= no
• Any of the rulings/circulars promulgated by the
violation of equal protection clause
Commissioner shall not be given retroactive
• Presence of 5th element (e.)= violative of
application if the revocation, modification or
equal protection clause
reversal will be prejudicial to the taxpayers, in the 4. POWER TO TAX INVOLVES THE POWER TO
interest of justice and fair play DESTROY

DOCTRINES IN TAXATION INTERNATIONAL JURIDICAL DOUBLE TAXATION/ INTL

INDIRECT DUPLICATE TAXATION (NOT DIRECT DUPLICATE
1. PROSPECTIVITY OF TAX LAWS TAXATION)- imposition of comparable taxes in 2/more
2. IMPRESCRIPTIBILITY OF TAXES states on the same taxpayer in respect of the same subject
3. DOUBLE TAXATION/ DIRECT matter for identical grounds; usually takes place when a
person is a resident of a contracting state and derives
DUPLICATE TAXATION income from or owns capital in, the other contracting state
4. POWER TO TAX INVOLVES THE POWER and both states impose tax on that income/capital
TO DESTROY • Rationale: to encourage free flow of goods and
services and the movement of capital, technology
5. ESCAPE FROM TAXATION and persons between countries, conditions
a. SHIFTING THE TAX BURDEN deemed vital in creating robust and dynamic
b. TAX EVASION economies

/YCP 9
BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION
ABELARDO T. DOMONDON from page 180 onwards

Signatories of the letters may be:

USUAL METHODS OF AVOIDING THE OCCURRENCE OF
DOUBLE TAXATION
1. Tax treaties which exempts foreign nationals from
local taxation and local nationals from foreign
taxation under the principle of reciprocity.
2. Tax credits where foreign taxes are allowed as
deductions from local taxes that are due to be
paid.
3. Allowing foreign taxes as a deduction from gross
income.
4. Reduction of Philippine income tax rates.
• Government Ministers;
• Diplomats; or,
• Departmental Heads
• It is stated that “treaties, agreements, conventions,
charters, protocols, declarations, memoranda of
understanding, modus vivendi and exchange of
notes” all refer to “international instruments and
binding at international law.”
EXCHANGE OF NOTES TAX ASSUMPTION

TAX TREATY- an agreement entered into between ASSUMPTION EXEMPTION

sovereign states for purposes of eliminating double taxation To “assume”—“to take on, Freedom from a duty,
on income and capital, preventing fiscal evasion, become bound as another is liability, or other
promoting mutual trade and investment, and according fair bound, or put oneself in requirement/ a privilege
and equitable tax treatment to foreign residents/nationals place of another as to an given to a judgment debtor
• Can be entered into by the President only with 2/3 obligation or liability.” The by law, allowing the debtor
concurrence of the Senate obligation or liability to retain certain property
• Congress cannot interfere in treaty negotiations remains, although the same without liability
• PURPOSE: to reconcile national fiscal legislations is merely passed on to a
of the contracting parties in order to help the different person.
taxpayer avoid simultaneous taxation in 2 different
jurisdictions
BINDING EFFECT OF TAX TREATIES
TREATY EXECUTIVE AGREEMENT
An international agreement An international agreement • Art. 2, Sec. 2 (Doctrine of Incorporation)- The
which involve political issues involving the adjustment of Philippines adopts the generally accepted
or changes of national details carrying out well principles of international law as part of the law of
policy and those involving established national policies the land,
international agreements of and traditions and involving o and adheres to the policy of peace,
a permanent character. agreements of a more or equality, justice, freedom, cooperation
less temporary character. and amity, with all nations.
Requires Senate Binding through executive • Pacta sunt servanda is a fundamental international
concurrence in the action only law principle that requires agreeing parties to
ratification comply with their treaty obligations in good faith.
• A treaty engagement is not a mere moral
ART. 7, SEC. 21, 1987 CONSTI- No treaty or international obligation but creates a legally binding obligation
agreement shall be valid and effective unless concurred by on the parties. A state which has contracted valid
at least 2/3 of all the members of the Senate international obligations is bound to make in its
legislations such modifications as may be
NATURE OF EXCHANGE OF NOTES necessary to ensure the fulfillment of the
• an executive agreement binding on the state even obligations undertaken.
without Senate Concurrence • Application of the provisions of the NIRC- must be
• record of a routine agreement that has many subject to the provisions of tax treaties entered into
similarities with the private law contract by the PH with foreign countries
• The agreement consists of the exchange of two • Failure to strictly comply with Revenue
documents, each of the parties being in the Memorandum Order will not deprive persons or
possession of the one signed by the representative of corporations of the benefit of a tax treaty.
the other.
• Accepting state repeats the text of the offering State INTENTION BEHIND “RELIEF FROM DOUBLE TAXATION” IN
to record its assent THE MFN PROVISION OF A TAX TREATY
• Purpose: speedy procedure and to avoid process of • Intention should be considered behind the most
legislative approval favored nation (MFN) clause to grant the
contracting party treatment not less favorable than

/YCP 10
BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION
ABELARDO T. DOMONDON
which has been or may be granted to the “most
favored” among other countries.
MOST FAVORED NATION CLAUSE
• intended to establish the principle of equality of
international treatment
• by providing that the citizens or subjects of the
contracting nations may enjoy privileges accorded
by either party to those of the most favored nation.
• Purpose: 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 is the same as that in the tax
treaty under which the taxpayer is liable
• SIMILARITY IN THE CIRCUMSTANCES OF
PAYMENT OF TAXES- condition for the enjoyment
of the most favored nation treatment precisely to
underscore the need for equality of treatment
ILLUSTRATIVE CASE OF APPLICATION OF THE MFN
CLAUSE
1. RP-West German Tax Treaty
• Provides a 10% tax on royalties, but expressly
allows as a credit against German income
and corporate tax 20% of the gross royalties
paid under the law of the PH.
2. RP-US Tax Treaty
• Tax on royalties earned by US firms in the PH
may either be of 3 rates:
o 25% of the gross amount of royalties
o 15% when the royalties are paid by a
corporation registered with the Philippine
Board of Invetments and engaged in
preferred areas of activities
o The lowest rate of PH tax that may be
imposed on royalties of the same kind
paid under similar circumstances to a
resident of a third state.
• May U.S. corporations claim entitlement to
the “most favored nation” tax rate of 10% on
royalties as provided in the RP-US Tax Treaty
in relation to the RP-West Germany Tax
Treaty?
o HELD: No. The entitlement of the 10%
rate by US firms despite the absence of
matching credit (20% for royalties) would
derogate from the design behind the
MFN clause to grant equality of
international treatment since the tax
burden laid upon the income of the
investor is not the same in the two
countries.
METHODS RESTORTED TO BY A TAX TREATY TO
ELIMINATE DOUBLE TAXATION
1. FIRST METHOD
/YCP
from page 180 onwards
a. Tax treaty sets out the respective rights to tax
i. by the state of source or situs and
ii. by the state of residence with
regard to certain classes of
income or capital.
b. In some case, 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.
2. SECOND METHOD
a. State of source is given a full or limited right
to tax together with the state of residence.
b. The treaty makes it incumbent upon the state
of residence to allow relief in order to avoid
double taxation.
c. The double taxation is the valid type in its
general sense or indirect duplication taxation.
2 METHODS OF RELIEF (SECOND METHOD):
i. TAX EXEMPTION METHOD USING THE
DEDUCTION METHOD
• Income/capital which is taxable in the
state of source/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/capital.
• Subtraction from income for tax
purposes, or an amount that is
allowed by law to reduce income prior
to the application of the tax rate to
compute the amount of tax which is
due.
• Reduces the income that is subject to
tax in order to arrive at taxable
income
• Exemption method focuses on
income or capital itself.
ii. TAX CREDIT METHOD
• Amount that is subtracted directly
from one’s total tax liability
• Allowance against the tax itself/a
deduction from what is owned
• Reduces the tax due, including –
whenever applicable – the income tax
that is determined after applying the
corresponding tax rates to taxable
income.
• Credit method focuses upon the tax.
TAX EXEMPTION TAX CREDIT METHOD
Focuses on income/capital Focuses upon the tax
itself
11
BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION
ABELARDO T. DOMONDON from page 180 onwards

taxes merely incurred – not necessarily paid – by a

TAX CREDIT
An amount subtracted
directly from one’s total tax
liability
Any amount given to a
taxpayer as a subsidy, a
refund, or an incentive to
encourage investment
Prior payment of taxes not a
prerequisite to avail of a tax
credit
Tax liability essential to the
availment or use of any tax
credit
TAX REFUND
Money that a taxpayer
overpaid and is thus
returned by the taxing
authority
domestic corporation during a taxable year in any
foreign country.
viii. Section 34(5) provides that for such taxes incurred
but not paid, a tax credit may be allowed, subject
to the condition precedent that the taxpayer shall
simply give a bond with sureties satisfactory to an
approved by petitioner, in such sum as may be
required; and further conditioned upon payment by
the taxpayer of any tax found due, upon
petitioner’s redetermination of it.
NIRC SEC. 34 (3)- In case of a citizen of the Philippines,
the amount of income taxes paid/incurred during the
taxable year to any foreign country may be allowed as a tax
credit.

PROVISIONS OF TAX CODE GRANTING TAX CREDITS EVEN
IF NO TAXES HAVE PREVIOUSLY BEEN PAID
Tax Code replete with provisions granting/allowing tax
credits, even though no taxes have been previously paid.
i. In computing the estate tax due, Section 86 allows
a tax credit – subject to certain limitations – for
estate taxes paid to a foreign country.
ii. Also in Section 101 is a provision for donor’s taxes
– again when paid to a foreign country – in
computing for the donor’s tax due. The tax credits
in both instances allude to the prior payment of
taxes, even if not made to our government.
iii. Under Section 110, a VAT – registered person
engaging in transactions – whether or not subject
to the VAT – is allowed a tax credit that includes a
ratable portion of any input tax not directly
attributable to either activity. The tax credit refers to
an input tax that is either due only or given a value
by mere comparison with the VAT actually paid –
then later prorated.
iv. For the purchase of primary agricultural products,
no prior tax payments are needed for the use of
the tax credit.
v. More important, a VAT-registered person whose
sales are zero-rated or effectively zero-rated may,
under Section 112(A), apply for the issuance of a
tax credit certificate for the amount of creditable
input taxes merely due – again not necessarily paid
to – the government.
vi. It may be argued that Section 28(B)(5)(b) of the
Tax Code is another illustration of a tax credit
allowed, even though no prior tax payments are not
required. This provision refers to the tax credit as a
condition only for the imposition of a lower tax
rate, not as a deduction from the corresponding
tax liability.
vii. Section 34(3), in relation to Section 34(7)(b),
categorically allows as credits, against the income
tax imposable under Title II, the amount of income
POWER TO TAX INVOLVES THE POWER TO DESTROY
• The power to tax involves the power to destroy.
(Valid Tax)
o Imposition of a valid tax could not be judicially
restrained merely because it would prejudice
taxpayer’s property.
o The power to tax can be used to destroy only if it
is used as an implement of police power.
• The power to tax is not the power to destroy while
the court sits. (Invalid Tax)
o An illegal tax could be judicially declared invalid
and should not work to prejudice taxpayer’s
property.
o The court will always be there to see whether the
inherent and constitutional limitations are
violated.
Taxation is a destructive power which interferes with the
personal and property rights of the people and takes from
them a portion of their property for the support of the
government.
Power to tax must be exercised with caution to minimize
injury to the proprietary rights of the taxpayer.
• In order to maintain the public’s trust and
confidence in the government, this power must be
used justly and not treacherously.
• It must be exercised fairly, equally and uniformly.
ROXAS, ET. AL. V. CTA, ET. AL.
Legitimate enterprises enjoy the constitutional
protection not to be taxed out of existence.
Incurring losses because of a tax imposition
may be an acceptable consequence but killing
the business of an entity is another matter and
should not be allowed. It is counter-productive
and ultimately subversive of the nation’s thrust
towards a better economy which will ultimately
benefit the majority of our people.

/YCP 12
BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION
ABELARDO T. DOMONDON from page 180 onwards

5. ESCAPE FROM TAXATION It is the final purchaser/consumer of such goods/services

The means employed by a taxpayer, whether legal or who, although not directly and legally liable for the payment
illegal, so as not to pay/absorb the burden of a tax that is thereof, ultimately bears the burden of the tax.
imposed
RIGHT TO CLAIM A REFUND FOR EXCISE TAXES- VESTS
MEANS EMPLOYED TO ESCAPE TAXATION UPON THE STATUTORY TAXPAYER (SUPPLIER) AND NOT
(SEA2) THE BUYER WHO PROCESSED AND SUBSEQUENTLY
a. To Shift the tax burden to another party EXPORTED THE SAME
b. Tax Evasion • Diageo Philippines, Inc. v. CIR, GR 183553
c. Tax Avoidance o A taxpayer means any person subject to tax.
d. Abatement o When the excise taxes were included in the
purchase price of the goods sold to Diageo—the
ESCAPE FROM TAXATION TAX EXEMPTION same was no longer in the nature of a tax but
already formed part of the cost of the goods.
AS TO PARTY WHO
INITIATES IT State exercises prerogative Therefore, he is the person legally liable to file a
Taxpayer who resorts to it not to collect taxes return and pay the tax as provided for in Sec.
130(A). He is the person entitled to claim a refund.
5a. TO SHIFT THE TAX BURDEN TO ANOTHER PARTY • SILKAIR (SINGAPORE) PTE, LTD. v. CIR, GR
173594, February 6 2008, 544 SCRA 100, 112
SHIFTING OF TAX BURDEN- Transferring the economic It is the statutory taxpayer, the person on whom
burden from the one who pays the tax to another the tax is imposed by law and who paid the same
even if he shifts the burden thereof to another.
WAYS OF SHIFTING THE BURDEN OF DOUBLE TAXATION
1. Include the tax as part of the selling price • NIRC provides that the excise tax should be paid
2. Listing the price separately and defining taxable by the manufacturer/producer before removal of
gross receipts as the amount received less the domestic products from place of production.
amount of the tax added; Tax is then billed
separately • LAW ON VAT- allows subsequent purchaser under
a. This method merely avoids payment by the tax credit method to refund/credit input taxes
the seller who is subject to the tax and not passed on to it by a supplier
the buyer • AS TO EXCISE TAX LAW- does not grant non-
statutory taxpayer to claim a refund/credit
TAXES THAT CAN BE SHIFTED
GR: Only the burden of indirect taxes may be shifted EXEMPTION FROM AVIATION FUEL TAX
e.g. (Most business taxes are indirect taxes) RAISON D’ETRE FOR EXEMPTION FROM AVIATION
FC-DE-VP FUEL TAX
1. Franchise Tax 1. Aircraft would be travelling further than necessary
2. Contractor’s Tax to fill up in low-tax jurisdictions
3. Documentary Stamp Taxes 2. With the prospect of declining sales of aviation jet
4. Excise Taxes fuel sales to international carriers on account of
5. Value-Added Tax major domestic oil or of petroleum products being
6. Percentage Taxes sold to said carriers by local manufacturers/sellers
at still high prices, the practice of tinkering would
GR: An exemption from “all taxes” EXCLUDES indirect not be discouraged
taxes. 3. Our commitment under international agreements;
XPN: Unless the exempting statute is so couched as to pacta sunt servanda; harmonization of national
include indirect tax from the exemption legislation with treaty provisions
4. Multiple taxation on the aircraft, fuel, technical
IN INDIRECT TAXATION supplies and the income of international air
LIABILITY FOR THE TAX BURDEN OF THE TAX
transport, as well as taxes on its sale and use,
were considered as major obstacles to the further
Impact of the tax Incidence of the Tax
development of international air transport
Not the one transferred The one
5. International air transport plays a major role in the
transferred/shifted/passed
development and expansion of international trade
on by the seller to the buyer
and travel

/YCP 13
BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION
ABELARDO T. DOMONDON
SEC. 135(a), in the fulfillment of an international agreement
and practice to exempt aviation fuel from excise tax and
other impositions, prohibits the passing of the excise tax to
international carriers who buys petroleum products from
local manufacturers/sellers.
ART. 24(A), CHICAGO CONVENTION
Fuel and lubricating oils on board an aircraft of a
Contracting State, on arrival in the territory of another
Contracting State and retained on board on leaving the
territory of that State, shall be exempt from customs duty,
inspection fees or similar national or local duties and
charges.
RA 10378 grants Tax Incentives to foreign carriers which
include exemption from the 12% VAT and 2.5 GPBT (Gross
Philippine Billings Tax).
GPBT is a form of income tax applied to international
airlines/shipping companies.
SALES TAX (Indirect Tax)- Tax on the seller and not on the
buyer; therefore, buyer’s exemption does not flow to the
seller.
5b. TAX EVASION (OUTSIDE OF LAWFUL MEANS)
• Scheme used outside of lawful means and when
availed of, usually subjects the taxpayer to
further/additional civil or criminal liabilities
• Connotes fraud through the use of pretenses and
forbidden devices to lessen or defeat taxes
FACTORS INTEGRATED IN TAX EVASION
1. End to be achieved (e.g. payment of less than that
known by the taxpayer to be legally due/non-payment
of tax when it is shown that a tax is due)
2. Accompanying state of mind (evil, bad faith,
willful/deliberate and not accidental)
3. Course of Action/Failure of Action which is unlawful
TAX CONSEQUENCES OF TAX EVASION
For filing a fraudulent return,
DUE= Deficiency Tax+ 50% Fraud Surcharge of the
Deficiency
includes CRIMINAL PROSECUTION for tax evasion for
natural persons (none if juridical person)
WHEN TAX EVASION CONSUMMATED
When taxpayer has knowingly and willfully filed a fraudulent
return with intent to evade and defeat the tax
FRAUDULENT RETURN
One that is calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or
equitable duty, trust/confidence justly reposed, resulting in
/YCP
from page 180 onwards
the damage of another, or by which an undue and
unconscionable advantage is taken of another
E.G.
1. Misdeclaration of true selling price
2. Exchange of the shares of stock which was prompted
more on the mitigation of tax liabilities than for
legitimate business purposes
5c. TAX AVOIDANCE
• Exploitation by the taxpayer of legally permissible
alternative rates/methods of assessing taxable
property/income in order to reduce/entirely avoid tax
liability
• Tax saving device within the means sanctioned by
law
• SHOULD BE USED BY IN GOOD FAITH AND AT
ARMS LENGTH
• e.g. availing of all deductions allowed by
law/refraining from engaging in activities subject to
tax
Delpher Trades Corp., et. al., v. IAC, et. al.,
157 SCRA 349
A taxpayer has the legal right by means permitted by law
to:
1. decrease the amount of what could be his taxes, or
2. altogether avoid them
WHEN IS THERE FRAUD (DID)= TAX EVASION
1. Deliberate Intention
2. Using Illegal Means
3. To Deprive government of its right to collect taxes
FRUIT-AND-THE-TREE DOCTRINE
An individual who earns income cannot assign that income
to another person to avoid taxation
JUDICIOUS USE OF TAX AVOIDANCE
While tax avoidance schemes and arrangements are not
prohibited, tax laws cannot be circumvented in order to
avoid payment of just taxes.
There is no law that prohibits the withdrawal of bank
deposits to use the proceeds to buy non-taxable or tax-
exempt securities. (Tax Avoidance)
5d. TAX ABATEMENT
Method for reduction/extinction of a tax
COMPROMISE TAX ABATEMENT
GROUNDS The COMMISSIONER has the authority
to compromise, abate and refund
credit taxes (NIRC 1997, Sec. 204
(B))
Doubt as to the 1. Tax be
validity of the unjustly/exces
14
BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION
ABELARDO T. DOMONDON
assessment/financial sively
incapacity to pay assessed; or,
2. The
administration
and collection
costs do not
justify the
amount due
EFFECT Tax merely reduced Tax cancelled
WHEN APPROVED
Only upon issuance of termination letter by the BIR
(Asiatrust Development Bank, Inc. v. CIR, GR No. 201530,
April 19, 2017)
But this ruling merely interpreted the provisions of RR No.
15-06 prescribing the guidelines on the implementation of
one-time administrative abatement of all penalties,
surcharges and interest on delinquent accounts and
assessments as of June 30, 2006.
The ruling does not refer to periods after June 30, 2006
which may be the subject of future issuances.
6. EXEMPTION FROM TAXATION
The act of State in divesting itself of its prerogative to
collect taxes upon certain subjects and objects of taxation
ESSENCE
• Immunity/freedom from a charge/burden to which
others are subjected
• Waiver of the government’s right to collect the
amounts that would have been collectible under our
tax laws
• When the law speaks of a tax exemption, it should be
understood as freedom from the imposition and
payment of a particular tax
NATURE
• Waiver by the State of an act of sovereignty;
therefore, must be strictly construed against the
taxpayer
• Only granted upon the clearest intention
• Should not exist by mere implication otherwise, the
very existence of the State would be imperiled for lack
of wherewithal to perform its functions
LEGAL AND ECONOMIC ASPECTS OF TAX EXEMPTION
Vital to foreign investors who have been enticed to invest
heavily in our country’s infrastructure and who have one so
on the firm assurance that the certain tax reliefs and
incentives can be availed of in order to enable them to
achieve their projected returns on these very long-term and
heavily funded investments
/YCP
from page 180 onwards
TAX INCENTIVES UNDER RA 7916/SPECIAL ECONOMIC
ZONE ACT OF 1995 TO PEZ REGISTERED ENTERPRISES
Fiscal incentives
Legal Basis:
a. PD 66- Law creating Export Processing Zone
Authority
b. Book VI of EO 226- Omnibus Investment Code of
1987
Also enjoyed by exporters using local materials as inputs
GR: No taxes, local and national, shall be imposed on
business establishments operating within the ECOZONE
XPN:
a. Any provision of existing laws, rules and
regulations to the contrary notwithstanding
b. Non-operational PEZA firm/ PEZA Corporation that
has never commenced operations
In lieu of paying taxes—5% of gross income earned by all
business and enterprises within the ECOZONE shall be
remitted to the national government
5% of gross income distribution:
• 3%- national government
• 1%- LGUs affected by the declaration of the
ECOZONE
• 1%- development fund to be utilized for the
development of municipalities outside and contiguous
to each ECOZONE
Respective share of LGU to be determined on the basis of
the ff. formula:
• Population- 50%
• Land area- 25%
• Equal Sharing- 25%
WHEN BUSINESS CONSIDERED IN OPERATION
When it starts entering into commercial transactions that
are not merely incidental to but are related to the purposes
of the business
CONCEPT OF DOING/ENGAGING IN/TRANSACTING
BUSINESS
Implies continuity of commercial dealings and
arrangements and contemplates, to that extent, the
performance of acts/works/the exercise of some of the
functions normally incident to, and in progressive
prosecution of, the purpose and object of its organization
FREEPORT ECONOMIC ZONES (FEZs) DO NOT HAVE
DUTY TO PROVE ENTITLEMENT OF TAX EXEMPTION
FEZ enterprises are clearly beyond the coverage of any law
imposing those very charges
No justifiable reason to require them to prove that they are
exempted from it
15
BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION
ABELARDO T. DOMONDON
DOUBTS IN RESPECT OF FEZs’ EXEMPTION PRIVILEGES
Resolved in favor of FEZ
KINDS OF TAX EXEMPTIONS
1. As to clarity
a. Express- law is specific in the identification of the
subjects and objects that are not to be taxed
b. Implied-exemption results from a failure of the tax
law to include the subject or object as among those
to be taxed
2. As to Extent
a. Total/General- exemption covers the entirety of tax
b. Partial- only a portion of the tax
3. Coverage
a. Broad- does not apply to all property within the
jurisdiction of the taxing authorities; property not
taxes is said to be exempted
b. Narrow- express/implied, to a particular person(s)
or corporation(s) of a particular class, from a tax
upon property/an excise tax which
persons/corporations generally within the same
taxing districts are obliged to pay
4. Intent
a. Intentional- expressly enunciates the policy to
exempt certain subjects and objects from taxation
b. Accidental/By Omission- not intended but results in
exemption just the same
5. Source
a. Constitutional
i. Self-executing provisions (can be availed of
without need of legislative enactment)
ii. Non self-executing provisions (dependent upon
legislative enactment before they could be
enjoyed)
b. Statutory
i. 2 basic tax codes and general law:
1. National Internal Revenue Code of 1997
• Sec. 30- exemption from income
taxation of certain entities
• Retirement Pay
2. Customs Modernization and Tariff Act
(CMTA)
• Sec. 800 Conditionally free
importations
• Sec. 423 De Minimis Exemption for
importations with FCA/FOB value of
not more than 10,000.00
3. General Law- Local Government Code of
1991 (LGC)
• Retention of tax exemptions previously
granted to non-stock, non-profit
educational institutions and hospitals
ii. Exemptions under Special Laws
Enacted for the purpose of promoting some
desirable object through exempting certain subjects
and objects from taxation
c. Treaty
/YCP
from page 180 onwards
d. Contractual- rendition of the subject/object of a
service in exchange for the exemption
e. Licensing Ordinance
Or may simply be classified into:
a. Express
b. Implied
c. Contractual
BASIS, STATUTORY TAX EXEMPTIONS
Essentially a legislative prerogative
REASON FOR STATUTORY TAX EXEMPTIONS
To encourage the development of certain types of
industries and business which would:
• Provide employment opportunities
• Promote the participation of the private sector in the
State’s effort to provide education for all
• Assist the underprivileged
• Reward the contribution made by certain sectors to
development
• Protect the environment
RATIONALE AND GROUNDS FOR TAX EXEMPTION:
• Sumptuary/regulatory purpose- to promote the
general welfare and to protect the health, safety or
morals of the inhabitants
• Tax Exemptions may be made in the implement of
police power
• Compensatory purpose- to implement social justice
provisions of the Constitution through the progressive
system of taxation which would result to equal
distribution of wealth
• To lower price of certain commodities and services
• Employment opportunities may be created as a result
of tax exemptions, encouraging establishment of
business enterprises
REVOCATION OF TAX EXEMPTION
May revoke tax exemption because:
• An act of liberality which could be taken back by the
Government
• No vested right in a tax exemption, more so when the
latest expression of legislative intent renders its
continuance doubtful
• Congress in the legitimate exercise of its lawmaking
powers, can enact a law withdrawing a tax exemption
just as efficaciously as it may grant the same
7. DOCTRINE OF EQUITABLE RECOUPMENT
Where the refund of a tax illegally or erroneously
collected/overpaid by a taxpayer is barred by prescription, a
tax presently being assessed against a taxpayer may be
recouped/set-off against the tax whose refund is now
barred by prescription
16
BAR Q&A TAXATION- VOLUME 1: GENERAL PRINCIPLES OF TAXATION
ABELARDO T. DOMONDON from page 180 onwards

Not applicable in PH because of the lifeblood theory

8. COMPENSATION AND SET-OFF

Taxes cannot be the subject of compensation and set-off
because of:
• Lifeblood theory
• Taxes not contractual obligation
• Government and taxpayer not mutually creditors
and debtors of each other
• Claim for taxes not a debt, demand,
contract/judgment

9. COMPROMISE AND TAX AMNESTY

COMPROMISE
Contract whereby parties through mutual agreement, make
reciprocal concessions in order to avoid litigation/put an
end to one already commenced
Effect- immediately executory and not appealable

TAX AMNESTY
General pardon/intentional overlooking by the State of its
authority to impose penalties on persons otherwise guilty of
evasion/violation of a revenue/tax law

Absolute waiver by the govt of its right to collect what is

due

Nature: Absolute forgiveness

Only Congress can grant

10. TAXPAYER’S SUIT

Case where the act complained of directly involves the
illegal disbursement of public funds derived from taxation

/YCP 17