bar reviewer on taxation

8/10/2019 Bar Reviewer on Taxation

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PM REYES BAR REVIEWER ON TAXATION I(Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the

Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)

PIERRE MARTIN DE LEON REYES Page 1 of 158Ateneo Law Batch 2013 Last Updated: 30 July 2013(v3)

This is the first installment of my two-part reviewer ontaxation. This covers two topics: (1) GeneralPrinciples of Taxation; and (2) Income Tax. It is aconsolidated and updated version of my reviewers inTax 1 and Taxation Law Review. This reviewer is

based on notes from Atty. Montero and Assoc. DeanGruba and the books and reviewers of Atty.Mamalateo and Atty. Domondon. I also added somestuff from Atty. Mickey Ingles reviewer and JusticeDimaampao. References have also been made to the2013 Bedan Red Book and the 2012 UP Tax Reviewer.

Further, I added the recent and relevant revenueregulations and other BIR issuances (especially thoseissued in 2012) and the latest SC and CTA

jurisprudence (as of January 31, 2013). Most of thedigests were sourced from Du Baladad andAssociates (BDB Law) and from Baniqued &Baniqued. The reviewer will make reference to codalprovisions. Thus, I recommend that you read this with

a copy of the NIRC and other Laws Codal (2012edition) by Atty. Sacadalan-Casasola

Possessors may reproduce and distribute myreviewer provided my name remains clearlyassociated with my work and no alterations in theform and content of my reviewer are made. If you findthis reviewer useful, please share it to others.

May this reviewer prove useful to you. If it does,please share it to others. Happy studying!

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TABLE OF CONTENTS

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I. General Principles of Taxation .................... 1II. NIRC

A. Income Tax .............................................. 45

----------------------------------------------------------I. GENERAL PRINCIPLES OF TAXATION----------------------------------------------------------

---------------------------------------------------------------A. Definition and Concept of Taxation---------------------------------------------------------------

Q: Define taxation

Taxation is the inherent power of the sovereignexercised through the legislature to impose burdensupon subjects and objects within its jurisdiction forthe purpose of raising revenues to carry out thelegitimate objects of government.It is the mode of raising revenue for public purposes.

It is the power by which the sovereign raisesrevenue to defray the expenses of government. It isa way of apportioning the cost of government amongthose who in some measure are privileged to enjoyits benefits and must bear its burden.

---------------------------------------------------------------B. Nature of Taxation---------------------------------------------------------------

Q: What is the nature of the power of

taxation?

The nature of the power of taxation is two-fold. It isboth an inherent powerand a legislative power.

1. An inherent power

The power of taxation is inherent in the State,being an attribute of sovereignty. The power totax is an incident of sovereignty and is unlimited inits range, acknowledging in its very nature no limits,so that security against abuse is to be found only inthe responsibility of the legislature which imposesthe tax on the constituency who are to pay itMACTAN CEBU INTERNATIONAL AIRPORT AUTHORITYVS.MARCOS [261SCRA667]. This is so because thevery existence of the State is dependent on taxes.

2. Legislative in character

The power of taxation is essentially a legislativefunction. Taxation is an attribute of sovereignty. It isthe strongest of all powers of the government. Thereis a presumption in favor of legislative determination.Public policy decrees that since upon the promptcollection of revenue depends the very existence ofgovernment itself, whatever determination shall bearrived at by the legislature should not be interferedwith, unless there be a clear violation of someconstitutional inhibition. [SARASOLA VS.TRINIDAD [40PHIL.252]

It is a legislative power because it involves thepromulgation of rules. The Constitution hasallocated to the legislative department theenactment of law


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Q: May the legisl ature enact a law to raise

revenues even in the absence of a

consti tut ional provis ion granting the said

body the pow er to tax?

Yes. The power to tax can be exercised by thegovernment even if the Constitution is entirely silenton the subject. There is no need for a constitutionalgrant for the State to exercise this power. The powerto tax is inherent in the State, being an attribute ofsovereignty. This is so because the State canneither exist nor endure without taxes.

It must be noted that Constitutional provisionsrelating to the power of taxation do not operate asgrants of power to the Government, but insteadmerely constitute as limitations upon a power which

would otherwise be practically without limit

Q: Why is the po wer to tax considered inherent

in sovereignty?

It is considered inherent in a sovereign Statebecause it is a necessary attribute of sovereignty.Without this power, no sovereign State can exist norendure. The power to tax proceeds upon the theorythat the existence of a government is a necessity.No sovereign State can continue to exist without themeans to pay its expenses, and, for those means, ithas the right to compel all citizens and properly

within its limits to contribute; hence, the emergenceof the power to tax.

---------------------------------------------------------------C. Characteristics of Taxation---------------------------------------------------------------

Note: This should properly refer to Characteristics orElements of a Tax, not Characteristics of Taxation. In theevent the question is asked, answer as if the questionrefers to characteristics of a tax. See Chapter 1, K.Characteristic of Tax. With reservations, however, as tothe source, the 2013 Beda tax reviewer enumerates ascharacteristic of taxation the following: (1) Comprehensive

(2) Unlimited (3) Plenary and (4) Supreme. It is submittedthat the proper answer would make reference to theinherent limitations to the power of taxation. Atty.Domondon states that the inherent limitations on the

power of taxation is also known as the elements, tenets orcharacteristics of taxation.

---------------------------------------------------------------D. Power of Taxation compared with otherpowers---------------------------------------------------------------

Q: Differentiate the power of taxation from

police power and the power of eminent

domain.

See table below.

TAXATION EMINENTDOMAIN

POLICEPOWER

Authority whoexercises thepower

Only by thegovernmentor itspoliticalsubdivisions

May beexercised by(1)governmentor politicalsubdivisionsOR (2)granted topublic utilities

Only bygovernmentor its politicalsubdivisions

Purpose The propertyis taken forthe supportof thegovernment

The propertyis taken forpublic useand must becompensated

The use ofthe propertyis regulatedfor promotingthe general

welfare andis notcompensable

Personsaffected

Operates ona communityor class ofindividuals

Operates onan individualas owner of aparticularproperty

Operates ona communityor class ofindividuals

Effect The moneycontributedbecomes

part of thepublic funds

There is atransfer ofthe right to

property

There is notransfer oftitle. At most,

there isrestraint onthe injurioususe ofproperty

Benefitsreceived

It isassumedthat the

He receivesthe marketvalue of the

The personaffectedreceives


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individualreceives theequivalentof the tax in

the form ofprotectionand benefitshe receivesfrom thegovernment

propertytaken fromhim

indirectbenefits asmay arisefrom the

maintenanceof a healthyeconomicstandard ofsociety

Amountofimposition

Generally,there is nolimit on theamount oftax that maybe imposed

No amountimposed butrather theowner is paidthe marketvalue ofpropertytaken

Amountimposedshould not bemore thansufficient tocover licenseandnecessaryexpenses

Relationship toConstitution

Subject tocertainconstitutional limitations;including theimpairmentof obligationof contracts

Inferior to theimpairment ofobligations ofcontractsprohibition;governmentcannotexpropriatepropertywhich under

a contract ithadpreviouslybound itselfto purchase

Relativelyfree fromconstitutionallimitations; itis superior totheimpairment ofcontractprovision

---------------------------------------------------------------D. Purposes of taxation1. Revenue-raising2. Non-revenue/special or regulatory---------------------------------------------------------------

Q: What are the purposes of taxation?1

_________________________________________

1 Atty. Mamalateo enumerated six purposes or objectives of

taxation, namely: (1) Revenue; (2) Regulatory; (3) Promotion ofGeneral Welfare; (4) Reduction of social inequity; (5) Encourageeconomic growth by granting incentives and exemptions; and (6)

1. Revenue purposes: The basic purpose oftaxation is to raise revenues.

2. Sumptuary or regulatory purpose: The

secondary purpose of taxation is to promotethe general welfare and to protect thehealth, safety or morals of inhabitants

Q: What are non-revenue (or sumptuary)

object ives of taxation?

1. Taxation can strengthen anemic enterprises;2. Taxes may be increased in period of

prosperity to curb spending power and haltinflation and lowered in periods of slump toexpand business and ward off depression

3. Taxes on imports may be increased to

protect local industries4. Taxes on imported goods may be used as a

bargaining tool by a country by setting trarrifrates first at a relatively high level beforetrade negotiations

5. Taxes can discourage certain business (e.g.tobacco and alcohol)

6. Taxes can also minimize inequity

Some cases illustrating the non-revenue orsumptuary objectives of taxation:

In PHILIPPINE COCONUT PRODUCERS FEDERATION VS.PCGG [178 SCRA 236], the Supreme Court heldthat the coconut industry is one of the majorindustries supporting the national economy. It istherefore, the States concern to make it a strongand secure source not only of the livelihood of asignificant segment of the population but also ofexport earnings the sustained growth of which is oneof the imperatives of economic stability.

In PHILIPPINE HEALTH CARE PROVIDERS VS. CIR[554 SCRA 411], the Supreme Court, on the issueof whether Health maintenance organizations(HMOs) were exempt from Documentary Stamp Tax(DST), held that it is not the purpose of the

government to throttle private business. On thecontrary, the government ought to encourage privateenterprise. HMOs, just like any concern organized

protectionism. Note: It is submitted that items (3) to (6) can beconsidered subsumed under the regulatory purpose.


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for a lawful economic activity have a right to maintaina legitimate business. Hence, HMOs should not bearbitrarily and unjustly included in the DSTcoverage.

In TIO VS. VIDEOGRAM REGULATORY BOARD [151SCRA208], the Supreme Court held that the levy of30% tax on videogram operators was imposedprimarily to answer the need for regulating the videoindustry, particularly rampant film piracy and flagrantviolation of intellectual property rights.

Q: May a tax be val idly imposed in the

exercise of pol ice power and not of the

pow er to tax?

Yes. The power of taxation may be used as an

implement of police power of the State with the endin view of regulating a particular activity.

Note: Some authors and jurisprudence still refer to theimposition levied for the purpose of regulation as a tax.This is inaccurate and adds to confusion. The proper term,as used by the Supreme Court in numerous decisionsshould be regulatory fee or fee. In earlier cases, theywere referred to as license fees. It is submitted that theuse of the term tax should only be used to refer to animposition for the purposes of revenue while the term feeis used for an imposition for purposes of regulation. Asyou will see later, the distinction between a tax and afee is relevant as certain inherent and constitutionallimitations apply only to one and no to the other. It is also

important for purposes of tax exemptions.

Q: How do you determine i f an imposi t ion is

a tax or a (regulator y) fee?

In determining whether an imposition is a tax or aregulatory fee, one must inquire into the following:

1. The purpose of the imposition2. The amount of the exaction3. The designation

Note: The criteria is based on Atty. Monteros lecture. This

is particularly useful in analyzing whether an imposition isa tax or a fee.

The purpose of the imposition

Q: How do you dis t inguish a tax from a

regulatory fee in terms of its p urpos e?

The distinction made by the Supreme Court inPROGRESSIVE DEVELOPMENT CORPORATION V.QUEZON CITY [172 SCRA 629] is particularlyinstructive. The Court stated that: If the generating of

revenue is the primary purpose and regulation ismerely incidental, the imposition is a tax; but if theregulation is the primary purpose, the fact thatincidentally revenue is also obtained does not makethe imposition a tax

Thus, a (regulatory) fee is imposed for purposes ofregulation (in exercise of police power) while a taxisimposed for revenue generation purpose (the powerof taxation).

Q: When an exaction is imposed to

discourage certain businesses, is the

exaction a tax?

No, it is a regulatory fee. In COMPANIA GENERAL DETABACOS DE FILIPINAS V. CITY OF MANILA [8 SCRA367], the Supreme Court held that the municipallicense fees for the privilege to engage in thebusiness of selling liquor or alcoholic beverageswere imposed for regulatory purposes as suchproducts are potentially harmful to public health andmorals.

Q: When an exaction is imp osed to provid e

means for the rehabil i tat ion and stabi l izat ion

of a thr eatened industry, is the exaction atax?

No. Jurisprudence provides that such exactions areconsidered regulatory fees in light of their purpose.

Some cases:

In OSMENA V. ORBOS [220 SCRA 703], indetermining whether the taxes collected for the OilPrice Stabilization Fund are taxes or regulatory fees,the Supreme Court stated that while the funds werereferred to as taxes, they were exacted not underthe power of taxation, but in the exercise of the

police power of the State. The main objective wasnot revenue but to stabilize the price of oil andpetroleum products..In REPUBLIC V.BACOLOD-MURCIA MILLING [17SCRA632], in determining whether the levy for thePhilippine Sugar Institute Fund is a fee or a tax, theSupreme Court held that such levy was not so much


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an exercise of the power of taxation but an exerciseof the police power to aid and support the sugarindustry.

Q: When the exaction is impo sed to make aprivate company viable, is it a fee or a tax?

The exaction should be considered a tax. InPLANTERS PRODUCT V.FERTIPHIL CORPORATION [548SCRA 485], an Letter of Instruction was issueimposing a capital recovery component on thedomestic sales of all fertilizer grades and suchexaction shall be collected until adequate capitalwas raised to make Planters Product, a privatecompany, viable. The Supreme Court held that thelevy was invalid for not serving a public purpose asthe ultimate beneficiary was a private company.Hence, the primary purpose was for revenuegeneration.

Q: Ar e royalty fees (on a per l i ter b asis)

imp osed on the movement of petroleum fuel

to and from special econom ic zones a tax or

a fee?

The royalty fees imposed on the movement ofpetroleum fuel are regulatory fees. As held inCHEVRON PHILIPPINES V. BCDA [SEPTEMBER 15,2010], the royalty fees were exacted on a per literbasis because the higher the volume of fuel enteringthe special economic zone, the greater the extentand frequency of supervision and inspectionrequired to ensure safety, security and order withinthe zone.

Q: Should margin fees be consid ered a tax

or a fee?

Margin fees are regulatory fees. In ESSO STANDARDEASTERN V. CIR [175 SCRA 149], the companysought to deduct the margin fees it paid from itsgross income. The Supreme Court held that themargin fees cannot be deducted as they are nottaxes. Margin fees are imposed to curb excessive

demand upon the international reserves in order tostabilize the currency. It is applied to strengthen thecountrys international reserves and is not imposedfor revenue purposes. Hence, as they are not taxes,they cannot be considered as a deductible businessexpense.

Q: Should universal charges (for electr ic i ty

end-users) be considered a tax or a fee?

Universal charges are regulatory fees. In GEROCHI V.

DOE [G.R. NO. 159796, JULY 17, 2007], indetermining whether the Universal Charge imposedon electricity end-users by distributors is a tax, theSupreme Court held in the negative and stated thatthe universal charge is a regulatory fee levied toensure the viability of the countrys electric powerindustry

The amount of the exaction

Q: How do you dis t inguish a tax from a

regulatory fee in terms of th e amo unt of th e

exaction?

If the amount levied is too high and/or if the amountlevied is not related to costs of regulation, theexaction should be considered a tax as it is leviedfor revenue purposes.Some cases:

In VILLEGAS V. HIU CHIONG TSAI PAO HO [86 SCRA270], in determining whether the exaction of P50.00from aliens securing an employment permit (from theMayor of Manila) is a fee or a tax, the SupremeCourt held that the amount was too excessive andthat there was no logic or justification in the exactionfrom aliens who have been cleared for employment.

The Court opined that it was obvious that thepurpose of the exaction is to raise money under theguise of regulation.

In PLANTERS PRODUCT V. FERTIPHIL CORPORATION[548 SCRA 485], the Supreme Court held that theamount collected from the imposition on thedomestic sales of fertilizer grades was too excessiveto serve a mere regulatory purpose.

In AMERICAN MAIL LINE V.CITY OF BASILAN [2SCRA309], the Supreme Court stated that for fees to beregulatory in nature, the same must be no more than

sufficient to cover the actual cost of inspection orexamination.


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ANGELES UNIVERSITY V.CITY OF ANGELES [G.R.189999,JUNE 27,2012],

DOCTRINE:(1)A charge which bears no relation at all tothe cost of inspection and regulation may be held to be atax rather than an exercise of the police power.

(2) The fact that revenue is incidentally raised does notmake the imposition a tax.

FACTS: Angeles University Foundation (AUF), a non-stock, non-profit educational institution, filed with the Cityof Angeles a building permit for the construction of thebuilding of the AUF Medical Center. The City Treasurerassessed AUF a Building Permit Assessment. AUF arguesthat it is exempt from the payment of the building permitfees (because it is a tax). The City argues that they are notexempt (because it is a regulatory fee).

HELD: The building permit fees are regulatory fees. Acharge of a fixed sum which bears no relation at all to thecost of inspection and regulation may be held to be a taxrather than an exercise of the police power. In this case,

AUF failed to demonstrate that the building fees werearbitrarily determined or unrelated to the activity beingregulated. Neither has AUF adduced evidence to showthat the rates of building permit fees imposed andcollected by the respondents were unreasonable or inexcess of the cost of regulation and inspection. While it isconceded that the revenue from the building fees isgenerated for the benefit of LGUs, the fact that therevenue is incidentally raised does not make theimposition a tax.

Q: Can an im posit ion w hich, at f irst, was

regulatory in nature be considered a taxbecause of the sub stantial increase in the

amoun t col lected?

Yes. In PALV.EDU[164SCRA320],in determiningwhether the motor vehicle registration fees (MVRF)were taxes or fees, the Supreme Court held thatwhile the MVRFs were originally intended forregulation, as motor vehicles became absolutenecessities and vehicular traffic exploded in number,

the registration of vehicles because a convenientway of raising revenues. Thus, their nature hasbecome that of taxes notwithstanding the fact one-fifth or less of the amount collected is set aside foroperating expenses of the agency administering theprogram.

Note:This case reversed the doctrine previously held inREPUBLIC V.PHILIPPINE RABBIT BUS L INES [32SCRA211]to

the effect that motor vehicle registrations fees areregulatory fees.

The Designation

Q: Does designation matter in determining

whether an exaction is a fee or a tax?

No. In Victorias Milling Co. vs. CIR [22 SCRA 13],the Supreme Court stated that the designation givenby the authorities does not decide whether theimposition is properly a tax or a fee.

Note: It is submitted that the purpose of the exaction is theprimary factor to consider. InGEROCHI V.DOE[527SCRA696], the Supreme Court stated the conservative and

pivotal distinction between the power of taxation andpolice power rests in the purpose for which the charge is

made.

Q: Can an exaction b e considered both a tax

and a regulatory fee?

There two views.

FIRST VIEW: No, simply because they are levied fordifferent purposes. The power to regulate as anexercise of police power does not include the powerto impose fees for revenue purposes (G.A.CUUNJIENG V. PATSTONE [42 PHIL 818]; AMERICANMAIL LINE V.CITY OF BASILAN [2SCRA309])

SECOND VIEW: Yes. An exaction can beconsidered both a tax and a regulatory fee through acombined exercise of police power and the power oftaxation. This view finds support in the case ofPCGG V. COJUANGCO [G.R. NO. 147062-64,DECEMBER 14,2001]where the Supreme Court heldthat the coco levy funds were raised through theStates police and taxing powers.Note: It is submitted that the first view is the moreacceptable view as it is consistent with the distinctionsmade between a tax and a fee. Thus, the rule shouldbe plain and simple: If the imposition is for revenue

purposes, it is a tax and it is in the exercise of the power to

tax; if it is for regulatory purposes, it is a fee and it is in theexercise of police power.

Q: May the power of taxation be used as an

implement of the power of eminent dom ain?

Yes. In CIRVS.CENTRAL LUZON DRUG CORPORATION[456SCRA413], the Supreme Court stated that thetaxation power can be used as an implement for the


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exercise of the power of eminent domain. It notedthat the tax credit granted to private establishmentsgiving senior citizen discounts can be deemed astheir just compensation for private property taken by

the State for public use.

---------------------------------------------------------------F. Principles of a sound tax system1. Fiscal Adequacy2. Administrative Feasibility3. Theoretical Justice---------------------------------------------------------------

Q: What the basic principles of a soun d tax

system?

The basic principles are the following:

1. Fiscal Adequacy The source of governmentrevenue must be sufficient to meetgovernmental expenditures and other publicneeds

2. Theoretical Justicea good tax system mustbe based on the taxpayers ability to pay

3. Administrative feasibility taxes should becapable of being effectively enforced.

In CHAVEZ V.ONGPIN [186SCRA331], at issue wasthe validity of the increase, via an Executive Order,of the property values for purposes of real property

taxes. The Supreme Court held that such was valid.One of the justifications was based on fiscaladequacy. The Court stated that fiscal adequacyrequires that the sources of revenue must beadequate to meet government expenditures. Tocontinue collecting at valuations arrived at severalyears ago is not in consonance with a sound taxsystem.Note: The basic principles of a sound tax system are alsoknown as the Canons of Taxation.

Q: Wil l a violat ion of the abovementionedprincip les render a tax law unc onsti tut io nal?

It depends. This was settled in the case of DIAZ V.SEC. OF FINANCE [JULY 19, 2011]. One of thegrounds raised in assailing the validity of theimposition of VAT on the collection of toll wayoperators was that it violated the principle ofadministrative feasibility. Particularly, the petitioner

asserted that the substantiation requirements forclaiming the input VAT were impractical andincapable of implementation as in order to claiminput VAT, the name, address and TIN of the toll

way user must be indicated in the VAT receipt orinvoice. In addition, the rounding off of the toll rateand putting the excess collection in an escrow isillegal while the giving of the change to meet theexact toll rate would be a logistical nightmare. TheSupreme Court held that while administrativefeasibility is a canon of a sound tax system, thenon-observance thereof will not render a taximposition invalid except to the extent thatspecific constitutional or statutory limitationsare impaired.

Note: J. Dimaampao is of the view that if the tax law runscontrary to the principle of theoretical justice, such

violation will render the law unconstitutional consideringthat under the Constitution, the rule of taxation should beuniform and equitable. It is submitted that this should bequalified. As to a violation of the principle of theoretical

justice on the basis of uniformity, I submit that it wouldamount to a violation of the Constitution, specifically theequal protection clause. However, as to a violation of the

principle of theoretical justice on the basis of equity, it issubmitted that such would not be constitutionally infirm.The basis of this view can be found in the case ofTOLENTINO VS.SECRETARY OF FINANCE [249SCRA 628]

which held that the system of taxation need not be alwaysprogressive.

---------------------------------------------------------------G. Theory and Basis of Taxation1. Lifeblood Theory2. Necessity Theory3. Benefits-Protection Theory (Symbioticrelationship)4. Jurisdiction over subject and objects---------------------------------------------------------------

Note: As explained by Atty. Domondon, the theory oftaxation and the basis or rationale for taxation are twodifferent concepts. The theory of taxation explains whythere is a need to impose taxes while the basis or

rationale for taxation explains the reason why a State mayimpose taxes. The theory of taxation refers to the lifebloodtheory (and the necessity theory which is but an extensionof the lifeblood theory). The basis or rationale of taxationrefers to (1) the symbiotic relationship and (2) jurisdictionby the state over persons and property within its territory.


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---------------------------------------------------------------1. Lifeblood Theory---------------------------------------------------------------

Q: What is the l i feblood th eory?

As stated in the case of CIR vs. Algue [158 SCRA9], the existence of government is a necessity; itcannot exist nor endure without the means to pay itsexpenses; and for those means, the government hasthe right to compel all its citizens and property withinits limits to contribute in the form of taxes.

Taxes are the lifeblood of the government and soshould be collected without unnecessary hindrance.On the other hand, such collection should be madein accordance with law as any arbitrariness will

negate the very reason for government itself. It istherefore necessary to reconcile the apparentlyconflicting interests of the authorities and thetaxpayers so that the real purpose of taxation, whichis the promotion of the common good, may beachieved. CIR vs. Algue [158 SCRA 9]

The lifeblood theory states that an assessment of atax is enforceable despite it being contestedbecause of the urgency to collect taxes, this beingthe governments primary source of revenue.CIR v.Cebu Portland [156 SCRA 535]

The lifeblood theory can be manifested inthe following cases:

1. The prohibition against set-off of taxes [seeSection 204(C), NIRC]

2. The prohibition against the issuance of aninjunction to restrain the collection of taxes

3. Presumption of correctness of assessments

Illustrative cases:

In CIR v. Cebu Portland [156 SCRA 535], thetaxpayer argued that that the deficiency assessmentcannot be enforced because it is still beingcontested. The Supreme Court held that thisargument loses sight of the urgency of the need tocollect taxes as the lifeblood of the government. Ifthe payment of taxes could be postponed by simplyquestioning heir validity, the machinery of the statewould grind to a halt and all government functionswould be paralyzed.

In PHILIPPINE GUARANTY V. CIR [13 SCRA 775], theSupreme Court stated that the requirement that thewithholding agent should withhold thetax before addressing a query to the Commissioner

of Internal Revenue is not without meaning for it is inkeeping with the general operation of our tax laws:payment precedes defense. Likewise, validity of atax cannot be assailed until after the taxpayer haspaid the tax under protest. By questioning a taxslegality without first paying it, a taxpayer, in collusionwith BIR officials, can unduly delay, if not totallyevade, the payment of such tax.

In CIR v. CTA [234 SCRA 348], the Supreme Courtheld that government cannot and must not bestopped in matters involving taxes as they are thelifeblood of the nation through which the governmentagencies continue to operate and with which theState effects its functions for the welfare of itsconstituents.

In PHILIPPINE NATIONAL OIL COMPANY VS. CA [457SCRA 32], the Supreme Court held that theGovernment cannot be estopped from collectingtaxes by the mistake, negligence, or omission of itsagents. Upon taxation depends the Governmentsability to serve the people for whose benefit thetaxes are collected. Neglect or omission ofgovernment officials entrusted to collect taxesshould not be allowed to bring harm or detriment tothe people.

In SEC. OF FINANCE VS.ORO MAURA SHIPPING LINES[593 SCRA 14], the Supreme Court opined thatassuming further that MARINA merely committed amistake in approving the vessels proposed cost andthat the Collector of the Port of Manila similarlyerred, we reiterate the legal principle that estoppelgenerally finds no application against the State whenit acts to rectify mistakes, errors, irregularities, orillegal acts of its officials and agents irrespective ofrank. The rule holds true even if the rectificationprejudices parties who had meanwhile receivedbenefits.

Q: What is the exception to the proh ibit ion

on the issuance of an injunction to restrain

the col lect ion of taxes?

An injunction may be issued to restrain the collectionof taxes when in the opinion of the Court thecollection may jeopardize the interest of the


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Government and/or the taxpayer, the Court at anystage of the proceeding may suspend the saidcollection and require the taxpayer either to depositthe amount claimed or to file a surety bond for not

more than double the amount with the Court. (SeeSection 11, RA 1125, as amended by RA 9282).

Note: It must be noted, however, that the CTA cannotissue a writ of injunction to restrain the collection of taxesin the exercise of its original jurisdiction. It can only issuesuch a writ of injunction in its appellate jurisdiction. TheSupreme Court held in CIR vs. J.C. Yuseco [G.R. No. L-12518, October 28, 1961]that nowhere does the law vestin the CTA original jurisdiction to issue writs of prohibitionor injunction independently of, and apart from, anappealed case. The writ of prohibition or injunction that itmay issue to suspend the collection of taxes, is merelyancillary to and in furtherance of its appellate jurisdiction.Taxes being the chief source of revenue for the

government to keep it running, must be paid immediatelyand without delay. A taxpayer who feels aggrieved by adecision of a revenue officer and appeals to the CTA must

pay the tax assessed, except if the CTA opines thatcollection would jeopardize the interest of the Governmentand/or taxpayer, it could suspend the collection andrequire the taxpayer to deposit the amount claimed or tofile a bond.

---------------------------------------------------------------2. Necessity Theory---------------------------------------------------------------

Q: What is the necessity theory?

As stated in the case of PHILIPPINE GUARANTY V.CIR[13 SCRA 775], taxation is a necessary burden topreserve the States sovereignty and a means to givethe citizenry an army to resist aggression, a navy todefend its shores from invasion, a corps of civilservants to serve, public improvements for theenjoyment of the citizenry, and those which comewithin the States territory and facilities andprotection which a government is supposed toprovide

---------------------------------------------------------------3. Benefits-Protection theory (Symbioticrelationship)---------------------------------------------------------------

Q: What is the benefi ts-protect ion th eory?

According to this principle, the basis of taxation isfound in the reciprocal duties of protection and

support between the State and its inhabitants. Inreturn for his contribution, the taxpayer receives thegeneral advantages and protection which thegovernment affords the taxpayer and his property.

In CIRVS.ALGUE [158SCRA9], the Supreme Courtstated that taxes are what we pay for civilizedsociety. Hence, despite the natural reluctance tosurrender part of ones hard-earned income, everyperson who is able must contribute his share in therunning of the government and the latter, for its part,is expected to respond in the form of tangible andintangible benefits intended to improve the lives ofthe people and enhance their moral and materialvalues. This symbiotic relationship is the rationale oftaxationand should dispel the erroneous notion thatit is an arbitrary method of exaction by those in theseat of power

---------------------------------------------------------------4. Jurisdiction over subjects and objects---------------------------------------------------------------

Q: Explain the jurisdict io n of th e State over

persons and pro perty within its terr i tory as a

basis or rat ionale of taxation.

Jurisdiction is a reason why citizens must providesupport to the state so the latter could continue togive protection. It is the country, state or sovereignthat gives protection that has the right to demand thepayment of taxes with which to finance activities so it

could continue to give protection. The basis orrationale of taxation is also used to explain whytaxation is basically territorial in character because itis only within the territorial boundaries of the taxingauthority where tax laws may be enforced. This is sobecause it is only within the confines of its territorythat a country, state or sovereign may giveprotection.

Q: Discuss the meaning and implicat ions o f

the fol lowing statement: the pow er to tax

involves the pow er to destroy.

Taxation is a destructive power which interferes withthe personal and property rights of the people andtakes from them a portion of their property forsupport of the government. Therefore it should beexercised with caution to minimize injury to theproprietary rights of a taxpayer. It must be exercisedfairly, equally and uniformly, lest the tax collector killthe "hen that lays the golden egg". And, in order tomaintain the general public's trust and confidence in


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the Government this power must be used justly andnot treacherously. ROXAS VS. CTA [23 SCRA 276];REYES V.ALMANZOR [196SCRA322];CIRV.TOKYOSHIPPING [244SCRA332]

Q: Justice Marshall said that the power totax involves the power to destroy. On theother h and, Justice Holmes stated later that

the power to tax is not the power to destroywhile the court sits. Reconcile theapparently inconsist ent statements.

The two statements can be reconciled on threelevels. First, the imposition of a valid tax could notbe judicially restrained merely because it wouldprejudice the taxpayers property. Second,an illegaltax could be judicially declared invalid and should

not work to prejudice a taxpayers property. Third, J.Marshalls view refers to a valid tax while J. Holmesview refers to an invalid tax.

---------------------------------------------------------------H. Doctrines in Taxation1. Prospectivity of tax laws2. Imprescriptibility3. Double Taxation4. Escape from Taxation5. Exemption from Taxation6. Compensation and Set-off

7. Compromise8. Tax Amnesty9. Construction and Interpretation---------------------------------------------------------------

---------------------------------------------------------------1. Prospectivity of tax laws---------------------------------------------------------------

Q: Are tax statutes prospective in its

appl icat ion?

Yes. As held in CEBU PORTLAND V.COLLECTOR [G.R.

NO. 18649, FEBRUARY 27, 1965], the general ruleunder the Civil Code that laws shall haveprospective application applies to tax laws.

Q: Can tax statutes be applied retroactively?

Yes. While, as a general rule, taxes must only beimposed prospectively, taxes, as an exception, may

be imposed retroactively if the law expresslyprovides and if it will not amount to a denial of dueprocess.

Hence, in resolving the issue of whether a statutefavorable to a taxpayer-heir can be given retroactiveeffect, the Supreme Court held in LORENZO VS.POSADAS [64 PHIL. 353] that inheritance taxation isgoverned by the statute in force at the time of thedeath of the decedent, unless the language of thestatute clearly demands or expresses that it shallhave a retroactive effect which is not the case. Andsuch Revenue laws are not to be classed penallaws, so even if favorable, should not be givenretroactive effect.

---------------------------------------------------------------

2. Imprescriptibility---------------------------------------------------------------

Q: Are taxes imprescript ib le?

As a general rule, taxes are imprescriptible.However, as an exception, the tax law may provideotherwise. In particular, the NIRC and LGC providesfor prescriptive periods for assessment andcollection of taxes.

Q: What is the rationale behind p rovidin g for

a statute of l imitat ions in the col lect ion of

taxes?

As held in the case of REPUBLIC VS. ABLAZA [108PHIL1105, the law prescribing a limitation of actionsfor the collection of the income tax is beneficial bothto the Government and to its citizens; to theGovernment because tax officers would be obligedto act promptly in the making of assessment, and tocitizens because after the lapse of the period ofprescription citizens would have a feeling of securityagainst unscrupulous tax agents who will always findan excuse to inspect the books of taxpayers, not todetermine the latter's real liability, but to take

advantage of every opportunity to molest peaceful,law-abiding citizens.

In CIR V.B.F.GOODRICH PHILS [FEBRUARY 24,1999],the Supreme Court noted that our tax laws providesfor a statute of limitations in the collection of taxesfor the purpose of safeguarding taxpayers from anyunreasonable examination, investigation orassessment.


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Q: How shou ld said statute of l imitat ions in

taxation be const rued?

The law on prescription being a remedial measureshould be liberally construed in order to affordprotection. On the other hand, the exceptions to thelaw on prescription should be strictly construed.Thus, in the case of CIR VS. PHILIPPINE NATIONALBANK [G.R. No. 161997, October 25, 2005], theCourt held that even if the 2-year prescriptive periodfor a claim for tax refund has already lapsed, thesame may be suspended for equity and specialcircumstances.

---------------------------------------------------------------3. Double Taxation

a) Strict senseb) Broad sensec) Constitutionality of double taxationd) Modes of eliminating double taxation---------------------------------------------------------------

Q: What is double taxation?

Double taxation is defined as taxing the sameproperty twice when it should be taxed but once. Ithas also been defined as taxing the same persontwice by the same jurisdiction over the same thing. Itis sometimes known as duplicate taxation.

Q: What are the two types of double

taxation?

Double taxation may be direct (strict sense) orindirect(broad sense).

In the strict sense, double taxation means directdouble taxation. This means that the same propertyis taxed twice when it should be taxed only once andthat both taxes are imposed on the same subjectmatter for the same purpose, by the same taxingauthority within the same jurisdiction during the

same taxing period and covering the same kind oftax.

In the broad sense, double taxation means indirectdouble taxation. Double taxation is indirect wheresome elements of direct double taxation are absent.It applies to all cases in which there are two or morepecuniary impositions.

Q: Is double taxation pro hibited und er the

Const i tu t ion?

It depends. The Constitution does not prohibit the

imposition of double taxation in the broad sense.However, if double taxation amounts to a directdouble taxation, then it becomes legallyobjectionable for being oppressive and inequitable. Itviolates the equal protection and uniformity clausesof the Constitution.

Q: What are the elements of (direct) double

taxation?

There is direct double taxation if the two taxes areimposed:

1. On the same subject matter2. For the same purpose3. By the same taxing authority4. Within the same jurisdiction5. During the same taxing period6. The taxes must be of the same kind or character

PEPSI-COLA BOTTLING COMPANY V. MUN. OFTANAUAN [69SCRA460]

Q: Bank As gross receipts from passiveincom e is subject to 20% final withh olding

tax. At the same tim e, the total gro ss receipt

of Bank A is sub ject to 5% gross receipts

tax (GRT). Is the imposit ion of th e FWT andGRT a form of dou ble taxation?

No. First, the taxes herein are imposed on twodifferent subject matters. The subject matter of theFWT is the passive income generated in the form ofinterest on deposits and yield on deposit substitutes,while the subject matter of the GRT is the privilegeof engaging in the business of banking. Second,although both taxes are national in scope becausethey are imposed by the same taxing authority -- thenational government under the Tax Code -- andoperate within the same Philippine jurisdiction for the

same purpose of raising revenues, the taxingperiods they affect are different. The FWT isdeducted and withheld as soon as the income isearned, and is paid after every calendar quarter inwhich it is earned. On the other hand, the GRT isneither deducted nor withheld, but is paid only afterevery taxable quarter in which it is earned. Third,these two taxes are of different kinds orcharacters. The FWT is an income tax subject to


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withholding, while the GRT is a percentage tax notsubject to withholding. Hence, there is no doubletaxation. (seeCIR VS.SOLIDBANK CORP [416 SCRA436];CHINA BANKING CORP VS.CA[403SCRA634])

Q: Under the Tax Code, Bank A is sub ject to

1% reserve defic iency tax if it incur s reserve

defic iencies. Under the General Banking

Law, Bank A m ust 1/10 of 1% for incurring

reserve deficiencies. Is there double

taxation?

No. One is a penalty; the other is a tax. Thepayment of 1/10 of 1% for incurring reservedeficiencies is clearly a penalty as the primarypurpose is regulation; while the payment of 1% forthe same violation is a tax for the generation of

income which is the primary purpose for thisinstance. (REPUBLIC BANK VS.CTA[213SCRA266])

Q: A City passed an ordinance imposing

l icense tax on persons engaged in the

busin ess of operating tenement hou ses. Is

there double taxation given th at bui ldings

pay real estate taxes and also incom e taxes

besides the tenement tax impos ed by the

ordinance?

No. In order to constitute double taxation in theobjectionable or prohibited sense the same propertymust be taxed twice when it should be taxed butonce; both taxes must be imposed on the sameproperty or subject-matter, for the same purpose, bythe same State, Government, or taxing authority,within the same jurisdiction or taxing district, duringthe same taxing period, and they must be the samekind or character of tax. It has been shown that areal estate tax and the tenement tax imposed by theordinance, although imposed by the same taxingauthority, are not of the same kind or character.Furthermore, while it is true that they are taxable asreal estate dealers (income tax) and still taxableunder the ordinance, the argument against double

taxation may not be invoked. The same tax may beimposed by the national government as well as bythe local government. There is nothing inherentlyobnoxious in the exaction of license fees or taxeswith respect to the same occupation, calling oractivity by both the State and a political subdivisionthereof. (VILLANUEVA V. CITY OF ILOILO [26 SCRA578])

Q: A mu nicipal i ty impo sed a storage fee for

the storage of copra within its jurisdict ion. A

mult inat ional company doing bus iness in

the Phil ippines stored copra in itswarehouse located in the munic ipal i ty and

was thus assessed the storage fee. The

MNC argues that it was already being taxed

for the manufacture of cop ra so there was

dou ble taxation. Decide.

There is no double taxation. In PROCTER &GAMBLEV. MUNICIPALITY OF JAGNA [94 SCRA 894], theSupreme Court stated that there is double taxationwhen the same person is taxed twice by the samejurisdiction for the same thing. A tax on products isdifferent from a tax on the privilege of storing coprain a bodega situated within the territorial jurisdictionof the municipality. Furthermore, in the former, thetaxing authority is the national government while inthe latter; the taxing authority is the localgovernment.

Q: A mu nicipal i ty enacted two o rdinances.

The first levies and col lects from soft drink s

producers a tax for every bott le corked

while the second levies and col lects on soft

dr inks produ ced and manufactured w ith in

its terr i torial jurisdict ion. Is there double

taxation?

Yes. All the elements of double taxation are present.However, it must be noted, that while the factualmilieu provided is similar to the case of PEPSI COLAV. MUNICIPALITY OF TANUAN [69 SCRA 460],Supreme Court ruled that there was no doubletaxation in the said case because the secondordinance repealed the first ordinance. Otherwise,there would have been double taxation.

Q: A city passed two ordinances. The firstordinance imp osed a tax on the priv i lege of

sel l ing l iquor while the second ordinanceimpo sed a tax on the sales of l iquor. Is there

doub le taxation?

No. In COMPANIA GENERAL DE TABACOS V. CITY OFMANILA [8SCRA367], the Supreme Court held thatboth a license fee and a tax may be imposed on thesame business and occupation and such as not aviolation of the rule against double taxation. The


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impositions are of a different character. The first is alicense fee for the privilege of engaging in the sale ofliquor in the exercise of police power while the otheris imposed for revenue purposes based on the sales

made.

Q: Comp any A, engaged in the manufacture

of tobacco, is subject to the payment of

tobacco inspection fees aside from other

taxes it pays to th e national gov ernment. Is

there double taxation?

No. Tobacco Inspection fees are undoubtedlyNational Internal Revenue taxes, they being one ofthe miscellaneous taxes provided for under the TaxCode. The Code specifically provides for thecollection and manner of payment of the said

inspection fees. Tobacco inspection fees are leviedand collected for purposes of regulation and control.Tobacco inspection fees are of a different kind andcharacter from other taxes imposed. (LA SUERTE VS.CTA[134SCRA36])

Q: A city ordinance imp osed a license fee

on any person, f irm, enti ty or co rporation

doing b usiness in the City. A contends th at

the ordinance con sti tutes double taxation as

he already pays taxes imposed by the

national government. Is A co rrect?

No. It has been expressly affirmed by the SupremeCourt that such an argument against double taxationmay not be invoked where one tax is imposed by thestate and the other is imposed by the city, it beingwidely recognized that there is nothing inherentlyobnoxious in the requirement that license fees ortaxes be exacted with respect to the sameoccupation, calling or activity by both the state andthe political subdivisions thereof. (CITY OF BAGUIOVS.DE LEON [25SCRA938])

Q: A local government uni t wishes to levy

excise taxes on quarry resources found

within its jurisdict ion. The nationalgovernm ent argues that it may not do so as

suc h artic les are already taxed by the NIRC.

Decide.

The local government unit may levy a tax on quarryresources extracted from public lands but not fromprivate lands. In PROVINCE OF BULACAN V. CA [299

SCRA442],the Supreme Court stated that the NIRClevies a tax on all quarry resources whetherextracted from public or private land. Thus, the localgovernment unit cannot impose taxes on quarry

resources as they are already taxed under theNIRC. However, by express provision in the LocalGovernment Code, the LGU may levy on quarryresources extracted from public land.

Q: What are the mod es of el imination doub le

taxation?

The usual methods of avoiding the occurrence ofdouble taxation are:

1. Allowing reciprocal exemption either by lawor by treaty

2. Allowance of tax credit for foreign taxes paid3. Allowance of deduction for foreign taxespaid; and

4. Reduction of the Philippine tax rate

---------------------------------------------------------------4. Escape from Taxationa) Shifting of tax burdenb) Tax Avoidancec) Tax Evasion---------------------------------------------------------------

---------------------------------------------------------------

a) Shifting of tax burden---------------------------------------------------------------

Q: What is meant by shifting the taxburden?

Shifting of tax burden is the process by which theburden of a tax is transferred from the statutorytaxpayer or the one whom the tax was assessed orimposed to another without violating the law.

Q: What is the meaning of impact and

incidence of taxation?

Impact of taxation and incidence of taxation are twodifferent concepts.

Impact of taxation (liability)is the point on which atax is originally imposed while incidence of taxation(burden)is that point on which the tax burden finallyrests or settles down.


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Q: Enumerate the ways of shif t ing th e tax

burd en and d efine each.

1. Forward shifting- When the burden of thetax is transferred from a factor of productionthrough the factors of distribution until itfinally settles on the ultimate purchaser orconsumer.

2. Backward shifting When the burden ofthe tax is transferred from the consumer orpurchaser through the factors of distributionto the factors of production.

2

3. Onward shiftingWhen the tax is shiftedtwo or more times either forwardor backward.

3

Q: What taxes can be shif ted?

Only indirect taxes may be shifted.

Q: How do you determine if a tax is direct or

indirect?

Direct taxesare taxes wherein the impact or liabilityfor the payment of the tax as well as the incidence orburden of the tax falls on the same person. On theother hand, indirect tax are taxes wherein theimpact or the tax liability for the payment of the taxfalls on one person but the incidence or burden

thereof can be shifted or passed to another.

In CIR v. PLDT [478 SCRA 61]), the Supreme Courtdistinguished direct taxes from indirect taxes bystating that direct taxes are those that are extractedfrom the very person who, it is intended or desired,should pay them while indirect taxes are those thatare demanded, in the first instance, from, or are paidby, one person in the expectation and intention thathe can shift the burden to someone else.

Q: In the refund of indirect taxes, who is th e

prop er party to claim the said refund?

_________________________________________

2As an example, the purchaser may shift the tax to the producer

by purchasing only when the price is reduced.3 As an example, the producer/manufacturer may pass the tax

burden to the retailer/seller of the goods who in turn will pass thetax burden to the purchaser.

In the refund of indirect taxes, the statutory taxpayeris the proper party who can claim the refund (SILKAIRVS.CIR[FEBRUARY 25,2010])

As held in the case of EXXONMOBIL V.CIR[G.R.NO.180909, JANUARY 19, 2011], in the case of indirecttaxes, it is the manufacturer of the goods who isentitled to claim any refund thereof. Indirect taxespaid by the manufacturers or producers of the goodscannot be refunded to the purchasers of the goodsbecause the purchasers are not the taxpayers.

CONTEX CORPORATION VS.CIR[433SCRA577]

The liability for the payment of the indirect tax liesonly with the seller of the goods or services, not inthe buyer thereof. In indirect taxes, when the sellerpasses on the tax to his buyer, he, in effect, shiftsthe burden, not the liability to pay it, to the purchaseras part of the price of goods sold or rendered. CIR v.PLDT [478 SCRA 61]

DIAGEO PHILIPPINES V. CIR [G.R. NO. 183553,NOVEMBER 12,2012]

DOCTRINE: The claimant for the refund of excise taxesrelated to exported products shall be the same personwho paid the taxes.

FACTS: Diageo Philippines, Inc. purchased raw alcoholfrom its supplier for use in the manufacture of its beverageand liquor products. The supplier imported the raw alcoholand paid the related excise taxes thereon before the samewere sold to the petitioner. The purchase price for the rawalcohol included, among others, the excise taxes paid bythe supplier. Subsequently, petitioner exported its locallymanufactured liquor products and received thecorresponding foreign currency proceeds of such exportsales. Petitioner then filed applications for tax refund/issuance of tax credit certificates corresponding to theexcise taxes which its supplier paid but passed on to it aspart of the purchase price of the subject raw alcoholinvoking Section130(D) of the Tax Code.

HELD:The Court ruled that the right to claim a refund or

be credited with the excise taxes belongs to its supplier.

Any excise tax paid thereon shall be credited or refundedrequires that the claimant be the same person who paidthe excise tax.


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SILKAIR V.CIR[G.R.NO.166482,JANUARY 25,2012]

DOCTRINE: The proper party to question or seek arefund of an indirect tax is the statutory taxpayer, theperson on whom the tax is imposed by law and who paidthe same even if he shifts the burden thereof to another.

FACTS:Petitioner filed an administrative claim for refund

on the excise taxes paid on the purchase of jet fuel fromits supplier oil company for the period of July 1, 1998 toDecember 31, 1998, which it alleged to have beenerroneously paid based on Section 135(a) and (b) of theTax Code of 1997. Due to inaction by respondentCommissioner, petitioner filed a Petition for Review withthe Court of Tax Appeals. The CTA denied the petitionand ruled that while petitioners country indeed exempts

from excise taxes petroleum products sold to internationalcarriers, petitioner nevertheless failed to comply with thesecond requirement under Section 135 (a) of the 1997 TaxCode as it failed to prove that the jet fuel delivered byPetron came from the latters bonded storage tank. Uponthe denial of the motion of reconsideration, petitionerelevated the case to the CA. The CA affirmed the denialand ruled that petitioner is not the proper party to seek forthe refund of the excise taxes paid.

HELD: The Supreme Court held that excise taxes, whichapply to articles manufactured or produced in thePhilippines for domestic sale or consumption or for anyother disposition and to things imported into thePhilippines, is basically an indirect tax. While the tax is

directly levied upon the manufacturer/importer uponremoval of the taxable goods from its place of productionor from the customs custody, the tax, in reality, is actuallypassed on to the end consumer as part of the transfervalue or selling price of the goods, sold, bartered orexchanged. The proper party to question, or seek a refundof an indirect tax is the statutory taxpayer, the person onwhom the tax is imposed by law and who paid the sameeven if he shifts the burden thereof to another. Petitioner,as the purchaser and end-consumer, ultimately bears thetax burden, but this does not transform its status into astatutory taxpayer.

Q: Can the sel ler claim an exemption on

indirect taxes if it sold produc ts to buyers

wh o, under th e law, are tax-exempt enti t ies?

No. The seller cannot claim an exemption or arefund on the indirect taxes it paid for those goodssold or services rendered to an entity exempt fromindirect taxes. As a tax-exempt entity, the buyer is

exempted from absorbing the burden of indirecttaxation and it is the seller then that shall shoulderthis burden. The tax exemption of the buyer cannotbe the basis of a claim for tax exemption of the

manufacturer (PHILIPPINE ACETYLENE V. CIR [20SCRA1056])

In PHILIPPINE ACETYLENE V. CIR [20 SCRA 1056],Philippine Acetylene claimed an exception on theindirect taxes it paid for the oxygen and acetylenegases it sold to NPC. The Supreme Court ruled thatNPC is a tax-exempt entity and the said tax is duefrom the manufacturer.

In CIR V. GOTAMCO [148 SCRA 36], at issue waswhether Gotamco & Sons should pay thecontractors tax (an indirect tax) on gross receipts itrealized from the construction of the WHO building inManila. The Supreme Court ruled in the affirmative.The Court opined that WHO, as a tax-exempt entity,cannot be made liable for the indirect taxes.

In MACEDA V. MACARAIG [197 SCRA 771], theSupreme Court ruled that the tax burden may not beshifted to the NPC, a tax-exempt entity, by the oilcompanies. As NPC is exempt from direct andindirect taxation, it must be held exempted fromabsorbing the economic burden of taxation. Thus,the oil companies must absorb all or part of theeconomic burden of the taxes. Had not NPC beenexempt from indirect taxes, the oil companies could

have shift the burden to NPC.

CIR v. PILIPINAS SHELL [G.R.188497,APRIL25,2012]

DOCTRINE: Oil companies are not exempt from thepayment of excise tax on petroleum productsmanufactured and sold by them to international carriers.

FACTS:The taxpayer filed with the Large Taxpayers Audit& Investigation Division II of the (BIR) the several formalclaims for refund or tax credit for various years. It filedpetitions for review since no action was taken by the BIR

on its claims. The CTAs First Division ruled that thetaxpayer is entitled to the refund of excise taxes in thereduced amount. It relied on a previous ruling rendered bythe CTA En Banc in a previous case involving the sametaxpayer, where the CTA also granted the taxpayers claimfor refund on the basis of excise tax exemption forpetroleum products sold to international carriers of foreignregistry for their use or consumption outside thePhilippines. On appeal, the CTA En Banc upheld the ruling


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of the First Division.

HELD: The Supreme Court held that both the earlieramendment in the 1977 Tax Code and the present Sec.135 of the 1997 NIRC did not exempt the oil companies

from the payment of excise tax on petroleum productsmanufactured and sold by them to international carriers.

Because an excise tax is a tax on the manufacturer andnot on the purchaser, and there being no express grantunder the NIRC of exemption from payment of excise taxto local manufacturers of petroleum products sold tointernational carriers, and absent any provision in theCode authorizing the refund or crediting of such excisetaxes paid, the Court holds that Sec. 135 (a) should beconstrued as prohibiting the shifting of the burden of theexcise tax to the international carriers who buys petroleumproducts from the local manufacturers. Said provision thusmerely allows the international carriers to purchasepetroleum products without the excise tax component asan added cost in the price fixed by the manufacturers ordistributors/sellers. Consequently, the oil companies whichsold such petroleum products to international carriers arenot entitled to a refund of excise taxes previously paid onthe goods.

The Supreme Court pointed out that the taxpayers failureto make a distinction on the exemption under Sections 134and 135 of the Tax Code, apparently led it to mistakenlyassume that the tax exemption under Sec. 135 (a)attaches to the goods themselves such that the excisetax should not have been paid in the first place. Theexemption found in Sec. 134 makes reference to thenature and quality of the goods manufactured (domestic

denatured alcohol) without regard to the tax status of thebuyer of the said goods while Sec. 135 deals with the taxtreatment of a specified article (petroleum products) inrelation to its buyer or consumer.

Further, it held that Sec. 135 (a) in relation to the otherprovisions on excise tax and from the nature of indirecttaxation, may only be construed as prohibiting themanufacturers-sellers of petroleum products from passingon the tax to international carriers by incorporatingpreviously paid excise taxes into the selling price. In otherwords, the taxpayer cannot shift the tax burden tointernational carriers who are allowed to purchase itspetroleum products without having to pay the added costof the excise tax.

Furthermore, considering that the excise taxes attaches topetroleum products as soon as they are in existence assuch, there can be no outright exemption from thepayment of excise tax on petroleum products sold tointernational carriers. The sole basis then of the taxpayersclaim for refund is the express grant of excise taxexemption in favor of international carriers under Sec.135(a) for their purchases of locally manufacturedpetroleum products.

Citing its ruling in Philippine Acetylene, it held that a taxexemption being enjoyed by the buyer cannot be the basisof a claim for tax exemption by the manufacturer or sellerof the goods for any tax due to it as the manufacturer or

seller. The excise tax imposed on petroleum productsunder Sec. 148 is the direct liability of the manufacturerwho cannot thus invoke the excise tax exemption grantedto its buyers who are international carriers.

Q: Dist inguish indirect taxes from

withh olding taxes.

See case digest below.

ASIA INTERNATIONAL AUCTIONEERS V.CIR[G.R.

179115,SEPT.26,2012]

DOCTRINE: See held.

FACTS:Asia International Auctioneers (AIA) received anassessment from the BIR for deficiency VAT. AIA availedof the tax amnesty program under RA 9480. The BIRcontends that AIA is disqualified under RA 9480 which,among others, enumerates withholding agents as personsto whom the tax amnesty shall not extend to. The BIRargues that AIA is a withholding agent.

HELD:AIA is not a withholding agent. Indirect taxes, likeVAT and excise tax, are different from withholding taxes.To distinguish, in indirect taxes, the incidence of taxation

falls on one person but the burden thereof can be shiftedor passed on to another person, such as when the tax isimposed upon goods before reaching the consumer whoultimately pays for it. On the other hand, in case ofwithholding taxes, the incidence and burden of taxation fallon the same entity, the statutory taxpayer. The burden oftaxation is not shifted to the withholding agent who merelycollects, by withholding, the tax due from incomepayments to entities arising from certain transactions andremits the same to the government. Due to thisdifference, the deficiency VAT cannot be deemed aswithholding taxes merely because they constitute indirecttaxes. Moreover, records in this case support theconclusion that AIA was assessed not as a withholding

agent but, as the one directly liable for the said deficiencytaxes.


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---------------------------------------------------------------b) Tax Avoidancec) Tax Evasion---------------------------------------------------------------

Q: What is the difference between tax

avoidance and tax evasion?

Tax avoidance and tax evasion are the two mostcommon ways used by taxpayers in escaping fromtaxation. Tax avoidance is the tax saving devicewithin the means sanctioned by law. This methodshould be used by the taxpayer in good faith and atarms length. Tax evasion, on the other hand, is ascheme used outside of those lawful means andwhen availed of, it usually subjects the taxpayer tofurther or additional civil or criminal liabilities.

Note: An example of tax avoidance is when a taxpayeravails of deductions allowed by law.

Q: What is the substance over formdoctr ine?

The doctrine provides that taxability is determined bythe reality of the transaction rather than theappearance which may be contrived.

Q: What are the three factors to be

considered in determining if a scheme is

designed to evade taxes?

The three factors to be considered are:

1. The end to be achieved (which is payment ofless taxes than that known by the taxpayer to belegally due or non-payment of a tax when it isshown that a tax is due);

2. An evil or deliberate state of mind; and3. A course of action which is unlawful.

Q: Husband and wife own a lot of real

estate. Upon advice of th eir lawyer, they

decided to org anize a corporation to take

contr ol of their propert ies. The husband and

wife w ere issued 2,500 original unis sued no

par value shares of stoc k in exchange for

their prop ert ies. Is the scheme designed to

avoid taxes or evade taxes?

This is only a case of tax avoidance. In DELPHERTRADES CORPORATION V. INTERMEDIATE APPELLATECOURT [157SCRA349], the Supreme Court opinedthat there was nothing wrong or objectionable about

the "estate planning" scheme resorted to by thetaxpayers. The legal right of a taxpayer to decreasethe amount of what otherwise could be his taxes oraltogether avoid them, by means which the lawpermits, cannot be doubted. In the said case, thetaxpayers acquired 2,500 original unissued no parvalue shares of stocks of the corporation inexchange for their properties. By virtue of thisexchange, the taxpayers became stockholders ofthe corporation by subscription. In effect, theychanged the nature of their ownership fromunincorporated to incorporated form by organizingthe corporation to take control of properties and atthe same save on inheritance taxes.

4

Q: ABC corporat ion sold i ts bui ld ing to A,

who in tu rn, sold during the same day the

same prop erty to XYZ Corporation. Is the

scheme design ed to avoid taxes or evade

taxes?

This is a case of tax evasion. In CIR VS.THE ESTATEOF BENIGNO TODA, JR. [483 SCRA 293], theSupreme Court held that the three factors in taxevasion were present. The two transfers weretainted with fraud since the intermediary transfer

(from the corporation to a natural person) wasprompted only by the desire to mitigate tax liabilitiesand not for any business purpose.

Q: ABC Corporation owns the ABC buildin g.

It sold the said building to A, a close

business associate of ABC Corporation, on

30 Augu st 1989. After a week, A sold th e

same to XYZ Corporation. Is the scheme

designed to avoid taxes or evade taxes?

This is a case of tax evasion. The scheme sought tomake it appear that there were two sales of the

_________________________________________

4If the properties were to be held by the spouses in the case, it

would be tied to the succession proceedings and theconsequential payment of estate taxes when the owner dies. Onthe other hand, a corporation does not die and can hold theproperty for a period of at least 50 years.


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subject properties. It is obvious that the objective ofthe sale to Z was to reduce the amount of tax to bepaid especially that the transfer from Z to XYZ wouldthen be subject to only 6% capital gains tax, and not

the 30% corporate income tax. The intermediarytransaction which was prompted more on themitigation of tax liabilities than for legitimatebusiness purpose constitutes one of tax evasion(CIR v. CA [327 Phil. 1]).

---------------------------------------------------------------5. Exemption from taxationa) Meaning of exemption from taxationb) Nature of tax exemptionc) Kinds of tax exemptiond) Rationale/grounds for exemptione) Revocation of tax exemption

---------------------------------------------------------------

Note: Tax exemption of special entities under theConstitution shall be discussed under Chapter 1.I.2.a.(iv)Prohibition against Taxation of religious, charitable entitiesand educational entities, (v) Prohibition against taxation ofnon-stock, non-profit institutions, (xii) exemption from real

property taxes.

---------------------------------------------------------------a) Meaning of exemption from taxation---------------------------------------------------------------

Q: What is a tax exempt ion?

A tax exemption is defined as a grant of immunity,express or implied, to particular persons orcorporations from the obligation to pay taxes.

Q: Who has the power to grant tax

exempt ions?

Both the power to tax and to exempt certain personsare vested in the legislature. In particular, ARTICLEVI, SECTION 28 OF THE CONSTITUTION provides thatNo law granting any tax exemption shall be passed

without the concurrence of a majority of all theMembers of the Congress.

Q: Enumerate the instances where tax

exemptions m ay be granted other than by

act of Congress:

1. Where the President exercises his powerunder the flexible tariff clause to removeexisting protective tariff rates (see Section28(2), Article VI, 1987 Constitution)

2. The local government may grant exemptionsfrom the payment of local taxes withoutcongressional approval consequent to itspower to levy taxes, fees and other charges.(see Section 5, Article X, 1987Constitution)

3. Where the President enters into and ratify atax treaty granting certain exemptionssubject only to Senate occurrence.

Q: May tax exemptions exist by im plicat ion?

No. In NDC v. CIR [151 SCRA 472], at issue was

whether the undertaking signed by the Secretary ofFinance in the promissory note can be consideredan exemption on taxes on the interest remitted. TheSupreme Court ruled in the negative and opined thattax exemptions cannot be merely implied but mustbe categorically and unmistakably expressed.

---------------------------------------------------------------b) Nature of tax exemption---------------------------------------------------------------

Q: What is the nature of tax exemp tions?

Tax exemptions are:

1. Mere personal privileges to the grantees;2. Generally revocable by the government unless

founded on contract which is protected by thenon-impairment clause;

3. Implies a waiver on the part of the Governmentof its right to collect what otherwise would bedue; and

4. Not necessarily discriminatory so long as theexemption has a rational basis.

---------------------------------------------------------------

c) Kinds of tax exemptions---------------------------------------------------------------

Q: What are the kinds o f tax exemp tions?

See table.


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As to source

Constitutional Exemption originates from

the ConstitutionStatutory Emanating from legislation

Contractual Based on contractualstipulation

Treaty Based on treaty provisions

Ordinance Based on an ordinanceexempting payment of localgovernment taxes.

As to manner of creation

Express Expressly granted by organicor statute law

Implied Whenever particular persons,properties, or excises aredeemed exempt as they falloutside the scope of thetaxing provision.

As to scope of extent

Total When certain persons,property or transactions areexempted from all taxes

Partial When certain persons,property or transactions are

exempted from certain taxes

As to object

Personal Those granted directly infavor of such persons as arewithin the contemplation ofthe law granting theexemption

Impersonal Those granted directly infavor of a certain class ofproperty

---------------------------------------------------------------d) Rationale/grounds for exemption---------------------------------------------------------------

Note: The rationale for exemption and the grounds forexemption are two different things. The rationale asks thequestion why tax exemptions are given while the groundstell us why the State can provide tax exemptions.

Q: What is the rationale behind tax

exemptions?

Tax exemptions are given because:

1. Public interest will be served by the exemptionallowed; and

2. Such public benefit or interest is sufficient tooffset the monetary loss entailed in the grant ofthe exemption

Q: What are the grounds o f tax exemptio n?

Tax exemption may be based on:

1. Contract;2. Some ground of public policy; and

3. Treaty created on grounds of reciprocity or tolessen the rigors of international double ormultiple taxation

Q: Can be there be a tax exemp tion o n the

ground of equi ty?

No. The Supreme Court held inDAVAO GULF V.CIR[293SCRA76], that there is no tax exemption solelyon the ground of equity.

---------------------------------------------------------------e) Revocation of tax exemption

---------------------------------------------------------------

Q: May a tax exemp tion be revok ed?

Yes. Since taxation is the rule and exemptiontherefrom is the exception, the exemption may bewithdrawn at the pleasure of the taxing authority.

Hence, in MCIAA V. MARCOS [261 SCRA 667], theSupreme Court noted that Section 234 of the theLocal Government Code unequivocally withdrewexemptions from payments of real property taxesgranted to natural or juridical persons, including

government-owned and control corporations. SinceMCIAA is a GOCC, it follows that its exemptiongranted under a charter prior to the LGC has beenwithdrawn.

In SMART V. CITY OF DAVAO [565 SCRA 237], theSupreme Court noted that the in lieu of all taxesclause in its charter has become functus officiowith


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the abolition of franchise tax on telecommunicationscompanies in accordance with the VAT law.

in REPUBLIC V. CAGUIOA [536 SCRA 194] held that

there is no vested right in a tax exemption and moreso when the latest expression of legislative intentrenders it continuance doubtful. In the said case, RA7227 granted private domestic corporations doingbusiness in the Subic SEZ tax exemptions onimportations of general merchandise. However, RA9334 withdrew the tax exemption on theimportations of cigars, cigarettes, distilled spirits,fermented liquors and wines.

In NITAFAN V. CIR [152 SCRA 284], the SupremeCourt held that the salaries of members of thejudiciary are subject to income tax as applied to alltaxpayers. The payment of income tax by Justicesand Judges do not fall within the constitutionalprotection against decrease of their salaries duringtheir continuance in office.

Q: Is there an exception to the above

doctr ine?

Yes. The exemption cannot be withdrawn if theexception was granted to private parties based onmaterial consideration of a mutual nature, whichthen becomes contractual and thus covered by thenon-impairment clause of the Constitution (MCIAAV.MARCOS [261SCRA667]).

---------------------------------------------------------------6. Compensation and set-off---------------------------------------------------------------

Q: Can taxes be the subject of

com pensation between the government and

the taxpayer?

No. As held in CALTEX VS. COA [208 SCRA 727],taxes cannot be the subject of compensationbecause the government and taxpayer are not

mutually creditors and debtors of each other. A claimfor taxes is not such a debt, demand, contract orjudgment as is allowed to be set-off. (see FRANCIA V.IAC[162SCRA753])

There can be no off-setting of taxes against theclaims that the taxpayer may have against thegovernment. A person cannot refuse to pay taxes onthe ground that the government owes him an

amount equal or greater than the tax being collected(PHILEX MINING V.CIR[294SCRA687]).

Taxes cannot be the subject of set-off because they

are not in the nature of contracts between partiesbut grow out of a duty to, and, are positive acts, ofthe Government, to the making and enforcing ofwhich, the personal consent of the taxpayer is notrequired (REPUBLIC V.MAMBULAO LUMBER [4 SCRA622])

The erroneous payment of final withholding taxcannot be used to offset or be treated as advancetax payment, and cannot be used against thesucceeding final withholding tax. COMMISSIONER OFINTERNAL REVENUE VS. GOULDS PUMPS (PHILS.)INCORPORATED,AUGUST 22,2012

Note: In one case, DOMINGO V.GARLITOS [8SCRA443],the Supreme Court allowed the set-off between taxes anddebts. It opined that if the obligation to pay taxes and thetaxpayers claim against the government are bothoverdue, demandable, as well as fully liquidated,compensation takes place by operation of law and bothobligations are extinguished to their concurrent amounts.In the said case, the taxpayer who has been assessedmunicipal taxes was allowed to assign in favor of themunicipality a final judgment obtained by him against thesaid municipality to cover the assessment. Atty.Domondon reconciled the rulings of the Supreme Court inDOMINGO V.GARLITOS [8SCRA443] and FRANCIA V.IAC[162SCRA753] by stating that in the former case, both

claims being overdue, demandable, and fully liquidatedwhile in the latter case, the claim against the governmentwas not overdue and demandable as it was alreadysettled. Atty. Domondon submits that when confrontedwith a bar problem, we follow the doctrine laid down inFRANCIA V.IAC[162SCRA753] unless the facts wouldinvolve the (1) the application of the principle of solutioindebiti or (2) it involves local government taxes.

Q: Is the civ i l concept of solut io indebit i

appl icable to taxation?

Yes. In the case of FILINVEST DEVELOPMENTCORPORATION VS. CIR [529 SCRA 605], the Court

held that in the field of taxation where the Stateexacts strict compliance upon its citizens, the Statemust likewise deal with taxpayers with fairness andhonesty. Hence, under the principle of solutioindebiti, the Government has to restore to petitionerthe sums representing erroneous payments of taxes.


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Q: What is the doctr ine of equitable

recoupment?

The doctrine provides that where the refund of a tax

illegally or erroneously collected or overpaid by ataxpayer is barred by prescription, a tax presentlybeing assessed against a taxpayer may berecouped or set-off against the tax whose refund isnow barred by prescription. This doctrine isinapplicable in the Philippines in light of the lifebloodtheory. (USTV.COLLECTOR [104PHIL.1062]

---------------------------------------------------------------7. Compromise---------------------------------------------------------------

Q: Can taxes be the subject of a

compromise?

Yes. Compromises are allowed and enforceablewhen the subject matter thereof is not prohibitedfrom being compromised and the person enteringinto it is duly authorized to do so. In fact, underSECTION 204 OF THE TAX CODE, payment of internalrevenue taxes may be compromised on the groundsof (1) doubtful validity of the assessment or (2)financial incapacity.

---------------------------------------------------------------8. Tax Amnesty

---------------------------------------------------------------

Q: What is a tax amnesty?

A tax amnesty is a general pardon or intentionaloverlooking by the State of its authority to imposepenalties on persons otherwise guilty of evasion orviolation of a revenue or tax. REPUBLIC V. IAC [196SCRA335]

Q: Dist inguish a tax amnesty from a tax

exemption.

Tax Amnesty Tax Exemptionimmunity from allcriminal, civil andadministrative liabilitiesarising from nonpaymentof taxes

bar reviewer on taxation

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