Taxation 1 Mi dt e r m Atty.

Ar ana s

Taxation 1
MIDTERM
Based on the Syllabus and Discussions of Atty. Aranas
AY 2017-2018

Credits to Mamalateo, Spectra Notes, Taxation 1 2014 notes, Tanya Notes, Atty
KMA’s notes, transcripts, case digests online and all other notes. :D

Table of Contents

Introduction To Taxation 9) Customs Duties .................................................................................................19

10)Tariff ...................................................................................................................19
I. History of Taxation .......................................................................................3

II. Definition of Taxation ..................................................................................3

XVI. Limitation of the Power of Taxation .........................................................19

Taxation vis-à-vis Tax.................................................................................................. 3 Inherent Limitation (PENIS)

Southern Luzon Drug Corp. v. DSWD, et. al. 1) Public Purpose ...................................................................................................19
Paseo Realty and Development Corporation v. CA Pascual v. Secretary of Public Works et. al,
Pelizloy Realty Corporation v, Province of Benguet Lutz v. Araneta, et. al.
III. Nature of Taxation Power ............................................................................5
2) Non-delegation of the legislative power to tax ................................................21
1. Inherent power of sovereignty; ...........................................................................5 3) Exemption from taxation of government entities ............................................22
Manifestations: ........................................................................................................6 PAGCOR v. BIR
Manila Memorial Park Inc. v. Sec. of DSWD and DOF CIR v. PAGCOR
2. Essentially a legislative function; ........................................................................7 4) International Comity .........................................................................................23
3. Subject to Constitutional and Inherent Limitations.............................................9 5) Territorial jurisdiction/Situs ............................................................................... 23
IV. Basis of Taxation (Necessity Theory) ............................................................9
Constitutional Limitation
Necessity Theory........................................................................................................9 1) Direct Constitutional Limitation ........................................................................ 24
V. Importance of Taxes - Lifeblood Doctrine ......................................................9
CIR v. St. Luke's Medical Center (SLMC)
Herrera v Quezon City Board of Assessment Appeals
VI. Theories of Taxation ....................................................................................9
Philippine Lung Center v Quezon City
1. Lifeblood Theory ..................................................................................................9 Abra Valley College Inc., v. Aquino
CIR v. Metro Star Superama Inc, American Bible Society v. City of Manila,
2. Necessity Theory ................................................................................................10 City Assessor of Cebu City v. Association of Benevola de Cebu Inc.
3. Benefits Received or Compensation Theory ......................................................10 CIR v. De La Salle University
4. Benefits-Received Theory/Reciprocity Theory/Symbiotic Theory (Doctrine of 2) Indirect Constitutional Limitation......................................................................32
Symbiotic Relationship) .................................................................................. 10 Chamber of Real Estate and Builders' Associations' Inc. v. Romulo et. al.
People v. Cayat
Southern Luzon Drug Corporation v. OSWD, et. Ormoc Sugar Company v. Conejos et al.
Scope of Legislative Taxing PoweR.......................................................................... 10 Tiu v. CA
VII. Purpose of Taxation .................................................................................10
XVII. Situs of Taxation ....................................................................................36

The Four (4) R’s of Taxation...................................................................................... 11 Rules that need to be observe: .............................................................................. 36
Primary: Revenue Raising....................................................................................... 11 Air Canada v. CIR
Secondary: Non-Revenue Raising .......................................................................... 11 XVIII. Double Taxation ...................................................................................38

McCulloch v. Maryland Meaning of double taxation ................................................................................... 38

Panhandle Oil C v. Mississippi Instances of double taxation................................................................................... 38
Reyes v. Almanzor et. al. Constitutionality of double taxation ...................................................................... 40
VIII. Scope of Taxation ...................................................................................12

1. Unlimited .......................................................................................................... 12 XIX. Forms of Escape from Taxation ................................................................40

2. Comprehensive ................................................................................................12 Six (6) Basic Forms

3. Plenary .............................................................................................................12 1. Shifting, in general ........................................................................................... 40
4. Supreme ...........................................................................................................12 2. Capitalization ....................................................................................................41
Pepsi Cola Bottling Philippines Company v. Municipality of Tanauan et. al. 3. Transformation ..................................................................................................41
Tio v. Videogram Regulatory Board 4. Tax Exemption ..................................................................................................41
IX. Aspect of Taxation ....................................................................................13
5. Tax avoidance (tax planning or tax minimization).............................................41
1. Levy or Imposition (Legislation) ........................................................................ 13 6. Tax evasion (Tax Dodging) .................................................................................41
2. Assessment ........................................................................................................13 XX. Exemption From Taxation ........................................................................42

3. Payment & Collection ........................................................................................13 Exemption, defined ............................................................................................... 42

X. Basic Principles of a Sound Tax System .......................................................13
Nature of Tax exemption ........................................................................................43
1. Fiscal Adequacy ................................................................................................13 Nature of the power to grant tax exemption ..........................................................43
2. Administrative Feasibility .................................................................................14 Rationale of Tax Exemption ....................................................................................43
3. Theoretical Justice or Equity .............................................................................14 Grounds for tax exemption ....................................................................................44
4. Economic Efficiency ..........................................................................................14 Kinds of tax exemption .......................................................................................... 44
XI. Taxation distinguished from Police Power and Eminent Domain ...............14
Examples of tax exemption ....................................................................................44
Planters Products Inc. v. Fertiphil Corp. Construction of tax exemption statutes .................................................................44
CIR v. Central Luzon Corporation
Carlos Superdrug Corporation v. DSWD Tax amnesty, defined ............................................................................................. 45
Manila Memorial Park, Inc. and La Funeraria Paz-Sucat, Inc v. Secretary of DSWD and DOF Tax remission or tax condonation, defined ............................................................ 45
XII. Taxes, Defined .........................................................................................16
xxI. Nature, Construction and Application of Tax Laws ....................................46

1. Internal Revenue Taxes......................................................................................16 Nature of internal revenue law .............................................................................. 46

2. Local/Municipal Taxes ........................................................................................16 Construction of tax laws ......................................................................................... 46
3. Tariff and Customs Duties..................................................................................16 Application of tax laws ........................................................................................... 47
4. Taxes and Tax Incentives under Special Laws ....................................................16 Mandatory and directory provisions of tax laws ..................................................... 47
XIII. Essential Characteristics and Attributes of Taxes ......................................16
Authority of the Secretary of Finance to proMulgate rules and regulations .......... 47
XIV. Classification of Taxes .............................................................................16
Nature and power to make regulations .................................................................48
As to subject matter or object ................................................................................. 17 Necessity and function of regulations .................................................................... 48
As to who bears the Burden ....................................................................................17 Requisites for validity and effectivity of regulations ............................................... 48
As to determinate of amount.................................................................................. 17 Force and effect of regulations................................................................................ 48
As to purpose.......................................................................................................... 17 Administrative rulings and opinions .....................................................................48
As to the scope or authority imposing the tax......................................................... 17 Administrative Rulings ........................................................................................... 49
As to graduate or rate.............................................................................................. 17 Administrative interpretation and the courts..........................................................49
Power of the Secretary of Finance to Revoke the Rulings of his predecessor ......... 49
XV. Tax Distinguished from other Impositions ................................................17
Non-retroactivity of repeal of regulationS or rulings, and its exceptions ............... 49
1) License or Permit Fee.........................................................................................17
2) Toll Fee ...............................................................................................................18 Decisions of the Supreme Court and the Court of Tax Appeals .............................. 49
3) Compromise Penalty .........................................................................................18 XXII. Sources of Tax Laws ...............................................................................50

4) Special Assessment ........................................................................................... 18 1. Constitution ........................................................................................................ 50

5) Debt ...................................................................................................................18 2. Legislative/Statues (RA, PD, EO) .........................................................................50
6) Subsidy.............................................................................................................. 18 3. Administrative rules and regulations, rulings or opinions of tax officials .......... 50
7) Revenue ............................................................................................................19 4. Judicial Decisions ............................................................................................... 50
8) Internal Revenue ...............................................................................................19 5. Tax treaties or agreements .................................................................................. 50

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Income tax
I. Definition of Income Tax .............................................................................51

II. Nature of Income Tax .................................................................................51

III. Purposes of Income Tax ............................................................................51

V. Brief Historical background Of the Philippine Income Tax ..........................51

V. Sources of Income tax Law .........................................................................52

VI. Definition of Terms ...................................................................................52

Madrigal vs Rafferty
VII. General Principles of Income Taxation in the Philippine System ...............53

VIII. System of Income Taxation .....................................................................54

IX. Kinds of Income Tax .................................................................................55

X. Features of our present income taxation ....................................................55

Comprehensive Tax Situs

1. Basic Features of Individual Income Taxation....................................................56
2. Basic Features of Corporate Income Taxation ...................................................57
3. Criteria Used — comprehensive system of imposing income tax .....................57
XI. Sources of Income ....................................................................................57

XII. Criteria to Determine if Income is Taxable ................................................57

XIII. Kinds of Taxable Income or Gain .............................................................60

1. Capital Gains ....................................................................................................60

2. Ordinary gains ..................................................................................................61
XIV. Gross Income .........................................................................................62

1. Inclusions - Section 32A ...................................................................................62

2. Exclusions - Section 32B ....................................................................................66
XV. Situs of Income (Section 42) ....................................................................66

XVI. Exclusions From Gross Income ................................................................67

1. Proceeds of Life Insurance Policy ......................................................................67

2. Amount Received as Return of Premium ......................................................... 68
3. Gifts, Bequests, Devises .....................................................................................69
4. Compensation for injuries or sickness ..............................................................69
5. Income Exempt under treaty .............................................................................70
6. Retirement benefits, Separation pay, Pensions, Gratuities ...............................70
7. Miscellaneous Items ........................................................................................72
XVII. Allowable Deductions ...........................................................................75

1. Deduction vs. Exemption ..................................................................................75

2. Deduction vs. Exclusion ....................................................................................75
3. Basic principles governing deductions ............................................................75
4. Kinds of allowable deductions .........................................................................76

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INTRODUCTION TO TAXATION We also had what we call as the bandala. It is an annual forced
sale and requisitioning of goods such as rice. Custom duties
and income tax were also collected.
I. HISTORY OF TAXATION In our case the tribute/buwis/dugyot during that Spanish
period basically can still be paid in kind and in cash. It can be
EGYPT
paid using chicken, goose, wool blanket, cotton, rice or any
During the various reins of the Egyptian Pharaohs tax collectors other products depending of on the region.
were known as scribes. During one period the scribes
imposed a tax on cooking oil. To insure that citizens were not
avoiding the cooking oil tax scribes would audit households to We also had what we call as the bandala. It is an annual forced
insure that appropriate amounts of cooking oil were sale and requisitioning of goods such as rice, customs duties
consumed and that citizens were not using leavings generated and income tax were also collected. During the Spanish
by other cooking processes as a substitute for the taxed oil. period, the collecting of taxes was specific in a particular area
nga rebellious to the Spaniard. Basil(wine made with rice)
It started in a place back taxation in Egypt, in Ancient Egypt – Revolt, the source is the bandala. People in there were already
where tax collectors were known as scribes and even impost making the Basil, when the Spaniards knew about it, they
taxes on cooking oil. Because it was even said that during this wanted to centralized everything daw they implemented the
period this people even make audit if people are using the bandala. What they did was there is this forced sale of the raw
cooking oil na girasyon ug gihatag sa ilaha. So that’s the base materials for the making of the Basil to the government in the
form of tax/ taxation. North Luzon. Then the North Luzon government gisugo nasad
nila balik ang mga namaligya to it process to basil and then
GREECE they will have to resend the basil to the same people who sold
to them the raw materials at a much higher price.
In times of war the Athenians imposed a tax referred to
aseisphora. No one was exempt from the tax which was used
to pay for special wartime expenditures. The Greeks are one of Cedula Personal (community tax) — everyone over 18 were
the few societies that were able to rescind the tax once the required to pay for personal identification. The local
emergency was over. When additional resources were gained gobernadorcillos were responsible for collection of the tribute.
by the war effort the resources were used to refund the tax. Under the cedilla system taxpayers were individually
In this also, taxation/tax is referred to as aseisphora which is responsible to Spanish authorities for the payment of the tax,
and were subject to summary arrest for failure to show.
used to pay for special war time expenditure. Different ang
rates because during this time they engage in different wars so
the tax, if they engage in war they will have to collect the tax, if POLO Y SERVICIO — payment of falla (sum of money) for
they have a loot in a while then the loot will also be used, iuli exemption
ang gi.collect the tax to their citizens. So when additional
Everyone over 18 yrs., but not more than 60 yrs. old, were
resources were gained by the war, the resources were used to required to pay for personal identification. Tax payers were
refund the taxes to the people so sila ang nakauna sa concept
responsible for Spanish authorities for payment for the tax. If
of tax refund/credit/carry-over. you cannot present the cedula receipt, the authorities can
immediately arrest you.
ROMAN EMPIRE Play a very important part in the Philippine history involving our
The earliest taxes in Rome were customs duties on imports and hero Andres Bonifacio in a particular event—Pugad Lawin,
exports called portoria. where the Filipinos tore their cedula as a sign that they are not
anymore adhering to the policies of the Spaniads.
In Roman Empire, they usually use the taxation- they applied it
Still existing until up to now, community tax certificate is still
in collecting for customs duties on their imports and exports.
called cedula. Technically it is not anymore the same cedula
They call it the portoria. What is the good thing in this Roman that was implemented during the Spanish period.
Empire is sila nakauna sa what you call Tax Haven, in every area
there is a tax but for this particular area there is no tax. So what
they did is that there was this specific canal where there will be CEDULA
no taxes. Why? So that they can use it during war para dali ang - during spanish colonial times
pagsulod ug gawas sa resources.
- issued to all indios between 18-60 upon the payee t of
residence tax
Great Britain - abolished during the American regime
- The first tax assessed in England was during the occupation - on 1/1/1940, CA No, 465 took effect mandating the payment
by the Roman Empire. of RESIDENCE TAX proof of payment is the residence tax
- Legend of Lady Godiva: Lady Godiva was an Anglo-Saxon certificate.
woman who lived in England during the 11th century. - Local gov’t code of 1991 renamed it to COMMUNITY TAX
According to legend, Lady Godiva's husband Leofric, Earl of and COMMUNITY TAX CERTIFICATION with amendments
Mercia, promised to reduce the high taxes he levied on the
residents of Coventry when she agreed to ride naked Forced labor; explains why in the Philippines we have so many
through the streets of the town. churches; all male are required at least 40-days/
15days(reduced) of work in one year for a ration of rice only. To
In Great Britain, the first tax was during the occupation of the be exempted from work, payment of falla must be made.
Spanish Empire so, basically it the Roman Empire who brings Falla — sum of money for exemption from polo y servicio.
the tax to Great Britain. The tax in the United States was
brought by the English. The legend of Lady Godiva, Lady
Godiva is the wife of an Earl or Duke in an area in Great Britain
(you will have this area, manage this area and collect taxes in
this area). The earl/duke imposes very high taxes. Now Lady
II. DEFINITION OF TAXATION
Godiva is for the people man daw, so nihangyo si Lady Godiva
to her husband na i.demise ang tax. So and condition sa iyang TAXATION VIS-À-VIS TAX

husband was he will minimize the tax if Lady Godiva will roam
the town naked riding a horse. Lady Godiva roamed around - The inherent power of the sovereign, exercised through the
the town naked riding a horse, the tax then was minimized. legislature, to impose burdens upon subjects and objects
within its jurisdiction for the purpose of raising revenues to
carry out the legitimate objects of government.
Philippines - The process or means by which the sovereign, through its
To support the Spanish Era colony, several races and law-making body, raises income to defray the necessary
monopolies were established. The buwis (tribute), which expenses of government. It is a method of apportioning the
should be paid in kind and in cash. It can be paid using cost of government among those who, in some measure, are
chicken, goose, wool blanket, cotton, rice or any other privileged to enjoy its benefits and must therefore bear its
products depending of on the region. burdens.

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Definition of Taxation TAXES — the enforced proportional contributions from persons

and property levied by the law-making body of the State by
Power by which the sovereign raises revenue to defray the
necessary expenses of the government from among those virtue of its sovereignty for the support of the government
and all public needs.
who in some measure are privileged to enjoy its benefit and
must bear its burden.
Take note on ENFORCED. Can you stop paying tax? No. So
Process of collecting the tax. long as you belong to that classification which is being
subjected to tax, you are liable to pay tax.
If primary purpose is revenue raising — tax
If primary purpose is for regulation/welfare — police power Proportional — it means that you will take into consideration the
persons ability to pay. The more you earn, the more tax you
pay. Progressive.
Taxation is a destructive power which interferes with the
personal and property rights of the people and takes from
them a proportion their property for the support of the TN: Not all the time we apply the ability to pay because we
government. (Paseo Realty Corp vs CA) have indirect taxes. Fixed percentage tax, like VAT. These
indirect tax has a regressive effect to the person. Like if you
Destructive power area billionare, the 12% will not matter for you, unlike if you
only have Php 100, the Php 12 is material.
Marshall Dictum: Taxation is the power to destroy.
Holmes Dictum: The power to tax is not the power to destroy Ability to pay is applicable in income taxation. Schedular tax
so long as this court sits. rate — range of salaries and applicable rates. The higher your
wage, the higher the range and tax rate.
Marshall and Holmes are justice associates of the US.
Our tax code is heavily copied and based with the US tax code. Progressive — tax rate of 5% to 32%; tax rate increases as the
Not with the spanish or other colonizers but the US. tax base increase
Digressive — stagnant at 32%; tax rate increases as the tax base
Reconciliation of the Marshall and Holmes Dicta decreases
The power to tax, though unlimited, must not be exercised in an Regressive — starts as a progressive rate
arbitrary manner. Taxpayers may seek redress before the courts
in case of illegal imposition of taxes and irregularities Public Needs — case to case basis, for public purpose.

What is the purpose?

Is not to grant the power but to limit the power. May the legislative body enact laws to raise revenue despite the
absence of constitutional provision?

Purpose of power to Taxation: Yes. Because it is an inherent power of the state.

1)Primary Purpose: Raise Revenue Most of the provisions in the constitution are limitations. It did
not grant the government to collect tax but limit.
2)Secondary Purpose: Sumptuary purpose of taxation
The constitution grants power to collect tax to the local
- redistribution of social irregularity, repricing, unfair government. LGU does not have inherent power.
competition, regulation, general welfare

If one of the real and substantial reason why the law is passed is May the Sangguniang Panlalawigan of Cebu enact law
for revenue — exercise the power of TAXATION imposing a tax not provided under the local government or
For valid or invalid, look at the limitations. If one of those other laws?
limitations did not meet, it is a ground to nullify. If that particular tax is not in the Local Government Code, the
LGU does not have power because it is not inherent. It is only
If exercise of POLICE POWER, primary purpose should be the national/congress which has the inherent power. LGU must
regulation or social welfare. For the benefit of persons with be delegated.
disability or senior citizens.
If the local government of cebu imposed amusement tax on
Power of Taxation is also used to prevent unfair competition. local swimming pools, not provided for in the local govt code or
other laws. Can it validly enact law imposing such tax?
No. they cannot. Although it is an inherent power, for local
How can the power of taxation destroy? government units, there must be a delegation. Cebu city is not
Most applicable to activities which are unnecessary or not sovereign thus there is no inherent power of taxation. Thus it
considered necessity. cannot impose any tax only those delegated to it by the
☞ Example: Sintaxes — which has negative impact on health; legislative branch of the government.
used to discourage immoral activities *Only the legislative branch (Congress) have an unlimited
Main objective is to raise revenue and not destroy. power to exercise the power to tax

Does the law limit or grant the power to tax? The power to tax “is an attribute of sovereignty” and as such,
It is not to grant the power but to limit the power. inheres in the State. Such, however, is not true for provinces,
cities, municipalities and barangays as they are NOT the
Is it a requisite that it should be in the constitution? sovereign; rather there are mere "territorial and political
No. Inherent subdivisions of the Republic of the Philippines.”

What is an example used for regulation? Can an LGU validly enact a law imposing amusement tax on
Sin taxes — taxes pertaining to non-essential goods or local swimming pools not provided in the LGC or other laws?
commodities like alcohol, cigarets, etc. No. Cebu City is not sovereign thus there is no inherent power
Another example is Income Tax. of taxation. Thus, it can impose only those taxes delegated to it
by the legislative branch of the national government. Only
Congress have an unlimited power to exercise the power to
What is the prime distinction between taxation and tax? tax.
Taxes: Enforced proportional contributions from persons and
property levied by the law-making body of the State by virtue May a legislative body enact laws to raise revenue in the
of its sovereignty for the support of the government and all absence of a constitutional provision granting such body the
public needs. power to tax?

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Yes. Taxation is inherent in the State, being an attribute of RTC rendered a Decision assailed Decision dismissing the Petition
sovereignty. Thus, the legislature can enact laws to raise for Declaratory Relief and Injunction for lack of merit.
revenues even without the grant of said power in the Procedurally, the RTC ruled that Declaratory Relief was a proper
Constitution. It must be noted that Constitutional provisions remedy. However, it gave credence to the Province of Benguet's
relating to taxation do not operate as grants of power to the assertion that resorts, swimming pools, bath houses, hot springs,
and tourist spots are encompassed by the phrase ‘other places of
Government, but merely constitute as limitations upon a power amusement’ in Section 140 of the LGC.
which would otherwise be practically without limit. ISSUE: W/N provinces are authorized to impose amusement taxes
on admission fees to resorts, swimming pools, bath houses, hot
springs, and tourist spots for being "amusement places" under the
Southern Luzon Drug Corp. v. DSWD, et. al. LGC.
G.R. No. 199669, April 25, 2017 RULING: NO.
Amusement taxes are percentage taxes. However, provinces are not
barred from levying amusement taxes even if amusement taxes are
TAX REFUNDS a form of percentage taxes. The levying of percentage taxes is
prohibited "except as otherwise provided" by the LGC. Section 140
Paseo Realty and Development Corporation v. CA provides such exception.
G.R. No. 119286, October 13, 2004. Section 140 expressly allows for the imposition by provinces of
FACTS : Paseo Realty and Development Corporation, a domestic amusement taxes on "the proprietors, lessees, or operators of
corporation engaged in the lease of two (2) parcels of land at Paseo theaters, cinemas, concert halls, circuses, boxing stadia, and other
de Roxas in Makati City, filed its ITR for the calendar year 1989. places of amusement."
Thereafter, Paseo Realty filed with CIR a claim for the refund of However, resorts, swimming pools, bath houses, hot springs, and
excess creditable withholding and income taxes for the years 1989 tourist spots are not among those places expressly mentioned by
and 1990. Section 140 of the LGC as being subject to amusement taxes. Thus,
Alleging that the prescriptive period for refunds for 1989 would soon the determination of whether amusement taxes may be levied on
expire and that it was necessary to interrupt the prescriptive period, admissions to these places hinges on whether the phrase ‘other
Paseo Realty filed with the CTA a petition for review praying for places of amusement’ encompasses resorts, swimming pools, bath
the refund. houses, hot springs, and tourist spots.
The CTA ordered the refund of the alleged excess creditable Under the principle of ejusdem generis, "where a general word or
withholding taxes paid. CIR moved for reconsideration. phrase follows an enumeration of particular and specific words of
CTA reversed and dismissed the petition for review. Paseo Realty the same class or where the latter follow the former, the general
then filed a petition for review with the CA. word or phrase is to be construed to include, or to be restricted to
In resolving the twin issues of whether Paseo Realty is entitled to a persons, things or cases akin to, resembling, or of the same kind or
refund representing creditable taxes withheld in 1989 and whether class as those specifically mentioned."
Paseo Realty applied such creditable taxes withheld to its 1990 Section 131 (c) of the LGC already provides a clear definition:
income tax liability, the CA held that petitioner is not entitled to "Amusement Places" include theaters, cinemas, concert halls,
a refund because it had already elected to apply the total circuses and other places of amusement where one seeks admission
amount which includes the refund claimed, against its income tax to entertain oneself by seeing or viewing the show or
liability for 1990. The CA denied Paseo Realty’s MR. performances.
ISSUE : Whether the alleged excess taxes paid by Paseo Realty in As defined in The New Oxford American Dictionary, ‘show’ means
1989 should be refunded or credited against its tax liabilities for "a spectacle or display of something, typically an impressive one";
1990? while ‘performance’ means "an act of staging or presenting a play, a
HELD : NO. Paseo Realty’s failure to present sufficient evidence to concert, or other form of entertainment." As such, the ordinary
prove its claim for refund is fatal to its cause. It is axiomatic that a definitions of the words ‘show’ and ‘performance’ denote not only
claimant has the burden of proof to establish the factual basis of his visual engagement (i.e., the seeing or viewing of things) but also
or her claim for tax credit or refund. active doing (e.g., displaying, staging or presenting) such that
actions are manifested to, and (correspondingly) perceived by an
Tax refunds, like tax exemptions, are construed strictly against the audience.
taxpayer. In this case, Paseo Realty combined its 1988 and 1989 tax
credits and applied its 1990 tax due against the total, and not against Considering these, it is clear that resorts, swimming pools, bath
its creditable taxes for 1989. houses, hot springs and tourist spots cannot be considered venues
primarily "where one seeks admission to entertain oneself by seeing
The then Section 69 of the NIRC (now Section 76) provides that in or viewing the show or performances". While it is true that they
case the corporation is entitled to a refund of the excess estimated may be venues where people are visually engaged, they are not
quarterly income taxes paid, the refundable amount shown on its primarily venues for their proprietors or operators to actively
final adjustment return may be credited against the estimated display, stage or present shows and/or performances.
quarterly income tax liabilities for the taxable quarters of the
succeeding year. The carrying forward of any excess or overpaid
income tax for a given taxable year is limited to the succeeding
taxable year only. The confusion as to Paseo Realty’s entitlement to
a refund could altogether have been avoided had it presented its tax
III. NATURE OF TAXATION POWER
return for 1990.
Nature of Taxation Power (ILS)
Such return would have shown whether petitioner actually applied
its 1989 tax credit, which includes the creditable taxes withheld for 1. Inherent power of sovereignty;
1989 subject of the claim for refund, against its 1990 tax liability as 2. Essentially a Legislative function;
it had elected in its 1989 return, or at least, whether petitioner’s tax
credit of was applied to its approved refunds as it claims. The return 3. Subject to constitutional and inherent limitations.
would also have shown whether there remained an excess.
1. INHERENT POWER OF SOVEREIGNTY;

Pelizloy Realty Corporation v, Province of Benguet

G.R. No. 183137, April 10, 2013. Existence commences concurrently with the four elements of
FACTS: Petitioner Pelizloy Realty Corporation owns Palm Grove the state — people, territory, sovereignty and government
Resort in Tuba, Benguet, which has facilities like swimming pools,
a spa and function halls. From the moment a state is born, it automatically possess the
In 2005, the Provincial Board of Benguet approved its Revenue power to collect taxes from its inhabitants.
Code of 2005. Section 59, the tax ordinance levied a 10%
amusement tax on gross receipts from admissions to "resorts,
swimming pools, bath houses, hot springs and tourist spots." Only the national government exercises the inherent power of
Pelizloy's posits that amusement tax is an ultra vires act. Thus, it the taxation of the state. LGUs do not possess the inherent
filed an appeal/petition before the Secretary of Justice. Upon the power.
Secretary’s failure to decide on the appeal within sixty days,
Pelizloy filed a Petition for Declaratory Relief and Injunction • There must be an express constitutional provision granting
before the RTC. them the power to tax
Pelizloy argued that the imposition was in violation of the limitation • Valid delegation of tax power through the statute from the
on the taxing powers of local government units under Section 133 national legislature granting LGUs to exercise.
(i) of the Local Government Code, which provides that the exercise
of the taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of percentage or value-added NATURE OF TAXATION POWER
tax (VAT) on sales, barters or exchanges or similar transactions on
goods or services except as otherwise provided.
The Province of Benguet assailed the that the phrase ‘other places of 1. INHERENT PREROGATIVE OF SOVEREIGNTY
amusement’ in Section 140 (a) of the LGC encompasses resorts,
swimming pools, bath houses, hot springs, and tourist spots since
Article 131 (b) of the LGC defines "amusement" as "pleasurable Basis: Lifeblood Theory
diversion and entertainment synonymous to relaxation, avocation,
pastime, or fun."
How is this manifested?

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Manifestation: Question on the Constitutionality or Validity of a Tax Law. Go to

the regular courts.
1. Imposition even in the absence of constitutional grant;
Protest does not involve any tax liability but only on the
2. State can select the object and subject of taxation;
constitutionality.
3. No injunction in the collection of taxes as a general Rule.
RTC → CA → SC
— Exception: CTA
4. Could not be subject to set-off
Not only on tax law but also for revenue regulation.
— Exception: When both claims are due and demandable Revenue Regulation — on implementing the tax law
and fully liquidated (Domingo v. Garlitos)
5. Taxation is an unlimited and plenary power
4. COULD NOT BE SUBJECT TO SET-OFF

Taxation is not subject to set-off or off-set.

BASIS: LIFEBLOOD THEORY

Lifeblood Theory: Taxes are lifeblood of the government and ■General Rule: Taxation is not subject to set-off or off-set.
should be collected without hindrance. It is said that taxes are
what we pay for a civilized society, without taxes, the You cannot say that you will claim refund provided that I will not
government will be paralyzed for the lack of motive to operate. anymore pay for the tax.
Or in cases of Eminent Domain, you have a receivable from the
government. Then you also have a tax liability. You cannot
MANIFESTATIONS:
offset.

1. Non-Delegation of Power Cannot apply Doctrine of Equitable Recoupment.

2. State can select the object and subject of taxation; Doctrine of Equitable Recoupment — claim for refund barred
3. No injunction in the collection of taxes. by prescription may be allowed to offset unsettled tax
4. Could not be subject to set-off liabilities. This doctrine finds no application in the Philippines.
5. Taxation is an unlimited and plenary power - Because taxes cant be compensated and such has already
prescribed.

1. IMPOSITION EVEN IN THE ABSENCE OF — EXCEPTION:

CONSTITUTIONAL GRANT;

- When both the claim of the Government for taxes and the
Tax can be imposed even absence of constitutional provision. claim of the taxpayer for the services rendered has
Inherent power of the government become overdue and demandable as well as fully
liquidated, compensation therefore, takes place by
operation of law.
2. STATE CAN SELECT THE OBJECT AND SUBJECT OF - Carlitos Case
TAXATION;
When the tax has already been
1) Due and demandable
3. NO INJUNCTION IN THE COLLECTION OF TAXES.
2) Fully liquidated
— Exception: CTA
What is set off?
General Rule: No injunctions when it comes to collecting of You have a receivable from the government and the
taxes. It should not be enjoined, it should not be stopped. government has a receivable from you.
- If you question the BIR, pending the resolution, the collection
will not stop. When do you have a receivable from the government?
Like for eminent domain or when payment for just
— Exception: You can issue injunction. compensation.
2 Requisites for CTA to issue injunction
1) If the taxpayer is able to show that the collection of tax Domingo vs Cardigon: although general rule in taxation there is
may jeopardize the government or it may jeopardize no off-setting, but when it is due and demandable and has
the operation been fully liquidated, there can be offsetting.
- Only the CTA can issue injunction.
2) If the tax payer is willing to put up BOND which should Q: May taxes be the subject of set-off or compensation? Explain.
be at least equal to double the tax assessed A: No. Taxes cannot be the subject of set-off or compensation for the following
— Exception: Illegal method of assessment/collection reasons: (1) taxes are of distinct kind, essence and nature, and these
by the BIR. impositions cannot be classed in merely the same category as ordinary
— Illegal because it is beyond the prescriptive period obligations; (2) the applicable laws and principles governing each are peculiar,
and BIR has no authority anymore to issue the not necessarily common, to each; and (3) public policy is better subserved if
assessment. Prescriptive period of BIR — no authority. the integrity
Only 3 years from filing.

What’s the purpose of the bond? Q: Can an assessment for a local tax be the subject of set-off or compensations
Assure collection on the part of the government especially against a final judgment for a sum of money obtained by the taxpayer against
when the taxpayer will lose its appeal. the local government that matade the assessment? Explain.
A: No. Taxes and debts are of different nature and character; hence, no set-off or
Hierarchy of Courts/Jurisdiction regarding protests. compensation between these two different classes of obligations is allowed.
Go to the CTA. The taxes assessed are the obligation of the taxpayer arising from law, while
the money judgment against the government is an oblgation arising from
When it comes to questions on assessment or PROTESTS on
contract, whether express or implied. Inasmuch as taxes are not debts, it
the assessment/computation on Tax Liability.
follows that the two obligations are not susceptible to set-off or legal
Follow the exhaustion of administrative remedies. compensation. It is only when the local tax assessment and final judgment are
both overdue, demandable, as well as fully liquidated may set-off or
First, go to the BIR. Assessment/Collection compensation be allowed.
If he loses, go to the CTA.
From CTA, go to the SC.
BIR → CTA → SC 5. TAXATION IS AN UNLIMITED AND PLENARY POWER

General rule: the power to tax is plenary and unlimited in its

range, acknowledging in its very nature no limits, so that the
principal check against its abuse is to be found only in the

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responsibility of the legislature (which imposes the tax) to its Tax Payable
constituency who are to pay it. Nevertheless, it is circumscribed Less: Tax Credits (— 1)
by constitutional limitations. Tax Due & Payable

As regards to the scope of the 3 powers of the state, the most 1 peso tax credit deduction = 1 peso
powerful is TAXATION.
Problem came when congress: Instead of tax credit, it became
tax deduction.
When it comes to superiority of power in the constitution, it is
the POLICE POWER.
MMP Contention: If tax deduction, it is not a peso for peso
discount. But if tax credit, it is a peso for peso. Alkansi sila if it
Marshall Dictum & Holmes Dictum. will be tax deduction.

What does it mean? IT WOULD DEPEND ON THE POWER USED.

Marshall Dictum: Power to tax is the power to destroy SC said: it is not an exercise of an eminent domain
Holmes Dictum. Power to tax is not the power to destroy while For it to be eminent domain, it has to be taking of private
this court sits. property to be compensated.
Here, there is no taking of private property because it is
Reconcile: Exercise it within its limits or not arbitrary DISCOUNT or deduction.
Concurring and Dissenting Opinion of Justice Leonen in Manila
Memorial Park vs Secretary of DSWD and DOF, GR. No. Is this an exercise of power of taxation?
175356, December 3, 2013 SC answer: PRIMARY PURPOSE — to raise revenue
This case is not for revenue raising because it also reduces the
The power to tax is “a principal attribute of sovereignty.” State’s revenue.
Such inherent power of the State anchors on its “social contract
with its citizen [which] obliges it to promote public interest and This is used on the police power of the state.
common good.” Another point: Remedy of the alleged loss. The law did not
prohibit the pricing or does not dictate the pricing of the
The scope of the legislative power to tax necessarily includes business. You can adjust the price if you know there is a
not only the power to determine the rate of tax but the deduction of price.
method of its collection as well. Power of taxation is plenary, unlimited and supreme.

In fact, the state has the power “to make reasonable…

presumption of validity” Bar Questions
Q: It is an attribute of sovereignty
This means that the power to tax also allows Congress to A: The power of taxation is an essential and inherent attribute of sovereignity,
determine matters as whether tax rates will be applied… belonging as a matter of right to every independent government, without
power has its limits being expressly conferred by the people (Pepsi-Cola Bottling Co v Mun of
Tanauan, Leyte)

As a general rule, the power to tax is plenary and unlimited in

its range, acknowledging in its very nature no limits, so that the
principal check against its abuse is to be found only in the Q: Why is the power to tax considered inherent in a sovereign State?
responsibility of the legislature (which imposes the tax) to its A: It is considered inherent in a sovereign State because it is a necessary
constituency who are to pay it. Nevertheless, it is circumscribed attribute of sovereignty. Without this power, no sovereign State can exist nor
by constitutional limitations. Concurring and Dissenting endure. The power to tax proceeds upon the theory that the existence of a
Opinion of Justice Leonen (Manila Memorial Park) government is a necessity. The power to tax is an essential and inherent
attribute of sovereignty, belonging as a matter of right to every independent
State. No sovereign State can continue to exist without the means to pay its
Manila Memorial Park Inc. v. Sec. of DSWD and DOF expenses, and for those means, it has the right to compel all citizens and
G.R. No. 175356, December 3, 2013 property within its limits to contribute; hence, the emergence of power to tax.
FACTS: Upon the enactment of RA 9257 amending Sec. 4 of RA
7432 otherwise known as Expanded Senior Citizen Act, the DSWD
and DOF issued IRRs allowing business establishment to claim
20% discount given to senior citizens as a tax deduction. Petitioner 2. ESSENTIALLY A LEGISLATIVE FUNCTION;

questions said tax treatment as it contravenes to the former Sec. 4

(a) of RA 7432 which allows 20% discount given to senior citizens • Law-making body of the government and its political
as a tax credit. It further claims that allowing the 20% tax deduction subdivisions exercise the power of taxation
scheme would violate Sec. 9 (1) Art. III of the Constitution which
provides that “private property shall not be taken for public use
without just compensation. 2. LEGISLATIVE IN CHARACTER
ISSUE: Whether or not the 20% discount to senior citizens that may
be claimed as a tax deduction by private establishments, valid and Basis: Taxes are a grant of the people who are taxed, and the
constitutional. grant must be made by the immediate representatives of the
HELD: YES. The 20% senior citizen discount is an exercise of people. And where the people have laid the power where it
public power where just compensation is not warranted contrary to must remain and be exercised. (Cooley)
the claim that it is an exercise of eminent domain which would
render it unconstitutional because it is not a peso to peso Legislative = imposition of the tax or the levy
reimbursement of the 20% discount given to senior citizens.
The 20% discount is a regulation affecting the ability of private What: Purpose, kind
establishments to price their products and services relative to a
special class of individuals, senior citizens, for which the Who: ascertain who will be the taxpayer
Constitution affords preferential concern. How much: covers how much tax rate and the tax base.

Question on validity of 20% discount of the senior citizens Tax base — where you will multiply the tax rate (gross income or
Discount is tax credit net income

What is tax credit? BASIS:

Gross Income Taxes are a grant of the people who are taxed and the grant
Less: Expenses/Deductions must be made by the immediate rep of the people.
Net/Taxable Income
x Tax Rate (30% for corporation)

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It should be our representatives who must levy and impose the • Taxation is exercised to raise renege for the existence of
tax. All revenue appropriations must originate in the house of government to serve the people.
representatives. • Without taxation, the other inherent powers would be
paralyzed.
■ General Rule: Cannot be delegated
— EXCEPTION:
Q: Describe the power of taxation. May a legislative body enact laws to raise
1. Local taxes by Local Government Units thru the Local revenues in the absence of a constitutional provision granting said body the
government code (Actually the constitution provides power to tax? Explain.
that taxation must be delegated to LGUs but the
congress merely set out the limitations) A: The power of taxation is inherent in the State, being an attribute of
sovereignty. As an incident of sovereignty, the power to tax has been described
2. Flexible tariff clause (Revenue bill, tariff, appropriations) as unlimited in its range, acknowledging in its very nature no limits, so that
3. Administrative regulation (assessment and collection) security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency who are to pay it.
Legislature referring to congress: lower house and the senate
Revenue bill, tariff, appropriations — must be instituted or
originate from the House of Representative Scope: To determine —
But doesn't mean the Senate cannot make changes. 1)Purpose(s)
2)Subjects and objects of taxation (within its jurisdiction)
As a rule, “The power to tax is exclusive vested in the legislature 3)Amount and rate of tax
and it cannot be delegated as a whole.” 4)Kind of tax to be collected
5)Apportionment of the tax
What is the basis for the delegation of power to the LGU?
6)Manner and mode of enforcement and collection
Sec. 5, Art X, 1987 Constitution
7)Situs of taxation
8)Grant tax exemption or condonation
How about taxation by the LGUs? Does it not contravene his 9)Provision of administrative and judicial remedies that may be
nature of taxation?
availed by the taxpayers and government
No. Congress merely sets limits.

In LGU, who sets the tax? SCOPE: TO DETERMINE—

Sanggunian/Legislative division of the LGU 1)Purpose(s)

Tax must be for a public purpose. The legislative body’s
determination however on the question of what is a public
Through what?
purpose is not conclusive. The courts can inquire into whether
An ordinance. the purpose is really public or private.

Other exceptions other than the LGU? Judicial action is limited only to a review where it involves:
Power delegated to the president
(a) the determination of the validity of the tax in relation to
constitutional precepts or provisions; or
What is the power of tax delegated to the president? (b) the determination in an appropriate case of the
Tariff, Import and export, Tonnage and wharfage dues application of a tax law

What are these laws called? 2)Subjects and objects of taxation (within its jurisdiction)
Flexible Tariff Laws Refer to the coverage and the kind or nature of the tax.
They may be persons, property, businesses, transactions, rights
What else? or privileges.
Administrative regulation of taxes A state is free to select the subject of taxation and it has been
repeatedly held that the inequalities which result from the
What department? singling out of one particular class for taxation or exemption
Department of Finance, BIR infringe no constitutional limitation so long as such is
reasonable and not arbitrary.

Non-delegation of Legislative Power to Tax

3)Amount and rate of tax
Power to make tax laws cannot be delegated to other branches
of the government. Cannot be exercised by the executive or As a general rule, the legislature may levy a tax of any amount
judicial branch of the government. or rate it sees fit.
When the power is delegated to the LGU, only the legislative If the taxes are oppressive or unjust, the only remedy is the
branch of the LGU can exercise the power. If delegated to the ballot box and the election of new representatives.
President, only limited to administrative discretion subject to However, the tax must be reasonable, one that would not go
valid standards. against the deprivation of property without due process of law.

Tax Delegation vs Tax Administration 4)Kind of tax to be collected

What may not be delegated is the power to make tax laws to a It can be based on income, sales, import or export, etc.
non-legislative body. If powers delegated are ministerial and
advisory, they shall be allowed since they are not legislative but 5)Apportionment of the tax
only administrative in nature. Refers to the determination of which portion of the society gets
If what is delegated is the tax legislation, the delegation is to be benefited by the tax. It could either of general or limited
invalid, but if what is involved is only tax administration, the application.
non-delegability rule is not violated.
6)Manner and mode of enforcement and collection
Importance of Taxation These refer to the administration of the tax or the
- Exists inseparably with the State implementation of tax laws. The legislature possesses the sole
- Essential for the existence of the government power to prescribe the mode or method by which the tax shall
- Primary source of government revenue be collected, and to designate the officers through whom its
will shall be enforced.
Congress should provide sufficient standards on how taxes is
• Power to tax may be used as an implement of police power
supposed to be collected.
in order to promote the general welfare of the people.

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☞ Ex: Withholding tax, creditable, etc. 3)Territorial

4)International Comity
7)Situs of taxation 5)Exemption of government
Refers to the place of taxation. In determining the same, the
nature of the taxes must be considered.
IV. BASIS OF TAXATION (NECESSITY THEORY)
☞ Example:
❖ Community tax — residence of the taxpayer NECESSITY THEORY

❖ Real property tax — location of the property

1. Necessity Theory:
The existence of a government is a necessity therefore there is a
8)Grant tax exemption or condonation need to levy and impose taxes for the countenance of the
The power to tax carries with it the power to grant exemption state, to defray the expenses.
therefrom. Exemptions are interpreted strictly against the
i. Necessity to serve the people
taxpayer and liberally in favor of the government.
ii. Necessity to protect the people
9)Provision of administrative and judicial remedies that may be • Taxation is the power emanating from necessity to preserve
availed by the taxpayers and government the Stat’s sovereignty.
✏ Q: Can the mayor impose tax? • Taxation is the “lifeblood” or the “bread and butter” of the
❖ A: No. only the sangunian. In short in so far as local government and every citizen must pay his taxes.
government units are concerned, imposition of taxes are
still made by the legislative branch — sangunians. 1. NECESSITY TO SERVE THE PEOPLE

3. SUBJECT TO CONSTITUTIONAL AND INHERENT

LIMITATIONS
2. NECESSITY TO PROTECT THE PEOPLE

1) Public Purpose
2) Inherently Legislative V. IMPORTANCE OF TAXES - LIFEBLOOD
3) Territorial/Jurisdiction DOCTRINE
4) International Comity
5) Exemption of government or instrumentality Lifeblood Theory — Taxes are the lifeblood of the government
and their prompt and certain availability is an imperious need.
This implies that:
1) PUBLIC PURPOSE 1) The BIR is justified in availing of the most expedient remedy
in the collection of the tax
2) INHERENTLY LEGISLATIVE 2) The BIR is not bound by the mistake, errors, or omissions of
its agents (this, the Doctrine of Estoppel does not apply to
the collection of taxes)
General Rule: it should be congress

— EXCEPTION: 
 3) No court other than the CTA may enjoin the collection of
1) Local Gov’t Code 
 taxes.
2) Flexible Tariff Clause

3) Administrative Regulation (assessment and collection)
VI. THEORIES OF TAXATION
3) TERRITORIAL/JURISDICTION 1. Necessity Theory
- Not limited to geographical or physical 2. Lifeblood Theory
a. Geographical 3. Benefits-Protection Theory/Symbiotic Relationship
b. Nexus or bond between a government/taxing authority
and the taxpayer.
Bar Question:
Q: Discuss the meaning and the implications of the following statement: “Taxes
Consulate — Trading relations of PH to that country are the lifeblood of government and their prompt and certain availability is an
Embassy — There is extension of PH country/government imperious need”
A: The phrase “taxes are the lifeblood of government, etc.” expresses the
It’s not under all instances that is subject to tax. underlying basis of taxation which is governmental necessity, for indeed,
There can be exemptions which is inside the territory without taxation, a government can neither exist nor endure. Taxation is the
indispensable and inevitable price for civilized society; without taxes, the
government would be paralyzed. This phrase has been used to justify the
4) INTERNATIONAL COMITY validity of the laws providing for summary remedies in the collection of taxes.
In Valley Trading Co. v CFI, when the Supreme Court ruled that the damages
that may be caused to the taxpayer by being made to pay the taxes cannot be
5) EXEMPTION OF GOVERNMENT OR INSTRUMENTALITY said to be a irreparable as it would be against the government’s inability to
Governmental Function: collect taxes.
Proprietary Function:

Instrumentality of the national government. 1. LIFEBLOOD THEORY

GOCC — no stance or capital stance that were divided into

shares, and that it could not also be considered as not stock Discussion about lifeblood theory above. (Click here to go
corporation, because it had no members and more than that, there)
part of its income is distributed to the national government
2. Lifeblood Theory
What is the reason why the government is exempted?
In short it wont make sense and not administratively feasible
Taxes are lifeblood of the government and should be collected
and does not add any value to the government.
without hindrance. It is said that taxes are what we pay for a
civilized society, without taxes, the government will be
MEMORIZE THE 5 INHERENT LIMITATIONS!! paralyzed for the lack of motive to operate.
1)Pubic Purpose
2)Inherently Legislative

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But even if we concede as to the indispensability of taxation, it

is a requirement in all democratic regime that it be exercised • The government collects taxes from the subjects of taxation
reasonably and in accordance with the prescribed procedure. in order that it may be able to perform its functions and
(Prescriptive Periods to assess/collect) provide services to them.
• Right to tax income emanates from its being a silent partner
in the production of income through means of providing
• Taxes are the lifeblood of the government and their prompt protection, proper business climate, and peace and order to
and certain availability is an imperious need. the taxpayers in the making of earnings.
• Taxes are the lifeblood of the nation, without revenue raised
• The citizen pays taxes to support the government in order
from taxation; the government will not survive, resulting in that he may continuously be sustained with security and
detriment to society. Without taxes, the government would benefits of an organized society.
be paralyzed for lack of motive power to activate and
operate it. • Symbiotic relationship and partnership between the
taxing authority and the subject of taxation is enough to
justify the imposition of tax power.
2 requisites of the CTA:
1. If the taxpayer is able to show that the collection of tax may This theory is the basis of taxation and is founded on the
jeopardize the government or it may jeopardize the reciprocal duties of protection and support between the State
operation and its inhabitants.
2. IF the tax payer is willing to put up BOND which should be at
least equal to double the tax assessed
Qualifications of Benefit-Received Principle — intended for
the general welfare.
CIR v. Metro Star Superama Inc, a.It does not mean that only those who are able to pay tax can
G.R. No. 185371, December 8,1010 citing 
 enjoy the privileges and protection given to a citizen

CIR v. Algue, GR. No. L-18896, February 17, 1988 He cannot object or resist payment of taxes.
FACTS: In January 2001, a revenue officer was authorized to b.The government renders no special or commensurate benefit
examine the books of accounts of Metro Star Superama, Inc. In
April 2002, after the audit review, the revenue district officer issued to any particular property or person.

a formal assessment notice against Metro Star advising the latter The only benefit the taxpayer is entitled is that derived from
that it is liable to pay P292,874.16 in deficiency taxes. Metro Star his enjoyment of the privileges of living in an organized
assailed the issuance of the formal assessment notice as it averred society.
that due process was not observed when it was not issued a pre-
assessment notice. Nevertheless, the Commissioner of Internal
Revenue authorized the issuance of a Warrant of Distraint and/or
Levy against the properties of Metro Star. 1. SUPPORT BY THE TAXPAYERS

Metro Star then appealed to the Court of Tax Appeals (CTA Case
No. 7169). The CTA ruled in favor of Metro Star.
ISSUE: Whether or not due process was observed in the issuance of
2. PROTECTION AND BENEFITS BY THE GOVERNMENT

the formal assessment notice against Metro Star.

HELD: No. It is true that there is a presumption that the tax Atty. A: Mutual Benefits; There exist reciprocal duties of
assessment was duly issued. However, this presumption is protection and support between the state and its inhabitants.
disregarded if the taxpayer denies ever having received a tax
assessment from the Bureau of Internal Revenue. In such cases, it is TAKE NOTE: state and inhabitants, not citizens, because even if
incumbent upon the BIR to prove by competent evidence that such you’re an alien and an inhabitant here, you are still taxed. The
notice was indeed received by the addressee-taxpayer. The onus protection is in the form of security (either tangible/intangible
probandi was shifted to the BIR to prove by contrary evidence that aspects)
the Metro Star received the assessment in the due course of mail. In
the case at bar, the CIR merely alleged that Metro Star received the
pre-assessment notice in January 2002. The CIR could have simply
presented the registry receipt or the certification from the Southern Luzon Drug Corporation v. OSWD, et.
postmaster that it mailed the pre-assessment notice, but failed. G.R. Na 199669, April 25 2017
Neither did it offer any explanation on why it failed to comply with
the requirement of service of the pre-assessment notice. The
Supreme Court emphasized that the sending of a pre-assessment
notice is part of the due process requirement in the issuance of a SCOPE OF LEGISLATIVE TAXING POWER

deficiency tax assessment,” the absence of which renders nugatory

any assessment made by the tax authorities. a.Subjects of taxation — persons, property, rights, transactions,
Taxes are the lifeblood of the government and so should be collected occupations, etc.
without unnecessary hindrance. But even so, it is a requirement in b.Purposes of tax — public purpose, limited to the
all democratic regimes that it be exercised reasonably and in
accordance with the prescribed procedure. determination of the validity of the tax in relation to
constitutional precepts or provisions
c. Amount or rate of the tax — legislature is free to levy a tax
2. NECESSITY THEORY
on any amount
d.Situs of Taxation — exercised only on persons, properties
(Discussion above) and excises within the taxing power
The power to tax proceeds upon the theory that the existence e.Manner, means, and agencies of collection of the tax —
of a government is a necessity. No sovereign State can sole power to prescribe the mode which the tax shall be
continue to exist without the means to pay its expenses, and for collected and to designate officers
those means, it has the right to compel all citizens and property
within its limit to contribute.
VII. PURPOSE OF TAXATION
3. BENEFITS RECEIVED OR COMPENSATION THEORY
PURPOSE AND OBJECTIVE OF TAXATION
i. 4 R’s of Taxation
(same as below) A. Revenue
B. Redistribution
4. BENEFITS-RECEIVED THEORY/RECIPROCITY C. Re-pricing
THEORY/SYMBIOTIC THEORY (DOCTRINE OF D. Representation
SYMBIOTIC RELATIONSHIP) ii. Primary: Revenue Raising
iii. Secondary: Non-revenue Raising
3. Benefits-Protection Theory/Symbiotic Relationship A. Regulation
There exist reciprocal duties of protection: B. Promotion of general welfare
C. Reduction of social inequalities (redistribution)
1. Support by the taxpayers D. Encourage economic growth
2. Protection and benefits by the government E. Protectionism

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MARSHALL DICTUM:
THE FOUR (4) R’S OF TAXATION
Taxation is the power to destroy.
Constitutional if taxation power is used validly as an implement
1. REVENUE
of police power in discouraging certain acts and enterprises
inimical to public welfare.
Purpose of taxation is to raise revenue in order to defray the Unconstitutional if in raising revenue, taxation is allowed to
expenses of the government. confiscate or destroy properties.

2. REDISTRIBUTION
McCulloch v. Maryland
People who earn more, pay more taxes, so their wealth is used 4 Wheat, 3164L ed. 579, 607
for the benefit of everyone, including the less wealthy Brief Fact Summary. The state of Maryland enacted a tax that
individuals. would force the United States Bank in Maryland to pay taxes to the
state. McCulloch, a cashier for the Baltimore, Maryland Bank, was
TN: This is the justification of estate tax. sued for not complying with the Maryland state tax.
Synopsis of Rule of Law. Congress may enact laws that are
3. RE-PRICING
necessary and proper to carry out their enumerated powers. The
United States Constitution (Constitution) is the supreme law of the
Higher taxes are imposed on articles which are considered land and state laws cannot interfere with federal laws enacted
dangerous to the health of the people, i.e. alcoholic drinks, within the scope of the Constitution.
cigarettes, etc. To address externalities and prevent citizens Facts. Congress chartered the Second Bank of the United States.
from using such dangerous products, higher taxes may be Branches were established in many states, including one in
Baltimore, Maryland. In response, the Maryland legislature adopted
imposed to curtail such practice. The end goal is to change the an Act imposing a tax on all banks in the state not chartered by the
behaviour of the citizens or to promote a certain policy. state legislature. James McCulloch, a cashier for the Baltimore
branch of the United States Bank, was sued for violating this Act.
McCulloch admitted he was not complying with the Maryland law.
Elasticity of revenues McCulloch lost in the Baltimore County Court and that court’s
☞ i.e. sin taxes, as a way to change behavior decision was affirmed by the Maryland Court of Appeals. The case
was then taken by writ of error to the United States Supreme Court
(Supreme Court).
4. REPRESENTATION
Issue. Does Congress have the authority to establish a Bank of the
United States under the Constitution?
Our representatives are the ones imposing the tax, but since
Held. Yes. Judgment reversed.
the people are the ones putting them in power, the people can
demand something from them — efficient and effective Counsel for the state of Maryland claimed that because the
Constitution was enacted by the independent states, it should be
government service. There is the sense of accountability. “No exercised in subordination to the states. However, the states ratified
taxation without representation” the Constitution by a two-thirds vote of their citizens, not by a
decision of the state legislature. Therefore, although limited in its
powers, the Constitution is supreme over the laws of the states.
Representation — demand for accountability from the There is no enumerated power within the Constitution allowing for
government on taxes collected the creation of a bank. But, Congress is granted the power of
making “all laws which shall be necessary and proper for carrying
into execution the foregoing powers.” The Supreme Court
Redistribution, repricing, representation — These are all determines through Constitutional construction that “necessary” is
considered as secondary. not a limitation, but rather applies to any means with a legitimate
end within the scope of the Constitution.
Because the Constitution is supreme over state laws, the states
PRIMARY: REVENUE RAISING
cannot apply taxes, which would in effect destroy federal legislative
law. Therefore, Maryland’s state tax on the United States Bank is
unconstitutional.
REVENUE PURPOSE
Discussion. This Supreme Court decision establishes the
The primary purpose: raise revenue by collecting funds or Constitution as the supreme law of the land, taking precedent over
property to promote the general welfare and protection of its any state law incongruent with it.
citizens.
The fiscal policy of the government is based on the rule that HOLMES DICTUM:
receipts or revenue should be equal to the annual government
expenditures. The power to tax is not the power to destroy so long as this court
sits.
Taxation power is the power to build. The power to tax should
TN: Of the three inherent powers of the State, only the power of not be the power to destroy. The power to destroy is merely a
taxation has for its purpose the raising of revenue. consequence of taxation.

SECONDARY: NON-REVENUE RAISING

Panhandle Oil C v. Mississippi
277 US 218
Also known as the SUMPTUARY purpose. Facts: The laws of Mississippi provided that “any person engaged in
the business of distributor of gasoline, or retail dealer in gasoline,
shall pay an excise tax for the privilege of engaging in such
1. REGULATION
business,” except that sold in interstate commerce or puchased
Regulatory, also known as Sumptuary, is a secondary objective outside the state and brought in by the consumer for his own use.
Since 1925, Panhandle Oil Co. has been engaged in such business.
of imposing tax. Subsequently, the State sued to recover taxes claimed on account of
sales made by the company to the United States for the use of its
Regulatory purpose to provide means for the rehabilitation and Coast Guard fleet in service in the Gulf of Mexico and its Veteran’s
Hospital at Gulfport. The company defended on the ground that
stabilization of a threatened industry. Mississippi statutes relevant to the case, if construed to impose
taxes on such sales, are repugnant to the federal constitution.
Taxes can be used to curtail or improve a particular industry. Issue: Whether Panhandle Oil Co. is liable for the excise tax
imposed by the State of Mississippi.
Taxes can be levied with a regulatory purpose to provide
means for the rehabilitation and stabilization of a threatened Held: The United States is empowered by the Constitution to
maintain and operate the fleet and the hospital. Authorization and
industry which is affected with public interest. laws enacted pursuant to the Constitution are supreme, and in case
of conflict, control state enactments. The States may not burden or
interfere with the exertion of national power, or make it a source of
Example: to protect local industries, higher taxes is imposed on revenue or take the funds raised or tax the means for for the
foreign investors in order to level the playing field and prevent performance of federal functions. While the State of Mississippi
unfair competition; re-pricing. may impose charges upon the company for the privilege of carrying
☞ Ex: Sugar industry trade that is subject to the power of the State, it may not lay any tax
upon transactions by which the United States secures the things
desired for its governmental purposes. The necessary operation of
the statutes when so construed is directly to retard, impede, and
burden the exertion by the United States of its constitutional powers

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to operate the fleet and the hospital. The exactions demanded the broadest scope of all the powers of government because in the absence of
infringe upon the right to have the Constitutional independence of limitations, it is considered as unlimited, plenary, comprehensive and
the United States, in respect to such purchases, remain
untrammeled. supreme. The two limitations on the power of taxation are the inherent and
Panhandle Oil Co. is, thus, not liable for the taxes claimed. constitutional limitations which are intended to prevent abuse on the exercise
of the otherwise plenary and unlimited power. It is the Court’s role to see to it
Note: It is not in the main body or decision, but in the dissenting that the exercise of the power does not transgress these limitations.
opinion of Justice Holmes that the following doctrine was
enunciated:
2. PROMOTION OF GENERAL WELFARE

“... (The Court), so often has defeated the attempt to tax in certain
ways, can defeat an attempt to discriminate or otherwise go too far Implementation of police power — Taxation may be used as
without wholly abolishing the power to tax. The power to tax is an implement of the police power to promote the general
not the power to destroy while this Court sits. The power to fix welfare of the people. But sometimes, the use of the power of
rates is the power to destroy if unlimited, but this Court while it taxation as an implement of taxation, can destroy industry.
endeavors to prevent confiscation does not prevent the fixing of
rates. A tax is not an unconstitutional regulation in every case where
an absolute prohibition of sales would be one.” 3. REDUCTION OF SOCIAL INEQUALITY (REDISTRIBUTION)

Progressive system of taxation prevents the undue

How were the doctrines reconciled: concentration of wealth in the hands of a few individuals.
The power to tax, though unlimited, must not be exercised in an Progressivity is the keystone on the principle that those who are
arbitrary manner. Taxpayers may seek redress before the courts able to pay, shoulders the bigger portion of the tax burden.
in case of illegal imposition of taxes and irregularities Whatever one earns is for the benefit of all.

Reyes v. Almanzor et. al. 4. ENCOURAGE ECONOMIC GROWTH

G.R. Nos. L-49839-46, ApriI 26, 1991 Refers to exemptions and incentives granted to foreign
FACTS: Petitioners JBL Reyes et al. owned a parcel of land in investors to entice them to invest in the country. This is also to
Tondo which are leased and occupied as dwelling units by tenants
who were paying monthly rentals of not exceeding P300. encourage higher reserves of foreign currencies, so the value
Sometimes in 1971 the Rental Freezing Law was passed prohibiting of the peso in relation to foreign exchange will be higher. The
for one year from its effectivity, an increase in monthly rentals of more foreign reserves, the higher the value of the currency.
dwelling units where rentals do not exceed three hundred pesos Encourage economic grown by granting incentives and
(P300.00), so that the Reyeses were precluded from raising the rents exemptions. Power to tax and exempt are inherent in the State
and from ejecting the tenants.
and in local government.
In 1973, respondent City Assessor of Manila re-classified and
reassessed the value of the subject properties based on the schedule
of market values, which entailed an increase in the corresponding ☞ Ex: PEZA, IT Park, Cebu Business Park – given lower tax rates
tax rates prompting petitioners to file a Memorandum of
Disagreement averring that the reassessments made were
"excessive, unwarranted, inequitable, confiscatory and 5. PROTECTIONISM

unconstitutional” considering that the taxes imposed upon them

greatly exceeded the annual income derived from their properties. To protect local industries from foreign competition.
They argued that the income approach should have been used in
determining the land values instead of the comparable sales
approach which the City Assessor adopted. VIII. SCOPE OF TAXATION
ISSUE: Is the approach on tax assessment used by the City Assessor
reasonable?
HELD: No. The taxing power has the authority to make a reasonable SCOPE OF TAXATION
and natural classification for purposes of taxation but the i. Unlimited
government's act must not be prompted by a spirit of hostility, or at ii. Comprehensive
the very least discrimination that finds no support in reason. It
suffices then that the laws operate equally and uniformly on all iii. Plenary
persons under similar circumstances or that all persons must be iv. Supreme
treated in the same manner, the conditions not being different both
in the privileges conferred and the liabilities imposed.
Consequently, it stands to reason that petitioners who are burdened
by the government by its Rental Freezing Laws (then R.A. No. 1. UNLIMITED

6359 and P.D. 20) under the principle of social justice should not
now be penalized by the same government by the imposition of - unlimited with regards to the object or subject of the power
excessive taxes petitioners can ill afford and eventually result in the of taxation
forfeiture of their properties.
- subject to the inherent limitations
While taxation is plenary and unlimited, it has restrictions. Both
the due process of law and equal protection clauses of the 2. COMPREHENSIVE

Constitution may be invoked to invalidate revenue measures. It

is the Court’s role to see to it that the exercise of the power 3. PLENARY

does not transgress these limitations.

The legislative body has the power to impose taxes as they may
How to reconcile according to Atty. Amago: deem expedient. After all, they can determine the subjects and
The power to tax can be used to destroy only if it used as an objects of taxation.
implement of police power, as when you try to regulate a
particular act, to the extent that industries can really close
down.
4. SUPREME

Hence, the power to tax is a power to destroy only if you are

looking at the power to tax as an implement of police power. Pepsi Cola Bottling Philippines Company v.
But in all other instances, no, because the court will always be Municipality of Tanauan et. al.
there to see whether the inherent and constitutional limitations G.R. No. L-31156 February 27, 1976
are violated. FACTS: In February 1963, plaintiff commenced a complaint seeking
to declare Section 2 of R.A. 2264 (Local Autonomy Act)
unconstitutional as an undue delegation of taxing power and to
declare Ordinance Nos. 23 and 27 issued by the Municipality of
Q: Justice Holmes once said: “The power to tax is not the power to destroy while Tanauan, Leyte as null and void. Municipal Ordinance No. 23 levies
this Court (the Supreme Court) sits.” Describe the power to tax and its limitations and collects from soft drinks producers and manufacturers one-
A: The power to tax is an inherent power of the sovereign, which is exercised sixteenth (1/16)of a centavo for every bottle of soft drink corked.
On the other hand, Municipal Ordinance No. 27 levies and collects
through the legislature, to impose burdens upon subjects and objects within on soft drinks produced or manufactured within the territorial
its jurisdiction for the purpose of raising revenues to carry out the legitimate jurisdiction of the municipality a tax of one centavo (P0.01) oneach
objects of government. The underlying basis for its exercise is governmental gallon of volume capacity. The tax imposed in both Ordinances
necessity for without it no government can exist nor endure. Accordingly, it has Nos. 23 and 27 is denominated as "municipal production tax.”

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ISSUES: Refers to the enactment of a law by Congress. The power to

1. Is Section 2 of R.A. 2264 an undue delegation of the power of levy taxes which involves tax policy is essentially legislative in
taxation? character, although it may be delegated to executive agencies
2. Do Ordinance Nos. 23 and 24 constitute double taxation and with respect to administrative matters, provided that adequate
impose percentage or specific taxes? guidelines or safeguards prescribed are followed in the
RULING: administration of tax laws. (Subordinate legislation)
1. NO. The power of taxation is purely legislative and cannot be
delegated to the executive or judicial department of the Tax administration – exercised by the executive department of
government without infringing upon the theory of separation of
powers. But as an exception, the theory does not apply to government, particularly the BIR with respect to internal
municipal corporations. Legislative powers may be delegated to revenue taxes.
local governments in respect of matters of local concern.
2. NO. The Municipality of Tanauan discovered that manufacturers
could increase the volume contents of each bottle and still pay 2. ASSESSMENT

the same tax rate since tax is imposed on every bottle corked. To
combat this scheme, Municipal Ordinance No. 27 was enacted. - Usually it is with the administrative (BIR)
As such, it was a repeal of Municipal Ordinance No. 23. In the
stipulation of facts, the parties admitted that the Municipal - But it starts with the TAXPAYER
Treasurer was enforcing Municipal Ordinance No. 27 only.
Hence, there was no case of double taxation.
Purpose: To know the tax liable

Tio v. Videogram Regulatory Board Self-assessment — Taxpayer (it is the taxpayer that will have to
G.R. No. 75697, June 19, 1987 assess or compute)
FACTS: In 1985, Presidential Degree No. 1987 entitled “An Act
Creating the Videogram Regulatory Board” was enacted which Deficiency & Delinquency Assessment
gave broad powers to the VRB to regulate and supervise the
videogram industry. The said law sought to minimize the economic - Deficiency — lacking/kulang
effects of piracy. There was a need to regulate the sale of - Delinquency Assessment — unable to file or pay on time
videograms as it has adverse effects to the movie industry. The
proliferation of videograms has significantly lessened the revenue
being acquired from the movie industry, and that such loss may be In Assessment and Collection, it is considered the
recovered if videograms are to be taxed. Section 10 of the PD administration of tax wherein the administration and
imposes a 30% tax on the gross receipts payable to the LGUs. implementation of the tax law by the executive department
In 1986, Valentin Tio assailed the said PD as he averred that it is through administrative agencies; assessment and collection.
unconstitutional on the following grounds:
1. Section 10 thereof, which imposed the 30% tax on gross receipts,
is a rider and is not germane to the subject matter of the law. Only Levy must be done by the legislative. The other may be
2. There is also undue delegation of legislative power to the VRB, delegated to others like BIR and Bureau of Customs.
an administrative body, because the law allowed the VRB to
deputize, upon its discretion, other government agencies to
assist the VRB in enforcing the said PD. TN: In the Philippines, we follow self-assessment. If ever it is not
ISSUE: Whether or not the Valentin Tio’s arguments are correct. enough, there is the involuntary assessment by the BIR.
HELD: No.
1. The Constitutional requirement that “every bill shall embrace
only one subject which shall be expressed in the title thereof” is 3. PAYMENT & COLLECTION

sufficiently complied with if the title be comprehensive enough

to include the general purpose which a statute seeks to achieve. - more of compliance by the taxpayer
In the case at bar, the questioned provision is allied and germane
to, and is reasonably necessary for the accomplishment of, the
general object of the PD, which is the regulation of the video Mode of payment — should be in money
industry through the VRB as expressed in its title. The tax
provision is not inconsistent with, nor foreign to that general
subject and title. As a tool for regulation it is simply one of the
regulatory and control mechanisms scattered throughout the PD.
ADMINISTRATION (TAX ADMINISTRATION)

2. There is no undue delegation of legislative powers to the VRB. - applying the law passed by congress to the specific person,
VRB is not being tasked to legislate. What was conferred to the property or activity covered by it
VRB was the authority or discretion to seek assistance in - Assess/compute how much is the tax
the execution, enforcement, and implementation of the
law. Besides, in the very language of the decree, the authority of
the BOARD to solicit such assistance is for a “fixed and limited Process or method of implementing the tax laws for the
period” with the deputized agencies concerned being “subject to purpose of satisfying the tax obligations, as when money is
the direction and control of the [VRB].”
actually taken from the taxpayers.
A tax does not cease to be valid merely because it regulates,
discourages, or even definitely deters the activities taxed. The Agencies involved:
power to impose taxes is one so unlimited in force and so
searching in extent, that the courts scarcely venture to declare 1. Bureau of Internal Revenue (BIR
that it is subject to any restrictions whatever, except such as rest 2. Bureau of Customs (BOC)
in the discretion of the authority which exercises it. 3. Provincial, City and Municipal Assessors and Treasurers

IX. ASPECT OF TAXATION X. BASIC PRINCIPLES OF A SOUND TAX

SYSTEM
ASPECT OF TAXATION
i. Levy/Imposition BASIC PRINCIPLE OF A SOUND TAX SYSTEM (F-A-T-E)
ii. Assessment i. Fiscal Adequacy
iii. Collection ii. Theoretical Justice or Equity – Ability to pay doctrine (Sec.
iv. Payment 28(1), Art. VI, 1987 Consti)
iii. Administrative Feasibility
iv. Economic Efficiency
1. LEVY OR IMPOSITION (LEGISLATION)

- refers to the enactment of a law by Congress, imposing a tax 1. FISCAL ADEQUACY

- imposed by the legislature

- Need to determine who will be taxed, how much will be The taxes envisioned to be collected must be sufficient for
taxed, the manner of collecting the tax, who has the government expenditures and other public needs.
responsibility in the levy or imposition of the tax

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NOTE: Be careful as sometimes… “an approximate estimate of Taxpayer’s are grouped into big and (small) taxpayers; it is not
government expenditures” is sufficient to satisfy the feasible for the government to audit all taxpayers
requirement. BIR are dividing people to large, medium and small taxpayers.
Purpose of this is for auditing.
- Means that the sources of revenue, that is, receipts therefrom,
taken as whole, should be sufficient to meet the demands of
public expenditure. 3. THEORETICAL JUSTICE OR EQUITY

- It means also that the revenues should be elastic or capable

Sec. 28(1), Art. VI, 1987 Constitution
of expanding or contracting annually in response to
variations in public expenditures. The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation.
What is fiscal adequacy?
The taxes envisioned to be collected must be sufficient for The tax law or system must be based on the taxpayer’s ability to
government expenditures and other public needs. pay. Rule of taxation must be uniform and equitable. The State
must evolve a progressive system of taxation.
If it violates the fiscal adequacy, what will happen to the law?
Violation: VALID Means that the tax burden should be distributed in proportion
to the taxpayer’s ability to pay. Similarly situated taxpayers
Even if a particular tax law violates this requirement, it does not should pay equal taxes, while those who have more should pay
make the law null and void because in the first place there is more. Taxation should be uniform as well as equitable.
no express requirement that a particular tax law must be fiscally
adequate for the needs of the country.
Most important principle: if tax law does not adhere to
theoretical justice it is defective and void; without fiscal
One characteristics of the tax should be proportionate. adequacy, administrative feasibility and economic efficiency
the tax law is merely defective but does not make it void.
What is the remedy?
1) Government can just pass another law and look at another
object or subject matter which could be subject to tax. 4. ECONOMIC EFFICIENCY

☞ E.g. Cory Aquino added VAT

Some authors have this but we will relate this to fiscal adequacy
2) Introduce a reform where to increase some rates.
- Combination of fiscal adequacy and administrative feasibility.
- To make sure that the economy will be stable.
2. ADMINISTRATIVE FEASIBILITY

A combination of fiscal adequacy and administrative feasibility.

The tax law must be capable of convenient, just, effective and The cost of collecting taxes should not be higher than the
efficient enforcement and administration. Likewise, tax law benefits derived from it.
should close-up the loopholes for tax evasion and deter
unscrupulous officials from committing fraud.
XI. TAXATION DISTINGUISHED FROM POLICE
This principle equally applies to taxpayers. Meaning, that must POWER AND EMINENT DOMAIN
not have difficulty understanding what the tax law is all about.
Eminent
Taxation Domain Police Power
- Means that tax laws should be capable of conveniently,
effectively enforced by the government As to purpose The property The property is The use of the
- A question of cost-benefit (generally money) is “taken” for public property is
taken for the use; it must be “regulated” for the
- Assessment and collection must not be more costly than what support of the compensated purpose of
can be collected and assessed government. - facilitate the state’s promoting the
- to raise revenue need for property general welfare; it is
for public purpose not compensable.
☞ i.e. if all taxpayer’s will be audited, it will be costly.
❖ Thus, taxpayer’s are grouped into big and (small) Amount of unlimited None; there is just Limited to the cost of
exaction compensation rendering the
taxpayers; it is not feasible for the government to audit service (license-
all taxpayers payment must only
cover the cost)
What is Administrative Feasibility? As to benefits Direct/indirect There is direct GR: no direct benefit
The tax law must be capable of convenient, just, effective and benefit; tangible or benefit in the form
efficient enforcement and administration. intangible of just
compensation;
This talks about the cost benefit of the implementation of a
particular tax law. As to non- cannot impair cannot impair can impair existing
impairment of existing contracts existing contracts contracts
contracts
The question there is if you can implement if effectively.
As to It is assumed that the He receives the The person affected
When it comes to assessment, it starts with self-assessment compensation individual receives market value of the receives indirect
(benefits) the equivalent of property taken from benefits as may
the tax in the form him. arise from the
If a law is not administratively feasible, will it be valid? of protection and maintenance of a
Violation: VALID benefits he receives healthy economic
from the standard of society.
government
What is the remedy?
Revenue regulation or revenue memorandum orders on how it As to persons Operates upon Operates on an Operates upon
affected (1)A community; or individual as the (1)A community; or
is going to implement a particular tax law. owner of a particular (2)Class of
(2)Class of
individuals. property. individuals.
For Administrative Feasibility, the problem on the part of the BIR
As to the May be exercised May be: May be exercised
or Dept of Finance. authority which only by the (1)Exercised by the only by the
exercises the government or its government or its government or its
power political political political
DOF and BIR who puts mechanisms into how to put a particular subdivisions. subdivisions; subdivisions.
tax law. (2)Granted to public
service
companies or
E.g. Self-assessment` public utilities.

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Eminent
Taxation Domain Police Power
CIR v. Central Luzon Corporation
As to the Generally, there is no No amount imposed Amount imposed G.R. No. 159647, April 15, 2005.
amount of limit on the amount but rather the owner should not be more Facts: Respondents operated six drugstores under the business name
imposition of tax that may be is paid the market than sufficient to Mercury Drug. From January to December 1996 respondent granted
(amount of imposed. value of property cover the cost of the 20% sales discount to qualified senior citizens on their purchases of
exaction) taken. license and medicines pursuant to RA 7432 for a total of ₱ 904,769.
necessary expenses. On April 15, 1997, respondent filed its annual Income Tax Return for
As to the Is subject to certain Inferior to the Relatively free from taxable year 1996 declaring therein net losses. On Jan. 16, 1998
relationship to constitutional impairment constitutional respondent filed with petitioner a claim for tax refund/credit of ₱
the limitations. prohibition; limitations. 904,769.00 allegedly arising from the 20% sales discount. Unable
Constitution - inherent government cannot - inherent to obtain affirmative response from petitioner, respondent elevated
expropriate private its claim to the Court of Tax Appeals. The court dismissed the same
property, which but upon reconsideration, the latter reversed its earlier ruling and
under a contract it ordered petitioner to issue a Tax Credit Certificate in favor of
had previously respondent citing CA GR SP No. 60057 (May 31, 2001, Central
bound itself to Luzon Drug Corp. vs. CIR) citing that Sec. 229 of RA 7432 deals
purchase from the exclusively with illegally collected or erroneously paid taxes but
other contracting that there are other situations which may warrant a tax credit/
party. refund.
- inherent CA affirmed Court of Tax Appeal's decision reasoning that RA 7432
required neither a tax liability nor a payment of taxes by private
Effect Including the There is a transfer of Is superior to the establishments prior to the availment of a tax credit. Moreover, such
prohibition against the right to property. impairment of credit is not tantamount to an unintended benefit from the law, but
impairment of the contract provision.
obligation of rather a just compensation for the taking of private property for
contracts. public use.
Issue: Whether or not respondent, despite incurring a net loss, may
still claim the 20% sales discount as a tax credit.
Ruling: Yes, it is clear that Sec. 4a of RA 7432 grants to senior
Planters Products Inc. v. Fertiphil Corp. citizens the privilege of obtaining a 20% discount on their purchase
G.R. No. 166006 March 14, 2008 of medicine from any private establishment in the country. The
FACTS: Petitioner PPI and respondent Fertiphil are private latter may then claim the cost of the discount as a tax credit. Such
corporations incorporated under Philippine laws, both engaged in credit can be claimed even if the establishment operates at a loss.
the importation and distribution of fertilizers, pesticides and A tax credit generally refers to an amount that is “subtracted directly
agricultural chemicals. from one’s total tax liability.” It is an “allowance against the tax
Marcos issued Letter of Instruction (LOI) 1465, imposing a capital itself” or “a deduction from what is owed” by a taxpayer to the
recovery component of Php10.00 per bag of fertilizer. The levy was government.
to continue until adequate capital was raised to make PPI A tax credit should be understood in relation to other tax concepts.
financially viable. Fertiphil remitted to the Fertilizer and Pesticide One of these is tax deduction – which is subtraction “from income
Authority (FPA), which was then remitted the depository bank of for tax purposes,” or an amount that is “allowed by law to reduce
PPI. Fertiphil paid P6,689,144 to FPA from 1985 to 1986. income prior to the application of the tax rate to compute the
After the 1986 Edsa Revolution, FPA voluntarily stopped the amount of tax which is due.” In other words, whereas a tax credit
imposition of the P10 levy. Fertiphil demanded from PPI a refund reduces the tax due, tax deduction reduces the income subject to tax
of the amount it remitted, however PPI refused. Fertiphil filed a in order to arrive at the taxable income.
complaint for collection and damages, questioning the A tax credit is used to reduce directly the tax that is due, there ought
constitutionality of LOI 1465, claiming that it was unjust, to be a tax liability before the tax credit can be applied. Without
unreasonable, oppressive, invalid and an unlawful imposition that that liability, any tax credit application will be useless. There will
amounted to a denial of due process.PPI argues that Fertiphil has no be no reason for deducting the latter when there is, to begin with, no
locus standi to question the constitutionality of LOI No. 1465 existing obligation to the government. However, as will be
because it does not have a "personal and substantial interest in the presented shortly, the existence of a tax credit or its grant by law is
case or will sustain direct injury as a result of its enforcement." It not the same as the availment or use of such credit. While the grant
asserts that Fertiphil did not suffer any damage from the imposition is mandatory, the availment or use is not. If a net loss is reported by,
because "incidence of the levy fell on the ultimate consumer or the and no other taxes are currently due from, a business establishment,
farmers themselves, not on the seller fertilizer company. there will obviously be no tax liability against which any tax credit
Planters Products Inc. Argument: Argued that LOI No. 1465 was a can be applied. For the establishment to choose the immediate
valid exercise of the police power of the State in ensuring the availment of a tax credit will be premature and impracticable.
stability of the fertilizer industry in the country. It also averred that
Fertiphil did not sustain any damage from the LOI because the The privilege enjoyed by senior citizens does not come directly
burden imposed by the levy fell on the ultimate consumer, not the from the State, but rather from the private establishments
seller. concerned. Accordingly, the tax credit benefit granted to these
Fertiphil Corporation Argument: Filed a complaint for collection establishments can be deemed as their just compensation for
and damages against FPA and Petitioner PPI with the RTC. It private property taken by the State for public use.
questioned the constitutionality of LOI No. 1465 providing for the The taxation power can also be used as an implement for the
imposition of a capital recovery component (CRC) on the domestic
sale of all grades of fertilizers in the Philippines of not less than P10 exercise of the power of eminent domain. Tax measures are
per bag. This capital contribution shall be collected until adequate but enforced contributions exacted on pain of penal sanctions
capital is raised to make PPI viable and clearly for a public purpose.
- Argued that LOI No. 1465 is unjust, unreasonable, oppressive,
invalid and an unlawful imposition that amounted to a denial of
due process of law. Fertiphil alleged that the LOI solely favored Carlos Superdrug Corporation v. DSWD
Petitioner PPI, a privately owned corporation, which used the G.R. No. 166494, June 29, 2007, 553 Phil. 120 (2007)
proceeds to maintain its monopoly of the fertilizer industry.
Facts: Petitioners are domestic corporations and proprietors
ISSUE: Whether or not Fertiphil has locus standi to question the operating drugstores in the Philippines.
constitutionality of LOI No. 1465.What is the power of taxation?
Petitioners assail the constitutionality of Section 4(a) of RA 9257,
RULING: Fertiphil has locus standi because it suffered direct injury; otherwise known as the “Expanded Senior Citizens Act of 2003.”
doctrine of standing is a mere procedural technicality which may be Section 4(a) of RA 9257 grants twenty percent (20%) discount as
waived. privileges for the Senior Citizens.
The imposition of the levy was an exercise of the taxation power of Petitioner contends that said law is unconstitutional because it
the state. While it is true that the power to tax can be used as an constitutes deprivation of private property.
implement of police power, the primary purpose of the levy was Issue: Whether or not RA 9257 is unconstitutional
revenue generation. If the purpose is primarily revenue, or if
revenue is, at least, one of the real and substantial purposes, then Held: Petition is dismissed. The law is a legitimate exercise of police
the exaction is properly called a tax power which, similar to the power of eminent domain, has general
Police power and the power of taxation are inherent powers of the welfare for its object.
State. These powers are distinct and have different tests for validity. Accordingly, it has been described as “the most essential, insistent
Police power is the power of the State to enact legislation that may and the least limitable of powers, extending as it does to all the
interfere with personal liberty or property in order to promote the great public needs.” It is the power vested in the legislature by the
general welfare, while the power of taxation is the power to levy constitution to make, ordain, and establish all manner of wholesome
taxes to be used for public purpose. and reasonable laws, statutes, and ordinances, either with penalties
The main purpose of police power is the regulation of a behavior or without, not repugnant to the constitution, as they shall judge to
or conduct, while taxation is revenue generation. The “lawful before the good and welfare of the commonwealth, and of the
subjects” and“lawful means” tests are used to determine the validity subjects of the same.”
of a law enacted under the police power. The power of taxation, For this reason, when the conditions so demand as determined by the
on the other hand, is circumscribed by inherent and constitutional legislature, property rights must bow to the primacy of police
limitations. power because property rights, though sheltered by due
process, must yield to general welfare.

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In this case, the Congress changed the tax credit scheme to a 6. LEVIED BY THE LAWMAKING BODY OF THE STATE
mere tax deduction. The Court held that the Expanded Senior
7. LEVIED FOR PUBLIC PURPOSE/S
Citizens Act is a legitimate exercise of police power and not
eminent domain. The basic reason for the passage of the law is
social justice and general welfare of the senior citizens. Hence, 1. ENFORCED CONTRIBUTION
property rights must bow to the primacy of police power
because property rights, though sheltered by due process, A tax is not a voluntary payment or donation and its imposition
must yield to general welfare. is in no way dependent upon the will or assent, open or
implied, or the person taxed.
Not dependent upon the will or contractual assent of the
Manila Memorial Park, Inc. and La Funeraria Paz- person taxed. Hence, whether the taxpayer likes it or not, he is
Sucat, Inc v. Secretary of DSWD and DOF compelled to pay taxes. It is a legal and mandatory obligation.
G.R. No. 175356, December. 3, 2013
Digest above. Click here to go to case digest.
2. GENERALLY PAYABLE IN MONEY
The 20% discount is a price regulatory measure affecting the
Can you go the BIR and pay tax in kind? NO.
ability of private establishments to price their products and
■ GR: it must be payable in money.
services relative to a special class of individuals, the senior
citizens, for which the Constitution affords preferential concern. — Exception:
These establishments have the capacity to revise their pricing 1) Backpay Certificate; Tax Credit Certificate — When
strategy so that whatever reduction in profits they may sustain taxes are paid in excess of that due, the
can be recouped through higher mark-ups or from other government issues a certificate where said excess
products not subject of discounts. As a result, the discounts in taxes will be deducted from the taxes payable
resulting from sales to senior citizens will not be confiscatory or the following year.
unduly oppressive. In sum, the 20% discount and tax 2) Tax liens – Forfeiture of property by reason of
deduction are valid exercises of police power of the State failure to pay real property tax — but this property
absent a clear showing that it is arbitrary, oppressive or will be sold and the proceeds shall be used to
confiscatory. The Central Luzon case was a mere obiter dictum. satisfy the tax obligation.

XII. TAXES, DEFINED 3. PROPORTIONATE IN CHARACTER

Taxpayer’s ability to pay (the more you have, the more you
Tax — enforced proportional contributions from persons and should pay). I B. t is assessed in accordance with some
properties levied by the lawmaking body of the State by virtue reasonable rule of apportionment which is usually based on
of its sovereignty for the support of government and for all the ability of the taxpayer to pay.
public needs.
Take note: proportionate is not progressive
DIFFERENT KINDS OF TAXES
1. INTERNAL REVENUE TAXES 4. LEVIED ON PERSON, PROPERTY OR THE EXERCISE OF A RIGHT
2. LOCAL/MUNICIPAL TAXES OR PRIVILEGE
3. TARIFF AND CUSTOMS DUTIES Within the taxing authority’s jurisdiction in accordance with the
4. TAXES AND TAX INCENTIVES UNDER SPECIAL LAWS principle of territoriality.

1. INTERNAL REVENUE TAXES

5. LEVIED BY THE STATE WHICH HAS JURISDICTION OVER THE
SUBJECT OR OBJECT OF TAXATION
- provided under NIRC
☞ Ex: Income tax, Business tax, Transfer tax, Donors and estate 6. LEVIED BY THE LAWMAKING BODY OF THE STATE
tax, Percentage tax, Excise tax, Documentary stamp tax The power to tax is a legislative power but is also granted to
local governments, subject to such guidelines and limitations
as law may provide.
2. LOCAL/MUNICIPAL TAXES

- provided under the LGC 7. LEVIED FOR PUBLIC PURPOSE/S

The public purpose of the imposition is implied in the levy of
tax. A tax levied for a private purpose constitutes taking of
3. TARIFF AND CUSTOMS DUTIES
property without due process of law.
- Provided under the TCC
REQUISITES OF A VALID TAX

4. TAXES AND TAX INCENTIVES UNDER SPECIAL (PUJ-DL /ang ma.jeep ma-dean’s lister) — MEMORIZE!!
1)it must be for Public purpose
LAWS

2)the rule on taxation should be Uniform

☞ Common example: PEZA law which provides 5% tax in lieu - when we talk about uniform, it should be for the same tax,
of all taxed for businesses catered within its territory. same subject or object, and should belong to the same
class
3)Either the person the property taxed must be within the
XIII. ESSENTIAL CHARACTERISTICS AND Jurisdiction of the taxing authority
ATTRIBUTES OF TAXES 4)That the assessment and collection be in consonance with
the Due process clause
For a tax to be valid, it must have all these essential 5)The tax must not fringed the inherent and constitutional
characteristics
Limitations of the power of taxation

ESSENTIAL CHARACTERISTICS AND ATTRIBUTES OF TAXES

1. ENFORCED CONTRIBUTION XIV. CLASSIFICATION OF TAXES
2. GENERALLY PAYABLE IN MONEY
i. As to subject matter or object
3. PROPORTIONATE IN CHARACTER
1) Personal, Poll or Capitation
4. LEVIED ON PERSON, PROPERTY OR THE EXERCISE OF A
RIGHT OR PRIVILEGE 2) Property
5. LEVIED BY THE STATE WHICH HAS JURISDICTION OVER 3) Excise
THE SUBJECT OR OBJECT OF TAXATION ii. As to who bears the Burden

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1) Direct 2) AD VALOREM

2) Indirect An ad valorem tax is a fixed proportion of the value of the

iii. As to determinate of amount property with respect to which the tax is assessed.
1) Specific - usually applicable to property tax or capital gains tax,
2) Ad valorem percentage of the fair market value
iv. As to purpose ☞ Examples: Income tax, real estate tax, excise tax on
1) General, fiscal or revenue automobiles
2) Specific or regulatory
v. As to the scope or authority imposing the tax AS TO PURPOSE

1) National
2) Municipal or local 1) GENERAL, FISCAL OR REVENUE

vi. As to graduate or rate Tax imposed for the general purposes of the government and
1) Proportion to raise revenue for governmental needs.
2) Progressive
3) Regressive 2) SPECIFIC OR REGULATORY

Tax imposed for a special purpose.

AS TO SUBJECT MATTER OR OBJECT
Non-useful occupation/activities/enterprises

1) PERSONAL, POLL OR CAPITATION TAX

Non-useful — luxury items; sintaxes
Tax of a fixed amount imposed on persons residing within a
specified territory, whether citizens or not, without regard to AS TO THE SCOPE OR AUTHORITY IMPOSING THE TAX

their property or the occupation of business which they may be

engaged.
1) NATIONAL TAX

☞ Ex. Community tax

Imposed by the national government. To be specific, it is
imposed by the legislative department and implemented by
2) PROPERTY TAX
the executive department through the BIR.
Tax imposed on property, real or personal, in proportion to its
value or in accordance with some other reasonable method of 2) MUNICIPAL OR LOCAL TAX

apportionment.
It must be provided in the LGC and is imposed by the local
- Levied on the property. executive body, Sangguniang Panglungsod or Panlalawigan.
☞ Ex. Real property tax

3) EXCISE TAX
AS TO GRADUATE OR RATE

A charge imposed upon the performance of an act for the 1) PROPORTION

enjoyment of the privilege or the engagement in an

occupation. Tax is based on a fixed percentage of the amount of the
property, receipts, or other basis to be taxed.
☞ Ex. Business taxes, VAT
☞ Ex: Real Estate Tax, Compensatory Tax

AS TO WHO BEARS THE BURDEN

2) PROGRESSIVE

1) DIRECT
The tax rate of which increases as the tax base or bracket
increases.
Tax for which the taxpayer is directly or primarily liable or which
he cannot shift to another.
Taxpayer is directly or primarily liable. Digressive Tax Rate — Started as progressive but eventually
remains fixed or constant at a particular rate.
☞ Ex. Income Tax
☞ Ex: 32% stagnant
Withholding agent — like the employer to the taxpayer/
employee 3) REGRESSIVE

The tax rate of which decreases as the tax base or bracket

increases
2) INDIRECT

Tax which is demanded from one person in the expectation and

intention that he shall indemnify himself at the expense of XV. TAX DISTINGUISHED FROM OTHER
another. IMPOSITIONS
A tax which the taxpayer can shift to another.
☞ Ex. VAT or Business taxes Tax Distinguished from other Impositions
1) License or Permit Fee
Can be shifted — not mandatory 2) Toll Fee
Statutory taxpayer — one statutorily liable, meaning the taxpayer 3) Compromise Penalty
will go after you but it does not mean you are directly liable 4) Special Assessment
5) Debt
Remedy if you paid erroneous tax — go after the seller and not 6) Subsidy
the BIR 7) Revenue
8) Internal Revenue
AS TO DETERMINATE OF AMOUNT
9) Customs Duties
10)Tariff
1) SPECIFIC

A specific tax is a tax of a fixed amount imposed by the head or

number, or by some standard of weight or measurement. 1) LICENSE OR PERMIT FEE

☞ Examples: Wines, fermented liquors, etc. Regulatory imposition in the exercise of the police power of the
State.

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■ License — is in the nature of a special privilege, or authority to Tax Special Assessment

do what is within its terms. It makes lawful an act which would
otherwise be unlawful. A license granted by the State is Definition Enforced proportional An enforced proportional
always revocable. contributions from persons and contribution from owners of
property lands especially benefited by
■ License fee — a charge imposed under the police power for public improvements
regulation.
Basis Based on necessity Based wholly on benefits
Tax License Fee
Subject Levied on: Levied only on land
Purpose Imposed for revenue purposes Imposed for regulatory purposes (a)Persons;
(b)Property; or
Basis Imposed under the power of Imposed under the police power (c)Acts.
taxation of the State
Scope Has general application It is exceptional both to the time
Amount No limit as to the amount of tax Amount of license fee that can be and place
collected is limited to the cost of
the license and the expenses of Person It is a personal liability of the Not a personal liability of the
police surveillance and regulation Liable taxpayer person assessed; his liability is
limited only to the land involved
Time of Normally paid after the start of Normally paid before the
Payment business commencement of the business

Effect of Failure to pay the tax does not Failure to pay a license fee makes Special Assessment
Non- make the business illegal the business illegal
payment Levied only on land based wholly on the benefit accruing
thereon as a result of improvement of public works
Surrender Taxes, being the lifeblood of the License fee may with or without undertaken by government within the vicinity.
State, cannot be surrendered consideration
excepts for lawful considerations - must be a project of the local government

Republic v. Bacolod, 17 SCRA 632

2) TOLL FEE
A special assessment is a levy on property which derives some
special benefit from the improvement. Its purpose is to finance
Amount charged for the cost and maintenance of property such improvement. It is not a tax measure intended to raise
used revenues for the government. The proceeds thereof may be
■ Toll — A sum of money for the use of something, generally devoted to the specific purpose for which the assessment was
applied to the consideration which is paid for the use of a authorized, this accruing only to the owners thereof who, after
road, bridge or the like, of a public nature. all, pay the assessment.
Tax Toll
Real Property Tax (RPT) — Tax on real property, regardless of
Definition Enforced proportional A sum of money for the use of location so long as within the jurisdiction of the government
contributions from persons and something, a consideration which
property is paid for the use of a property
which is of a public nature; e.g.,
road, bridge 5) DEBT

Basis A demand of sovereignty A demand of proprietorship

Debt Tax
Amount No limit as to the amount of tax Amount of toll depends upon the
cost of construction or Basis Based on contract or judgement Based on law
maintenance of the public
improvement used Effect of Non- No imprisonment for failure to Taxpayer may be imprisoned for
payment pay a debt his failure to pay the tax (except
Authority May imposed only by the May be imposed by the poll tax)
government government or private
individuals or entities Mode of May be payable in money, Generally payable in money
Payment property or services

Assignability Can be assigned (you can let the Not assignable

3) COMPROMISE PENALTY
other person pay the debt on
your behalf)
Amount collected in lieu of criminal prosecution in cases of tax Interest Draws interest if stipulated or Does not draw interest unless
violations. delayed delinquent
Compromise because the taxpayer voluntarily pays, he will not Authority Can be imposed by private Imposed by public authority
anymore be liable. individuals

Prescription Civil code governs the prescriptive Prescriptive periods for tax are
■ Compromise penalty — sanction imposed as a punishment period of debts determined under the NIRC
for violation of a law or acts deemed injurious. This is paid in
lieu of prosecution.
Debt vs Tax
Tax Penalty A debt is generally based on contract, express or implied, while
a tax is based on laws.
Definition Enforced proportional Sanction imposed as a A debt is assignable, while a tax cannot generally be assigned.
contributions from persons and punishment for violation of a law
property or acts deemed injurious; A debt may be paid in kind, while a tax is generally paid in
violation of tax laws may give rise money.
to imposition of penalty
A debt may be the subject of set off or compensation, a tax
Purpose Intended to raise revenue Designed to regulate conduct cannot.
Authority May imposed only by the May be imposed by A person cannot be imprisoned for non-payment of tax, except
government (a)Government; or poll tax.
(b)Private individuals or entities A deft is governed by the ordinary periods of prescription,
while a tax is governed by the special prescriptive periods
provided for in the NIRC.
4) SPECIAL ASSESSMENT
A debt draws interest when it is so stipulated or where there is
default, while a tax does not draw interest except only when
Special assessment — a charge imposed lands especially delinquent.
benefited by public works or improvements financed by the
government. It is not a personal liability of the person assessed.
His liability is limited only to the land involved. It based wholly 6) SUBSIDY

on benefits and not necessity.

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A sum of money granted by the government or a public body - If what is incidental is the promotion of a private enterprise, as
to assist an industry or business so that the price of a long as there is a link to the public welfare, the purpose is still
commodity or service may remain low or competitive. public.
- The test is not as to who receives the money, but the
7) REVENUE
character of the purpose for which it is expended.
- Not the immediate result of the expenditure but rather the
Refers to all the funds or income derived by the government, ultimate result.
whether from tax or from whatever source and whatever
manner The term "public purpose" is not defined. It is an elastic concept
- inflow that can be hammered to fit modern standards. Jurisprudence
- Not limited to the taxes under NIRC states that "public purpose" should be given a broad
interpretation. It does not only pertain to those purposes which
TN: All taxes are revenues, but not all revenues are taxes. are traditionally viewed as essentially government functions,
such as building roads and delivery of basic services, but also
includes those purposes designed to promote social justice.
8) INTERNAL REVENUE
Thus, public money may now be used for the relocation of
illegal settlers, low-cost housing and urban or agrarian reform.
Internal Revenue – taxes imposed by the legislature other than Planters vs Fertiphil
duties on imports and exports.
General rule, public money can only be spent for a public
purpose. Although private individuals are directly benefited,
9) CUSTOMS DUTIES
the tax would still be valid provided that such benefit is only
incidental. Pascual vs Sec. of Public Works
Taxes imposed on goods exported from or imported into a
country.
TEST: not as to who receives the money but the character of
the purpose of which it is expected and not the immediate
10)TARIFF
result of the expenditure but rather the ultimate result.
For you to determine if its public purpose, it must be reckoned
Customs duties, toll, or tributes payable upon a merchandise to on the date when the law is passed.
the government.
Determination that tax is for a public purpose:
Tariff is the list of applicable rates for merchandise that comes in 1) Proceeds of the tax must be use for the support of the
and goes out of the country government, specifically on its governmental function
2) Proceeds of the tax must be for any of the recognized
- Not covered under NIRC objects of the government
- Administrating agency BIR 3) Proceeds of the tax must be to promote the welfare of the
community
Atty. A: what is important here, from no. 1 to no. 10, of the
things enumerated is that all are not considered taxes. If they Atty. A:
are not considered taxes then it is not a requirement that those - As long as there is still link to the public welfare, the purpose
enumerated should be for PUJ-DL (the requirements for a valid is still public.
tax). - The test is not as to who receives the money but the character
of the purpose of which it is expected and not the immediate
result of the expenditure but rather the ultimate result.
XVI. LIMITATION OF THE POWER OF - For you to determine if its public purpose, it must be
TAXATION reckoned on the date when the law is passed.
CONSTITUTIONAL AND INHERENT LIMITATIONS
These limitations are those provided in the fundamental law or Sugar Stabilization Fund
implied therefrom, while the rest spring from the nature of the Oil Stabilization Fund
taxing power itself although they may or may not be provided
in the Constitution.
Tax for Special Purpose [Sec. 29 (3), Art. 6]
- treated as special fund and should be spent only for that
purpose only; thereafter, it shall revert to the general funds of
INHERENT LIMITATION (PENIS) the government
1) Public Purpose
2) Exemption from taxation of government entities Sugar Stabilization Fund —
3) Non-delegation of the legislative power to tax Oil Stabilization Fund — into distribution of oil
4) International Comity
5) Situs/Territorial Jurisdiction
Pascual v. Secretary of Public Works et. al,
G.R. No. L-10405
1) PUBLIC PURPOSE
FACTS: On August 31, 1954, petitioner Wenceslao Pascual
instituted this action for declaratory relief, with injunction, upon the
ground that Republic Act No. 920, entitled "An Act Appropriating
“Public money can only be spent for a public purpose.” Funds for Public Works", approved on June 20, 1953, contained, in
section 1-C thereof, an item of P85,000.00 "for the construction,
reconstruction, repair, extension and improvement" of Pasig feeder
TEST OF RIGHTFUL TAXATION road terminals; that, at the time of the passage and approval of said
Proceeds of a tax must be used Act, the aforementioned feeder roads were "nothing but projected
and planned subdivision roads, not yet constructed, . . . within the
❏ for the support of the government Antonio Subdivision . . . situated at . . . Pasig, Rizal" which
❏ for any of the recognized objects of the government projected feeder roads “do not connect any government property or
any important premises to the main highway"; Respondents moved
❏ to promote the welfare of the community
to dismiss the petition upon the ground that petitioner had "no legal
capacity to sue", and that the petition did "not state a cause of
Public Purpose: action”.
ISSUE: Should appropriation using public funds be made for public
Although private individuals are directly benefited, the tax purposes only?
would still be valid, provided such benefit is only incidental. HELD: The right of the legislature to appropriate funds is
correlative with its right to tax, and, under constitutional provisions
against taxation except for public purposes and prohibiting the

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collection of a tax for one purpose and the devotion thereof to legislative authority, exerted within its proper field, need not
another purpose, no appropriation of state funds can be made for embrace all the evils within its reach".
other than for a public purpose.
The test of the constitutionality of a statute requiring the use of
public funds is whether the statute is designed to promote the public Atty. A: Why only those people engaged in the sugar industry
interest, as opposed to the furtherance of the advantage of business will be the one to carry the burden of paying the tax?
individuals, although each advantage to individuals might
incidentally serve the public. So long as there is valid classification, even if it would result to
inequality to some people or affect individuals, the law cannot
be considered invalid per se. These people in the sugar
industry business are the ones who will directly benefit from
Lutz v. Araneta, et. al. the said imposition of tax.
G.R. No. L-7859, December 22, 1955
FACTS: This case was initiated in the Court of First Instance of
Negros Occidental to test the legality of the taxes imposed by CONCEPTS RELATIVE TO PUBLIC PURPOSE
Commonwealth Act No. 567, otherwise known as the Sugar
Adjustment Act. 1) Inequalities resulting from the singling out of one particular
Promulgated in 1940, the due to the threat to our industry by the class for taxation or exemption must infringe no
imminent imposition of export taxes upon sugar as provided in the constitutional limitation
Tydings-McDuffe Act, and the "eventual loss of its preferential 2) An individual taxpayer need not derive direct benefits from
position in the United States market"; wherefore, the national policy tax
was expressed "to obtain a readjustment of the benefits derived
from the sugar industry by the component elements thereof" and "to 3) Public purpose is continually expanding, areas formerly left
stabilize the sugar industry so as to prepare it for the eventuality of to private initiative are now maybe undertaken by the
the loss of its preferential position in the United States market and government, if it is to meet the increasing social challenges
the imposition of the export taxes." of the time.
In section 2, Commonwealth Act 567 provides for an increase of the
existing tax on the manufacture of sugar, on a graduated basis, on ☞ Ex: Senior Citizens discount
each picul of sugar manufactured; while section 3 levies on owners 4) Public purpose is determined at the time of the enactment
or persons in control of lands devoted to the cultivation of sugar of the tax law and not at the time its implementation.
cane and ceded to others for a consideration, on lease or otherwise a
tax equivalent to the difference between the money value of the
rental or consideration collected and the amount representing 12 per
centum of the assessed value of such land. TAXPAYER’S SUIT

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the

Intestate Estate of Antonio Jayme Ledesma, seeks to recover from What is a Taxpayer’s Suit?
the Collector of Internal Revenue the sum of P14,666.40 paid by A case where the act complied of directly involves the illegal
the estate as taxes, under section 3 of the Act, for the crop years disbursement of public funds derived from taxation; courts
1948-1949 and 1949-1950; alleging that such tax is unconstitutional have the discretion to allow taxpayers suit.
and void, being levied for the aid and support of the sugar industry
exclusively, which in plaintiff's opinion is not a public purpose for
which a tax may be constitutionally levied. The action having been ❖ Taxpayers have sufficient interest of preventing the illegal
dismissed by the Court of First Instance, the plaintiffs appealed the
case directly to this Court (Judiciary Act, section 17). expenditures of money raised by taxation (NOT
ISSUE: Whether or not the CA No. 567 or Sugar Adjustment Act is DONATIONS AND CONTRIBUTIONS)
constitutional and for public purpose. ❖ A taxpayer is not relieved from the obligation of paying tax
HELD: The basic defect in the plaintiff's position is his assumption because of his belief that it is being misappropriated by
that the tax provided for in Commonwealth Act No. 567 is a pure certain officials.
exercise of the taxing power. Analysis of the Act, and particularly of ❖ A taxpayer has no legal standing to question executive acts
section 6, will show that the tax is levied with a regulatory purpose,
to provide means for the rehabilitation and stabilization of the that do not involved the use of public funds (Gonzales vs.
threatened sugar industry. In other words, the act is primarily an Marcos)s
exercise of the police power.
This Court can take judicial notice of the fact that sugar production
is one of the great industries of our nation, sugar occupying a Requisites for Taxpayer’s suit
leading position among its export products; that it gives 1) That the tax money is being extracted and spent in violation
employment to thousands of laborers in fields and factories; that it of specific constitutional protection against abuses of
is a great source of the state's wealth, is one of the important
sources of foreign exchange needed by our government, and is thus legislative power
pivotal in the plans of a regime committed to a policy of currency 2) That public money is being deflected to any improper
stability. Its promotion, protection and advancement, therefore purpose;
redounds greatly to the general welfare. Hence it was competent for
the legislature to find that the general welfare demanded that the 3) That the petitioner seeks to restrain the respondents from
sugar industry should be stabilized in turn; and in the wide field of wasting public funds through enforcement of an invalid or
its police power, the lawmaking body could provide that the unconstitutional law
distribution of benefits therefrom be readjusted among its
components to enable it to resist the added strain of the increase in
taxes that it had to sustain. However, the SC has discretion has to whether or not to
Once it is conceded, as it must, that the protection and promotion of entertain a taxpayer’s suit and could brush aside the lack of
the sugar industry is a matter of public concern, it follows that the locus standi where the issues are of transcendental importance
Legislature may determine within reasonable bounds what is is keeping with the court’s duty to determine that public offices
necessary for its protection and expedient for its promotion. Here, have not abused the discretion given to them.
the legislative discretion must be allowed fully play, subject only to
the test of reasonableness; and it is not contended that the means
provided in section 6 of the law bear no relation to the objective Taxpayers have sufficient interest of preventing the illegal
pursued or are oppressive in character. If objective and methods are expenditures of money raised by taxation (NOT DONATIONS
alike constitutionally valid, no reason is seen why the state may not
levy taxes to raise funds for their prosecution and attainment. AND CONTRIBUTIONS)
Taxation may be made the implement of the state's police power.
That the tax to be levied should burden the sugar producers • Basically, you’re questioning whether the public money is
themselves can hardly be a ground of complaint; indeed, it appears used for public purpose or not.
rational that the tax be obtained precisely from those who are to be
benefited from the expenditure of the funds derived from it. At any • It’s a case where the act complained of is directly involved in
rate, it is inherent in the power to tax that a state be free to select the the illegal disbursement of public funds. However, the public
subjects of taxation, and it has been repeatedly held that funds must be derived from taxation.
"inequalities which result from a singling out of one particular class
for taxation, or exemption infringe no constitutional limitation". • Taxpayers have sufficient interest of preventing the illegal
From the point of view we have taken it appears of no moment that expenditures of money raised by taxation, although this
the funds raised under the Sugar Stabilization Act, now in question, does not apply to donations and contributions made by
should be exclusively spent in aid of the sugar industry, since it is public individuals or private entities.
that very enterprise that is being protected. It may be that other • A taxpayer is not relieved from the obligation of paying tax
industries are also in need of similar protection; that the legislature
is not required by the Constitution to adhere to a policy of "all or because for his belief that it is being misappropriated by
none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 certain officials.
U. S. 270, 84 L. Ed. 744, "if the law presumably hits the evil where • A taxpayer has no legal standing to question executive acts
it is most felt, it is not to be overthrown because there are other
instances to which it might have been applied;" and that "the that do not involve the use of public funds.

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If the government receives a donation from Henry See and adjust the tariff rates under Sec. 401 of the Code in the
Henry See specified that his donation will be used for the interest of national economy, general welfare and/or
construction of a hospital named after him. Can you file a national security.
taxpayer’s suit questioning why the hospital should be named
in favor of the Donor? Art. 8, Sec.28 (2) of the Constitution
A: No, because although the donation became a public fund,
the source of it is not from taxation but rather from donation. The Congress may, by law, authorize the President fix within
specified limits and subject to such limitations and restrictions it
may impose, tariff rates, import and export quotas, tonnage and
Important concepts to remember: wharfage dues and other duties or imposts within the
1. The public funds must be derived from taxation framework of the national development program of the
2. Does not apply to donations and contributions made by government.
public individuals or private entities
3. Taxpayer is not relieved from the obligation to pay tax just The term "FLEXIBLE TARIFF CLAUSE" refers to the authority
because of his belief that it is being misappropriated given to the President to adjust tariff rates under Section 401 of
4. A taxpayer has no legal standing to question acts which do the Tariff and Customs Code, which is the enabling law that
not involve the use of public funds. made effective the delegation of the taxing power to the
President under the Constitution.

Q: When may a taxpayer suit be allowed?

Flexible Tariff Clause (Sec. 401 TCC)
A: A taxpayer’s suit may only be allowed when an act complained of, which may
include a legislative enactment, directly involves the illegal disbursement of In the interest of national economy, general welfare and/or
public funds derived from taxation (Pascual v. Secretary of Public Works). No national security, the President upon the recommendation of
money shall be paid out of the Treasury, except in pursuance of an NEDA is empowered:
appropriation made by law. (Sec 29, Art VI, 1987 Constitution).
1) To increase, reduce or remove existing protective rates of
import duty, provided that the increase should not be
4) NON-DELEGATION OF THE LEGISLATIVE POWER higher than 100% ad valorem
2) To establish import quota or to ban imports of any
TO TAX
commodity
3) To impose additional duty on all imports not exceeding 10%
“The power of taxation is peculiarly and exclusively legislative, ad valorem
therefore, it may not be delegated.”

EXCEPTIONS: Flexible Tariff clause provided under Sec. 401(a) of TCC which
states that:
1) Delegation to the President
In the interest of national economy, general welfare and/or
2) Delegation to the local government units national security, and subject to the limitations herein
3) Delegation to administrative units prescribed, the President, upon recommendation of the National
Economic and Development Authority (hereinafter referred to
POWERS WHICH CANNOT BE DELEGATED as NEDA), is hereby empowered:
1) Determination of the subjects to be taxed (1) to increase, reduce or remove existing protective rates of
2) Purpose of the tax import duty (including any necessary change in
3) Amount or rate of the tax classification). The existing rates may be increased or
decreased to any level, in one or several stages but in no case
4) Manner, means and agencies of collection shall the increased rate of import duty be higher than a
5) Prescription of the necessary rules with respect thereto maximum of one hundred (100) per cent ad valorem;
(2) to establish import quota or to ban imports of any commodity,
The power of taxation is peculiarly and exclusively belongs to as may be necessary; and
the legislative, therefore it may not be delegated, as a rule. (3) to impose an additional duty on all imports not exceeding ten
(10) percent ad valorem whenever necessary: Provided : That
■ General Rule: the power of taxation is vested to the upon periodic investigations by the Tariff Commission and
legislative branch of the government and it cannot be recommendation of the NEDA, the President may cause a
delegated to other branches of government. gradual reduction of protection levels granted in Section One
— Exception: Hundred and Four of this Code, including those
‣ President
subsequently granted pursuant to this section.
‣ LGU
‣ Administrative units Who passed this TCC?
Diba Congress. So the congress even made guidelines for the
president in exercising such power.
POWERS WHICH CANNOT BE DELEGATED:

(these powers lies exclusively under the legislative department) TN: Hence, the Congress passed the Local Government Code
๏ the determination of the subject to be taxed o purpose the of 1991 which embodies the guidelines on how LGUs can
tax exercise such power.
๏ amount of rate of the tax
๏ manner, means and agencies of collection Reason: Impelled by necessity. These matters pertain to
international trade. In the enactment of laws, the process
๏ prescription of the necessary rules with respect thereto
attendant thereto is very cumbersome. If we let Congress fix
tariff rate, it would take a really long time. But any such
TAKE NOTE: what cannot be delegated strictly is the imposition delegation to the President must be done by Congress
or the levy of tax. While administration, collection and through the enactment of a law.
regulation can be delegated by the legislature. And in the
Phis., it is already been delegated to the BIR.
2. DELEGATION TO LOCAL GOVERNMENT UNITS (LGU)

— EXCEPTION:
“Each local government unit has the power to create its own
revenue and to levy taxes, fees and charges subject to such
1. DELEGATION TO THE PRESIDENT
guidelines and limitations as the Congress may provide.” (Art
A. Impose tariff rates, import and export quotas, tonnage X, Sec. 5)
and wharfage dues, and other duties or imposts.
B. Flexible tariff clause — the authority given to the
President, upon the recommendation of NEDA, to

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Basco vs PAGCOR (Consti Law Case) The exemption applies only to governmental entities through
❖ The power to local government unit to impose taxes and fees which the government immediately and directly exercises its
is always subject to the limitations which Congress may sovereign powers.
provide, the former having no inherent power to tax.
❖ Municipal corporations are mere creatures of Congress NDA v. Cebu City
which has the power to create and abolish municipal “The Republic, like any individual, may form a corporation with
corporations. Congress therefore has the power to control personality and existence distinct from its own. The separate
over local government units. If Congress can grant to a personality allows a GOCC to hold and possess properties in
municipal corporation the power to tax certain matters, it its own name and, thus permit greater independence and
can also provide exemptions or even take back the power. flexibility in its operations. It may, therefore, be states that tax
exemption of property owned by the Republic of the
Philippines “refers to properties owned by the Government
Our Constitution, under Art. X, Sec. 5, provides:
and its agencies which do not have separate and distinct
Each local government unit shall have the power to create its personalities (unincorporated entities).”
own sources of revenues and to levy taxes, fees and charges
subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Original Charter (unincorporated vs Special Charter
Such taxes, fees, and charges shall accrue exclusively to the local Incorporated)
governments.
But this provision is not enough so the Congress passed the Limited to the administrative implementation that calls for some
LGC which embodies the guidelines on how to exercise such degree of discretionary powers under sufficient standards
power. expressed by law or implied from the policy and purposes of
the Act.
Can a municipality pass an ordinance imposing a tax on any sale
or transfer of real property located within its territory? A)Power to value property for purposes of taxation
No. The Local Tax Code only allows provinces and cities to B)Power to assess and collect taxes
impose a tax on the transfer of ownership of real property. C)Power to perform an innumerable details of computation,
Municipalities are prohibited from imposing said tax that appraisal and adjustment
provinces are specifically authorized to levy. While it is true that
the Constitution has given broad powers of taxation to LGUs,
this delegation however is subject to such limitations as may be TN: When Congress delegates legislative powers to the various
provided by law. administrative agencies, i.e. BIR, BOC, what is delegated is the
power of “subordinate legislation” — confers upon the
administrative bodies the power and authority to fill in the
3. DELEGATION TO THE ADMINISTRATIVE BODIES
details which are lacking in the law and which Congress may
BIR and Bureau of Customs not have the competence or opportunity to fill in.

Limited to the administrative implementation that calls for some Reason: It’s like getting money from one pocket and
degree of discretionary powers under sufficient standards transferring it to another pocket.
expressed by law or implied from the policy and purposes of
the Act. Rule:
• If the agency is performing governmental function =
A.Power to value property for purposes of taxation EXEMPTED
B.Power to assess and collect taxes • If GOCC performing proprietary function = TAXABLE
C.Power to perform an innumerable details of computation, — Exemption: If the Charter of the said GOCC expressly
appraisal and adjustment exempts from paying taxes.

TN: When Congress delegates legislative powers to the various Government Entities Exempt from Tax
administrative agencies 1) GSIS
☞ i.e. BIR, BOC, what is delegated is the power of “subordinate 2) SSS
legislation” — confers upon the administrative bodies the
power and authority to fill in the details which are lacking in 3) PHIC
the law and which Congress may not have the competence 4) PCCSO
or opportunity to fill in. 5) PAGCOR

What are the two tests of a valid delegation?

1. Completeness test — the law should already be complete in PAGCOR v. BIR
G.R. No. 215427, December 10, 2014
all its terms and conditions before it leaves the Congress so
that when the law reaches the hands of the delegate, the FACTS: On April 17, 2006, petitioner filed a Petition for Review on
Certiorari and Prohibition seeking the declaration of nullity of
latter has nothing else to d but enforce the same. Section 1 of RA 9337 insofar as it amends Section 27(c) of RA
2. Sufficient standard test — even if the law is not complete in 8424, otherwise known as the NIRC by excluding petitioner from
itself, but any such delegation of authority may be upheld as the enumeration of government-owned or controlled corporations
(GOCCs) exempted from liability for corporate income tax.
valid if such delegation is accompanied by sufficient stands
as to map out the boundaries of the exercise of the On March 15, 2011, SC partly granted the petition insofar as it held
that the BIR Revenue Regulation No. 16-2005 which subjects
delegate’s delegated authority. PAGCOR to 10% VAT is null and void for being contrary to the
NIRC. It also held that Section 1 of RA 9337 is valid and
TN: These standards may take the form of legislative policies as constitutional.
may be mentioned in the law itself or in another related law BIR issued RMC No. 33-2013 on April 17, 2013 pursuant to the
decision which clarifies the “Income Tax and Franchise Tax Due
which would recite the circumstances under which such from PAGCOR, its Contractees and Licensees.” It now subjects the
delegated authority may be validly performed. income from PAGCOR’s operations and licensing of gambling
casinos, gaming clubs and other similar recreation or amusement
places, gaming pools, and other related operations, to corporate
4) EXEMPTION FROM TAXATION OF GOVERNMENT income tax under the NIRC.
PAGCOR filed a Motion for Clarification in the case entitled
ENTITIES
PAGCOR vs The Bureau of Internal Revenue, et al., which was
promulgated on March 15, 2011 which also prays for the issuance
TN: Refers only to REAL ESTATE TAX of a TRO and/or writ of Preliminary Injunction against BIR in the
implementation of BIR Revenue Memorandum Circular No.
33-2013 dated April 17, 2013. PAGCOR alleges that said RMC is
an erroneous interpretation and application of the aforesaid
decision.
ISSUES:

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1) Whether PAGCOR’s gaming income is subject to both 5% 1. Sovereign equality among states — under international law
franchise tax and income tax? by virtue of which one state cannot exercise it sovereign
2) Whether PAGCOR’s income from operation of related services is powers over another.
subject to both income tax and 5% franchise tax. 2. Usage among states — when one enters the territory of
HELD: another, there is an implied understanding that the former
1) Gaming Income: Franchise Tax – YES; Income Tax - NO does not intend to degrade its dignity by placing itself
Under PD 1869, as amended, petitioner is subject to income tax only under the jurisdiction of the latter.
with respect to its operations of related services. Accordingly, the 3. A foreign government may not be sued without its consent —
income tax exemption ordained under Section 27(c) of RA 8424
clearly pertains only to petitioner’s income from operation of it is useless to assess a tax since anyway it cannot be
related services. Such income tax exemption could not have been collected.
applicable to petitioner’s income from gaming operations as it is
already exempt therefrom under PD 1869.
There was no need for Congress to grant tax exemption to petitioner Bar Question:
with respect to its income from gaming operating as the same is A multinational corporation doing business in the Philippines donated 100
already exempted from all taxes of any kind or form, income or
otherwise, whether national or local, under its Charter, save only for shares of stock of said corporation to Mr. Cortez, its resident manager in the
the five percent (5%) franchise tax. The exemption attached to the Philippines. What is the tax liability if any of the said corporation?
income from gaming operations exists independently would be Foreign corporations effecting a donation are subject to donor’s tax only if the
downright ridiculous, if not deleterious, since petitioner would be in property donated is located in the Philippines. Accordingly, donation of a
a worse position if the exemption was granted (then withdrawn)
then when it was not granted at all in the first place. foreign corporation of its own shares of stocks in favor of resident employees is
not subject to donor’s tax. However, if 85% of the business of the foreign
2) Income from Operation of related services: Income tax - YES ; corporation is located in the Philippines, or the shares have acquired business
Franchise tax - NO situs in the Philippines, the donation may be taxed in the Philippines, subject
Petitioner’s Charter is not deemed repealed or amended by RA 9337; to the rule of reciprocity.
petitioner’s income derived from gaming operation is subject only
to the five percent (5%) franchise tax, in accordance with PD 1869,
as amended. With respect to petitioner’s income from operation of
other related services, the same is subject to income tax only. The 5) TERRITORIAL JURISDICTION/SITUS

five percent (5%) franchise tax finds no application with respect to

petitioner’s income from other related services, in view of the Persons or property must be within the jurisdiction of the taxing
express provision of Section 14(5) of PD 1869, as amended. power.
Thus, it would be the height of injustice to impose franchise tax
upon petitioner for its income from other related services without
basis therefor. The territoriality rule does not merely relate to “geographical”
SC granted the petition and ordered the respondent to cease and location, but to the rural concept or nexus or bond between
desist the implementation of RMC No. 33-2013 insofar as it the taxing authority and the taxpayers. And this nexus depends
imposes corporate income tax on petitioner’s income derived from on the type of taxes imposed, the personal circumstances of
its gaming operations; and franchise tax on petitioner’s income the taxpayers, and also the location of the subject of taxation.
from other related services.

A state may not tax property lying outside its border or lay an
Bar Question: excise or privilege tax upon the exercise or enjoyment of a
right or privilege derived from the laws of another state and
A tobacco corporation bought a parcel of land and donated the same to a
therein exercised. Persons, properties, businesses, activities,
municipality for the sole purpose of devoting said land as a relocation site.
Through an ordinance, the municipality ordained that the lots be finally and other transactions within the territorial boundary of the
State, which, and persons outside it, who, received benefits and
transferred and donated to the beneficiaries. Determine the tax consequence of
the foregoing disposition with respect to the municipality. protection from the government, are subject to tax.
The Municipality is not subject to any donor’s tax on the value of the land it
subsequently donated, it being exempt from taxes as a political subdivision of ✏ Q: What about foreign embassy?
the National Government. ❖ Not subject to tax because they are considered extension
of the sovereign of the foreign country they represent.

CIR v. PAGCOR Atty. A: what will happen if the tax law violates the inherent
G.R. No. 177387, November 9, 2016 limitation? What’s the consequence?
VOID. Not just mere defective. IT’S VOID.

4) INTERNATIONAL COMITY
■ GR: Taxation may be exercised only within the territorial
jurisdiction of the taxing authority.
“The Philippines adopts the generally accepted principles of — XPN: Where privity of relationship exists. Hence, a person
international law as part of the law of the land.” may be taxed where there is between him and the taxing
state a privity of relationship justifying the levy. Thus, a
If a tax law violates certain principles of international law, then it citizen’s income may be taxed even if he resides abroad
is not only invalid but also unconstitutional. as the personal jurisdiction of his government over him
remains.
Grounds For Tax Exemption of Foreign Government Property
1. Sovereign equality of States TN: In this case, the basis of the power to tax is not dependent
on the source of the income, location of the property or upon
2. Usage among States the residence of the taxpayer but upon his relation as a citizen
3. Immunity from suit of a State to the state. As such citizen, he is entitled, wherever he may be,
inside or outside of his country, to the protection of his
government.
Principle if sovereign equality among states and of their
freedom from suit without their consent limit the authority of
the government to effectively impose taxes on a sovereign Reasons:
state and its instrumentalities, as well as on its property held, 1. Tax laws do not operate beyond a country’s territorial limits
and activities taken in that capacity. 2. Property which is wholly and exclusively within the
jurisdiction of another state receives none of the protection
The property of a foreign state or government may not be for which a tax is supposed to be a compensation.
taxed by another under the principle of sovereign equality
among states by virtue of which one state cannot exercise its Foreign embassies
sovereign powers over another. Foreign embassies are not subject to tax because they are
considered extensions of the foreign country they represent.
This principle is based on any of the following grounds:

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Situs of taxation and form a committee who will have to resolve it. Then if it
Within the territorial jurisdiction, the taxing authority may passes to the senate, and then signed by the president, senate
determine the situs. Situs of taxation literally means the place president and the speaker of the house. Then it became a
of taxation. statute.

b. CONCURRENCE OF A MAJORITY OF ALL THE MEMBERS

CONSTITUTIONAL LIMITATION OF CONGRESS FOR THE PASSAGE OF A LAW GRANTING
1. Direct Constitutional Limitation TAX EXEMPTION

2. Indirect Constitutional Limitation 1) Law granting any tax exemption — Absolute majority
(Substantive due process)
1) DIRECT CONSTITUTIONAL LIMITATION
2) Law withdrawing any tax exemption — Relative Majority

Applicable only to the power of taxation NOTE: Tax exemption, amnesties, refunds are considered in the
(1) Revenue bill must originate exclusively in the House but the nature of tax exemptions.
Senate may propose with amendments — lawmaking
process A grant thereof, needs approval of the absolute majority of
(2) Concurrence of a majority of ALL the members of Congress the congress.
for the passage of a law granting tax exemption
(3) Rule of uniformity and equity in taxation
Absolute majority — not majority on quorum, but must be
(4) Progressive system taxation based on 50 + 1. So if there are 200 members but only 101 are
(5) Exemption of religious, charitable and educational entities, present, all the 101 must agree for it to be passed.
non-profit cemeteries, and churches from property taxation 

(6) Exemption of non-stock, non-profit educational institutions Relative majority — majority base on quorum. So if 101 are
from taxation present, need only 52 votes.
(7) Non-imprisonment for non-payment of a poll tax
(8) Non-impairment of the jurisdiction of the SC in tax cases What is your idea of tax exemption?
Tax exemption is given when the government withholds its
power to 

a. REVENUE BILL MUST ORIGINATE EXCLUSIVELY IN THE enforce taxes. It is actually benefit or privilege given to a few.
HOUSE BUT THE SENATE MAY PROPOSE WITH For example, the congress passes a law granting tax exemption
AMENDMENTS — LAWMAKING PROCESS
and it was voted upon by majority of the members during the
Article VI, Section 24 quorum (50% plus 1), is it a valid grant of tax exemption? NO, it
All appropriation, revenue or tariff bills shall originate from the must be voted by majority of ALL MEMBERS of congress not
House of Representatives, but the Senate may propose or concur only of the quorum (actually this is vague because it does not
with amendments. specify whether all the members of both houses vote together
or separately).
Required for tax exemption is ABSOLUTE majority (majority of
NOTE: It is the BILL and not the LAW that should originate from all the members) however if it refers to a law withdrawing any
the lower house. In other words, if the final version is
tax exemption it only requires RELATIVE majority (majority of
substantially that bill passed by the. Senate, for as long as the the quorum) during the session.
initiatory bill was commenced by the lower house, it is valid.
Tax exemptions, amnesties and refunds are considered in the
nature of tax exemptions, a grant thereof needs the approval of
TN: What’s required to originate from HREP is the bill and not the absolute majority of the members of congress.
the law or statute.

c. RULE OF UNIFORMITY AND EQUITY IN TAXATION

“To insist that a revenue and not only the bill which initiated the
legislative process culminating in the enactment of the law Art. 6, Sec. 28(1) of the Constitution
must substantially be the same as the House bill would be to “The rule of taxation shall be uniform and equitable.”
deny the Senate’s power not only to “concur with
amendments” but also to “propose amendments.” It would be
to violate the co-equality of legislative power of the two Uniformity in Taxation — It requires the uniform application
houses of Congress and in face make the House superior to and operation, without discrimination, of the tax in every place
the Senate.” where the subject of the tax is found. It does not, however,
require absolute identity or equality under all circumstance,
but subject to reasonable classification.
The constitution simply requires that there must be initiative
coming from the House of Representatives relative to
appropriation, revenue and tariff bills. Equity in Taxation — The concept of equity in taxation requires
that the apportionment of the tax burden be more or less, just
in the light of the taxpayer’s ability to shoulder to tax burden
The Constitution does not also prohibit the filing in the Senate and if warranted, on the basis of the benefits received from the
of a substitute bill in anticipation of its receipt of the bill from government. Its cornerstone is the taxpayers ability to pay.
the House, as long as action by the Senate is withheld until
receipt of the said bill. (Tolentino vs. Sec. of Finance, GR No.
115455 Oct. 30, 1995) Uniformity: it implies that “all taxable articles or properties of
the same class shall be taxed at the same rate.”
Equity: uniformity in taxation is effected through the
This is more on the law making process.
apportionment of the tax burden among the taxpayers which
To Remember: what will originate from the house is the BILL, under the Constitution must be equitable; based on the ability
not the law or the statute. of the taxpayer to pay the tax.

When is it considered as statute?

Equality in Taxation Uniformity in Taxation
When it is already passed by the congress and bi-cameral
committee, and/or approved by the president.
accomplished when the burden of the tax A tax is considered uniform when it
falls equally and impartially upon all the operates with the same force/effect in
The bill is just a proposition then it undergoes three (3) persons and property subject to it every place where the subject may be
readings. Eventually if it passed in the House of Representative, found
it will be submitted in the senate. And there, they might have Equitability is achieved when the burden
of taxation falls to those better able to pay All property belonging to the same class
their own version. If they have their own version and if it is shall be taxed alike
different form the one submitted, they will have to combine it

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Constitutional Equality in Taxation Is classification allowed?

- Means that all persons who are similarly situation should be Yes. Uniformity in taxation does not prohibit the classification of
treated alike both in the privilege conferred and burdens the objects of taxation or the entities or subjects upon which
imposed taxes are imposed. However, to withstand any constitutional
- The application of the concept of equal protection of the laws infirmity, such classification must comply with certain
which prohibits discrimination other than those instances guidelines.
where there is valid classification
A.It is based upon substantial distinctions which make real
Uniformity of Taxation NOT the same as equality in taxation differences
Uniformity of taxation means that all articles or properties of the B.These are germane to the purpose of the legislation or
same class shall be taxed at the same rate. Different articles or ordinance
properties of the same class shall be taxed at the same rate. C.The classification applies, not only to present conditions, but,
Different articles or other subjects like transactions, business, also, to future conditions substantially identical to those of
rights, may be taxed at different rates provided that the rate the present
(not necessarily the amount) is uniform in the same class D.The classification applies equally to all those who belong to
everywhere. the same class

d. PROGRESSIVE SYSTEM TAXATION

Bar Question:
Art. 6, Sec. 28(1) of the Constitution The City of Makati, in order to solve the traffic problem in its business districts,
“Congress shall evolve a progressive system of taxation.” decided to impose a tax, to be paid by the driver, on all private cars entering the
city during peak hours from 8:00 am to 9:00 am from Mondays to Fridays, but it
exempts those cars carrying more than two occupants, excluding the driver. Is
Tax rate increases as tax base increases
the ordinance valid?
No. The ordinance is in violation of the rule of uniformity and equality, which
NOTE: The constitution provides that the congress shall evolve requires that all subjects or objects of taxation, similarly situated must be
a progressive system of taxation. However, this provision is treated alike and must not be classified in an arbitrary manner. The ordinance
merely a directive to Congress, NOT a right enforceable before exempts cars carrying more than two occupants and taxes only private cars,
the courts. exempting public vehicles, although both contribute to the traffic problem.
Also, the tax is imposed not on the registered owner but the driver, who has no
control over the route of the vehicle. The ordinance does not just violate the
PROGRESSIVITY IS NOT REPUGNATED TO UNIFORMITY rule of uniformity, the same is likewise unjust.
AND EQUALITY

A.Uniformity does not require the things which are not different e. EXEMPTION OF RELIGIOUS, CHARITABLE AND
be treated in the same manner
EDUCATIONAL ENTITIES, NON-PROFIT CEMETERIES,
B.Differentiation, which is not arbitrary and conforms to the
dictates of justice and equity is allowed. Progressivity is one
AND CHURCHES FROM PROPERTY TAXATION

way of classification Art. 6, Sec. 28 [3]

C.The State has the inherent right to select subjects of taxation “(3) Charitable institutions, churches and personages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually, directly, and
Progressive — There shall be more direct taxes than indirect exclusively used for religious, charitable, or educational
taxes, with ability to pay as the principal criterion. Hence, the purposes shall be exempt from taxation.”
tax rate increases as the tax bracket increases.

Tax laws shall place emphasis on direct rather than indirect REASON FOR THE RULE:
taxation, with ability to pay as the principal criterion. As income Cemeteries are exempt from the payment of taxes because of
increases, so as the tax rate. the difficulty of collecting a tax thereon and the obvious
impropriety of selling the graves of the dead to defray the
expenses of carrying on the government of the living.
RA 7716 (EVAT), does not violate the constitutional mandate
that Congress shall “evolve a progressive system of taxation”
Churches and parsonages or convents appurtenant thereto, are
exempt from taxation because such institutions perform work
The Constitution does not really prohibit the imposition of which would otherwise have to be carried on by the public at
indirect taxes, which like the VAT, are regressive. The the expense of the taxpayers and that the expenses of such
constitutional provision means simply that indirect taxes shall institutions from taxation lessens rather than increases the
be minimized. burden upon other taxpayers.

The mandate to Congress is not to prescribe, but to evolve, a APPLICATION:

progressive system of taxation.
Who is exempted? Charitable, Religious, or Educational
purpose
Resort to indirect taxes should be minimized but not to be Charitable institution — no limit
avoided entirely because it is difficult, if not impossible to
avoid them by imposing such taxes according to the taxpayers What is subject to exemption? Real Property from Real Property
ability to pay. (Tolentino vs. Sec. of Finance, GR No. 115455 Tax
Oct. 30, 1995)
TEST OF APPLICABILITY:
Is progressive system of taxation directory or mandatory? - Covers only property taxes and not other taxes;
It is merely directory not mandatory because we even have - It is the use of the property that is exempt, not the ownership;
regressive taxes (ex. VAT) - Property must be used actually, directly, and exclusively for
It is merely directory because we even have regressive taxes religious, charitable, or educational purposes;
(VAT) – the lesser money you have, the more you can feel the - Exemption extends to facilities which are incidental to or
impact. It is regressive as to effect. Such a provision is placed in necessary for the accomplishment of said purposes
the Constitution as moral incentives to legislation and not as - Self-executing provision of the Constitution
judicially enforceable rights.
Hospitals — non-stock, non-profit — Charitable institutions
VAT – the lesser money you have the more you can feel the
impact impact. Non-stock — check the AOI (articles of incorporation) = no
shares of stocks

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Non-profit — profits not for a specific individual case of a corporation, of the taxpayer's taxable income
derived from trade or business or profession (Sec. 34 (H),
Non-profit Hospitals — Charitable institution NIRC).


3. For purposes of donor's and estate taxation, donations in

Example: USC favor of religious and charitable institutions are generally not
• School building/area — exempt from property tax Reason: subject to tax provided, however, that not more than 30% of
used for educational purpose the said bequest devise or legacy or transfer shall be used
• Area rented by commercial establishments — taxable for administration purposes (Sec. 87 and 101, NIRC).

CONTROLLING DOCTRINE ON EXEMPTION FROM IMPORTANT PRINCIPLES:

TAXATION OF REAL PROPERTY OF RELIGIOUS,
CHARITABLE AND EDUCATIONAL INSTITUTIONS 1) The tax exemption of religious, charitable and educational
institutions covers real property tax only.
In the recent case of Lung Center of the Philippines vs. Q.C and
2) The test is usage and not ownership.
Constantino p. Roxas City Assessor of Q.C, G.R. no. 144104,
June 29, 2004, 433 SCRA 119, the prevailing rule on the 3) The exemption extends to facilities which are incidental to or
application of tax exemption to properties incidentally used for reasonably necessary for the accomplishment of said
religious, charitable and educational purposes, as enunciated purpose
in the case of Herrera vs. QC-BAA, 3 SCRA 187, has now been
ABANDONED.
Test of Exemption Nature of Use Scope of Exemption
In resolving the issue of whether or not the portions of the real
property of Lung Center that are leased to private entities are
exempt from real property taxes, the SC reexamined the intent Use of the property, and Actual, direct and Real property taxes on
not the ownership. exclusive use for facilities which are:
of the Constitutional provision granting tax exemption of religious, charitable and a. Actual
properties ACTUALLY, DIRECTLY AND EXCLUSIVELY USED educational purposes b. Incidental
FOR RELIGIOUS, CHARITABLE AND EDUCATIONAL c. Reasonably 

PURPOSES. necessary for the
accomplishment of
said purpose
Thus, the records of the Constitutional Commission reveal that
what is exempted is not the institution itself,' those, exempted
from real estate taxes are lands, buildings and improvements Is the income of the church taxable?
actually, directly and exclusively used for religious, charitable or
educational purposes. No. It is not taxable. While it is true that Section 28 Art 6 deals
only with real property tax exemption, but income tax
exemption is provided under Sec 30 of the National Internal
"Exclusive" is defined as possessed and enjoyed to the Revenue Code.
exclusion of others; debarred from participation or enjoyment;
and "exclusively" is defined, “in a manner to exclude; as
enjoying a privilege exclusively.” If real property is used for one Section 30 of the NIRC of 1997
or more commercial purposes, it is not exclusively used for the Sec 30. The following organizations shall not be taxed under this
exempted purposes but is subject to taxation. The words Title in respect to income received by them as such:
"dominant use" or “principal use” cannot be substituted for the (E) Non-stock corporation or association organized and operated
words "used exclusively" without doing violence to the exclusively for religious, charitable, scientific, athletic, or cultural
Constitution and the law. Solely is synonymous with exclusively. purposes, or for the rehabilitation of veterans, no part of its net
income or asset shall belong to or inures to the benefit of any
What is meant by actual, direct and exclusive use of property for member, organizer, officer or any specific person.
charitable, religious and educational institutions is the direct
and immediate and actual application of the, property itself to
the purposes for which the charitable institution is organized. It CIR v. St. Luke's Medical Center (SLMC)
G.R. No. 203514. February 13, 2017
is not the use of the income from the real property that is
determinative of whether the property is used for tax-exempt Stock entity but non-profit hospitals.
purposes. (St. Louis Men's Christian Association vs. Genher, 47 Given a preferential tax rate.
S.W.2d77)
More on income tax.
Was exempted for the income tax.
NOTE: The rule remains that it is the USE and not ownership
Regardless of the disposition of the proceeds.
that determines the exempt character of the property. What is
meant by "use" remains a litigious issue, but should always be
measured under the constitutional prescription of Actually- St. Lukes cannot claim exemption under Art 6. Sec. 28
Directly-Exclusively purposes. The exemption is provided under Sec. 30 of NIRC with the
exemption.
SUMMARY OF RULES:
St. Lukes is not exempted from paying income tax for paying
1. For PURPOSES OF income taxation, the income of non-stock
patients. It is only exempted from the non-paying patients.
corporations operating exclusively for charitable and
religious purposes, no part of which inures to the benefit of It does not lose its character of being a charitable institution just
any member, organizer or officer or any specific person, because they took paying patients.
shall be exempt from tax. 



Herrera v Quezon City Board of Assessment Appeals
However, the income of whatever kind and nature from any GR No. L-15270 September 30, 1961
of their properties, real of personal or from any of their Principle: Where rendering charity is its primary object, and the
activities for profit regardless of the disposition made of funds derived from payments made by patients able to pay are
such income shall be subject to tax. (Sec. 30, par, E and last devoted to the benevolent purposes of the institution, the mere fact
par., NIRC).
 that a profit has been made will not deprive the hospital of its
benevolent character.
2. For purposes of income taxation, donations received by Facts: In 1952, the Director of the Bureau of Hospitals authorized
Jose V. Herrera and Ester Ochangco Herrera to establish and
religious, charitable and educational institutions are operate the St. Catherine’s Hospital. In 1953, the Herreras sent a
considered as income but not taxable income as they are letter to the Quezon City Assessor requesting exemption from
items of exclusion. 
 payment of real estate tax on the hospital, stating that the same was

 established for charitable and humanitarian purposes and not for
On the part of the donor, such donations are deductible commercial gain. The exemption was granted effective years 1953
expense provided that no part of the income of which inures to 1955. In 1955, however, the Assessor reclassified the properties
from “exempt” to “taxable” effective 1956, as it was ascertained
to the benefit of any private stockholder or individual in an that out 32 beds in the hospital, 12 of which are for pay-patients. A
amount not exceeding 10% in case of individual, and 5% in

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school of midwifery is also operated within the premises of the But here in Phil. Lung Center, “exclusively” here means it is
hospital. synonymous to “solely”. Hence, to be exempted of real
Issue: Whether St. Catherine’s Hospital is exempt from realty tax. property taxation, it should be SOLELY for charitable purpose
Held: The admission of pay-patients does not detract from the not just mere incidental to the principal purpose. So we follow
charitable character of a hospital, if all its funds are devoted the Phil. Lung Center case.
exclusively to the maintenance of the institution as a public charity.
The exemption in favor of property used exclusively for charitable or Herrera was resolved under the 1935 Const, which states that
educational purpose is not limited to property actually indispensable
therefore, but extends to facilities which are incidental to and so long as it is principally used, it is exempted.
reasonably necessary for the accomplishment of said purpose, such PLC was resolved under 1987 constitution — To the exclusion of
as in the case of hospitals — a school for training nurses; a nurses’ others.
home; property used to provide housing facilities for interns,
resident doctors, superintendents and other members of the hospital
staff; and recreational facilities for student nurses, interns and
residents. Within the purview of the Constitution, St. Catherine’s Abra Valley College Inc., v. Aquino
Hospital is a charitable institution exempt from taxation. G.R. No. L-39086 June 15, 1988
FACTS: Petitioner, Abra Valley College (a private school), an
Atty. A: But take note that this is now not controlling. This case educational corporation and institution of higher learning duly
lays down the rule on incidental use but this was decided incorporated with the Securities and Exchange Commission in
under the 1935 Constitution which had no provision yet on 1948, filed a complaint to annul and declare void the “Notice of
“actually, directly and exclusively used”. Nganu imu man mi Seizure’ and the “Notice of Sale” of its lot and building located at
gipabasa ana sir nga di nmn d.i na controlling? Well, what if Bangued, Abra, for non-payment of real estate taxes and penalties
amounting to P5,140.31. Said “Notice of Seizure” by respondents
mugawas sa exam or mubalik? But of course, you base your Municipal Treasurer and Provincial Treasurer, defendants below,
answer on the recent ruling. Your reason will not be it is was issued for the satisfaction of the said taxes thereon.
exempted because it’s incidental—that’s not anymore The parties entered into a stipulation of facts adopted and embodied
subsisting. but rather, you answer using the the Phil. Lung by the trial court in its questioned decision. The trial court ruled for
Center ruling. the government, holding that the second floor of the building is
being used by the director for residential purposes and that the
ground floor used and rented by Northern Marketing Corporation, a
commercial establishment, and thus the property is not being used
Philippine Lung Center v Quezon City exclusively for educational purposes. Instead of perfecting an
GR No. 144104, June 29, 2004 appeal, petitioner availed of the instant petition for review on
FACTS: The petitioner Lung Center of the Philippines is a non-stock certiorari with prayer for preliminary injunction before the Supreme
and non-profit entity established by virtue of Presidential Decree Court, by filing said petition on 17 August 1974.
No. 1823. It owns a piece of land, in the middle of which is a ISSUE: Whether or not lot and building of Petitioner is exempt from
hospital stands. A big space at the ground floor is being leased to real estate tax
private parties for canteen and small stores and to medical and to CONCLUSION: The lot and building of Petitioner is exempt except
professional practitioners. A big portion of the lot is being leased for the first floor thereof as being used for commercial purposes.
commercial purposes to a private enterprise. In 1993, both land and Respondent is ordered to return to Petitioner half of the assessed
the hospital building were assessed for real property taxes in the tax. The appeal is granted
amount of about Php 4.5 Million. The petitioner avers that it is a
charitable institution within the context of Section 28(3), Article VI RULE: The exemption in favor of property used exclusively for
of the 1987 Constitution. It asserts that its character as a charitable charitable or educational purposes is 'not limited to property
institution is not altered by the fact that it admits paying patients actually indispensable' therefor (Cooley on Taxation, Vol. 2, p.
and renders medical services to them, leases portions of the land to 1430), but extends to facilities which are incidental to and
private parties, and rents out portions of the hospital to private reasonably necessary for the accomplishment of said purposes, such
medical practitioners from which it derives income to be used for as in the case of hospitals, "a school for training nurses, a nurses'
operational expenses. home, property use to provide housing facilities for interns, resident
ISSUE: Whether or not the property is tax exempt under the 1987 doctors, superintendents, and other members of the hospital staff,
Constitution. and recreational facilities for student nurses, interns, and
residents' (84 CJS 6621), such as "Athletic fields" including "a firm
CONCLUSION: Petitioner is exempt from taxation except those used for the inmates of the institution.
precise portions of the land and the area thereof which are leased to HELD: In this case, while the use of the second floor of the main
private persons. The petition is granted. building in the case at bar for residential purposes of the Director
RATIONALE: The test whether an enterprise is charitable or not is and his family, may find justification under the concept of
whether it exists to carry out a purpose reorganized in law as incidental use, which is complimentary to the main or primary
charitable or whether it is maintained for gain, profit, or private purpose—educational, the lease of the first floor thereof to the
advantage. As a general principle, a charitable institution does not Northern Marketing Corporation cannot by any stretch of the
lose its character as such and its exemption from taxes simply imagination be considered incidental to the purpose of education.
because it derives income from paying patients, whether out- The trial court correctly arrived at the conclusion that the school
patient, or confined in the hospital, or receives subsidies from the building as well as the lot where it is built, should be taxed, not
government, so long as the money received is devoted or used because the second floor of the same is being used by the Director
altogether to the charitable object which it is intended to achieve; and his family for residential purposes, but because the first floor
and no money inures to the private benefit of the persons managing thereof is being used for commercial purposes. However, since only
or operating the institution. a portion is used for purposes of commerce, it is only fair that half
However, under the 1973 and 1987 Constitutions and Rep. Act No. of the assessed tax be returned to the school involved.
7160 in order to be entitled to the exemption, the petitioner is
burdened to prove, by clear and unequivocal proof, that (a) it is a TN: This was decided under the 1935 Constitution
charitable institution; and (b) its real properties are ACTUALLY,
DIRECTLY and EXCLUSIVELY used for charitable purposes. SC adhered to the condition actually, directly and exclusively
Accordingly, only those portions of the hospital used for patients used.
whether paying or non-paying are exempt from real property taxes. If it is “incidental”, it is also exempted.
Those portions of its real property that are leased to private entities
are not exempt from real property taxes as these are not actually,
directly and exclusively used for charitable purposes. American Bible Society v. City of Manila,
Accordingly, we hold that the portions of the land leased to private G.R. No. L-9637, April 30, 1957
entities as well as those parts of the hospital leased to private
FACTS: American Bible Society is a foreign, non-stock, non-profit,
individuals are not exempt from such taxes.45 On the other hand, religious, missionary corporation duly registered and doing business
the portions of the land occupied by the hospital and portions of the in the Philippines through its Philippine agency established in
hospital used for its patients, whether paying or non-paying, are Manila in November, 1898. City of Manila is a municipal
exempt from real property taxes. corporation with powers that are to be exercised in conformity with
As a general principle, a charitable institution does not lose its the provisions of Republic Act No. 409, known as the Revised
character as such and its exemption from taxes simply because it Charter of the City of Manila.
derives income from paying patients, whether out-patient, or American Bible Society has been distributing and selling bibles and/
confined in the hospital, or receives subsidies from the government, or gospel portions throughout the Philippines and translating the
so long as the money received is devoted or used altogether to the same into several Philippine dialect.
charitable object which it is intended to achieve; and no money Contention of City Treasurer of Manila:
inures to the private benefit of the persons managing or operating
the institution City Treasurer of Manila informed American Bible Society that it
Under P.D. No. 1823, the petitioner is entitled to receive donations. was violating several Ordinances for operating without the
The petitioner does not lose its character as a charitable institution necessary permit and license, thereby requiring the corporation to
simply because the gift or donation is in the form of subsidies secure the permit and license fees covering the period from 4Q
granted by the government. 1945-2Q 1953.
- Argued that said ordinances were enacted by the Municipal Board
Atty. A: As you can observe, in the Herrera case, the meaning of of the City of Manila by virtue of the power granted to it by
“exclusive use” is the “principal” or “dominant” use. So long as section 2444, subsection (m-2) of the Revised Administrative
it is related to the principal purpose, then it can be exempted. Code, superseded on June 18, 1949, by section 18, subsection (1)
of Republic Act No. 409, known as the Revised Charter of the

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City of Manila, and praying that the complaint be dismissed, with contended that the building is used actually, directly and exclusively
costs against plaintiff part of hospital and should have an assessment level of 10%.
- Argued that bibles bearing the price of 70 cents each from ISSUE: Whether or not the new building is liable to pay the 35%
plaintiff-appellant's New York office are sold here by plaintiff- assessment level?
appellant at P1.30 each; those bearing the price of $4.50 each are RULING: We hold that the new building is an integral part of the
sold here at P10 each; those bearing the price of $7 each are sold hospital and should not be assessed as commercial. Being a tertiary
here at P15 each; and those bearing the price of $11 each are sold hospital, it is mandated to fully departmentalized and be equipped
here at P22 each, clearly show that plaintiff's contention that it with the service capabilities needed to support certified medical
never makes any profit from the sale of its bible, is evidently specialist and other licensed physicians. The fact that they are
untenable. holding office is a separate building does not take away the essence
To avoid closing of its business, American Bible Society paid the and nature of their services vis-a-vis the overall operation of the
City of Manila its permit and license fees under protest. hospital and to its patients.
Contention of American Bible Society: Under the Local Government Code, Sec. 26: All lands, buildings and
American Bible filed a complaint, questioning the constitutionality other improvements thereon actually, directly and exclusively used
and legality of the Ordinances 2529 and 3000, and prayed for a for hospitals, cultural or scientific purposes and those owned and
refund of the payment made to the City of Manila. used by local water districts… shall be classified as special.
(a)They had been in the Philippines since 1899 and were not The CHH Medical Arts Center (CHHMAC) is an integral part of
required to pay any license fee or sales tax
CHH. It is definitely incidental to and reasonably necessary for
(b)it never made any profit from the sale of its bibles the operations of Chong Hua Hospital.
- Argued that such ordinances provide for religious censorship and
restrain the free exercise and enjoyment of its religious
profession, to wit: the distribution and sale of bibles and other First, CHHMAC is only for its consultants or accredited doctors
religious literature to the people of the Philippines and medical specialists. Second, the charging of rentals is a
- Argued and tried to establish that it never made any profit from the practical necessity: (1) to recoup the investment cost of the
sale of its bibles, which are disposed of for as low as one third of building, (2) to cover the rentals for the lot CHHMAC is built on,
the cost, and that in order to maintain its operating cost it obtains
substantial remittances from its New York office and voluntary and (3) to maintain the CHHMAC building and its facilities.
contributions and gifts from certain churches, both in the United Third, as correctly pointed out by respondent, it pays the
States and in the Philippines, which are interested in its proper taxes for its rental income. And, fourth, if there is indeed
missionary work. any net income from the lease income of CHHMAC, such does
City of Manila prayed that the complaint be dismissed, reiterating not inure to any private or individual person as it will be used
the constitutionality of the Ordinances in question. Trial Court for respondent’s other charitable projects.
dismissed the complaint. American Bible Society appealed to the
Court of Appeals.
ISSUE: Whether or not the ordinances of the City of Manila, Nos. Atty. A: What is the difference then with the Herrera case and
3000, as amended, and 2529, 3028 and 3364, are constitutional and the City Assessor case? One thing is, the former was decided
valid based on the 1935 Consti wherein we adhere to the principle
CONCLUSION: The ordinances are constitutional but such are that exclusivity means principal and dominant. That everything
inapplicable to plaintiff. Defendant is ordered to return to Plaintiff incidental to it, whether commercial or not, will be exempted.
the sum of P5,891.45 unduly collected from it
But in the latter, it was decided under the 1987 Consti wherein
RULE: Article III, section 1, clause (7) of the Constitution of the
Philippines aforequoted, guarantees the freedom of religious exclusivity means sole purpose and not primary purpose which
profession and worship. "Religion has been spoken of as a means that even if it is incidental, so long as it is commercial, it
profession of faith to an active power that binds and elevates man to is subject to tax. But na-counter lang nila (Chong Hua), they
its Creator" (Aglipay vs. Ruiz, 64 Phil., 201). were able to prove that it was no commercial purpose.
It has reference to one's views of his relations to His Creator and to
the obligations they impose of reverence to His being and character,
and obedience to His Will (Davis vs. Beason, 133 U.S., 342). The Medical arts center is not a commercial building but rather it is
constitutional guaranty of the free exercise and enjoyment of part of Chong Hua and is for charitable purpose.
religious profession and worship carries with it the right to Amount of the rent or lease is necessary for the maintenance of
disseminate religious information.
the building.
Any restraints of such right can only be justified like other restraints
of freedom of expression on the grounds that there is a clear and It is connected with Chong Hua because only the doctors in the
present danger of any substantive evil which the State has the right Medical Arts are accredited in the Chong Hua hospital.
to prevent".
APPLICATION: In this case, it may be true that the price asked for Sec. 30 of NIRC
the bibles and other religious pamphlets was in some instances a
little bit higher than the actual cost of the same but this cannot mean Section 30. Exemptions from Tax on Corporations. - The
that appellant was engaged in the business or occupation of selling following organizations shall not be taxed under this Title in
said "merchandise" for profit. For this reason We believe that the respect to income received by them as such:
provisions of City of Manila Ordinance No. 2529, as amended,
cannot be applied to appellant, for in doing so it would impair its (A)Labor, agricultural or horticultural organization not
free exercise and enjoyment of its religious profession and worship organized principally for profit;
as well as its rights of dissemination of religious beliefs.
(B)Mutual savings bank not having a capital stock represented
With respect to Ordinance No. 3000, as amended, which requires the
obtention the Mayor's permit before any person can engage in any by shares, and cooperative bank without capital stock
of the businesses, trades or occupations enumerated therein, We do organized and operated for mutual purposes and without
not find that it imposes any charge upon the enjoyment of a right profit;
granted by the Constitution, nor tax the exercise of religious (C)A beneficiary society, order or association, operating fort the
practices.
It seems clear, therefore, that Ordinance No. 3000 cannot be exclusive benefit of the members such as a fraternal
considered unconstitutional, even if applied to plaintiff Society. But organization operating under the lodge system, or mutual aid
as Ordinance No. 2529 of the City of Manila, as amended, is not association or a non-stock corporation organized by
applicable to plaintiff-appellant and defendant-appellee is powerless employees providing for the payment of life, sickness,
to license or tax the business of plaintiff Society involved herein accident, or other benefits exclusively to the members of such
for, as stated before, it would impair plaintiff's right to the free
exercise and enjoyment of its religious profession and worship, as society, order, or association, or non-stock corporation or their
well as its rights of dissemination of religious beliefs, We find that dependents;
Ordinance No. 3000, as amended is also inapplicable to said (D)Cemetery company owned and operated exclusively for the
business, trade or occupation of the plaintiff.
benefit of its members;
(E)Non-stock corporation or association organized and operated
City Assessor of Cebu City v. Association of exclusively for religious, charitable, scientific, athletic, or
Benevola de Cebu Inc. cultural purposes, or for the rehabilitation of veterans, no part
G.R. No. 152904, June 8, 2007 of its net income or asset shall belong to or inures to the
FACTS: Benevola de Cebu is a non-stock non-profit organization benefit of any member, organizer, officer or any specific
which in 1990, a medical arts building was constructed and in 1998 person;
was issued with a certification classifying the building as (F)Business league chamber of commerce, or board of trade, not
commercial. City assessor of Cebu assessed the building with a
market value of Php 28,060,520 and on assessed value of Php organized for profit and no part of the net income of which
9,821,180 at the assessment level of 35% and not 10% which is inures to the benefit of any private stock-holder, or individual;
currently imposed on private respondent herein. Petitioner claimed (G)Civic league or organization not organized for profit but
that the building is used as commercial clinic/spaces for renting out operated exclusively for the promotion of social welfare;
to physicians and thus classified as commercial. Benevola de Cebu

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(H)A non-stock and nonprofit educational institution; (I)

Government educational institution; Subject to conditions prescribed by law, all grants,
(I)Farmers' or other mutual typhoon or fire insurance company, endowments, donations, or contributions used actually,
mutual ditch or irrigation company, mutual or cooperative directly, and exclusively for educational purposes shall be
telephone company, or like organization of a purely local exempt from tax.
character, the income of which consists solely of assessments,
dues, and fees collected from members for the sole purpose of Atty. A: where educational institution is private and non-profit
meeting its expenses; and but a stock corporation, it is subject to income tax but a
(J)Farmers', fruit growers', or like association organized and preferential rate of 10%. Same thing is true for charitable
operated as a sales agent for the purpose of marketing the hospital/institution, it is subject to 10% income tax.
products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the
basis of the quantity of produce finished by them; Requisite for the application of the 10% preferential rate:
Notwithstanding the provisions in the preceding paragraphs, the 1) It must be private
income of whatever kind and character of the foregoing 2) It has permit to operate from the DECS, or CHED, or DepEd,
organizations from any of their properties, real or personal, or or TESDA
from any of their activities conducted for profit regardless of the 3) It is non-profit;
disposition made of such income, shall be subject to tax imposed 4) Its gross income from unrelated trade or business must not
under this Code. exceed 50% of its total gross income from all sources

f. EXEMPTION OF NON-STOCK, NON-PROFIT Requisite for the application of the 10% preferential rate:
EDUCATIONAL INSTITUTIONS FROM TAXATION
1) It must be private
Art. 14, Sec. 4 [3,4] 2) It has permit to operate as an educational institution from
the DECS, or CHED, or DepEd, or TESDA
(3) All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for 3) It is non-profit;
educational purposes shall be exempt from taxes and duties. 4) Its gross income from unrelated trade or business must not
Upon the dissolution or cessation of the corporate existence of exceed 50% of its total gross income from all sources
such institutions, their assets shall be disposed of in the manner — otherwise, if it will exceed the 50%, it will be subject to
provided by law. the 30% corporate income tax rate

Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to such Atty. A: Para dali mahinumduman, for educational institution:
exemptions, subject to the limitations provided by law, (1)For non-stock and non-profit, no tax;
including restrictions on dividends and provisions for (2)Even if it’s for profit, so long as it is an educational institution,
reinvestment. preferential/special rate of 10%, provided its gross income
(4) Subject to conditions prescribed by law, all grants, from unrelated trade or business must not exceed 50% of its
endowments, donations, or contributions used actually, directly, total gross income from all sources (otherwise, if it will
and exclusively for educational purposes shall be exempt from exceed the 50%.
tax.
SUMMARY OF RULES:
Revenue — related/unrelated activity 1) If non-stock, non-profit educational institution — tax exempt
Assets — referring to exemption from real property tax 2) Even if for profit — preferential rate at 10% provided its gross
income from unrelated trade must not exceed 50% of its
Non-stock, non-profit distinction: total gross income
1) No stocks
2) No board of directors but has board of trustees instead. NOTE: NULL AND VOID. Refer to Sec. 30 of NIRC
EXEMPTION DOES NOT EXTEND TO:
Educational Institution — school system; permit coming from 1) Income derived by these educational institutions from their
DepEd, ChEd, TESDA property, real or personal, and
2) From activities conducted by them for profit regardless of
- Covers income, property, and donor’s taxes, and customs the disposition made on such income.
duties;
- the revenue, assets, property or donations must be used Where the educational institution is private and nonprofit (but a
actually, directly, and exclusively for educational purposes; stock corporation) it is liable for income tax but at the
- lands, buildings, and improvements actually, directly, and preferential rate of ten percent (10%)
exclusively used for educational purposes are exempt from
property tax whether the educational institution is proprietary
or non-profit; However, the 10% preferential tax rate does not apply to the
following:
- we’re after of the USE of the property, not the ownership
1) The passive income derived by the educational institution,
- self-executing provision of the Constitution which is subject to final income tax. i.e. rent income or
interest income
Example: 2) Engaged in unrelated trade or business or other activity
USC (non-stock, non-profit) with a gross income from such exceeds 50% of the total
- Rent income — taxable gross income derive by the school from all sources 


TAKE NOTE: where a donation is made in favor of an

UC (proprietary)
educational institution pursuant to sports competition or
- not exempted but given a special rate of 10% tournaments, the donor is also exempted from the payment of
- School building/area — exempted from property tax (under donor’s tax.
exemption E)
- Rent income of UC – taxable @ 30% (normal corporate Perpetual Succour Hospital — CTA declared it as non-stock, non-
income tax rate)
profit charitable institution (exempt under Section 30 (E) of
NIRC)
Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to such
exemptions, subject to the limitations provided by law, “In making a distinction between a nonprofit hospital subject to
including restrictions on dividends and provisions for 10-percent income tax, the court made the following
reinvestment. differentiation: A nonprofit hospital is a proprietary or

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private hospital which income from activity unrelated to "Amended Articles of Incorporation" and "By-Laws” of the
hospital business is not more than 50 percent of its total YMCA, but found nothing in them that even hints that it is a
gross income. A nonstock, nonprofit hospital, on the other school or an educational institution.
hands a nonstick corporation operated exclusively for
charitable purposes and no part of its income inures to the It is settled that the term "educational institution," when used in
benefit of any member, organizer or a specific person. In fact, laws granting tax exemptions, refers to a ". . . school seminary,
the court said the receipt of fees from services rendered, such college or educational establishment . . . ." Therefore, the
as those from pay-patients, does not detract from the private respondent cannot be deemed one of the educational
charitable character of the hospital if all the funds are devoted institutions covered by the constitutional provision under
exclusively to the maintenance of the institution as a charitable consideration.
institution.

The last paragraph of Section 30 of the Tax Code is:

Hence, the tax exempt is not lost.
(1)without force and effect with respect to nonstock, non-profit
[CTA No. 7304, December 1, 2010] educational institutions, provided, that the non-stock, non-
profit educational institutions prove that its assets and
When a hospital is proprietary, or private, which is not for profit revenues are used actually, directly and exclusively for
and its gross income from unrelated trade, business or other educational purposes, and
activity does not exceed 50% of its total gross income from all (2)the tax-exemption constitutionally-granted to non-stock,
sources, it is subject to 10% tax rate. On the other hand, when a non-profit educational institutions, is not subject to
hospital is non-stock, meaning, its capital stock is not divided limitations imposed by law.
into shares, and is not authorized to distribute to the holders of (CIR v. De La Salle University, Nov. 9, 2016)
such shares dividends, operated exclusively for religious or
charitable purpose, no part of its net income or asset belong to
or inure to the benefit of any specific person, then the hospital Revenues  consist of the amounts earned by a person or
entity from the conduct of business operations. It may refer to
will fall under the provision of Section 130(E) of the NIRC
of1997, as amended. the sale of goods, rendition of services, or the return of an
investment. Revenue is a component of the tax base in income
tax, VAT, and local business tax (LBT).
It is well settled, in this connection, that the admission of pay-
patients does not detract from the charitable character of a
Assets, on the other hand, are the tangible and intangible
hospital, if all its funds are devoted 'exclusively to the
maintenance of the institution' as a 'public charity'. In other properties owned by a person or entity. It may refer to real
estate, cash deposit in a bank, investment in the stocks of a
words, where rendering of charity is its primary object, and the
funds derived from payments made by patients able to pay are corporation, inventory of goods, or any property from which
devoted to the benevolent purposes of the institution, the the person or entity may derive income or use to generate the
same. In Philippine taxation, the fair market value of real
mere fact that a profit has been made will not deprive the
hospital of its benevolent character. property is a component of the tax base in real property tax
(RPT). Also, the landed cost of imported goods is a component
of the tax base in VAT on importation and tariff duties.
CIR vs CA, GR No. 124043. October 14, 1998
Income derived by YMCA from leasing out a portion of its Thus, when a non-stock, non-profit educational institution
premises to small shop owners, like restaurant and canteen proves that it uses its  revenues  actually, directly, and
operators, and from non-members are taxable income. exclusively for educational purposes, it shall be exempted
from income tax, VAT, and LBT. On the other hand, when it
YMCA is not an educational institution, also shows that it uses its assets in the form of real property for
educational purposes, it shall be exempted from RPT.
The rent income derived by YMCA from leasing out a portion of To be clear, proving the actual use of the taxable item will result
its premises to small shop owners, like restaurants 
 in an exemption, but the specific tax from which the entity shall
and canteen operators, and from parking fees collected from be exempted from shall depend on whether the item is an
non-members are taxable income. item of revenue or asset.

The exemption claimed by the YMCA is expressly disallowed by The tax exemption granted by the Constitution to non-
the very wording of the last paragraph of then Section 27 of stock, non-profit educational institutions, unlike the
the NIRC which mandates that the income of exempt exemption that may be availed of by proprietary
organizations (such as the YMCA) from any of their properties, educational institutions, is not subject to limitations
real or personal, be subject to the tax imposed by the same imposed by law.
Code. Because the last paragraph of said section
unequivocally subjects to tax the rent income of the YMCA
from its real property, the Court is duty-bound to abide strictly By the Tax Code’s clear terms, a proprietary educational
by its literal meaning and to refrain from resorting to any institution is entitled only to the reduced rate of 10% corporate
convoluted attempt at construction. 
 income tax. The reduced rate is applicable only if: (1) the
proprietary educational institution is non profit and (2) its gross
For the YMCA to be granted the exemption it claims under the income from unrelated trade, business or activity does not
exceed 50% of its total gross income.
aforecited provision, it must prove with substantial 

evidence that (1) it falls under the classification non-stock, non-
profit educational institution; and (2) the income it seeks to be Consistent with Article XIV, Section 4 (3) of the Constitution,
exempted from taxation is used actually, directly, and these limitations do not apply to non-stock, non-profit
exclusively for educational purposes. However, the Court notes educational institutions.
that not a scintilla of evidence was submitted by private
respondent to prove that it met the said requisites.
CIR v. De La Salle University
G.R. Nos. 196596, 198841, 198941, November 9, 2016
YMCA is not an educational institution within the purview of
Article XIV, Section 4, par. 3 of the Constitution. The term FACTS: BIR issued to DLSU a LOA to its officers authorizing them
to examine the letters books.
"educational institution" or "institution of learning" has
acquired a well-known technical meaning, of which the BIR through a letter of Demand assessed DLSU for non-payment of
ITR, VAT, Document Stamp Tax.
members of the Constitutional Commission are deemed BIR protested stating that under the constitution they are exempted.
cognizant. Under the Education Act of 1982, such term refers ISSUE: Whether income from the canteen or bookstore
to schools. The school system is synonymous with formal
RULING:
education, which "refers to the hierarchically structured and
chronologically graded learnings organized and provided by Court cited Art. 14 Sec. 4 (3)
the formal school system and for which certification is required - that there are 2 categories
in order for the learner to progress through the grades or - DLSU falls on the first category
move to the higher levels." The Court has examined the

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Non-stock & non-profit educational are exempt from income tax as Under Article XIV, Section 4(3) of the 1987 Constitution, all
long as it’s used
revenues and assets of non-stock, non-profit educational
- regardless of the source of the income Institutions, used actually, directly and 13 exclusively for
educational purposes, are exempt from taxes and duties. Are
Unlike Art 6. Sec 28 (3) income derived from dormitories, canteens and bookstores as
- for the property to be exempted, it must be derived from charitable well as interest income on bank deposits and yields from
or educational
deposit substitutes automatically exempt from taxation?
Explain.
Court also noted that non-stock, non-profit educational institution is
not subject to limitation of law A: no. The interest income on bank deposits and yields from
deposit substitutes are not automatically exempt from taxation.
There must be a showing that the income are included in the
Under Sec. 27 Property Educational Institution which are non-profit
shall pay a tax of 10% of their taxable income. school's annual information return and duly audited financial
Requisites: statements, together with:
1) proprietary educational institution is non-profit (a)certifications from depository banks as to the amount of
2) its gross income from unrelated business does not exceed 50% of interest income earned from passive investments not subject
its total gross income to the 20% FWT; and
(b)certification of actual, direct and exclusive utilization of said
income for educational purposes;
What was basis of the BIR in subjecting it to tax?
(c)Board resolution on proposed project to be funded out of
Proviso of Sec. 30 of the NIRC
the money deposited in banks or placed in money market
Regardless of the disposition. placements, which must be used actually, directly and
exclusively for educational purposes.
BIR — relied on Sec. 30 of NIRC The income derived from dormitories, canteens and
De La Salle — relied on the Constitution. bookstores are not also automatically exempt from taxation.
There is still the requirement for evidence to show actual, direct
and exclusive use for educational purposes. It is to be noted
SC agreed with La Salle and follow what is provided under the that the 1987 Constitution does not distinguish with respect to
constitution with the requisites of the sources or origin of the income. Th distinction is with
1) non-stock, non-drift educational institutions respect to the use which should be actual, direct and exclusive
2) used actually, directly, and exclusively for educational for educational purposes. Consequently, the provisions of
purposes Section 30 of the NIRC, that a non-stock and non-profit
educational institution is exempt from taxation only in respect
2nd paragraph of the NIRC is null and void ONLY insofar as to income received By them as such could not affect the
non-stock, non-profit educational institution. It is still applicable constitutional tax exemption. Where the Constitution does not
to other institutions. distinguish with respect to sources or origin, the Tax Code
should not make distinctions.

Proprietary Educational Institution is NOT exempted from

income tax under the constitution but has preferential tax of XYZ Colleges is a non-stock, non-profit educational institution,
10% of the income subject to the 50% condition. run by the Archdiocese of BP City. It collected and received the
following: Tuition fees; Dormitory fees; Rentals from canteen
concessionaires; Interest from money market placements of the
Distinguish Article VI from Article XIV tuition fees; Donation of a lot and building by school alumni.
1. Which of these above-cited income and donation would not
Article VI, Section 28 (3) Article XIV, Section 4 (3) be exempt from taxation? Explain briefly.
2. Suppose that XYZ Colleges is a proprietary educational
Charitable institutions, churches and Non-stock, non-profit educational institution owned by the Archbishop's family, rather than the
parsonages or convents appurtenant institutions — exempt from 30% income Archdiocese, which of those above-cited income and
thereto, mosques, non-profit cemeteries, tax donation would be exempt from taxation?
and all lands, buildings, and
improvements, actually, directly, and A: (1) All of the income derived by the non-stock, non-profit
exclusively used for religious, charitable, educational institution will be exempt from taxation, provided
or educational purposes. they are used actually, directly and exclusively for educational
purposes are exempt from taxation. The donation is likewise
Property taxes Income tax, property, donor’s taxes and
customs duties exempt from donor’s tax, if actually, directly and exclusively
used for educational purposes, provided that not more than
30% of the donation is used by the done for administration
purposes. The donee, being a non-stock, non-profit
IMPORTANT PRINCIPLES: educational institution, is a qualified entity to receive an
A.The exemption covers income, property, and donor’s taxes, exempt donation, subject to conditions prescribed by law.
custom duties, and other taxes imposed by either or both Accordingly, none of the cited income and donation collected
the national government or political subdivisions on all and received by the non-stock, non-profit educational
revenues, assets, property or donations, used actually, institution would not be exempt from taxation.
directly and exclusively for educational purposes. (2) If XYZ Colleges is a proprietary educational institution, all of
TN: In case of religious and charitable entities and its income from school related and non-school-related
non-profit cemeteries, the exemption is limited only activities will be subject to the income tax, based on its
to property tax. aggregate net income derived from both activities.
B.The exemption does not cover revenues derived from, or Accordingly, all of the income enumerated in the problem will
assets used in, unrelated activities or enterprise. be taxable. The donation of lot and building will likewise be
C.Lands, buildings, and improvements actually, directly and subject to the donor’s tax because a donation to an
exclusively used for educational purposes are exempt from educational institution is exempt only if the school is
property tax (Sec 28 (3) Art VI), whether the educational incorporated as a non-stock entity paying no dividends. Since
institution is proprietary or non-profit. the donee is proprietary educational institution, the donation is
taxable.
D.The test is usage and not ownership.
E.Similar tax exemptions may be extended to proprietary
educational institutions by law subject to such limitations as it
may provide, including restrictions on dividends and g. NON-IMPRISONMENT FOR NON-PAYMENT OF A POLL
provisions for reinvestment. The restrictions are designed to TAX

insure that the tax-exemption benefits are used for Sec. 20, Art. III, 1987 Consti:
educational purposes.
“No person shall be imprisoned for debt or non-payment of a
poll tax.”
Bar Questions:

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Poll tax — a tax of a fixed amount fixed on persons residing If quorum lang, it is void for substantive is not followed.
within a specified territory, whether resident or not, without
regard to their property or the occupation of business which Ex. BIR assessed you for tax liability and you are not registered
they may be engaged. in that area but in another, it is violative of substantive due
process.
NOTE: But if acts, violative of laws were committed in the
issuance and payment of the cedula, imprisonment is allowed. • Procedural due process — The means employed must be
For instance, if a taxpayer was issued a cedula thru reasonably necessary to the accomplishment of the purpose
misrepresentation or falsification, the taxpayer could be and not unduly oppressive
imprisoned for falsification of public document.
- an act is done after compliance with fair and reasonable
methods or procedure prescribed by law
h. NON-IMPAIRMENT OF THE JURISDICTION OF THE SC IN - requires notice and hearing, or at least, an opportunity to
TAX CASES
be heard
Article VIII, Section 2
The Congress shall have the power to define, prescribe, and The requirement of due process whether taken from the
apportion the jurisdiction of the various courts but may not substantive to the procedural aspect simple means one thing —
deprive the Supreme Court of its jurisdiction over cases reasonableness of the legislation.
enumerated in Section 5 hereof.
“Substantive” means that it should not be harsh, confiscatory,
Sec. 5 (2)(b), Art. VIII: unjust and oppressive.
The Supreme Court shall have the following powers: “Procedural” means that it must provide notice and
opportunity to be heard. Thus, they simply mean that the law
2) Review, revise, reverse, modify, or affirm on appeal or must be reasonable.
certiorari, as the law or the Rules of Court may provide, final
judgments and orders of lower courts in:
There must be evidence to support a claim of violation of this
(b) All cases involving the legality of any tax, impost, assessment,
constitutional provision. Without proof, the presumption of
or toll, or any penalty imposed in relation thereto. constitutionality of law applies.

Article VI, Section 30

What are the requirements of due process in taxation?
No law shall be passed increasing the appellate jurisdiction of the A.It must be for a public purpose
Supreme Court without its advice and concurrence
B.Imposed within the taxing authority’s territorial jurisdiction
C.Assessment or collection is not arbitrary or oppressive
What is the scope of judicial review in taxation?
Limited only to the interpretation and application of tax laws. Its
power does not include inquiry into the policy of legislation. INSTANCES OF VIOLATION OF DUE PROCESS: MEMORIZE!!
Neither can it legitimately question or refuse to sanction the 1. Where the law is in violation of the inherent limitations
provisions of any law consistent with the Constitution. a. public purpose
b. imposed within the jurisdiction
2) INDIRECT CONSTITUTIONAL LIMITATION
c. international committee
d. exemption of government
1. Due process of law e. non-delegation of power
2. Equal protection of the laws 2. If the tax amounts to a confiscation of property
3. Non-impairment of the obligations of contracts - Like if there is no valid classification for imposing the tax
4. Non-infringement of religious freedom for that particular object or subject
5. No appropriation for religious purposes 3. if the subject of confiscation is outside the jurisdiction of the
6. Non-infringement of the freedom of the press taxing authority
7. Power of the President to veto any particular items in a 4. if the law which is applied retroactively imposes unjust and
revenue or tariff bill oppressive taxes
5. if the law is imposed for a purpose other than a public
purpose
a. DUE PROCESS OF LAW

Sec. 1, Art. III, 1987 Consti: POINTS TO REMEMBER WHEN IT COMES TO THE DUE PROCESS
“No person shall be deprived of life, liberty or property without CLAUSE:
due process of law, nor shall any person be denied the equal
protection of the laws.” 1)  The validity of a statute may be contested only by one who
sustained direct injury in consequence of its performance
— EXCEPT: transcendental importance; taxpayer’s suit
• Substantive due process — The interests of the public
generally as distinguished from those of a particular class 2) There must be proof of arbitrariness, otherwise, apply the
presumption of constitutionality
require the intervention of the State
3) Due process requires hearing before adoption of
- an act is done under the authority of a valid law or the legislative rules by administrative bodies of interpretative
Constitution itself
rulings
- requires that a tax statute must be within the constitutional 4) Compliance of strict procedural requirements must be
authority of Congress to pass
followed to avoid a collision course between the state’s
- it must be reasonable, fair and just; power to tax and the individuals’ recognized rights
☞ i.e. to grant exemption, the constitution mandates that it 5) Due process clause may correctly be invoked only when
must be passed by a vote of ALL members of congress there is a clear contravention of inherent or constitutional
(absolute majority; not just those who are present) limitations in the exercise of tax power.

Atty. A: therefore, everything nga mu-contradict with the direct

constitutional limitations that we have discussed awhile ago, Chamber of Real Estate and Builders' Associations'
there is now infringement of your substantive due process. Inc. v. Romulo et. al.
G.R. No. 160756,. March 9, 2010
Congress has the power to condition, limit or deny deductions from
TN: Anything that contradicts with the direct constitutional gross income in order to arrive at the net that it chooses to tax. This
limitations is an infringement of substantive due process. is because deductions are a matter of legislative grace. The
assignment of gross income, instead of net income, as the tax base
of the MCIT, taken with the reduction of the tax rate from 32% to
It falls here of the grant of tax exemption — majority vote. 2%, is not constitutionally objectionable.

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FACTS: Chamber of Real Estate and Builders' Associations, Inc. During the MCIT
(CHAMBER) is questioning the constitutionality of Sec 27 (E) of Gross Sales/Receipts xx
RA 8424 and the revenue regulations (RRs) issued by the Bureau of Deductions (xx)
Internal Revenue (BIR) to implement said provision and those
involving creditable withholding taxes (CWT). [CWT issues will Gross income xx
not be discussed] x MCIT 2% ⟵ MCIT
CHAMBER assails the validity of the imposition of minimum
corporate income tax (MCIT) on corporations and creditable
withholding tax (CWT) on sales of real properties classified as MCIT is only temporary. Will go back to the 30% once the
ordinary assets. Chamber argues that the MCIT violates the due normal income is back.
process clause because it levies income tax even if there is no
realized gain.
MCIT scheme: (Section 27 (E). [MCIT] on Domestic Corporations. b. EQUAL PROTECTION OF THE LAWS

A corporation, beginning on its fourth year of operation, is assessed

an MCIT of 2% of its gross income when such MCIT is greater than Sec. 1, Art. III, 1987 Consti:
the normal corporate income tax imposed under Section 27(A) “...nor shall any person be denied the equal protection of the
(Applying the 30% tax rate to net income).
 laws.”
If the regular income tax is higher than the MCIT, the corporation
does not pay the MCIT. - All persons, all properties, all businesses should be taxed at
Any excess of the MCIT over the normal tax shall be carried forward the same rate so long as they belong to the same
and credited against the normal income tax for the three classification.
immediately succeeding taxable years. - This is where substantial distinction applies: that it must be
The Secretary of Finance is hereby authorized to suspend the real and not superficial
imposition of the [MCIT] on any corporation which suffers losses
on account of prolonged labor dispute, or because of force majeure, - What is prohibited is class legislation wherein there is no
or because of legitimate business reverses. substantial distinction
The term ‘gross income’ shall mean gross sales less sales returns,
discounts and allowances and cost of goods sold. "Cost of goods
sold" shall include all business expenses directly incurred to CRITERIA FOR EQUAL PROTECTION:
produce the merchandise to bring them to their present location and 1.  When the law operates uniformly:
use.
CHAMBER claims that the MCIT under Section 27(E) of RA 8424 a. on all persons
is unconstitutional because it is highly oppressive, arbitrary and b. under similar circumstances
confiscatory which amounts to deprivation of property without due 2. All persons are treated in the same manner:
process of law. It explains that gross income as defined under said
provision only considers the cost of goods sold and other direct a. the conditions not being different
expenses; other major expenditures, such as administrative and b. both in privileges conferred and the liabilities imposed
interest expenses which are equally necessary to produce gross
income, were not taken into account. Thus, pegging the tax base of c. favoritism and preferences are not allowed
the MCIT to a corporation’s gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is
not "realized gain." REQUIREMENTS FOR VALID CLASSIFICATION:
ISSUE: (FC si SG/Feeling Close si Security Guard)
1. WON the imposition of the MCIT on domestic corporations is 1) There must be a Substantial distinction that make a real
unconstitutional difference
2. WON RR 9-98 is a deprivation of property without due process of
law because the MCIT is being imposed and collected even 2) It must be Germane or relevant to the purpose of the law
when there is actually a loss, or a zero or negative taxable 3) It must apply not only to the present but also to Future
income situation
HELD: 4) The distinction must apply to persons belonging to the same
1. NO. MCIT is not violative of due process. The MCIT is not a tax Class
on capital. The MCIT is imposed on gross income which is arrived
at by deducting the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods and other direct expenses from gross Substantial distinction — it must be real, material and not
sales. Clearly, the capital is not being taxed. superficial distinction
Furthermore, the MCIT is not an additional tax imposition. It is
imposed in lieu of the normal net income tax, and only if the normal
income tax is suspiciously low. People v. Cayat
The MCIT merely approximates the amount of net income tax due G.R. No. L-45987
from a corporation, pegging the rate at a very much reduced 2% and
uses as the base the corporation’s gross income. FACTS: In 1937, there exists a law (Act 1639) which bars native
non-Christians from drinking gin or any other liquor outside of their
CHAMBER failed to support, by any factual or legal basis, its customary alcoholic drinks. Cayat, a native of the Cordillera, was
allegation that the MCIT is arbitrary and confiscatory. It does not caught with an A-1-1 gin in violation of this Act. He was then
cite any actual, specific and concrete negative experiences of its charged and sentenced to pay P5.00 and to be imprisoned in case of
members nor does it present empirical data to show that the insolvency. Cayat admitted his guilt but he challenged the
implementation of the MCIT resulted in the confiscation of their constitutionality of the said Act. He averred, among others, that it
property. violated his right to equal protection afforded by the constitution.
Taxation is necessarily burdensome because, by its nature, it He said this an attempt to treat them with discrimination or “mark
adversely affects property rights. The party alleging the law’s them as inferior or less capable race and less entitled” will meet
unconstitutionality has the burden to demonstrate the supposed with their instant challenge. The law sought to distinguish and
violations in understandable terms. classify native non-Christians from Christians.
2. NO. RR 9-98, in declaring that MCIT should be imposed ISSUE: Whether or Not the law denies equal protection to one
whenever such corporation has zero or negative taxable income, prosecuted and sentenced for violation of said law.
merely defines the coverage of Section 27(E). HELD: No. It satisfies the requirements of a valid classification, one
This means that even if a corporation incurs a net loss in its business of which is that the classification under the law must rest on real or
operations or reports zero income after deducting its expenses, it is substantial distinctions. The distinction is reasonable. The
still subject to an MCIT of 2% of its gross income. This is classification between the members of the non-Christian and the
consistent with the law which imposes the MCIT on gross income members of the Christian tribes is not based upon accident of birth
notwithstanding the amount of the net income. or parentage but upon the degree of civilization and culture. The
term ‘non-Christian tribes’ refers to a geographical area and more
directly to natives of the Philippines of a low grade civilization
MCIT applies only after the 4th year. usually living in tribal relationship apart from settled communities.
The distinction is reasonable for the Act was intended to meet the
peculiar conditions existing in the non- Christian tribes” The
Before the MCIT prohibition is germane to the purposes of the law. It is designed to
Gross Sales/Receipts xx insure peace and order in and among the non- Christian tribes has
often resulted in lawlessness and crime thereby hampering the
Less: Deductions (xx) efforts of the government to raise their standards of life and
Gross income xx civilization. This law is not limited in its application to conditions
existing at the time of the enactment. It is intended to apply for all
Less: Expenses (xx) times as long as those conditions exist. The Act applies equally to
Taxable Income xx all members of the class. That it may be unfair in its operation
against a certain number of non- Christians by reason of their
x Tax % 30% degree of culture is not an argument against the equality of its
Tax Payable xx operation nor affect the reasonableness of the classification thus
established.

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Equal protection not violated by legislation based on reasonable Tiu v. CA

classification. Classification to be reasonable (1) must rest on G.R. No. 127410 January 20, 1999
substantial distinctions (2) germane to the purpose of the law (3) Facts: The petitioners assail the constitutionality of the said Order
not limited to existing conditions only (4) apply equally to all claiming that they are excluded from the benefits provided by RA
members of the same class. In (1), not based on accident of birth or 7227 without any reasonable standards and thus violated the equal
parentage but upon the degree of civilization and culture. Non protection clause of the Constitution. The Court of Appeals upheld
Christian refers not to religious belief but to geographical area. In the validity and constitutionality and denied the motion for
(2), unquestionable because it is designed to insure peace and order reconsideration. Hence, this petition was filed.
in and among Non Christian tribes. In (3), it applies for all times as
long as those conditions exist. In (4), it’s not an argument here. The —————
government raise their culture and civilization and secure for them On March 13, 1992, Congress, with the approval of the President,
the benefits of their progress with the ultimate view of placing them passed into law RA 7227. This was for the conversion of former
with Christians on the basis of true equality. military bases into industrial and commercial uses. Subic was one
of these areas. It was made into a special economic zone.
In the zone, there were no exchange controls. Such were liberalized.
Ormoc Sugar Company v. Conejos et al. There was also tax incentives and duty free importation policies
under this law.
A perusal of the requisites instantly shows that the questioned On June 10, 1993, then President Fidel V. Ramos issued Executive
ordinance does not meet them, for it taxes only centrifugal Order No. 97 (EO 97), clarifying the application of the tax and duty
sugar produced and exported by the Ormoc Sugar Company, incentives. It said that
Inc. and none other. At the time of the taxing ordinance's On Import Taxes and Duties. — Tax and duty-free importations shall
enactment, Ormoc Sugar Company, Inc., it is true, was the only apply only to raw materials, capital goods and equipment brought in
sugar central in the city of Ormoc. Still, the classification, to be by business enterprises into the SSEZ
reasonable, should be in terms applicable to future conditions On All Other Taxes. — In lieu of all local and national taxes (except
as well. The taxing ordinance should not be singular and import taxes and duties), all business enterprises in the SSEZ shall
exclusive as to exclude any subsequently established be required to pay the tax specified in Section 12(c) of R.A. No.
7227.
sugar central, of the same class as plaintiff, for the coverage of Nine days after, on June 19, 1993, the President issued Executive
the tax. As it is now, even if later a similar company is set up, it Order No. 97-A (EO 97-A), specifying the area within which the
cannot be subject to the tax because the ordinance expressly tax-and-duty-free privilege was operative.
points only to Ormoc City Sugar Company, Inc. as the entity to Section 1.1. The Secured Area consisting of the presently fenced-in
be levied upon. former Subic Naval Base shall be the only completely tax and duty-
free area in the SSEFPZ. Business enterprises and individuals
(Filipinos and foreigners) residing within the Secured Area are free
to import raw materials, capital goods, equipment, and consumer
Ormoc Sugar Company v. Conejos et al. items tax and duty-free.
G.R. No. L-23794, February 17, 1968 Petitioners challenged the constitutionality of EO 97-A for allegedly
Facts: The Municipal Board of Ormoc City passed a municipal tax being violative of their right to equal protection of the laws. This
ordinance imposing on any and all productions of centrifugal sugar was due to the limitation of tax incentives to Subic and not to the
milled at the Ormoc Sugar Company Inc. one percent per export entire area of Olongapo. The case was referred to the Court of
sale to the US and other foreign countries. Said company filed Appeals.
before the CFI of Leyte a complaint against the City of Ormoc, its The appellate court concluded that such being the case, petitioners
Treasurer, Municipal Board and Mayor, alleging sasid ordinance is could not claim that EO 97-A is unconstitutional, while at the same
violative of the equal protection clause and the rule of uniformity of time maintaining the validity of RA 7227.
taxation, among other things. Ormoc Sugar Company Inc. was the
only sugar central in Ormoc City at the time. The court a quo also explained that the intention of Congress was to
confine the coverage of the SSEZ to the "secured area" and not to
Issue: WON the constitutional limits on the power of taxation, include the "entire Olongapo City and other areas mentioned in
specifically the EPC and uniformity of taxation, were infringed. Section 12 of the law.
Held: Yes. Though Ormoc Sugar Company Inc. is the only sugar Hence, this was a petition for review under Rule 45 of the Rules of
central in the city of Ormoc at the time, the classification, to be Court.
reasonable, should be in terms applicable to future conditions as Issue: Whether the provisions of Executive Order No. 97-A
well. Said ordinance shoouldn’t be singular and exclusive as to confining the application of R.A. 7227 within the secured area and
exclude any subsequently established sugar central, of the same
class as plaintiff, for coverage of the tax. excluding the residents of the zone outside of the secured area is
discriminatory or not owing to a violation of the equal protection
EPC applies only to persons or things identically situated and clause.
doesn’t bar a reasonable classificationof the subject of legislation. A
classification is reasonable where: 1) it is based on substantial Held. No. Petition dismissed.
distinctions which make real differences; (2) these are germane to Ratio: Citing Section 12 of RA 7227, petitioners contend that the
the purpose of the law; (3) the classification applies not only to SSEZ encompasses (1) the City of Olongapo, (2) the Municipality
present conditions but also to future conditions which are of Subic in Zambales, and (3) the area formerly occupied by the
substantially identical to those of the present; (4) the classification Subic Naval Base. However, they claimed that the E.O. narrowed
applies only to those who belong to the same class. the application to the naval base only.
OSG — The E.O. Was a valid classification.
Court --The fundamental right of equal protection of the laws is not
Tiu v. CA, G.R. No. 127410 January 20, 1999 absolute, but is subject to reasonable classification. If the groupings
are characterized by substantial distinctions that make real
differences, one class may be treated and regulated differently from
Certainly, there are substantial differences between the big another. The classification must also be germane to the purpose of
investors who are being lured to establish and operate their the law and must apply to all those belonging to the same class.
industries in the so-called "secured area" and the present Inchong v Hernandez — Equal protection does not demand absolute
business operators outside the area. On the one hand, we are equality among residents; it merely requires that all persons shall be
treated alike, under like circumstances and conditions both as to
talking of billion-peso investments and thousands of new, jobs. privileges conferred and liabilities enforced.
On the other hand, definitely none of such magnitude. In the Classification, to be valid, must (1) rest on substantial distinctions,
first, the economic impact will be national; in the second, only (2) be germane to the purpose of the law, (3) not be limited to
local. Even more important, at this time the business activities existing conditions only, and (4) apply equally to all members of the
outside the "secured area" are not likely to have any impact in same class.
achieving the purpose of the law, which is to turn the former RA 7227 aims primarily to accelerate the conversion of military
military base to productive use for the benefit of the Philippine reservations into productive uses. This was really limited to the
economy. There is, then, hardly any reasonable basis to extend military bases as the law's intent provides. Moreover, the law tasked
the BCDA to specifically develop the areas the bases occupied.
to them the benefits and incentives accorded in RA 7227.
Among such enticements are: (1) a separate customs territory within
It is well-settled that the equal-protection guarantee does not the zone, (2) tax-and-duty-free importations, (3) restructured
require territorial uniformity of laws. As long as there are income tax rates on business enterprises within the zone, (4) no
actual and material differences between territories, there is no foreign exchange control, (5) liberalized regulations on banking and
violation of the constitutional clause. And of course, Anyone, finance, and (6) the grant of resident status to certain investors and
of working visas to certain foreign executives and workers. The
including the petitioners, possessing the requisite investment target of the law was the big investor who can pour in capital.
capital can always avail of the same benefits by channeling his Even more important, at this time the business activities outside the
or her resources or business operations into the fenced-off "secured area" are not likely to have any impact in achieving the
free port zone. purpose of the law, which is to turn the former military base to
productive use for the benefit of the Philippine economy. Hence,
there was no reasonable basis to extend the tax incentives in RA
7227.
It is well-settled that the equal-protection guarantee does not require
territorial uniformity of laws. As long as there are actual and

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material differences between territories, there is no violation of the 2) If the exemption is granted by virtue of a contract, where
constitutional clause. the government enters into a contract with a private
Besides, the businessmen outside the zone can always channel their corporation
capital into it. ❖ cannot be revoked unilaterally by the government
RA 7227, the objective is to establish a "self-sustaining, industrial, 3) If the basis of the tax exemption is a franchise granted by
commercial, financial and investment center”. There will really be
differences between it and the outside zone of Olongapo. Congress and under the franchise or the tax exemption is
The classification of the law also applies equally to the residents and given to a particular holder or person
businesses in the zone. They are similarly treated to contribute to ❖ it can be unilaterally revoked by the gov’t thru Congress
the end gaol of the law.

d. NON-INFRINGEMENT OF RELIGIOUS FREEDOM

c. NON-IMPAIRMENT OF THE OBLIGATION OF CONTRACTS

Sec. 5, Art. III, 1987 Consti:
Sec. 10, Art. III, 1987 Consti: “No law shall be made respecting an establishment of religion, or
“No law impairing the obligation of contracts shall be passed.” prohibiting the free exercise thereof. The free exercise and
enjoyment of religious profession and worship, without
discrimination or preference, shall forever be allowed. No
Non-impairment clause of the constitution constitutes a religious test shall be required for the exercise of civil or political
limitation on the power of taxation. rights.”

The obligation or contract is impaired the nits terms or

The income of such organizations from any activity conducted
conditions are changed by law or by a party without consent of
for profit or from any of their property, real or personal,
the other thereby weakening the position of the latter. Thus, regardless of the disposition made of such income, is taxable.
there is no impairment by law when a tax exemption based on
a contact is revoked by a later taxing statute.
This provision has 3 coverage:
Remember: Obligation of contract. (1) freedom to choose religion;
There are other kinds of obligations such as law, delict, quasi (2) freedom to exercise one’s religion;
delict, contract… If under a law, it can be impaired. (3) Prohibition upon the national government to establish a
- Obligation of the government to grant exemption. national religion;
- In relation to the power of taxation, what is prohibited is no. 3.
It may be well to point out that the non-Impairment clause will
only be violated if and when the taxing authority was a party to Jimmy Swaggart Case
the contract in question.
The free exercise of religion clause does not prohibit imposing
Note: The rule, however, does not apply to public utility a generally applicable sales tax on the sale of religious
franchises or rights since they are subject to amendment, materials by religious organization. (payment of license fees
alteration or repeal by the Congress when the public interest for distribution of bibles)
so requires. (Cagayan Electric and Light Co., Inc. vs. The sale of religious articles can be subject to VAT.
Commissioner, G.R. no. 60216, September 25, 1985)
What cannot be taxed is the exercise of religious worship or
activity.
NOTE: This provision was NOT REALLY thought of as a The income of the priest from the exercise of a religious activity
limitation on the power of taxation EXCEPT in case where tax cannot also be taxed.
exemption was granted for a valuable consideration. So the
question now should be are tax exemptions falling under the
subject constitutional provision revocable? e. NO APPROPRIATION FOR RELIGIOUS PURPOSES

You have to qualify, if the exemption is granted via a franchise, it

can be revoked because of Section 11 Article 12 of the
■ As a general rule, no appropriation,
Constitution. However, if the exemption is via a contract, it — EXCEPT: for salary or payment of priest or minister
cannot be revoked. Why the distinction? Because in the grant serving in AFP, penal institutions, orphanage, and
of franchise, the government is exercising a governmental leprosarium.
function, while in contract, the government merely exercises a
proprietary function. Q: Is the appropriation or budget given for the visit of the pope
in the Philippines valid or a violation to the separation of the
■ General Rule: The power of tax is pursuant to law therefore church and the state?
the obligation to pay taxes is imposed by law. Thus, the non- A: It is valid. The Pope is a head of the state. Being a head of the
impairment clause does not apply because the non- state, the appropriation made by the government for the visit is
impairment here refers to obligations brought about by justified.
contracts, not law.
— Exception: the non-impairment clause applies when— f. NON-INFRINGEMENT OF THE FREEDOM OF THE PRESS

‣ When the law merely provides for the fulfillment of an

obligation Sec. 4, Art, III, 1987 Consti:
‣ When the law merely recognizes or acknowledges the “No law shall be passed abridging the freedom of speech, of
existence of an obligation created by acts expression or of the press.” 


Atty. A: only when the law establishes the obligation and also There is curtailment of press freedom and freedom of thought
and expression if a tax is levied in order to suppress this basic
provides for its fulfillment that the law is the source of the
right and impose a prior restraint. (Tolentino, et.al vs. Secretary
obligation.
of Finance, 235 SCRA 630)

TAKE NOTE: the constitutional guarantee of the non-

impairment clause can only be invoked in the grant of tax Focus of press freedom not expression: there is curtailment of
press freedom and freedom of thought and expression if a
exemption.
taxed is levied in order to suppress this basic right and impose
prior restraint.
RULES: ☞ Example: impose a very high tax in order to prevent the
1) If the exemption was granted for valuable consideration on press or the freedom of expression — violates the
the basis of a contract constitutional provision, Non-infringement of the freedom of
❖ cannot be revoked by passing another law the press.
- Valuable consideration — employment

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However it does not mean that the press is exempted to tax. RULES THAT NEED TO BE OBSERVE:

The press is subject to tax but the tax should be 


reasonable not oppressive, not arbitrary.
Rules Observed in Fixing Tax Situs
The sale magazine or newspapers may be subject to taxation. 1) Poll/Capitation/Community tax — residence of the
What is not allowed is to impose tax on the exercise of an taxpayer
activity which has a connection with freedom of the press. For 2) Property tax
example: collection of license fees before one can exercise that ❖ Real Property — in the state or country where ti is located
freedom. (lex res sitae), regardless of owner’s residency
❖ Personal Property

g. POWER OF THE PRESIDENT TO VETO ANY PARTICULAR GR: Doctrine of Mobilia Sequuntur Personam
(movables follow the person)
ITEM/S IN A REVENUE OR TARIFF BILL

Exception: Actual or Business Situs (Section 104, RA

Sec. 27(b), Art. 6, 1987 Consti: 8424)
“The President shall have the power to veto any particular item
or items in an appropriate, revenue or tariff bill, but the veto
shall not affect the item or items to which he does not object.” 1. Poll/community tax — situs/place of taxation is the
residence of the taxpayer regardless of citizenship.
What type of veto? 2. Property tax — real or personal
Particular or specific veto a. Real property — lex rei sitae/lex rei situs; levied in the
country where the real property is located.
b. Personal property — principle mobilia sequuntur
XVII. SITUS OF TAXATION personam; movables follow the person; depends on the
domicile of the owner of the property.
Situs of Taxation i. Tangible personal property — where the property is
Place of Taxation physically located although the owner resides in
another jurisdiction
ii.Intangible personal property
Rule: The state where the subject to be taxed has a situs may
rightfully levy and collect the tax ■ GR: Domicile of the owner because movables follow
the person.
Situs/Territoriality pertains to either: — EXCEPTION:
1) Geographical location; or 1. When the law provides for the situs of the subject
of tax
2) Jural concept or nexus or bond between the taxing authority
and taxpayers 2. When the property has acquired a business situs in
another jurisdiction

As a rule when it comes to persons , properties or activities it

Exception: Actual or Business Situs (Sec. 104, RA 8428)
can only be taxed within the place of the taxing authority or
within its territorial jurisdiction. 1) Franchise exercised in the Philippines
2) Shares of stock, obligations, bonds issued by domestic
corporations organized and constituted in accordance with
Persons, properties or activities can only be taxed within the
place of the taxing authority or within its territorial jurisdiction. Philippine laws;
Within the territorial jurisdiction, the taxing authority may 3) Shares of stocks, obligations, bonds issued by the foreign
determine the situs. Situs of taxation literally means “place of corporation: 85% of its business is located in the
taxation”. Philippines. It is subject to donor’s and estate tax;
4) Shares or right in a partnership business or industry
Situs of taxation is the place or the authority that has the established in the Philippines;
power to collect taxes. It is premised upon the symbiotic 5) Shares, obligations, bonds issued by foreign corporations
relation between the taxpayer and the State. used which acquired business situs when sanction in the
furtherance of the business of the foreign corporation.
Basic rule: The state where the subject to be taxed has a situs
may rightfully levy and collect the tax, and the situs is NB: Subject to reciprocity rule
necessarily in the state which has jurisdiction or which exercises
dominion over the subject in question.
A foreign corporation acquires business situs in the country — if
it has permanent establishment in the Philippines. Either it
Remember: look at the geographical location for jurial concept maintains an office, a production plant, or there is a continuous
or nexus or bond between the taxing authority and the tax commercial activity in the country.
payer. If it acquires business situs, we do not care anymore about the
☞ Example: A Filipino resident citizen earning income abroad percentage.
can still be a subject of tax in the Philippine not because of
geographical location but due to the jural concept or nexus ■ Actual/Business situs — sec .104, RA 8424 (enumeration
or bond between the taxing authority and the taxpayer.
under) even if they are located outside of the Philippines, can
still be subject to tax; or even if the owner are foreigners but
WHY is it important to know the situs/place of taxation? they are located in the Philippines, they can still be subject to
1. To know it the taxing authority really has the authority to tax. tax.
2. There are exceptions/exemptions which only applies to a ■ Example:
specific locality. a. Franchise exercised in the Philippines even if the
franchise owner/franchise holder is not from the
What are the factors that determine situs? Philippines.
1. Nature of the tax b. Shares of stocks, obligations, bonds issued by domestic
2. Subject matter of the tax (person, property, act or activity) corporations: taxed in the Philippines
3. Possible protection and benefit that may accrue both to the c. Shares of stocks, obligations, bonds issued by the
government and the taxpayer foreign corporation: 85% of its business is located in
the Philippines; subject to tax in the Philippines
4. Citizenship of the taxpayer
d. Shares or right in a partnership business or industry
5. Residence of the taxpayer established in the Philippines: taxed in the Philippines
6. Source of income even if the holders or owners thereof are not Filipino.
e. Shares, obligations, bonds issued by foreign
corporations used which acquired business situs when

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sanction in the furtherance of the foreign corporation: Kind of Tax Situs

taxed in the Philippines Others
Business Tax Place of business
NOTE: Even if owners are not domiciled in the Philippines Poll, capitation or Residence of taxpayer, regardless of the source of
they will still be taxed in the Philippine, subject to community tax income or location of the property of the taxpayer
Reciprocity Rule (citizen of such country which grants
exemption to the intangible personal properties Filipinos
in their country will also be exempted).
Air Canada v. CIR
3) Business tax — place of business G.R. No. 169507, January 11, 2016
4) Excise tax — where the act is performed or the occupation is FACTS: Air Canada is a foreign corporation organized and existing
pursued. under the laws of Canada. On April 24, 2000, it was granted an
authority to operate as an offline carrier by the Civil Aeronautics
5) Sales tax — where the sale is consummated; personal Board, subject to certain conditions, which authority would expire
property on April 24, 2005.
6) Income tax — to consider: Citizenship [nationality theory], As an off-line carrier, Air Canada does not have flights originating
Residence [domiciliary theory], sources [source rule] of from or coming to the Philippines and does not operate any airplane
in the Philippines.
income (sec. 42, RA 8428) On July 1, 1999, Air Canada engaged the services of Aerotel Ltd.,
7) Transfer tax — residence or citizenship of the taxpayer or the Corp. (Aerotel) as its general sales agent in the Philippines. Aerotel
location of the property sells Air Canada’s passage documents in the Philippines. For the
8) Franchise tax — state which granted the franchise period ranging from the third quarter of 2000 to the second quarter
of 2002, Air Canada, through Aerotel, filed quarterly and annual
9) Value-added tax — ‘Cross-Border Doctrine’ is followed income tax returns and paid the income tax on Gross Philippine
10)Tax on Interest Income — residence of the borrower who Billings in the total amount of ₱5,185,676.77.
pays the interest irrespective of the place where the On November 28, 2002, Air Canada filed a written claim for refund
obligation was contracted of alleged erroneously paid income taxes amounting to
₱5,185,676.77 before the Bureau of Internal Revenue (BIR). It’s
basis was found in the revised definition of Gross Philippine
Billings under Section 28(A)(3)(a) of the 1997 National Internal
3. Business tax — place of business Revenue Code (NIRC)1 .
4. Excise tax — where the act is performed or the occupation is To prevent the running of the prescriptive period, Air Canada filed a
pursued. Petition for Review before the Court of Tax Appeals (CTA).
5. Sales tax — where the sale is consummated; personal The CTA denied the petition. It found that Air Canada was engaged
property in business in the Philippines through a local agent that sells airline
tickets on its behalf.
- Presumption: sale of personal property As such, it held that while Air Canada was not liable for tax on its
6. Income tax — to consider: Gross Philippine Billings under Section 28(A)(3), it was
a. Citizenship – the nationality theory nevertheless liable to pay the 32% corporate income tax on income
derived from the sale of airline tickets within the Philippines
b. Residence – the domiciliary theory pursuant to Section 28(A)(1). On appeal, the CTA En Banc affirmed
c. Source – the source rule the ruling of the CTA First Division.
7. Transfer tax — donor’s or estate tax; residence or citizenship
1) Whether Air Canada is subject to the 2 1⁄2% tax on Gross
of the taxpayer or the location of the property; case to case Philippine Billings pursuant to Section 28(A)(3).
basis
NO. Air Canada is not is not liable to tax on Gross Philippine
8. Franchise tax — the state which granted the franchise Billings under Section 28(A)(3). The tax attaches only when the
9. Value-added tax — cross-border doctrine or destination carriage of persons, excess baggage, cargo, and mail originated
principle — if the good/property is not to be consumed in from the Philippines in a continuous and uninterrupted flight,
regardless of where the passage documents were sold. Not having
the Philippines then it should not be taxed in the flights to and from the Philippines, petitioner is clearly not liable for
Philippines; treated differently form business tax and sales the Gross Philippine Billings tax.
tax because it has a specific law applied to it.
10.Tax on Interest Income — the domiciliary theory — 2) If not, whether Air Canada is a resident foreign corporation
residence of the borrower who pays the interest irrespective engaged in trade or business and thus, can be subject to the
of the place where the obligation was contracted, not the regular corporate income tax of 32% pursuant to Section
28(A)(1);
residence of the creditor.
YES. Petitioner falls within the definition of resident foreign
corporation under Section 28(A)(1)2 , thus, it may be subject to
Summary of Rules: 32% tax on its taxable income.
Kind of Tax Situs The Court in Commissioner of Internal Revenue v. British Overseas
Airways Corporation declared British Overseas Airways
Real property Place where the real property is located Corporation, an international air carrier with no landing rights in the
Philippines, as a resident foreign corporation engaged in business in
Tangible personal Place where property is physically located although the Philippines through its local sales agent that sold and issued
property the owner resides in another jurisdiction tickets for the airline company.
Property Intangible GR: Domicile of the owner (movables follow the
Tax personal property person) According to said case, there is no specific criterion as to what
XPNS: constitutes “doing” or “engaging in” or “transacting” business.
(e.g. credits, bills, 1. When the property has acquired a business situs Each case must be judged in the light of its peculiar environmental
stocks, promissory in another jurisdiction circumstances. The term implies a continuity of commercial
notes) 2. When the law provides for the situs of the object dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the
Excise tax Where the act is performed or the occupation is functions normally incident to, and in progressive prosecution of
pursued commercial gain or for the purpose and object of the business
organization.
Source of the income, nationality or residence of the
Income tax taxpayer
An offline carrier is “any foreign air carrier not certificated by the
Location of the property, nationality or residence of Civil Aeronautics Board, but who maintains office or who has
Donor’s tax designated or appointed agents or employees in the Philippines,
the taxpayer
Excise Tax who sells or offers for sale any air transportation in behalf of said
Location of the property, nationality or residence of foreign air carrier and/or others, or negotiate for, or holds itself out
Estate tax by solicitation, advertisement, or otherwise sells, provides,
the taxpayer
furnishes, contracts, or arranges for such transportation.”
Where the transaction is made Cross-border doctrine
or destination principle – if the good is not to be
VAT consumed in the Philippines, then it should not be Petitioner is undoubtedly “doing business” or “engaged in trade or
taxed in the Philippines business” in the Philippines. In the case at hand, Aerotel performs
acts or works or exercises functions that are incidental and
Franchise tax State which granted the franchise beneficial to the purpose of petitioner’s business. The activities of
Aerotel bring direct receipts or profits to petitioner. Further,
Where the sale is consummated petitioner was issued by the Civil Aeronautics Board an authority to
Sales tax Presumption: Sale of personal property operate as an offline carrier in the Philippines for a period of fiveAn
Others
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offline carrier is “any foreign air carrier not certificated by the Civil Double taxation — strictly, taxing twice the same object/subject,
Aeronautics Board, but who maintains office or who has designated same taxing jurisdiction, same purpose, same tax, same year
or appointed agents or employees in the Philippines, who sells or (“direct duplicate”); should one of these is not same,
offers for sale any air transportation in behalf of said foreign air ☞ i. e., say not same year, then it is called (“indirect duplicate”).
carrier and/or others, or negotiate for, or holds itself out by
solicitation, advertisement, or otherwise sells, provides, furnishes, In either case, there is not law which prohibits the same. There is
contracts, or arranges for such transportation.” not even a prohibition by the constitution as you say it.

Petitioner is undoubtedly “doing business” or “engaged in trade or However, in case of direct duplicate, if ti amounts to
business” in the Philippines. In the case at hand, Aerotel performs
acts or works or exercises functions that are incidental and confiscation of property for being unjust, oppressive, or unfair,
beneficial to the purpose of petitioner’s business. The activities of then it is unconstitutional not on the ground of double taxation
Aerotel bring direct receipts or profits to petitioner. Further, but for being violative of the due process clause.
petitioner was issued by the Civil Aeronautics Board an authority to
operate as an offline carrier in the Philippines for a period of five
years. Petitioner is, therefore, a resident foreign corporation that is Note: There is no constitutional prohibition against double
taxable on its income derived from sources within the Philippines. taxation. It is not favored but permissible.

Juliane a non-resident alien appointed as a commission agent

INSTANCES OF DOUBLE TAXATION

by a domestic corporation with a sales commission of 10% all

sales actually concluded and collected through her efforts. The Instances of Double Taxation:
local company withheld the amount of P107,000 from her sales 1) DIRECT
commission and remitted the same to the BIR. - Occurs when the same subject/object is taxed twice when it
She filed a claim for refund alleging that her sales commission is should be taxed once; objectionable or prohibited sense
not taxable because the same was a compensation for her
services rendered in Germany and therefore considered as
income from sources outside the Philippines. Requisites:
Is her contention correct ? A)The same subject/object is taxed twice when it should only
SUGGESTED ANSWER: be taxed once;
B)Both taxes are imposed for the same purpose;
Yes. The important factor which determines the source of
income of personal services is not the residence of the payor, C)Imposed by the same taxing authority;
or the place where the contract for service is entered into, or D)Within the same jurisdiction;
the place of payment, but the place where the services were E)During the same period; and
actually performed. F)Covering the same kind or character of tax
Since the activity of securing the sales were in Germany, then
the income did not originate from sources from within the
Philippines. (Commissioner of Internal Revenue v. Baier-Nickel, 1. STRICT SENSE (DIRECT DUPLICATE TAXATION)

G. R. No. 153793, August 29, 2006)

Double taxation in the objectionable or prohibited sense. It is
illegal for being oppressive and inequitable.
NOTE AND COMMENTS: In the above case, the Supreme
Court reiterated the rule that “source of income” relates to the
property, activity or service that produced the income. With Strict Sense (direct duplicate taxation/direct double taxation) —
respect to rendition of labor or personal service, it is the place (a)same subject/object is taxed twice,
where the labor or service was performed that determines the (b)by the same taxing authority,
source of the income. (c)within the same jurisdiction or taxing district,
The above Baier-Nickel case discussed the import of the (d)for the same purpose,
landmark cases (Howden and BOAC) involving sources of (e)in the same year [or taxing period],
income for tax purposes both of which may be dangerous for
Bar purposes: (f)same of the property in the territory
Both taxes must be imposed on the same property or subject
matter.
A domestic insurance company decided to reinsure with a
foreign reinsurer the risks it has undertaken with its local clients.
The foreign reinsurer does not have an office, neither does it do 2) INDIRECT
business in the Philippines. Are the reinsurance premiums - Allowed if the taxes are of different natures or character,
subject to Philippine income taxation ? imposed by different taxing authority
SUGGESTED ANSWER:
Yes because the undertaking of the foreign insurance company
to indemnify the local insurance company is the activity that 2. BROAD SENSE (INDIRECT DUPLICATE TAXATION)

produced the income. Broad Sense (indirect duplicate taxation/indirect double

The reinsurance premiums remitted to the foreign reinsurer had taxation) — taxation other than direct duplicate. It extends to all
for their source the undertaking to indemnify the local insurer cases in which there is a burden of two or more pecuniary
against liability. Said undertaking is the activity that produced impositions.
there insurance premiums, and the same took place in the
Philippines. The reinsured, the liabilities insured and the risk
originally undertaken by the local insurance company, upon There is double taxation in the broad sense if any of the
which the reinsurance premiums and indemnity were based, elements for direct duplicate taxation is absent. It extends to all
were all situated in the Philippines. (Alexander Howden & Co., cases in which there are two or more pecuniary impositions, for
Ltd. v. Collector of Internal Revenue, 121 Phil. 579; 13 SCRA example, a tax upon the same property imposed by two
601 (1965) cited in Baier-Nickel) different states.

TN: Double taxation in its strict sense is undoubtedly

unconstitutional but that in the broader sense is not necessarily
XVIII. DOUBLE TAXATION so. Where double taxation (in its strict sense) occurs, the
taxpayer may seek relief under the uniformity rule or the equal
MEANING OF DOUBLE TAXATION
protection guarantee.

DOUBLE TAXATION REQUISITES FOR DIRECT DUPLICATE:

- strictly, taxing twice the same object/subject, same taxing 1) Same subject/object is taxed twice
jurisdiction, same purpose, same tax, same year (“direct
duplicate”); 2) Same purpose
3) Imposed by the same taxing authority
4) Within the same jurisdiction

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5) Within the same period 2. INDIRECT - Allowed if the taxes are of different natures or character,
6) Same kind or character of tax imposed by different taxing authority
- permissible double taxation
* if one is missing, it is indirect duplicate taxation which is 3. DOMESTIC Arises when the taxes are imposed by the local or national
valid government

3. DOMESTIC (DOMESTIC INDIRECT TAX)

4. INTERNATIONAL Refers to the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject
matter and for identical periods
3) DOMESTIC (Indirect)
- Arises when the taxes are imposed by the local or national
government
DOCTRINES OF DOUBLE TAXATION:

■ Domestic double taxation — arises when the taxes are

imposed by the local or the national government DOCTRINES of DOUBLE TAXATION
4) Direct Double Taxation (DDT) is not allowed because it
amounts to confiscation of property without due process of
4. INTERNATIONAL (INTERNATIONAL INDIRECT TAX) law
4) INTERNATIONAL 5) You can question the validity of double taxation if there is a
- Refers to the imposition of comparable taxes in two or more violation of the equal protection clause or equality or
states on the same taxpayer in respect of the same subject uniformity of taxation
matter and for identical periods 6) Doubts as to whether double taxation has been imposed
should be resolved in favor of taxpayer
Case of Manny Pacquiao when he won in Las Vegas. He paid
that there and here in the Philippines
■ Only direct double taxation is not allowed because it
■ International double taxation — imposition of comparable amounts to confiscation of property without due process of
taxes in two or more states on the same taxpayer with law. It violates the due process clause.
respect to the same subject matter and for identical period ■ You can question the validity of double taxation if there is a
❖ Allowed because they are imposed by different taxing violation of the equal protection clause, or equality or
authorities (domestic and international) uniformity of taxation.
❖ Measures allowed by the government are refund or ■ Doubts as to whether double taxation has been imposed
credit, but not to declare it invalid. should be resolved in favor of the taxpayer. 

☞ Ex: Manny Pacquiao – subject to income tax by US
and Philippines ✏ Situation: TJ owns a beer house. He pays sales/business tax
as well as the local tax (ordinance) imposed on every bottle
of beverage to be sold. Is there double taxation?
How to minimize the effect of indirect international tax?
❖ Yes. There is indirect double taxation because it is
Through Tax Treaties
imposed by different taxing authority and the purpose is
different, one is the sales, the other is the fact of selling.
Important principles Hence, it does not make the local ordinance invalid. 

1) Only direct double taxation is not allowed because it
amounts to confiscation of property without due process of DECIDED CASES: THERE IS ONLY INDIRECT DOUBLE
law. It violates the due process clause.
TAXATION

2) You can question the validity of double taxation if there is

violation of the equal protection clause, or uniformity of a) Taxpayers with warehousing business although carried on
taxation in relation to the operation of its sugar central is a distinct
3) Doubts as to whether double taxation has been imposed and separate taxable business.
should be resolved in favor of the taxpayer. - different subject, although the same owner.
- TN: There can be no double taxation where the State merely
Instances of double taxation imposes a tax on every separate and distinct business in
(1) A tax on a mortgage as personal property when the which a party is engaged in.
mortgaged property is also taxed at its full value as real
estate;
b)A license tax may be levied upon a business or occupation
(2) A tax upon a corporation for its property and upon its although the land or the property use in connection
shareholders for their shares;
therewith is subject to property tax.
(3) A tax upon a corporation for its capital stock as a whole and
upon the shareholders for their shares; - license tax applies to the business, property tax is for the land;
(4) A tax upon depositors in a bank for their deposits and a tax different subject, object or purpose although the burden is
carried by one entity.
upon the bank for the property in which such deposits are
invested;
(5) An excise tax upon certain use of property and a property c)Both a license fee and a tax may be imposed in the same
tax upon the same property; and business or occupation for selling the same article.
(6) A tax upon the same property imposed by two different - license fee is not a tax
states.

Illustrative example d)When every bottle or container of intoxicating beverages is

✏ Tanya owns a beer house. She pays sales/business tax as well
subject to local tax and at the same time the business of
selling such product is also subject to liquor’s license.
as the local tax imposed by an ordinance on every bottle of
beverage to be sold. Is there double taxation? - different taxing authority and purpose.
❖ YES. There is indirect double taxation because it is
imposed by different taxing authorities and the purpose
e)A tax imposed in both the occupation of fishing and the fish
is different, one is for the sales and the other is for the pond.
fact of selling. Hence, it does not make the local
ordinance invalid. - different object and subject

KINDS OF DOUBLE TAXATION

f) A local ordinance imposing a tax in the storage of copra
where it appears that the finished products manufactured
1. DIRECT - Occurs when the same property is taxed twice when it out of the copra is also subject to VAT.
should be taxed once
- Objectionable or prohibited sense - different subject matter and purpose in the finished product

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same purpose and with the same kind or character of tax. The
Means employed to avoid double taxation real estate tax is a tax on property; the real estate dealer’s tax is
1) Tax deductions a tax on the privilege to engage in business; while the income
2) Tax credits tax is a tax on the privilege to earn an income. These taxes are
3) Provide for exemption impose by different taxing authorities and are essentially of
different kind and character.
4) Enter into treatise with other states
5) Allowance on the principle of reciprocity
XIX. FORMS OF ESCAPE FROM TAXATION
MODES OF AVOIDING THE OCCURRENCE OF DOUBLE TAXATION
(1) Allowing reciprocal exemption either by law or by treaty SIX (6) BASIC FORMS
(2) Allowance of tax credit for foreign taxes paid
(3) Allowance of deduction for foreign taxes paid Basic forms of escape from taxation (Caste2)
(4) Reduction of Philippine tax rate 1) Shifting
2) Capitalization
3) Transformation
CONSTITUTIONALITY OF DOUBLE TAXATION
4) Evasion
■ General Rule: Not prohibited by the Constitution, hence, it 5) Avoidance, and
may not be invoked as a defense against the validity of a tax 6) Exemption
law.
DEFINITION OF TERMS

— Exception: Though not forbidden, it is not favored. Such

taxation, it has been held, should, whenever possible, be 1. SHIFTING, IN GENERAL

avoided and prevented.

‣ Doubts as to whether double taxation has been Shifting
imposed should be resolved in favor of the taxpayer Process where the tax burden is transferred from the statutory
to avoid injustice or unfairness. taxpayer (impact of taxation) to another (incident of taxation)
‣ Where double taxation (in its narrow sense) occurs, without violation the law
the taxpayer may seek relief under the uniformity rule
or the equal protection guarantee.
Process where the tax burden is transferred from the statutory
taxpayer (impact of taxation) to another (incident of taxation)
Is double taxation constitutionally prohibited? without violation the law
There is no constitutional prohibition against double taxation in
the Philippines. It is something not favored, but is permissible,
- Applicable only to indirect taxes like business taxes or
percentage taxes.
provided some other constitutional requirement is not thereby
violated.
☞ Illustration: Value Added Tax. The seller is required by law to
pay the tax, but the burden is actually shifted or passed on
Pepsi Cola v. Mun. of Tanauan to the buyer.
Double taxation, standing alone and not being forbidden by
our fundamental law, is not a valid defense against the legality
of a tax measure. But from it might emanate such defenses * Statutory taxpayer — taxpayer required under the law to pay
against taxation as oppressiveness and inequality of the tax. the tax or to remit the tax to the government

■ Impact of taxation — that point on which a tax is originally

Q: (a) Is double taxation a valid defense against the legality of imposed.
tax measure?
(b) When an item of income is taxed in the Philippines and the - In so far as the law is concerned, the taxpayer is the person
same income is taxed in another country, is there a case of who must pay the tax to the government; referred to as the
double taxation? statutory taxpayer
(c) What are the unusual methods of avoiding the occurrence of
double taxation? ■ Incidence of taxation — that point on which the tax burden
A: (a) No, double taxation standing alone and not being finally rests or settles down.
forbidden by our fundamental law is not a valid defense
against legality of a tax measure (Pepsi-Cola Bottling Company - It takes place when shifting has been effected from the
of the Phil v. Mun of Tanauan, Leyte). However, if double statutory taxpayer to another or someone else who cannot
taxation amounts to a direct duplicate taxation, in that the same pass the burden further. But there may be incidence without
subject is taxed twice when it should be taxed but once, in a shifting, as in transformation. In case of business taxes,
fashion that both taxes are imposed for the same purpose by incidence of taxation falls on the final consumer.
the same taxing authority, within the same jurisdiction or taxing * direct taxes cannot be shifted
district, for the same taxable period and for the same 6 kind or ☞ e.i. income tax
character of a tax, then it becomes legally objectionable for
being oppressive and inequitable.
(b) Yes, but it is only a case of indirect duplicate taxation which WAYS OF SHIFTING THE TAX BURDEN

is not legally prohibited because the taxes are imposed by i) Forward shifting
different taxing authorities.
When the burden of the tax is transferred from a factor of
(c) The usual methods of avoiding the occurrence of double production through the factors of distribution until it finally
taxation are: settles on the ultimate purchaser or consumer; from
1. Allowing reciprocal exemption either by law or by treaty; manufacturer/producer
2. Allowance of tax credit for foreign taxes paid;
- from manufacturer/producer to wholesaler, then to the
3. Allowance of deduction for foreign taxes paid; and retailer and finally to the consumer
4. Reduction of the Philippine tax rate - Manufacturer/producer ⤍ wholesaler ⤍ retailer ⤍
consumer
Q: X, a lessor of a property, pays real estate tax on the premises, - demand is greater than supply (D>S)
a real estate dealer’s tax based on rental receipts and income ☞ e.i. VAT, percentage tax
tax on the rentals. He claims that this is double taxation. Decide
A: There is no double taxation. “Double taxation” means taxing
for the same tax period the same thing or activity twice, when it ii) Backward shifting
should be taxed but once, by the same taxing authority for the

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effected when the burden of the tax is transferred from the - the more you produce, the lower the price of production
consumer or purchaser through the factors of distribution to
the factor of production. (discounting) - In such a case, the loss occasioned by the tax may be offset by
- when the buyer haggles for a discount from the retailer the gains resulting from the economics of production; the
taxpayer escapes, not by shifting but by transforming the tax
- supply is greater than demand (S>D) into a gain through the medium of production. (supply is
☞ Example: Consumer or purchaser may shift tax imposed greater than demand) i
on him to retailer by purchasing only after the price is
reduced, and from the latter to the wholesaler, and
finally to the manufacturer or producer. ☞ Illustration: videoke, the greater in number, the lesser is the
cost (amot)

iii) Onward shifting

When the tax is shifted two or more time either forward or 4. TAX EXEMPTION

backward.
It is the grant of immunity to particular persons or corporations
- Thus, a transfer form producer to consumer or from seller or to persons or corporations of a particular class from a tax
to purchaser involves one shift; from producer to which persons and corporations generally within the same
wholesaler, then to retailer, we have two shifts; and if the state or taxing district are obliged to pay; an immunity or
tax is transferred again to the purchaser by the retailer, we
privilege; it is freedom from a financial charge or burden to
have three shifts in all. which others are subjected; allowed only when there is a clear
☞ Example: A transfer from producer to wholesaler provision of the law
involves one shift; from producer to wholesaler then to
retailer, two shifts; if the tax is transferred again to the
consumer by the retailer, there are three shifts in all. Exemption is allowed only if there is a clear provision there for.

Relationship between impact, shifting and incidence of a * Double nexus rule:

tax You must prove that:
1. Law granting the exemption
Impact is the imposition of the tax; shifting is the transfer of the 2. You fall under within the law or you qualify in the
tax; while incidence is the setting or coming to rest of the tax exemption
or the result.
EXEMPTION VS EXCLUSION
The impact is the initial phenomenon, the shifting is the Exemption — specific provisions in the law; it is a privilege;
intermediate process, and the incidence is the result. government can take away; without this, you are not exempted
Exclusion — by its very nature, not taxable; here is no need for a
provision; not income or it is a capital
Relations among impact, shifting and incidence
■ IMPACT — imposition of the tax; contain in the tax law; is the
initial phenomenon 5. TAX AVOIDANCE (TAX PLANNING OR TAX
■ SHIFTING — Transfer of the tax; is the intermediate process MINIMIZATION)
■ INCIDENCE — Setting or coming to rest of the tax; the burden
finally settles down; is the result
The use by the taxpayer of legally permissible alternative tax
Thus, the impact of sale tax is on the seller (manufacturer) who rate or methods of assessing taxable property or income, in
shifts the burden to the customer who finally bears the order to avoid or reduce tax liability.
incidence of the tax.
Also known as “tax minimization”
2. CAPITALIZATION

Ex: estate planning schemes, donating schemes, capital gains

- reduction in the price of the taxed object equal to the schemes
capitalized value of future taxes on the property sold - Here, the taxpayer uses tax saving device or means
- special form of backward shifting sanctioned or allowed by law, so no law is violated in any
way. (estate planning, the heirs create a corporation and
convert their inheritance to shares to avoid estate tax)
The reduction in the price of the taxed object equal to the
capitalized value of future taxes which the purchaser expects to
be called upon to pay.
Q: Mr. Pascual’s income tax from leasing his property reaches the
maximum rate of tax under the law. He donated ½ of his said
- Occurs when the tax falls on an income-producing property property to non-stock, non-profit educational institution whose
(e.g., commercial building). income and assets are actually, directly and exclusively used for
- The buyer naturally takes into account the taxes that he will be educational purposes, and therefore qualified for tax
paying on the property when he becomes the owner thereof exemption under Article XIV, Section 4(3) of the Constitution
in determining whether the price is reasonable or not. and Section 3(h) of the Tax Code. Having thus transferred a
- The burden of the tax rests on the present owner (seller) if he portion of his said asset, Mr. Pascual succeeded in paying a
reduces the price because of the tax; may be considered as a lesser tax on the rental income derived from his property. Is
special form of backward shifting except that while the latter there tax avoidance or tax evasion? Explain.
involves the throwing back of a whole series of taxes (e.g., A: There is tax avoidance. Mr. Pascual exploited a legally
real estate taxes which are payable every year) and takes permissive alternative method to reduce his income tax for
place before any of them, with the exception of the first is transferring part of his rental income to a tax exempt entity
paid. through a donation of one half of the income producing
property. The donation is likewise exempt from the donor’s tax.
The donation is the legal means employed to transfer the
3. TRANSFORMATION
incidence of income tax on the rental income.

The manufacturer or producer upon whom the tax has been

imposed, fearing the loss of his market if he should add the tax 6. TAX EVASION (TAX DODGING)
to the price, pays the tax and endeavors to recoup himself by
improving his process of production thereby turning out his
Tax evasion is the use by the taxpayer of illegal or fraudulent
units of products at a lower cost.
means to defeat or lessen the payment of a tax.
- still more like backward shifting

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It is punishable by law. ❊ Tax evasion is a term that connotes fraud through the use of
pretenses or forbidden devices to lessen or defeat taxes.
[Yutivo v. Court of Tax Appeals, 1 SCRA 160]
Also known as “tax dodging”
- punishable by law, subjecting the taxpayer to civil and ☞ Example: Deliberate failure to report a taxable income or
criminal liabilities property; deliberate reduction of income that has been
received.

ELEMENTS OF TAX EVASION

Tax evasion connotes the integration of three factors: TAX AVOIDANCE

1. The end to be achieved. • Tax avoidance is the exploitation by the taxpayer of legally
permissible alternative tax rates or methods of assessing
☞ Example: the payment of less than that known by the
taxpayer to be legally due, or in paying no tax when taxable property or income in order to avoid or reduce tax
such is due. liability. It is politely called “tax minimization” and is not
punishable by law.
2. An accompanying state of mind described as being “evil,” “in
bad faith,” “willful” or “deliberate and not accidental.”
❊ Delphers Traders Corp. v. Intermediate Appellate Court
[157 SCRA 349] — the Supreme Court upheld the estate
3. A course of action (or failure of action) which is unlawful. planning scheme resorted to by the Pacheco family in
converting their property to shares of stock in a corporation
Should fraud be proved by direct evidence? which they themselves owned and controlled. By virtue of the
No. Since fraud is a state of mind, it need not be proved by deed of exchange, the Pachecho co-owners saved on
direct evidence but may be inferred from the circumstances of inheritance taxes. The Supreme Court said the records do not
the case. One can only present circumstantial evidence or point to anything wrong and objectionable about this estate
make use of presumptions under tax laws. planning scheme resorted to. The legal right of the taxpayer
to decreased the amount of what otherwise could be his
taxes or altogether avoid them by means which the law
☞ Example: under declaration over 30% - fraud is presumed permits cannot be doubted.
under the law

EVIDENCE TO PROVE TAX EVASION

Q: Distinguish tax evasion from tax avoidance.
A: Tax evasion is a scheme used outside of those lawful means
Indicia of Fraud in Tax Evasion: to escape tax liability and, when availed of, it usually subjects
1. Failure to declare for taxation purposes true and actual the taxpayer to further or additional civil or criminal liabilities.
income derived from business for two consecutive years; or Tax avoidance, on the other hand, is a tax saving device within
2. Substantial under-declaration of income tax returns of the the means sanctioned by law; hence, legal.
taxpayer for four (4) consecutive years coupled with
intentional overstatement of deductions.
XX. EXEMPTION FROM TAXATION
Evidence to Prove Tax Evasion:
Since fraud is a state of mind, it need not be proved by direct Art. 6, Sec.28 (4) of the Constitution
evidence but may be proved from the circumstances of the No law granting any tax exemption shall be passed without the
case. concurrence of a majority of all the members of Congress.

“Failure of the taxpayer to declare for taxation purposes his true EXEMPTION, DEFINED

and actual income derived from his business for two (2)
consecutive years is an indication of his fraudulent intent to
cheat the government of its due taxes.” [Republic vs Gonzales\ It is an immunity or privilege; it is freedom from a financial
charge or burden to which others are subjected.

• Since fraud is a state of mind, it need not be proved by direct

evidence but may be proved from the circumstances of the It is the grant of immunity to particular persons or corporations
case. or to persons or corporations of a particular class from a tax
which persons and corporations generally within the same
state or taxing district are obliged to pay.
❊ Republic v. Gonzales [13 SCRA 633] — the Supreme Court
affirmed the assessment of a deficiency tax against Gonzales,
a private concessionaire engaged in the manufacturer of • Exemption is allowed only if there is a clear provision
furniture inside the Clark Air Base, for under declaration of his therefor.
income. SC held that the failure of the taxpayer to declare for • It is not necessarily discriminatory as long as there is a
taxation purposes his true and actual income derived from reasonable foundation or rational basis.
his business for two (2) consecutive years is an indication of
his fraudulent intent to cheat the government if its due taxes. Important principles
1) It is an immunity or privilege
DISTINCTION BETWEEN TAX EVASION AND TAX AVOIDANCE
2) It is freedom from a financial charge or burden to which
others are subjected
Tax Evasion Tax Avoidance
3) Allowed only when there is a clear provision of the law.
4) Strictly construed against the taxpayer.
Connotes fraud through the use of Legal means used by the taxpayer to
pretenses and forbidden devices to lessen reduce taxes 5) It is not necessarily discriminatory as long as there is a
or defeat taxes reasonable foundation or rational basis.
Scheme used outside of those lawful Tax saving device within the means
means sanctioned by law Double nexus rule
Person claiming exemption must prove:
1. The law granting the exemption
TAX EVASION
2. You fall within the law or you qualify in the exemption 

• Tax evasion is the use by the taxpayer of illegal or fraudulent
means to defeat or lessen the payment of a tax. It is also Taxation is the rule and exemption, the exception
known as “tax dodging.” It is punishable by law. Taxation is the rule and exemption, the exception, and
therefore, he who claims exemption must be able to justify his
claim or right thereto, by a grant expressed in terms “too plain
to be mistaken and too categorical to be misinterpreted.” If not

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expressly mentioned in the law, it must at least be within its NATURE OF THE POWER TO GRANT TAX EXEMPTION

purview by clear legislative intent.

Nature of the power to grant tax exemption:

NATURE OF TAX EXEMPTION
Exemption is allowed only if there is a clear provision there for.
Exemptions are not presumed, but when public property is
A.Personal privilege involved, exemption is the rule and taxation is the exemption.
B.Generally revocable; Exception
C.Waiver on the part of the government What is the best way to prove tax exemption?
D.Not necessarily discriminatory Ask for a certification of you are exempted. Certificate of
exemption from the BIR.
Ask for a BIR ruling.
a. PERSONAL PRIVILEGE

Mere personal privilege of the grantee — cannot be assigned

or transferred without the consent of the Legislature. The 1) NATIONAL GOVERNMENT

legislative consent to the transfer may be given either in the The power to grant tax exemptions is an attribute of
original act granting the exemption or in a subsequent law sovereignty for the power to prescribe who or what persons or
property shall be taxed implies the power to prescribe who or
what persons or property shall not be taxed.
b. GENERALLY REVOCABLE

It is generally revocable by the government unless the It is inherent in the exercise of the power to tax that the
exemption is founded on a contract which is protected from sovereign state be free to select the subjects of taxation and to
impairment. grant exemptions therefrom.
Unless restricted by the Constitution, the legislative power to
— EXCEPTION: Unless founded on a contract which is exempt is as broad as its power to tax.
protected from impairment. But the contract must contain
the essential elements of other contracts.
2) LOCAL GOVERNMENTS

— EXCEPTION to EXCEPTION: A legislative franchise Municipal corporations are clothed with no inherent power to
which is in the nature of a contract. It may be repealed tax or to grant tax exemptions. But the moment the power to
or amended pursuant to the Constitution (Sec. 11, Art. impose a particular tax is granted, they also have the power to
XII). grant exemption therefrom unless forbidden by some
provision of the Constitution or the law.
c. WAIVER ON THE PART OF THE GOVERNMENT
The legislature may delegate its power to grant tax exemptions
Implies a waiver on the part of the government of its right to the same extent that it may exercise the power to exempt.
to collect taxes due to it, and, in this sense, is prejudicial
thereto. Hence, it exists only by virtue of an express grant and
❊ Basco v. PAGCOR (196 SCRA 52): The power to tax
must be strictly construed.
municipal corporations must always yield to a legislative act
The very nature is taxable, but because of the rule, they are which is superior, having been passed by the State itself.
exempted. Municipal corporations are mere creatures of Congress
which has the power to create and abolish municipal
d. NOT NECESSARILY DISCRIMINATORY
corporations due to its general legislative powers. If
Congress can grant the power to tax, it can also provide for
Not necessarily discriminatory, provided it has reasonable exemptions or even take back the power.
foundation or rational basis. Where, however, no valid
distinction exists, the exemption may be challenged as
violative of the equal protection guarantee or the uniformity ❊ Chavez v. PCGG, G.R. No. 130716, 09 December 1998: In
rule. a compromise agreement between the Philippine
Government, represented by the PCGG, and the Marcos
heirs, the PCGG granted tax exemptions to the assets which
Bar Question: will be apportioned to the Marcos heirs. The Supreme Court
ruled that the PCGG has absolutely no power to grant tax
ABC Corp. was granted tax exemption by the government as an
incentive for newly established companies. It purchased exemptions, even under the cover of its authority to
compromise ill gotten wealth cases. The grant of tax
materials by XYZ Corp. Normally, the sale is subject to sales tax.
exemptions is the exclusive prerogative of Congress.
XYZ Corp claims that since it sold the equipment to ABC Corp
which is tax exempt, it should not be liable to pay the sales tax. • In fact, the Supreme Court even stated that Congress itself
Is the claim tenable? cannot grant tax exemptions in the case at bar because it
No. Exemption from taxes is personal in nature and covers only will violate the equal protection clause of the Constitution.
taxes for which the taxpayer-grantee is directly liable. The sales
tax is a tax on the seller who is not exempt from taxes. Since
XYA is directly liable for the sales tax and no tax exemption RATIONALE OF TAX EXEMPTION

privilege is ever given to it, therefore, its claim that the sale is
exempt is not tenable. A tax exemption is construed in Rationale of Tax Exemption
strictissimi juris and it cannot be permitted to exit upon vague The theory behind the grant of tax exemptions is that such act
implications. will benefit the body of the people. It is not based on the idea
of lessening the burden of the individual owners of property.
Supposing XYZ Corp paid the sales tax. ABC Corp later found
however that XYZ merely shifted or passed on to ABC the The inherent power of the state carries with it the inherent
amount of the sales tax by increasing the purchase price. ABC power to grant tax exemption.
Corp now claims for a refund from the BIR in an amount
corresponding to the tax passed on to it, since it is tax exempt.
Is the claim of ABC Corp meritorious? Municipal corporations are clothed with no inherent power to
tax or grant tax exemptions. But the moment the power to
No, the claim of ABC Corp is not meritorious. Although the tax
impose a particular tax is granted, they also have the power to
was shifted to ABC by the seller, what is paid by it is not a tax
grant exemption therefrom unless forbidden by some
but a part of the cost it has assumed. The taxpayer who can file provision of the Constitution or the law.
a claim for refund is the person statutorily liable for the
payment of the tax. Since ABC Corp is not said taxpayer, it has
no capacity to file a claim for refund. Such exemption will benefit the body of the people and not
particular individuals or private interest and that the public
benefit is sufficient to offset the monetary loss entailed in the
grant of the exemption.

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- When certain persons, property or transactions are, by

Its avowed purpose is some public benefit or interest which the express provision, exempted from all or certain taxes,
lawmaking body considers sufficient to offset the monetary either entirely or in part.

loss entailed in the grant of the exemption. 

TN: May be made by provisions of the Constitution,
statutes, treaties, ordinances, franchises, or contracts.
GROUNDS FOR TAX EXEMPTION
3) Implied exemption or exemption by omission
- When a tax is levied on certain classes of persons,
1) May be based on contract. 
 properties, or transactions without mentioning the other
In such a case, the public which is represented by the classes.
government is supposed to receive a full equivalent therefor
- Every tax statute makes exemptions because of omissions.
☞ i.e. charter of a corporation. - Every tax statute, in a very real sense, makes exemptions
since all those not mentioned are deemed exempted.

2) May be based on some ground of public policy. 

☞ i.e. to encourage new industries or to foster charitable TN: The omission may be either accidental or intentional.
institutions. Here, the government need not receive any Exemptions are not presumed, but when public property
consideration in return for the tax exemption. is involved, exemption is the rule, and taxation, the
exception.
3) May be based on grounds of reciprocity or to lessen the 4) Contractual
rigors of international double or multiple taxation. - In the real sense of the term and where the non-
impairment clause of the Constitution can rightly be
invoked, are those agreed to by the taxing authority in
Note: Equity is not a ground for tax exemption. Exemption is contracts, such as those contained in government bonds
allowed only if there is a clear provision therefor.
or debentures, lawfully entered into by them under
enabling laws in which the government, acting in its
While equity cannot be used as a basis or justification for tax private capacity, sheds its cloak of authority and waives its
exemption, a law may validly authorize the condonation of governmental immunity.

taxes on equitable considerations. 

TN: These contractual tax exemptions, however, are not
to be confused with tax exemptions granted under
Chavez v. PCGG, GR No. 130716, 09 December 1998 franchises. A franchise partakes the nature of a grant
PCGG has absolutely no power to grant tax exemptions, even which is beyond the purview of the non-impairment
under the cover of its authority to compromise ill gotten clause of the Constitution.
wealth cases. The grant of tax exemptions is the exclusive
prerogative of the Congress.
EXAMPLES OF TAX EXEMPTION

Neither can Congress itself grant tax exemptions in the case at

bar because it will violate the equal protection clause of the
Constitution. CONSTRUCTION OF TAX EXEMPTION STATUTES

In the construction of tax statutes, exemptions are not favored

KINDS OF TAX EXEMPTION
and are construed strictissimi juris against the taxpayer. The
fundamental theory is that all taxable property should bear its
AS TO BASIS
share in the cost and expense of the government.
1) Constitutional: Immunities from taxation which originate
from the constitution Taxation is the rule and exemption is the exemption.
2) Statutory: Those which emanate from legislation
3) Contractual: i.e. government bonds and debentures He who claims exemption must be able to justify his claim or
right thereto by a grant express in terms “too plain to be
mistaken and too categorical to be misinterpreted.” If not
AS TO FORM expressly mentioned in the law, it must be at least within its
1) Express: Expressly granted by organic or statute law purview by clear legislative intent.
2) Implied: When particular persons, properties, or excises are
deemed exempt as they fall outside the scope of the taxing
provision itself. RULE ON CONSTRUCTION OF EXEMPTION:
1. Exemptions from taxation are not presumed.
2. He who Claims as exemption must be able to justify his claim
AS TO SCOPE OR EXTENT
by the clearest grant of organic or statute law by words too
1) Total: Connotes absolute immunity plain to be mistaken. If ambiguous, there.is no exemption.
- When certain persons, property or transactions are 3. He who claims exemption should prove by convincing proof
exempted, expressly or implied, from all taxes. that he is exempted.
2) Partial: One where a collection of a part of the tax is 4. Taxation is the rule; tax exemption is the exception.
dispensed with 5. Tax exemption must be strictly construed against the
- When certain persons, property or transactions are taxpayer and liberally in favor of the taxing authority.
exempted, expressly or implied, from certain taxes, either 6. Constitution exempt is self-executing.
entirely or in part.
7. Tax exemptions are personal.

AS TO OBJECT
STRICT CONSTRUCTION RULE —
1) Personal: granted directly in favor of certain persons It simply means that if after the application of all rules of
2) Impersonal: granted directly in favor of a certain class of interpretation for the purpose of ascertaining the intention of
property the legislature, a well founded doubt exists, then the ambiguity
☞ Examples: This may arise through pardon by the that occurs maybe settled by the rule of strict construction.

government, reciprocity between states, contractual
agreement or mere generosity. ✏ Atty. A: when will you apply the strict construction?
❖ You will only apply it if there is doubt as to the
interpretation of the law exempting the person or the
AS TO MANNER OF CREATION
property. If there is no doubt, no need to apply the strict
1) Express or affirmative exemption construction.

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NOTE: Strict interpretation does not apply to the government 3) Tax-exempting grant is in the form of special law — Where
and its agencies the tax-exempting grant is in the form of special law and not
❊ Petitioner cannot invoke the rule on stritissimi juris with by a general law, even if the terms of the general act are
respect to the interpretation of statutes granting tax broad enough to include the intent to repeal or alter the
exemptions 
 special law
to the NPC. The rule on strict interpretation does not apply in
the case of exemptions in favor of a political subdivision or 
 - Still there would be no revocation of tax exemption.
instrumentality of the government. [Maceda v. Macaraig] - So if you want to revoke the tax exemption in a special law
then you must pass another special law revoking it. It
cannot be revoked by implied revocation.
❊A tax cannot be imposed unless it is supported by the clear
and express language of a statute; on the other hand, once
the 
 TAX AMNESTY, DEFINED

tax is unquestionably imposed, “a claim of exemption from

tax payments must be clearly shown and based on language
in the law too plain to be mistaken.” Since the partial refund A general pardon or intentional overlooking by the State of its
authorized under Section 5, RA 1435, is in the nature of a tax authority to impose penalties on persons otherwise guilty of
evasion or violation of a revenue or tax law.
exemption, it must be construed strictissimi juris against the
grantee. Hence, petitioner’s claim of refund on the basis of
the specific taxes it actually paid must expressly be granted in Partakes of an absolute forgiveness or waiver by the
a statute stated in a language too clear to be mistaken. government of its right to collect.
Davao Gulf v. Commissioner, 293 SCRA 76 (1998)
It is granted particularly to tax evaders who wish to relent and
are willing to reform, thus giving them a chance to do so and
Exception to Application of Strictssimi Juris thereby become a part of the new society with a clean slate.
1) When the statute granting exemption provides for liberal
interpretation thereof; - There is already a finding that this person has already
evaded the payment of tax
2) Special taxes relating to special cases and affecting only
special classes of persons;
❊ Partakes of an absolute forgiveness or waiver by the
3) If exemptions refer to public property government of its right to collect what otherwise would be
4) In cases of exemptions granted to religious, charitable and due it and, in this sense, prejudicial thereto. It is granted
educational institutions or their property particularly to tax evaders who wish to relent and are willing
5) Exemptions in favor of the government, its political to reform, thus giving them a chance to do so and thereby
subdivisions or instrumentalities become a part of the new society with a clean slate. Republic
6) If there is express mention or if the taxpayer falls within the v. Intermediate Appellate Court, 196 SCRA 335
purview by clear legislative intent • When we say of absolute forgiveness, this is retrospective.
Meaning it looks back to your previous liabilities and if you
are given a tax amnesty, it is as if you did not incur those
EXCEPTION TO APPLICATION OF STRICTSSIMI JURIS 
 previous liabilities.
(INSTANCES WHERE THERE IS LIBERAL CONSTRUCTION)
1) The rule on strict construction rule does not apply where the Like tax exemption, tax amnesty is never favored nor presumed
statute granting the exemption expressly provides for in law. It is granted by statute. The terms of the amnesty must
liberal interpretation; also be construed against the taxpayer and liberally in favor of
2) The rule does not apply to special taxes relating to special the government.
cases and affecting only special classes of persons;
3) In case of property owned by the state (public property) Exemption looks forward — prospective; express waiver for civil
an express exemption should not be construed with the liability
same degree of strictness that applies to exemptions Exclusion looks backward — need not expressly stated. Very
contrary to public policy of the state. nature of object takes it away from taxation
— When it comes to public property, the rule is exemption Amnesty looks backward — prospective; erases liability
and taxation is the exemption
4) Exemptions to traditional exemptees, such as religious and Tax amnesty not favored
charitable institution;
A tax amnesty, much like a tax exemption, is never favored nor
— This is provided than no less than the constitution itself presumed in law. If granted, the terms of the amnesty, like that
5) The rule does not apply in the case of exemptions in favor of of a tax exemption, must be construed strictly against the
governmental political subdivision or instrumentality. taxpayer and liberally in favor of the taxing authority.
6) If the taxpayer falls within the purview of exemption by
clear legislative intent. CIR v. Marubeni Corp.
For the right of taxation is inherent in government. The State
RESTRICTIONS ON REVOCATION OF TAX EXEMPTION
cannot strip itself of the most essential power of taxation by
doubtful words. He who claims an exemption (or an amnesty)
1) Non-impairment clause — if grant is with material from the common burden must justify his claim by the clearest
consideration grant of organic or state law. It cannot be allowed to exist upon
a vague implication. If a doubt arises as to the intent of the
- There is a contract but we need to qualify because not all legislature, that doubt must be resolved in favor of the state.
instances that the non-impairment clause will restrict the
revocation of the tax exemption because if the tax exemption
is provided by law, the non-impairment clause will not apply. TAX REMISSION OR TAX CONDONATION, DEFINED

The non-impairment clause will apply only if the exemption is

granted in a contract.
Tax remission or Tax condonation
- TN: Where the tax exemption is provided by law, the non-
impairment clause will not apply. The word “remit” means to desist or refrain from exacting,
inflicting or enforcing something as well as to restore what has
already been taken. The remission of taxes due and payable to
2) Adherence to form — if exemption is granted by the exclusion of taxes already collected does not constitute
constitution; unfair discrimination. Such a set of taxes is a class by itself and
the law would be open to attack as class legislation only if all
- The rule is if the exemption is granted by the Constitution, taxpayers belonging to one class were not treated alike. Juan
then exemption can only be revoked upon Constitutional
amendment. You cannot revoke by mere passage of law. Luna Subd. V. Sarmiento, 91 Phil 370

The condonation of a tax liability is equivalent to and is in the

nature of a tax exemption. Thus, it should be sustained only

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when expressly provided in the law. Surigao Consolidated Thus, our tax laws continued in force during the Japanese
Mining v. Commissioner of Internal Revenue, 9 SCRA 728 occupation.

To desist from exacting, inflicting or enforcing something. The ❊ Hilado v. Collector, 100 Phil 288 — “It is well known that our
remission of taxes due and payable to the exclusion of taxes internal revenue laws are not political in nature and, as such,
already collected does not constitute unfair discrimination. continued in force during the period of enemy occupation
Such a set of taxes is a class by itself and the law would be and in effect were actually enforced by the occupation
open to attack as class legislation only if all taxpayers government. Income tax returns that were filed during that
belonging to one class were not treated alike. period and income tax payments made were considered
valid and legal. Such tax laws are deemed to be the laws of
the occupied territory and not of the occupying enemy.”
❊ The word “remit” means to desist or refrain from exacting,
inflicting or enforcing something as well as to restore what
has already been taken. The remission of taxes due and - Internal revenue laws are not political in nature. They are
payable to the exclusion of taxes already collected does not deemed to be the laws of the occupied territory and not of
constitute unfair discrimination. Such a set of taxes is a class the occupying enemy. So even we are occupied by another
by itself and the law would be open to attack as class State, the taxation laws continue. It is as if there is no
legislation only if all taxpayers belonging to one class were stoppage of the tax law. Thus, our tax laws continued in force
not treated alike. Juan Luna Subd. V. Sarmiento, 91 Phil during the Japanese occupation.
370
During the Japanese occupation. Taxpayer was assessed
Atty. A: from the word condonation, it simply means to say that before the Japanese occupation. Taxpayer paid taxes to the
you forgive the taxpayer out of liberality. But as discussed in Japan. —
the Juan Luna case, if you are going to remit or condoned a
tax, you must not apply it to a specific person only but you Was the payment that taxpayer to the Japanese valid?
need to apply it to the entire individual or property belonging
to the same class. Otherwise, it will amount to class legislation. Valid payment

❊ Thecondonation of a tax liability is equivalent to and is in the b) CIVIL, NOT PENAL, IN NATURE

nature of a tax exemption. Thus, it should be sustained only

Tax laws are civil and not penal in nature, although there are
when expressly provided in the law. Surigao Consolidated penalties provided for their violation.
Mining v. Commissioner of Internal Revenue, 9 SCRA 728

Atty. A: it is still prospective in application. The purpose of tax laws in imposing penalties for
delinquencies is to compel the timely payment of taxes or to
punish evasion or neglect of duty in respect thereof.
TN: Remission or condonation simply means forgiving the
taxpayer out of liberality. However, if the government is to ❊ Republic v. Oasan, 99 Phil 934: The war profits tax is not
remit or condone a tax, it must not be applied to a specific
person alone but to the entire persons or property belonging subject to the prohibition on ex post facto laws as the latter
applies only to criminal or penal matters. Tax laws are civil in
to the same class. Otherwise, it will amount to class legislation.
nature.

In the nature of a tax exemption

The condonation or remission of a tax liability is equivalent and Compromise penalty — voluntarily paid by the taxpayer which is
is in the nature of a tax exemption. Thus it should be sustained for a minor violation
only when expressly provided in the law.
CONSTRUCTION OF TAX LAWS

Tax Amnesty Tax Exemption

Construction of tax laws:
Is an immunity from all criminal and civil
obligations arising fro non-payment of 1) Tax laws are generally prospective in operation
taxes
Is an immunity from the civil liability only. 2) Rule when legislative intent is clear
It is a general pardon given to all
taxpayers to cover a particular taxing Tax statutes are to receive a reasonable construction with a view
period or transaction to carrying out their purpose and intent.
Absolute forgiveness from all criminal and Only immune from your civil liability
civil obligation arising from your non- 3) When there is doubt
(prospective effect)
payment of taxes (retrospective effect)
In every case of doubt, in tax statutes imposing payment of tax,
General pardon given to all taxpayers to it shall be construed strictly against the government and
cover a particular taxing period or a A privilege, a freedom from a charge or
burden of which others are subjected liberally in favor of the taxpayer.
particular transaction
Taxes, being burdens, are not to be presumed beyond what the
It applies to past tax periods, hence of statute expressly and clearly declares.
retroactive application It is generally prospective in application

4) Provisions granting tax exemption

Such provisions are construed strictly against the taxpayer
XXI. NATURE, CONSTRUCTION AND claiming tax exemption
APPLICATION OF TAX LAWS
5) When the language is plain — rule on strict construction
NATURE OF INTERNAL REVENUE LAW
against the government does not apply

• Internal revenue laws are not political in nature. 6) Public purpose is always presumed
• Tax laws are civil and not penal in nature.
7) Provisions of the tax act are not to be extended by
a) NOT POLITICAL IN NATURE
implication

Internal Revenue Laws are not political in nature. They are

8) Tax laws are special laws and they prevail over general laws
deemed to be the laws of the occupied territory and not of the
occupying enemy
No person or property is subject to taxation unless within the
terms or plain import of a taxing statute. Taxes, being burdens,

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they are not to be presumed beyond what the statute expressly

and clearly declares. — EXCEPTION to EXCEPTION: A tax law should not be
given retroactive application when it would be so harsh
■ General rule: In case of doubt, tax laws are to be construed and oppressive, for in such case, the constitutional
strictly against the government and liberally in favor of the limitation of due process would be violated.
taxpayer.
— Exceptions:
Q: Due to an uncertainty w/n a new tax law is applicable to
1) Where the language of the statute is plain and printing companies, DEF Printers submitted a legal query to the
there is no doubt as to the legislative intent BIR on that issue. BIR issued a ruling that printing companies
2) Where the taxpayer claims exemption from are not covered by a new tax law. Relying on this ruling, DEF
taxation. 
 Printers did not pay said tax. Subsequently however the BIR

 reversed the ruling and issued a new one stating that the tax
TN: In case of tax exemptions, the rule is strictly covers printing companies. Could the BIR now assess DEF
against the taxpayer and liberally in favor of the Printers for back taxes corresponding to the years before the
government. new ruling?
A. No. The reversal of a ruling shall not be given a retroactive
Rules: application, if said reversal will be prejudicial to the taxpayer.
1) Generally prospective in operation Therefore, the BIR cannot assess DEF Printers for back taxes
because it would be violative of the principle of non-
retroactivity of rulings and doing so would result in grave
2) Rule when legislative intent is clear: receive reasonable injustice to the taxpayer who relied on the first ruling in good
construction to carry out the purpose and intent faith.

3) When there is doubt

- In every case of doubt in tax statute imposing payment of MANDATORY AND DIRECTORY PROVISIONS OF TAX
tax, it shall be construed strictly against the government
and liberally in favor of the taxpayer. LAWS

- (reason: the tax law does not want to burden the

inhabitants in the payment of tax) Directory provisions are those designed merely for the
information or direction of officers or to secure methodical and
- However, when it comes to exemption and deduction, the systematic modes of proceedings.
rule is strictissimi juris. Strictly against the taxpayer and
liberally in favor of the government.
- (reason: lifeblood doctrine) Mandatory provisions are those intended for the security of
the citizens or which are designed to ensure equality of
- Taxes, being burdens, are not to be presumed beyond taxation or certainty as to the nature and amount of each
what the statute expressly and clearly declares. person’s tax.

4) Provisions granting tax exemption, when there is doubt, it is ❊ The omission to follow mandatory provisions renders invalid
construed strictly against the taxpayer claiming the tax
the act or proceeding to which it relates while the omission
exemption.
to follow directory provisions does not involve such
consequence. [Roxas v. Rafferty, 37 Phil 958]
5) When the language is plain, rule on strict construction
against the government does not apply
LEGISLATIVE APPROVAL BY RE-ENACTMENT

6) Public purpose is always presumed Where a statute is susceptible of the meaning placed upon it by
a ruling of the government agency charged with its
7) Provisions of the tax act are not to be extended by enforcement and the legislature thereafter re-enacts the
implication provisions without substantial change, such action is to some
extent confirmatory that the ruling carries out the legislative
purpose.
8) Tax laws are special laws and they prevail over general laws
TN: The legislature is presumed to have full knowledge of the
existing revenue regulations interpreting the provisions of law,
Q: Why are tax exemptions strictly construed against the
taxpayer? and with its subsequent substantial re-enactment, there is a
presumption that the lawmakers have approved and
A: Tax exemptions are strictly construed against the taxpayer confirmed the rules in question as carrying out the legislative
because such provisions are highly disfavored and may almost
purpose.
be said to be odious to the law (Manila Electric Company v.
Vera). The exception contained in the tax statutes must be
strictly construed against the one claiming the exemption AUTHORITY OF THE SECRETARY OF FINANCE TO
because the law does not look with favor on tax exemptions,
they being contrary to the lifeblood theory which is underlying PROMULGATE RULES AND REGULATIONS

basis for taxes. The natural rule is that everyone in the state
must contribute to the support of government. Exemptions are The Secretary of Finance, upon recommendation of the
in derogation of sovereignty; hence, they must be strictly Commissioner of Internal Revenue, shall promulgate needful
construed against the person claiming it (Commissioner v. rules and regulations for the effective enforcement of the
Guerrero). provisions of the NIRC.

This is without prejudice to the power of the Commissioner of

APPLICATION OF TAX LAWS
Internal Revenue to make rulings or opinions in connection
with the implementation of the provisions of internal revenue
■ General rule: Tax laws are prospective in operation because laws, including rulings on the classification of articles for sales
the nature and amount of the tax could not be foreseen and tax and similar purposes.
understood by the taxpayer at the time the transactions
which the law seeks to tax was completed.
TAKE NOTE:
• Promulgation: Secretary of Finance
— Exception: While it is not favored, a statute may nevertheless • Recommendation: Commissioner of Internal Revenue
operate retroactively provided it is expressly declared or is
clearly the legislative intent. But a tax law should not be • Administrative rulings: Commissioner of Internal Revenue
given retroactive application when it would be harsh and
oppressive.

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NATURE AND POWER TO MAKE REGULATIONS

4) Effectivity date for enforcement of the new issuance shall
take place thirty (30) days from the date the issuance has
been sent to the above-enumerated organizations.
NECESSITY AND FUNCTION OF REGULATIONS

TAKE NOTE: IRR and admin regulation are NOT THE SAME. You
Purpose of rules and regulations: have the law, then you pass the IRR and from the IRR, it now
1) To properly enforce and execute the laws depends from the Commissioner kung kugihan xa kay he will
2) To clarify and explain the law now issue a revenue regulation but this revenue regulation is
not to implement the whole IRR but specific provisions only.
3) To carry into effect the law’s general provisions by providing
details of administration and procedure
ADMINISTRATIVE RULINGS AND OPINIONS

REQUISITES FOR VALIDITY AND EFFECTIVITY OF La Suerte v. Court of Tax Appeals, 134 SCRA 29
REGULATIONS

When an administrative agency renders an option by means of

Requisites for validity and effectivity of regulations a circular or memorandum, it merely interprets existing law
a)Must be reasonable and no publication is therefore necessary for its validity.
b)Must be within the authority conferred Construction by an executive branch of the government of a
c)They must not be contrary to law and the Constitution particular law, although not binding upon courts, must be
given weight as the construction came from the branch of the
d)They must be published in the Official Gazette or a government which is called upon to implement the law.
newspaper of general circulation

From Tanya notes

- known as BIR rulings
A.It must be issued under authority of law
Less general interpretation of tax laws being issued from time
to time by the Commissioner of Internal Revenue. They are 

B.It must be within the scope and purview of the law; not usually rendered on request of taxpayers to clarify certain
contrary to law and the Constitution 
 provisions of a tax law.

C.It must be published in the OG or newspaper of general

circulation 
 These rulings may be revoked by the Secretary of Finance if the
latter finds them not in accordance with law.


TN: Interpretative rules or those merely internal in nature
may simply be posted in conspicuous places in the agency The Commissioner may revoke, repeal or abrogate the acts or
itself. previous rulings of his predecessors in office because the
construction of the statute by those administering it is not
binding on their successors if, thereafter, such successors are
D.Where the regulations impose penal sanctions, the law itself
must declare as punishable the violation of the administrative satisfied that a different construction of the law should be
given.
rule or regulation and should fix or define the penalty
thereof.
Rulings in the form of opinions are also given by the Secretary
of Justice who is the chief legal officer of the Government.
FORCE AND EFFECT OF REGULATIONS

How does it work?

- Revenue Memorandum Circular 20-86 was issued to govern Atty. A: IF there is a provision in the tax law which is not clear,
the drafting, issuance, and implementation of revenue tax
issuances, including: you can send a clarification to the BIR. You just have to lay
down all the facts and all the details that you have and send it
1) Revenue Regulations; either to the Commissioner or Regional Director and they will
2) Revenue Audit Memorandum Orders; and address and clarify your concerns.
3) Revenue Memorandum Circulars and Revenue
Memorandum Orders. But when it comes to BIR rulings and admin rulings, it applies
only to the entity asking for it. So even if you have the same
— Except when the law otherwise expressly provides, the condition, let’s say for example, Company A and Company B
aforesaid revenue tax issuances shall not begin to be and Company A is asking if it is exempted then BIR declared in
operative until after due notice thereof may be fairly a ruling that Company A is exempt. Company B, same
assumed. economy conditions of Company A, cannot presumed that the
it (Co. B) is also exempt. To be safe, Company B should also ask
from the BIR a ruling pertaining to its own company, even if it
Due notice of the said issuances may be fairly presumed only has the same situation or condition with Company A.
after the following procedures have been taken:
1) Copies of the tax issuance have been sent through
registered mail to the following business and professional FORCE AND EFFECT OF REGULATIONS

organizations:
Force and Effect of Regulations
a. Philippine Institute of Certified Public Accountants; Revenue Memorandum Circular 20-86 was issued to govern
the drafting, issuance and implementation of revenue tax
b. Integrated Bar of the Philippines; issuances including:
c. Philippine Chamber of Commerce and Industry; 1. Revenue Regulations
d. American Chamber of Commerce; 2. Revenue Memorandum Orders; and
e. Federation of Filipino-Chinese Chamber of Commerce; 3. Revenue Memorandum Circulars
f. Japanese Chamber of Commerce and Industry in the
Philippines.
Except when the law otherwise expressly provides, the
aforesaid revenue tax issuances shall not begin to be operative
2) However, other persons or entities may request a copy of the until after due notice thereof may be fairly assumed.
said issuances.

3) The Bureau of Internal Revenue shall issue a press release

covering the highlights and features of the new tax issuance Due notice of said issuances may be fairly presumed only
in any newspaper of general circulation. after the following procedures have been taken:

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Copies of tax issuance have been sent through registered mail such successors are satisfied that a different construction of the
to the following business and professional organizations: law should be given.
1. Philippine Institute of Certified Public Accountants
2. Integrated Bar of the Philippines Can Sec, of finance revoke the ruling?
3. Philippine Chamber of Commerce and Industry Yes.
4. American Chamber of Commerce
5. Federation of Filipino-Chinese Chamber of Commerce; and The Sec. of Finance has the power to revoke, repeal or
6. Japanese Chamber of Commerce and Industry in the abrogate the acts or previous rulings of his predecessors in
Philippines office if the former becomes satisfied that a different
construction should be given.

The Bureau of Internal Revenue shall issue a press release The Commissioner may revoke, repeal or abrogate the acts or
covering the highlights and features of the new tax issuance in previous rulings of his predecessors in office because the
any newspaper of general circulation. construction of the statute by those administering it is not
binding on their successors if, thereafter, such successors are
Effectivity date for enforcement if the new issuance shall take satisfied that a different construction of the law should be
place thirty (30) days from the date of issuance has been sent given.
to the above-enumerated organizations.
TN: Rulings in the form of opinions are also given by the
Secretary of Justice who is the chief legal officer of the
ADMINISTRATIVE RULINGS
Government.

BIR Rulings
NON-RETROACTIVITY OF REPEAL OF REGULATIONS
Administrative rulings known as BUR rulings, are less general OR RULINGS, AND ITS EXCEPTIONS

interpretation of tax laws being issued from time to time by the

Commissioner of Revenue. They are usually rendered on Revocation, modification for revenue of any rules and
request of of taxpayers to clarify certain provisions of a tax law. regulations promulgated by the Secretary of Finance or CIR
These rulings may be revoked by the Secretary of Finance if he shall not have retroactive effect if it will be prejudicial to the
latter finds them not in accordance with the law. taxpayer, except:

1) Where the taxpayer deliberately misstates or omits material

ADMINISTRATIVE INTERPRETATION AND THE COURTS
facts from his return or in any document required of him by
the BIR;
The power to interpret the provisions of the Tax Code and other 2) Where the facts subsequently gathered by the BIR are
tax laws is under the exclusive and original jurisdiction of the materially different from the facts on which the ruling is
Commissioner of Internal Revenue subject to review by the based; and
Secretary of Finance.
3) Where the taxpayer acted in bad faith.

- Different from the IRR

■ General Rule: No retroactivity if the repeal, revocation,
modification or reversal of regulations or rulings is prejudicial
Rule: when it comes to admin interpretation, ruling or opinions
to the taxpayer.
are not binding to the courts. However, it is given great weight 

in making the decision.
— Exception:
❊ Commissioner v. Court of Appeals, 240 SCRA 368: The a) Where the taxpayer deliberately misstates or omits
authority of the Minister of Finance, in conjunction with the material facts from his return or in any document
Commissioner of Internal Revenue, to promulgate rules and required of him by the BIR;
regulations for the effective enforcement of internal revenue b) Where the facts subsequently gathered by the BIR
rules cannot be controverted. Neither can it be disputed that are materially different from the facts on which the
such rules and regulations, as well as administrative opinions ruling is based; and
and rulings, ordinarily should deserve weight and respect by c) Where the taxpayer acted in bad faith.
the courts. Much more fundamental than either of the above,
however, is that all such issuances must not override, but
must remain consistent with, the law they seek to apply and DECISIONS OF THE SUPREME COURT AND THE
implement. Administrative rules and regulations are intended COURT OF TAX APPEALS

to carry out, neither to supplant nor to modify, the law.

Decisions of the Supreme Court applying or interpreting
❊ La Suerte v. Court of Tax Appeals, 134 SCRA 29: When an existing tax laws are binding on all subordinate courts and
administrative agency renders an opinion by means of a have the force and effect of law. As provided for in Article 8 of
circular or memorandum, it merely interprets existing law and the Civil Code, they “form part of the law of the land”. They
no publication is therefore necessary for its validity. constitute evidence of what the law means.
Construction by an executive branch of the government of a
particular law, although not binding upon courts, must be The same is also true with respect to decisions of the Court of
given weight as the construction came from the branch of Tax Appeals. However, by the nature of its jurisdiction, the
the government which is called upon to implement the law. decisions of this court are still appealable to the Supreme
Court by a petition for review on certiorari.
POWER OF THE SECRETARY OF FINANCE TO REVOKE
THE RULINGS OF HIS PREDECESSOR
Remember:
1. Follow the hierarchy of the courts
Power of the Secretary of Finance to Revoke the Rulings of his 2. If it is a question pertaining to the constitutionality of a ruling
predecessor or IRR, raise it immediately in the regular courts
3. But if it pertains to questions on the tax payable
computations, question it first with the BIR (administrative
The Secretary of Finance as well as the CIR may revoke, repeal level) then appeal it to the CIR (depends on the amount),
or abrogate the acts or previous rulings of his predecessors in then after it can be appealed later on to the Sec. of Finance
office because the construction of the statute by those or CTA then after, that’s the time you can go the SC.
administering it is not binding on their successors if, thereafter,
4. But in the SC, it should only be purely questions of law.

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XXII. SOURCES OF TAX LAWS

1. CONSTITUTION

2. LEGISLATIVE/STATUES (RA, PD, EO)

3. ADMINISTRATIVE RULES AND REGULATIONS,

RULINGS OR OPINIONS OF TAX OFFICIALS

4. JUDICIAL DECISIONS

Stare decisis, meaning, only the decisions of the SC

5. TAX TREATIES OR AGREEMENTS

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General Tax:
• Levied of all kinds of income. If through gambling or robbery,
INCOME TAX you earn income, taxable. Thus, SOURCE BLIND (so long as
there’s flow of wealth, increase in income, even if source is
I. DEFINITION OF INCOME TAX illegal, should be subject to income tax).
• Tax with no particular purpose or object for which the
• A tax on all yearly profits arising from property, professions, revenue is raised, but is simply raised for whatever need may
trades or offices, or arise.
• A tax on a person’s income, emoluments, profits & the like. • Income Tax is source “blind”. This means that we do not look
• It may be succinctly defined as a tax on income, whether at the source; so long as there is income, gain, or profit, you
gross or net, realized in one taxable year. will subjected to tax.

Special tax (tax for a special purpose) goes to a special fund. On

TN: Yearly profits because insofar as income taxation is
the other hand, the general tax (not being for a special
concerned, collection of income tax is on a year-to-year basis. purpose) goes directly to the general fund of the government.
The primary purpose of income tax is to raise revenue for all
Profit: purposes.
Investment worth 1000. You lost. So recovered 500. Is there
income tax? No. There is no profit. So when we talk of Profit, it
means RETURN ON CAPITAL. Thus, ON top of your capital. III. PURPOSES OF INCOME TAX
Purposes of Income Tax
Income tax is source blind — does not look at the legality or
illegality 1. To provide large amounts of revenue
2. To offset regressive sales and consumption of taxes
3. To mitigate the evils arising in the unequal distribution of
II. NATURE OF INCOME TAX income and wealth which are considered deterrents to
social progress, by a progressive scheme of taxation
Nature of Income Tax
1) National Tax Income tax is regarded as the best measure of a person’s ability
2) Excise Tax to pay.
3) Direct Tax, and
4) General Tax
FISCAL PURPOSE:
To provide large amounts of revenue
Income Tax is source “blind”.

NON FISCAL PURPOSE:

National Tax:
1) To offset regressive sales and consumption of taxes
• The BIR has the authority to collect as found in RA 8424, NIRC
Application: The consumer gets the burden of tax because
which took effect on January 1, 1998.
they cannot transfer it. The wholesalers, manufacturers
• Tax imposed by the National Government (specifically the may shift the burden down the line but they get to pay the
legislative department) income tax and this offsets the effect of regressive taxes.
• It is the BIR who implements or administers the collection of
taxes
2) To mitigate the evils arising in the unequal distribution of
income and wealth
You cannot go to the municipal treasurer to pay your income This is redistribution of wealth. This follows ability to pay,
taxes. Even if your payment is received by the municipal those who earn more are taxed more which will be used to
treasurer, it will be as if you have not paid because it is a wrong benefit everyone.
jurisdiction.
All taxes are for the purpose of raising revenue save for the
Excise Tax: case of secondary purposes such as to offset the effects of
• Also considered as Excise tax (tax on exercise of profession/ sales and consumption taxes which are seen as regressive
on privilege or right to earn something) taxes by some proponents and in order to mitigate the effects
• It is levied upon the right or the privilege of a person to of the inequitable distribution of wealth between different
receive income or profits, of which not all taxpayers have the income earners. Of course, this is made together with the
privilege to do so imposition of estate taxes because we are taking about wealth
and income distribution.
Direct Tax:
• Impact and incidence of taxation is upon the taxpayer. Regressive taxation means that as the tax base increases, the tax
Cannot be shifted to another, thus personal. decreases. A common example of such is VAT. To offset that, we
have the income tax which is progressive in character. This
• The tax burden is borne by the income recipient upon whom means that as the income increases, the income tax increases.
the tax is imposed. It is tax demanded from the very person, That is why we say that Income tax is regarded as the best
who it is intended for and who should pay the tax. measure of a person’s ability to pay. Meaning to say, the more
you have, the more you will pay.
In other words, the impact as well as the incidence of taxation
falls on the very same person. Thus, the statutory tax payer will
have the burden. V. BRIEF HISTORICAL BACKGROUND OF THE
PHILIPPINE INCOME TAX
When an employer withholds part of the employee’s salary as
payment for the income tax, is it not a violation of the principle
that income tax is a direct tax? Under ER-EE relationship, this
basically represents advance payment of your income tax.
There is no violation because it is still the employee who has the
burden to pay the income tax. The role of the employer, in
withholding the income tax, is only for administration or
collection purposes so that he merely withholds and collects
the income tax from the employee and subsequently remit it to
the BIR. Insofar as the impact and the incidence of income
taxation is concerned, it still falls upon the employee.

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United States Revenue Act TODAY — RA 8424, RA 9337, gains derived from the sale or other disposition of capital
of 1913 RA 10963 (TRAIN) assets. (Return ON income)
- Extended to the Philippines ‣ Income means
which was then a territorial
possession of the US - accession to wealth
- Administered & enforced by PD 1994 of NIRC of 1986 - gain
internal revenue officers of - enacted to simplify certain - flow of wealth
the Philippine Government provisions of the NIRC

Return ON Capital vs. Return OF Capital

Revenue Act of 1916, War • Return OF Capital – return of the amount invested; not subject
Revenue Act of 1917 PD 1158 or NIRC of 1977
to income tax
- Amended Revenue Act 1913 • Return ON Capital – amount received on top of the amount
invested; subject to tax
CA No. 466 (NIRC of 1939)
Act. No. 2833
- revised, amended, and codified Examples:
- enacted by the Philippine into a single tax code all
Congress under the authority internal revenue laws ☞ A person invested 1,000 and earned 1,000: return OF
conferred to it under the embodied in the 1939 NIRC
1917 Act capital; not subject to income tax as it is not considered as
amendatory income
☞ A person invested 1,000 and sold the thing at 900: no
1. US Revenue Act of 1913 — Income Tax of Philippines has an income, in fact, there is a loss; not subject to income tax
American Origin. This Act administered collection of income ☞ After selling the thing, there is 1,500: return OF capital is
tax here in the Philippines. US was trying to collect revenue 1,000; while, the return ON capital is 500 (amount received
taxes. on top of the capital); 500 is subject to income tax as it is
2. Revenue Act of 1916 and War Revenue Act of 1917 — profit, gain, or income
amended Rev Act 1913. Still American origin.
3. Act 2833, promulgated by the Philippine Congress under CAPITAL

the authority conferred to it under the 1917 Act. — this

started during the Commonwealth Era • Capital — a fund or property existing at one point of time
(while income denotes a flow of wealth during a definite
4. CA 466 or NIRC of 1939 — revised, amended, and codified
period of time). Capital is wealth, income is the flow of
all internal revenue laws embodied in the 1939 NIRC. wealth. Should not be subject to income tax.
5. PD 1158 or NIRC of 1977
6. PD 1994 of NIRC of 1986 which enacted to simplify certain Capital is considered as the tree; while, Income/gain is the
‣
provisions of the NIRC. VAT was first started and introduced
fruit. What is being subjected to income tax is the fruit
in this era. SNITS (Simplified Net Income Tax System) was
(income) and not the tree (capital)
also introduced here.
‣ Different from labor; the latter can also be a source of
7. RA 8424, Jan 1 1998, amended by RA 9337. Present Day
income which may be subject to income tax
NIRC.
8. Since American Origin, in case of doubt, they usually refer to
US Jurisprudences. ☞ Example: Manufacturing of Furniture
❖ Cost – 1M
❖ Sales – 1M
V. SOURCES OF INCOME TAX LAW ๏ Is there an income? None.
๏ Is cost of sales equated to capital? Not necessarily.
- National Internal Revenue Code, as amended

A.Constitution – the most supreme source of our tax laws The example we had earlier (amount of 1,000) is what we refer
to as Capital. Say for example Ms. Alcaraz hired the services of
Mr. Fernandez and gave him a payment of 1,000. Is that amount
B.Legislation from Congress – National Internal Revenue Code considered as income? In this case, you have to qualify. If the
and other special laws like the exemption granted to payment is made purely under ER-EE relationship, then the
economic zones entire amount is considered as income and subject to income
Side note: these are subject to income tax on activities not tax. However, if Mr. Fernandez received that payment for the
exempted from their grant since they can have the 5% rate practice of his profession (Mr. Fernandez being a solo
in lieu of other taxes practitioner), then you have to deduct the expenses from the
amount received as payment to arrive at the amount of income.
C.Judicial decisions – As per the principle of stare decisis, SC
decisions form part of the law of the land.
Madrigal vs Rafferty
Income as contrasted with capital or property is to be the test. The
D.Administrative rules and regulations – Those issued by BIR, essential difference between capital and income is that capital is a
and other administrative agencies to interpret tax laws. fund; income is a flow. A fund of property existing at an instant of
time is called capital. A flow of services rendered by that capital by
1. Revenue regulations – issued by Sec of Finance with 
 the payment of money from it or any other benefit rendered by a
recommendation of the Commissioner of Internal fund of capital in relation to such fund through a period of time is
Revenue called an income. Capital is wealth, while income is the service of
wealth. (See Fisher, "The Nature of Capital and Income.") The
2. Revenue memorandum orders, memorandum rulings, Supreme Court of Georgia expresses the thought in the following
and memorandum circulars – issued by BIR figurative language: "The fact is that property is a tree, income is
the fruit; labor is a tree, income the fruit; capital is a tree, income
the fruit. A tax on income is not a tax on property. "Income," as here
VI. DEFINITION OF TERMS used, can be defined as "profits or gains."

The definitions laid down in Title II, Chapter 1 are good for title So what is being taxed is the fruit not the tree.
II only and you cannot use it for other titles. However, if there
are no other definitions provided in other titles, definitions in
Title II may be used as a supplement to understand other Illustration:
terms. These terms are discussed as they are used in a • Rocha owed Gocuan 100,000. Out of love and liberality,
particular Codal provision. Gocuan condoned the debt. Is there taxable income for
Rocha?
‣ No. Rather, it’s Donor’s Tax. There is no income because
INCOME
what has been forgiven is just equivalent to the debt. It is
• Income (broad sense) — all wealth w/c flows into the taxpayer not taxable income but may be subjected to donor’s tax.
other than as a mere return of capital; includes the forms of
income specifically described as gains & profits, including

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• Rocha owed Gocuan 100,000. Out of love and liberality,

Gocuan condoned the debt in exchange for a free massage Sec 1, Art IV, 1987 Philippine Constitution
for one year. Is there a taxable income? Sec. 1The following are citizens of the Philippines:
‣ Yes. There is already consideration—service. Thus, there
(1) Those who are citizens of the Philippines at the time of the
can be income. THUS if it is just a mere return OF capital,
adoption of this Constitution;
no income. But if it is a return ON capital, there is an
income and such is taxable. (2) Those whose fathers or mothers are citizens of the Philippines;
(3) Those born before January 17, 1973, of Filipino mothers, who
elect Philippine citizenship upon reaching the age of
GAIN
majority; and
• Gain — transaction resulting in increases of wealth capable of (4) Those who are naturalized in accordance with law.
pecuniary estimation

Income vs. Gain: Both terms are synonymous. But in fact, gain is
B. NON-RESIDENT CITIZEN — WITHIN

an example of an income. Income is broader. A NON-RESIDENT CITIZEN is taxable only on incomes derived
from sources within the Philippines.
GROSS INCOME
Non-Resident Alien: an individual whose residence is not
• Gross Income — income (in its broad sense) less income w/c within the Philippines and who is not a citizen thereof (Sec. 22
is by statutory provision or otherwise excluded from the tax (g), NIRC)
imposed by law. This includes but not limited to the • Non-Resident Alien engaged in trade or business within
enumerations under Section 32a. the Philippines
‣ All income less the statutory exclusions as provided under
• Non-Resident Alien not engage in trade or business
the Tax Code. within the Philippines

GROSS INCOME TAXATION

Sec 22(e) of NIRC
• Gross Income Taxation — a system of taxation where the The term 'nonresident citizen' means:
income is taxed at gross. The taxpayers under this system are (1) A citizen of the Philippines who establishes to the satisfaction
not entitled to any deductions. of the Commissioner the fact of his physical presence abroad
with a definite intention to reside therein.
NET INCOME TAXATION
(2) A citizen of the Philippines who leaves the Philippines during
the taxable year to reside abroad, either as an immigrant or
• Net Income Taxation — system of taxation where the income for employment on a permanent basis.
is taxed at net. The taxpayer may claim allowable deductions.
(3) A citizen of the Philippines who works and derives income
from abroad and whose employment thereat requires him to
PASSIVE INCOME
be physically present abroad most of the time during the
• Passive Income — refers to those items of gross income taxable year.
earned by the taxpayer w/o his active/direct participation in (4) A citizen who has been previously considered as nonresident
the earning process. citizen and who arrives in the Philippines at any time during
the taxable year to reside permanently in the Philippines
shall likewise be treated as a nonresident citizen for the
TAXABLE INCOME
taxable year in which he arrives in the Philippines with
• Taxable Income (previously, Net Income) — pertinent items of respect to his income derived from sources abroad until the
income as specified in the Tax Code less the deductions and/ date of his arrival in the Philippines.
or personal and additional exemptions, if any, authorized for (5) The taxpayer shall submit proof to the Commissioner to show
such types of income by the Code or other special laws. It is his intention of leaving the Philippines to reside permanently
the amount of income that is taxed [Pertinent items of GI – abroad or to return to and reside in the Philippines as the
Allowed Deductions] case may be for purpose of this Section.
‣ Pertinent items of Gross Income less Allowed Deductions
and/or Exemptions
C. OVERSEAS CONTRACT WORKER — WITHIN

An OVERSEAS CONTRACT WORKER (OCW) is taxable only on

VII. GENERAL PRINCIPLES OF INCOME income from sources within the Philippines. A seafarer who is
TAXATION IN THE PHILIPPINE SYSTEM a citizen of the Philippines and who receives compensation for
services rendered abroad as a member of the complement of
a vessel engaged exclusively in the international trade shall be
treated as an overseas contract worker.

☞ Example: Shipper for Coast-wise shipping (inter-island

destination not international)— since this is domestic, thus it
means you are still domiciled. Thus Taxable within or
without.

D. ALIEN INDIVIDUAL — WITHIN

An ALIEN INDIVIDUAL whether a resident or not of the

Philippines, is taxable only on income derived from sources
within the Philippines. 

Take note: Resident Citizens and Domestic Corporations are
taxed for income earned within and without the Philippines. All
the rest are taxed only for income earned within the E. DOMESTIC CORPORATION — WITHIN AND OUTSIDE

Philippines. A DOMESTIC corporation is taxable on all income derived from

sources within and without (outside) the Philippines.
A. RESIDENT CITIZEN — WITHIN AND OUTSIDE

A RESIDENT CITIZEN is taxable on all income derived from Domestic Corporation: a corporation created and organized
sources within and without (outside) the Philippines. in the Philippines and under its laws (Sec. 22 (c), NIRC)

Resident Alien: an individual whose residence is within the NB: To determine, we do not look at the nationality of
Philippines and who is not a citizen thereof (Sec. 22 (f), NIRC) stockholders or incorporators BUT we look at the law

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incorporating the corporation. 


Q: Newtex International (Phils), Inc. is an American firm dully authorized to
engage in business in the Philippines as a branch office. In its activity of acting
F. FOREIGN CORPORATION — WITHIN
as a buying agent for foreign, buyers of shirts and dresses abroad and
A FOREIGN Corporation whether engaged or not in trade or performing liaison work between its home office and the Filipino garment
business in the Philippines, is taxable only on income derived manufacturers and exporters, Newtex does not generate any income. To finance
from sources within the Philippines. its office expenses here, its head office abroad regularly remits to it the needed
amount. To oversee its operations and manage its office here, which had been in
operation for two years, the head office assigned three foreign personnel. Are
TN: Only Resident Citizens and Domestic Corporations are the three foreign personnel subject to Philippine income tax?
taxed for income derived both within and without the A: The three foreign personnel are subject to tax on the income that they receive
Philippines. for services rendered in the Philippines. Non-resident aliens are subject to tax
on income from sources within the Philippines. Income is deemed derived
• Foreign Corporation: a corporation which is not domestic from sources within the country when it is earned for services rendered in the
(Sec. 22 (d), NIRC) Philippines.

• Resident Foreign Corporation: a foreign corporation Q: Mr. Cortez is a nonresident alien based in HK. During the calendar year 1999,
engaged in trade or business within the Philippines (Sec. 22 he came to the Philippines several times and stayed in the country for an
(h), NIRC) aggregated period of more than 180 days. How will Mr. Cortez be taxed on his
• Non-Resident Foreign Corporation: a foreign corporation income derived from sources within the Philippines and from abroad?
not engaged in trade or business within the Philippines (Sec. A: Mr. Cortez being a nonresident alien individual who has stayed for an
22 (i), NIRC) aggregate period of more than 180 days during the calendar year 1999, shall
for that taxable year be deemed to be a nonresident alien doing business in
the Philippines.
Considering the above, Mr. Cortez shall be subject to an income tax in the same
• Dual Citizens: insofar as Philippines is concerned, he/she is manner as a resident citizen on taxable income received from all sources
a Filipino Citizen
within the Philippines.
• Seafarers who are engaged exclusively in international Thus, he is allowed to avail of the itemized deductions including the personal
trade: considered as overseas contract workers; subject to
and additional exemptions, but subject to the rule on reciprocity on the
income tax for income earned within the Philippines
personal exemptions.
• Seafarer engaged in coastwise shipping (vessel
operating within the country — inter-island shipping):
taxable on all income derived from sources within and
without the Philippines; considered a resident citizen VIII. SYSTEM OF INCOME TAXATION
[Philippines: Party Schedular and partly global system of income
For example, XYZ Corporation which is organized in the US and taxation)
registered in the Philippines to transact trade or business. In this
case, that corporation is considered as a Foreign Corporation
because it is organized and incorporated under laws other than 1. SCHEDULAR INCOME TAX SYSTEM

the Philippine laws. Take note that registration is different from

Schedular System of Taxation — income tax treatment varies
organization and incorporation as the former usually refers to
having a permit to conduct business in the Philippines. 
 depending on the kind of taxable income of the taxpayer. It
provides for different tax treatment for different types of
income so that a separate return is required to be filed for
If, for example. five Japanese nationals will come here to the each type of income and tax is computed on a per return or
Philippines to organize a corporation in the Philippines, what do per schedule basis. This is applicable to individual taxpayers.
you call that corporation? It is a Domestic Corporation because
we do not look at the nationality of the shareholders but on the - Follows a schedule of tax rates
law under which the corporation is organized or incorporated. - The Tax Code or Congress treats differently every category of
Same thing if you have five Filipinos who goes to Japan and income earners.
organizes a corporation under the laws in Japan; that -  Usually applicable to Individual Tax Payers
corporation is considered as a Foreign Corporation insofar as
Philippines is concerned.
In this type of income taxation, you will have to identify what
type of income you have earned (passive income, business
Q: Four Catholic parishes hired the services of Frank Binatra, a foreign income, compensation income, etc.). The passive income will
nonresident entertainer, to perform for four nights at the Folk Arts Theatre, be subject to a different tax rate and will be reported in a
Binatra was paid P200,000.00 a night. The parishes earned separate tax return, same with the business income and
P1,000,000.00which they can be used for the support of the orphans in the city. compensation income earned.
Who are liable to pay taxes?
A: (a) The four Catholic parishes because the income received by them, not 2. GLOBAL INCOME TAX SYSTEM

being income earned as such in the performance of their religious functions

and duties, is taxable income under the last paragraph of Section 26; in Global system of taxation — the tax treatment views
relation to Section 26(e) of the Tax Code. In promoting and operating the indifferently the tax base and generally treats in common all
Binatra Show, they engaged in an on activity conducted for profit. categories of taxable income of the taxpayer. The taxpayer is
(b) The income of Frank Binatra, a non-resident alien under our law, is taxable at required to lump all items of income earned during a taxable
the rate of 30% (now 25%) FWT based on the gross income from the show. Mr. period and pay under a single set of income tax rules. This is
Binatra is not engaged in any trade or business in the Philippines. applicable to corporate taxpayers.
- follows the proportional rate
Q: Alain Descartes, a French citizen permanently residing in the Philippines, - applicable to corporate taxpayers: 30%
received several items of income during the taxable year, such as consultancy - a uniform rate or proportional rate for all types of income so
fees received for designing a computer program and installing the same in the long as it is classified within the same class. If it is corporate 

Shanghai facility of a Chinese firm; interests from his deposits in a local bank of taxpayer, all the income of the corporations regardless of
foreign currency earned abroad converted to Philippine pesos; dividends value is taxed at a flat rate of 30%
received from an American corporation which derived 60% of its annual gross
receipts from Philippine sources for the past 7 years; and gains derived from the
sale of his condominium unit located in Taguig City to another resident alian. In this type of income taxation, you will have to add all income
Which item of income is not subject to Phlippine income tax? regardless of its classification, report it in one income tax return
A: The consultancy fees are not subject to Philippine income tax. Being an alien, and it will be subjected to one income tax rule (not necessarily
same rate).
it is subject to income tax only on income from sources within the Philippines.
Since the consultancy fees are received by him for designing a computer
program and installing the same in China, the same shall be treated as income Currently, we adopt a partly Schedular and partly Global System
from sources outside the Philippines. of Income Taxation. It is partly Schedular because there are
certain type of income which are treated differently from other

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types of income (e.g., passive income which is subjected to

Final Tax and to be declared in a separate income tax return). This will allow deductions and encourage people to pay taxes.
For your compensation, business income and other types of When you follow gross income taxation, you might be
income, we usually use the Global System since we add overburdened by the huge taxes you pay and you will feel
everything and report it in a single return. disheartened. But this type of taxation is still followed in the
Philippines. MCIT follows gross income taxation to curtail some
evils.
3. SEMI-SCHEDULAR AND SEMI-GLOBAL

(Applicable in the Philippines)

Formula:
There are several items of income which are lumped by kind
All Income xx
and subjected to a similar rate.
Less: Exclusions (xx)
Income subject to Final Tax (xx) l
This is still just similar to following a schedular tax system
Gross Income xx l
because we still classify them and then subject them to
different tax rates and then when all incomes are lumped such Less: Deductions (xx)
as business and compensation income, we subject this lump to Exemptions (personal/additional) (xx) l
a uniform rate. Taxable Income (Net Income) xx l

Therefore, it is schedular in the sense that we lump different Tax Payable (Tax Table or Tax Rate) xx
items of income per type or category and it is global in the Less: Tax Credits, if any (xx) l
sense that we subject all the items in this lump to one tax rate Tax still due xx

Passive incomes such as royalties, interests and dividends are

however subject to different tax rates. This cannot be lumped All income
and so we follow a schedular tax rate here Less: Exclusions (as enumerated under NIRC)
Gross Income
Passive incomes earned by non-stock, non-profit educational Less: Deductions*/Exemptions
institutions are either subject or not subject to tax. No definite
SC decision yet. It may be answered either way. Net Income or Taxable Income

Q: Distinguish “scheduler treatment” from “global treatment” as used in income * DEDUCTIONS: pertains to expenses, loss, interest, tax
taxation. payments made by corporations plus operating expenses.
A: Under a schedular system, the various types/items of income (e.g. * Net Income: refers to Taxable income
compensation; business/professional income) are classified accordingly and
are accorded different tax treatments, in accordance with schedules - For Individual, subjected to graduated tax rate of 5-32%
characterized by graduated tax rates. Since these types of income are treated - For Corporation, Final Income Tax of 30%
separately, the allowable deductions shall likewise vary for each type of
income.
○ Exclusions are those specifically enumerated under the Tax
Under the global system, all income received by the taxpayer are grouped Code
together, without any distinction as to the type or nature of the income, and
after deducting therefrom expenses and other allowable deductions, are ○ Deductions include expenses, losses, interest, and taxes
subjected to tax at a graduated or fixed rate. ○ Exemptions (personal/additional) applies only to individual
tax payers, although not all individual tax payers (applies
usually to resident citizens, non-resident citizens, resident
aliens and non-resident aliens engaged in trade or business
Q: (a) Discuss the meaning of the global and schedular systems of taxation.
 in the Philippines)
(b) To which system would you say that the method of taxation under the NIRC
belong?
(a)A global system of taxation in one where the taxpayer is required to lump all X. FEATURES OF OUR PRESENT INCOME
items of income earned during a taxable period and pay tax under a single TAXATION
set of income tax rules on these different items of income. A schedular
system of taxation provides for a different tax treatment of different types of RA No. 8424, RA No. 9504, RA No. 9337
income so that a separate tax return is required to be filed for each type of
income and the tax is computed on a per return or per schedule basis.
To determine taxable income, based on:
(b)The current method of taxation under the Tax Code belongs to a system
• Domicile of the taxpayer
which is partly schedular and partly global.
• Citizenship or Nationality of the taxpayer
• Source of the income itself
IX. KINDS OF INCOME TAX
FOLLOWS A COMPREHENSIVE TAX SITUS
1. GROSS INCOME TAXATION
Uses nationality, residence and source rules in determining
where or what income are considered taxable or not.
A system of taxation where the income is taxed at gross
A lot of factors to account for prior to determining if the income
This is a system based on gross income, which doesn’t allow is taxable in the Philippines or not.
deductions but allows exclusions.
The general principles of income taxation discusses who are
Gross Income = Income – Exclusions (e.g. Capital) the individuals taxable within and without, including those for
the corporation.
2. NET INCOME TAXATION

A system of taxation where the income is taxed at net (gross Illustration:

income less allowable deductions and/or exemptions) For individuals, resident-citizens are taxable within and
without; Non- resident, taxable sourced within.
Net Income = Gross Income – Deductions
Residency, citizenship, and source of income are factors
considered to determine how the person is taxed. The fact that
In the Philippines, net income taxation is used more. There are
there are several factors to consider before taxing a person is
other expenses which are not part of direct cost so you are the reason why the income taxation system of the Philippines is
given deductions (indirect costs such as those you pay to your comprehensive but corporation have a fixed tax rate.
lawyers, etc).

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Semi-schedular or semi-global but mostly schedular. Normally, return of capital is deducted from gross income. BUT
for pure compensation earners, there is no return of capital
since these individuals do not have any capital to put in (you
COMPREHENSIVE TAX SITUS only use yourself as your capital). The compensation pure
compensation earners get are taxable right away but subject to
50,000 pesos exemption as provided by law which is
1. BASIC FEATURES OF INDIVIDUAL INCOME considered the BASIC personal exemption and 25,000 pesos
TAXATION
for every dependent.

1) SCHEDULAR SYSTEM OF TAXATION.

Illustration:
- Graduated Income Tax (GIT); rates: 20% - 35%
- Unlike in corporate, we use Normal Income Tax (NIT); rate: 30, 000/mo. income * 12 mos. = P360,000
30% P360,000 – 50,000 (personal exemption) = P310,000 (This
amount is now taxable)
UPDATED TAX SCHEDULE UNDER TRAIN LAW
SECTION 5. Section 24 of the NIRC, as amended, is hereby TN: That is why it is modified because although you are not
further amended. allowed deductions, you are granted this exemption by law.
Note also that only pure compensation earners are subjected
to modified gross income. The rest, net income is used.
Effective January 1, 2018 until December 31, 2022
Amount of net taxable income
Rate 4) NET INCOME TAXATION REGARDS THOSE INDIVIDUAL
Over But not over TAX PAYERS THAT DERIVE BUSINESS, TRADE OR
P250,000 0% PROFESSIONAL INCOME.

P250,000 P400,000 20% of the excess over P250,000 Allowable deductions under Section 34 may be claimed by
P400,000 P800,000 P30,000 + 25% of the excess over P400,000 individual taxpayers who derive business, trade and/or
professional income.
P800,000 P2,000,000 P130,000 + 30% of the excess over P800,000
- Pure business income earner, pure profession income earner
P490,000 + 32% of the excess over or modified (both income and employment)
P2,000,000 P8,000,000 P2,000,000
- Allowed to claim deductions; covered by net income taxation.
P2,410,000 + 35% of the excess over But in all cases, the schedular rates will have to be applied for
P8,000,000 P8,000,000 individuals

Tax Schedule Effective January 1, 2023 and onwards Background on Individual income taxation —
○ Always, always the rates will be schedular.
Amount of net taxable income
Rate ○ WON an individual is allowed deductions; RULES:
Over But not over
(1) Pure compensation income earner: modified gross income
P250,000 0% taxation; deductions would only be personal and additional
P250,000 P400,000 15% of the excess over P250,000 exemptions which will subjected to
P400,000 P800,000 P22,500 + 20% of the excess over P400,000 (2) Compensation PLUS business earner or profession or trade
earner: net income taxation; deductions are allowed. Logic
P800,000 P2,000,000 P102,500 + 25% of the excess over P800,000 behind — is once you earn income other than from
P402,500 + 30% of the excess over employment, you will be expected to have incurred
P2,000,000 P8,000,000 expenses for your business, trade or profession.
P2,000,000
P2,202,500 + 35% of the excess over
P8,000,000 P8,000,000 For those who earn income through business, trade or
business, they follow the net income.

2) TAX RATES ARE PROGRESSIVE IN CHARACTER.

Illustration:

- When tax rate increases as the income of the taxpayer Sir Amago, an employee earns compensation income as his
increases. allowance from the firm, but also earns business income from
- Tax base increases as tax rate increases. his practices as a lawyer. At the end of the year, both types of
income are subjected to tax. But for the portion for the
- Ability to pay principle. (Consistent with constitutional business income, he can deduct electricity, rent, depreciation,
provision)
etc. These expenses are allowed to be deducted. I will add
both incomes and whatever is the result, deduct personal and
Proportional to income earned by individual. The income tax basic exemption:
imposed is proportional to the income earned by the
individual. Progressive system is much more clearly illustrated
in individual than corporation. Compensation Income = Income A
Business Income (Business Income – Deductions (expenses) =
Income B
3) MODIFIED GROSS INCOME TAXATION AS REGARDS Total Income = Income A + Income B
PURE COMPENSATION EARNER.

- Pure compensation income earner in the Philippines - all Income A + Income B – P50,000 (BPE) = Taxable income
income is derived from pure employment (purely under 

employer-employee relationship, no business income, no
passive income, etc.), subjected to gross income 
 5) “PAY-AS-YOU-FILE” SYSTEM

taxation although modified. - Expected to pay within the same day upon filling of return.
- Modified because deductions such as expenses Regarding last minute questions, taxes still needs to be paid
(ex.transportation expenses) are not allowed. but rather pay it “Under Protest”.
- Only personal (P50,000) and additional (P25,000 per - Self-Assessment System
dependent) exemption are allowed to be deducted. • The taxpayer will be the one who will determine how
much is the taxable income (computation) in trade,
A modified gross income taxation is used for pure business or exercise of profession, not the BIR.
compensation earners because deductions such as return of • If pure compensation earner, employer will be the one
capital are not allowed. The computation for gross income only who will determine how much is the taxable income. The
have exclusions.

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one who will pay and file is the employer, this is called ❖ Because we follow the three principles of tax situs:
substituted filling. Residency, Nationality or Citizenship and Source rules.

The moment you file your income tax return, you pay taxes due.
Pay and file to the bank. Those who go to BIR are those
individuals or entities that either those incurred a loss or do not XI. SOURCES OF INCOME
pay any taxes at all. They have correctly paid their taxes as they
have estimated in their income tax return. 1) CAPITAL

- A fund or property existing at one point of time.

If no tax to pay – go to BIR.
If you have tax to pay – go to authorized banks. 2) LABOR - TAXABLE IF:

- it is for the benefit of another and;

6) UNDER CERTAIN CASES, “PAY-AS-YOU-EARN” SYSTEM, - it has pecuniary value or is capable of pecuniary estimation
AS APPLICABLE TO INCOME SUBJECT TO
WITHHOLDING TAX.
3) BOTH LABOR AND CAPITAL

- Applicable to income subject to withholding tax.

- Applied primarily to passive income.
- Immediately when earned it will be subjected to tax basically 4) SALE OF PROPERTY

final withholding tax. - Shares of tax or real property

Compensation income earners are subjected to withholding Example 1:

tax. Persons who are leasing out their properties—persons or ☞ Farming (fruits and vegetables for personal consumption
corporations— earn net income. They are subjected to income only);
tax but there is withholding tax required by them which is
being withheld by the lessee. Lessees are required to withhold ☞ painter (painted his own house)
equivalent to 5%.
* Both are under Self-Help income — not taxable, even if
income is sourced from labor.
☞ Example: if you have deposits in the bank and it earns
interest, the bank will automatically deduct the FWT from
the interest income. You did not file yet but the tax is already Example 2:
deducted and remitted by the bank to the BIR. ☞ N painted the house of R, in return, R massaged N.
- Not taxable; not under self-help income
2. BASIC FEATURES OF CORPORATE INCOME - If it can be estimated, taxable (conceptually only)
TAXATION

Source definition
1) GLOBAL CONCEPT OF TAXATION
Source is the property, activity, or service that produces the
income. Presented in the form of capital, labor or dealings in
- No schedule, no graduation of tax rates; tax rate is applied as property. (Discussed in Bayer-Nickel Case)
a final tax rate (30%).
Necessity of determining source of income
Fixed rate of 30% As defined in general principles of income taxation, there are
The progressive system still exists for Corporate Income individuals or entities taxable only for income sourced within
taxation even though the rate is fixed because the how much a the Philippines while some are within and without the country
corporation is taxed still increases by the income it earns
Therefore, we need to know where the income is sourced to
Net Income for Corporate Income Taxation know where the income can be taxed, here in the Philippines
Can deduct itemized deductions under Sec 34 or abroad by another taxing authority. If services are rendered
in the Philippines by a non- resident citizen, this is taxed by the
Philippines
2) CORPORATE TAXPAYERS’ EXCEPTION

- resident foreign corporations are entitled to deductions. Net Examples:

Income taxation is applicable to domestic corporations and
resident foreign corporations. OFW- non-resident under Tax code. If you have a property
leased in the Philippines. It is taxable in the Philippines
- Only resident foreign corporations are entitled to deductions, because property is located here and the source is the
non-resident foreign corporations are not entitled. Not all property or to be strict, the activity of leasing out is the source
allowable deductions applicable to domestic corporation are which is conducted here in the Philippines.
applicable to resident foreign corporation. Subject to
reciprocity rule.
So, taxable because being a non-resident, taxable within but his
- Net Income taxation - applicable to domestic corporations
compensation while working abroad, not taxable here. Outside
and resident foreign corporations.
the Philippines, so not taxable here.

3) “PAY-AS-YOU-FILE” SYSTEM

(except in cases of electronic filing system application)

XII. CRITERIA TO DETERMINE IF INCOME IS
— Exception - in cases of electronic filing system
TAXABLE
application (EFPS) 1. There is gain or profit
2. Accrual actually or constructively received
3. CRITERIA USED — COMPREHENSIVE SYSTEM OF 3. Income is not exempted by any treaty or law
IMPOSING INCOME TAX

TN: These three must be complied with before income can be

a) Residency (Domiciliary Rule) said to be taxable.
b) Nationality or citizenship (Nationality Rule)
c) Place/Source of Income (Source Rule) 1. THERE IS GAIN OR PROFIT

There is gain or profit (derived from a close and completed

✏ We use the Comprehensive Tax Situs or Comprehensive Tax transaction)
Source. Why comprehensive?

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- Condition based from closed and completed transaction • You have rendered service but payment for the service was
(capital) not yet received (income has been earned or has accrued —
• No more condition Accrual Method): INCOME IS REALIZED
• Service is rendered • You have received payment for service that is yet to be
rendered (Cash Method): INCOME IS RECEIVED
• Constructively realized or received — under your control or
NB: In determining the profit for sale of property (classified as disposition (e.g., interest on bank deposits, matured interest
ordinary property or ordinary asset), the formula is 
 coupons, dividends, share in a General Professional
Amount Received/Realized LESS Cost of Property = Profit Partnership)

- Determine if under employer-employee or practice of From Tanya Notes:

profession (labor) Accrual actually or constructively received
Actual – there is actual possession of the wealth
• Return ON capital — profit must be derived from a completed Constructive- no actual possession but already in your control.
or closed transaction Examples: Income deposited in a bank; shares of stock
- It is usually applicable if capital since if your source of income
is labor, you do not necessarily look at the gain or profit.
 ✏ Q. You own shares of stock. Purchased for P100. You look at
stock exchange, the value is P1,000. Is there gain or profit?
Concept of accrual and deferral in accounting will not matter ❖ Yes since you are in a better position than before.
because:
✦ Rendered the service — taxable
✏ Q. Did it comply with the 2nd criteria of actual or constructive
✦ Not rendered the service but received the money/ receipt?
payment — taxable (constructive receipt) ❖ No. It is complied only when you sell it.

If you are in a better position than where you were originally or You can only realize the profit in this case is when you separate
net worth increases in value than what you used to have. it from the capital. You can separate when you sell the shares,
you can deduct the cost and the remaining is the realized gain.
Clearly presented if there is investment, Invested 100 then got
400, there is a 300 gain or profit. But, even if you do not have Buying stocks at 100 pesos per share, then when the right time
any investment like you found a bar of gold in the street. It comes and the share increases to 1000 pesos per share, the
increased your net worth. No investment so the entire value is only way you realize profit is when you sell your shares and get
considered an investment. the profit out of that sale. In that sense, you get to control both
capital and gain by physically segregating them.
TN: If that property is classified as a capital property or capital
asset, we don’t deduct the cost of the property since the basis in You can physically segregate income from capital whereas if
computing the tax is the selling price or fair market value, not yet sold, it is something inchoate. You do not own the
whichever is higher. amount (P1,000) yet but you own the shares which could
potentially be an income.
2. THE GAIN OR PROFIT IS REALIZED OR RECEIVED 

(EITHER ACTUALLY OR CONSTRUCTIVELY)
✏ Q. When is income said to be realized?
Example of income constructively received: 1. If there is control of income
i. Matured interest coupons 2. It is borne out of a completed transaction 

ii. Interest on savings bank deposit
TN: SALE IS NOT THE ONLY WAY TO EARN INCOME.
iii. Dividends applied to indebtedness of a shareholder
iv. Share in the profits of a partner in a GPP
Other ways to earn income:
Contract of loan – Interest payment is the source of income. The
- Actually or; moment it is executed, deemed realized. When transaction is
✦ Physicalpossession regardless whether there was service completed, contract perfected, there is already control I the
rendered or not sense that if due and demandable, can demand payment of
- Constructively interest.
✦ the disposition is under your control although not yet
received
3. SUCH GAIN OR PROFIT IS NOT EXEMPT UNDER ANY LAW
✦ Constructive Receipt concept
OR TREATY

→ Income which is credited to the account of or set

apart for a taxpayer and which may be drawn upon - Otherwise stated, if there is a provision of law recognizing or
by him at any time is subject to tax for the year taxing the income.
during which so credited or set apart, although not ○ In short, for an income to be considered as taxable, 2
then actually reduced to possession. The income requirements:
must be credited to the taxpayer without any a)  It must be a realized income;
substantial limitation or restriction as to the time or b) It must be a recognized income or there is a law
manner of payment or condition upon which which recognizes it as taxable income
payment is to be made.
- If the gain or profit is recognize under the law, then it is not
→ The property/income already pertains to the taxpayer exempt. If It is not recognized, then it is excluded.
or the taxpayer already has the control over the
property/income even if it is not yet actually received
or not yet in possession. Constructively, has the right From Tanya Notes:
to claim as an income because it was already earned Not taxable income
or the service was already rendered. NIRC provides for exclusion, and some exceptions.
All those income (sec 32B), while they are considered income
☞ Example: dividends applied to debts of under first two criteria, cannot tax them.
shareholders, interests on saving in bank deposits,
matured interest coupons, share in the profits in a • Stated otherwise, gain or profit is recognized under the law
general of professional partnership. 

• Received and Recognized: Taxable
• Realized and Recognized: Taxable
* exercise of profession; ex. lawyers; deposits of clients
are already treated as income by the BIR.

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TESTS (to determine if there is a gain/profit, and ultimately, if The first scenario pertains to Self-help Income. It is an income
taxable): that you earn by using your own effort. There is no need to
i. FLOW OF WEALTH TEST report this in your income tax return since it is not subjected to
income tax. There is actually no economic benefit on your part
The determining factor for the imposition of income tax is since you are using your own labor. However, if you render your
whether any gain was derived from the transaction . (CIR vs. service to another person, you earn income because of the
Administratrix of the Estate of Echerri) labor or service rendered; thus, you are economically
benefitted. The income earned in that situation will now be
- There is gain derived in a particular transaction subject to income tax.
- If there is gain, there is flow of wealth
A more complex example relates to stock options. This is usually
given to employees as employee benefits wherein the
ii. REALIZATION TEST employees are given the option to purchase stocks of the
also known as "Macomber Test" -unless the income is deemed company at a much lower price. In this case, the employee is
“realized,” there is no taxable income. Revenue is generally benefitted in the form of savings; thus, under the Economic-
recognized when both of the ff. conditions are met: Benefit Test, that will be subjected to tax.
a) The earning process is complete or virtually complete, and
b) An exchange has taken place. iv. NET EFFECT TEST
☞ Example: Stock Dividends as rule are not subject to The substance of the whole transaction, not the form, usually
Income tax.
controls the tax consequences.

- No taxable income until there is a separation from capital of - Usually the test applied if it is not clear if there is a gain or
something of exchangeable value, thereby 

income
supplying the realization or transmutation which would result
in the receipt of income - The substance of the whole transaction will be taken into
consideration. We do not look at the form (malversation
cases) of the transaction.
- Eisner vs Macomber (Macomber Test)
→ Issue: Whether or not stock dividends is an income or
☞ Common example: shares of stock transfers
not. It cannot be considered as a taxable income
because it does not make the stockholder nor the ○ Shares of stock (stock owned by a shareholder) are
corporation any richer or poorer. transferred to another person. Usually, in deed of
assignment or deed of sale of stocks it reflects that the
■ General Rule: The stock dividend merely changes the
stocks were sold at par value (value reflected in the
interest of the stockholder in the corporation.
financial statement) to make it appear na gamay ra ang
— Exception to the Rule: if only one or some of the nabayaran. Under this test, the BIR will not only look at the
stockholders are given the stock dividends and par value reflected in such deed but would rather look at
hence, the percentage of ownership of each other documents such as the audited financial statement
stockholders will now change. or look at the appraisal value of the shares of stocks
being sold/transferred - to be able to determine its fair
- Issue in the Macomber case: whether or not stock market value (to find out the real rate used in the sale of
dividends are considered as taxable income. The US such shares of stock). The difference between the par
Supreme Court held that it is not a taxable income since value and the fair market value will be considered as
there is actually no gain realized by the shareholders since income.
all of the shareholders’ interest will increase, in effect they
will have the same shareholder interest. That is the general This was used in the case of Napoles. The BIR looks at the
rule. The exception to that is when not all stockholders are substance of the whole transaction, regardless of its form. It is
given the stock dividends since there will be a change in also applicable in transfer of shares transactions.
the stockholders’ interest; thus, there is gain realized.
- What is subject to tax is the difference between the old
v. CLAIM OF RIGHT DOCTRINE
shareholdings and the new shareholdings. That is
considered as constructive receipt. Doctrine of ownership, command or control (embezzled funds-
there is no consensual agreement to return, hence taxable as
an income)
iii. ECONOMIC-BENEFIT PRINCIPLE
Flow of wealth realized is taxable only to the extent that the All-events TEST:
taxpayer is economically benefited. Example: stock options -
FMV in shares upon exercise of the option vs. option price is 1) right to collect the income or an obligation on the
additional compensation income other party to pay the same
2) the amount if liquidated/certain
- Increases in economic status
- Flow of wealth realized is taxable only when the taxpayer is - More or less the same as the realization test (in the concept of
economically benefited accrual) – here the service is already rendered or already
parted ways with the consideration (goods were delivered)
- More applicable on stock options
then the claim of right accrues, which means that the
ownership or control of the property/income can already be
☞ Example: stock option — instead of giving the employees claimed due to the fulfillment of the obligation.
bonuses in cash, employees are offered to purchase stocks - Also Known as Doctrine of Ownership, Command or Control.
at a much lower rate, giving them a chance to be a Note: it does not necessarily mean that you are the owner.
stockholder of the corporation. The difference between the
fair market value of the shares of stocks and the stock price - does not necessarily mean that you are the owner; embezzled
funds are taxable on the part of the embezzler (not on the
offered to the employees can be considered as taxable part of the victim)
income because there is an economic benefit on the part of
the employees. Any economic benefit to the employee that
increases his net worth is taxable. ☞ Example: embezzled funds of embezzler is taxable as
income
Let’s say, for example, Ms. Curan is into carpentry. If she repairs ○ Income is source blind
her house, she does not earn income as she is not benefitted ○ Wealth increases drastically for a short amount of time
from it; thus, there is no taxable income. However, if she uses ○ A taxable gain is conditioned upon the presence of a
her carpentry skills and renovates or repairs the house of Ms. claim of right to the alleged gain and the absence of a
Yap, there is income gained from the repair of the house, the definite unconditional obligation to return or repay that
source of which is the labor, which is subject to income tax. which would otherwise constitute gain. To collect a tax
would give the government an unjustified preference as

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to the part of the money that rightfully and completely • Listed but not traded in the PSE (e.g., when it is done
belongs to the victim. The embezzler’s title is void. over-the-counter or from shareholder to shareholder)
(Commissioner vs. Wilcox, 286u.s. 41~ 424)
‣ subject to CGT: 5% for the first 100K and 10% for
XIII. KINDS OF TAXABLE INCOME OR GAIN the excess based on the Net Capital Gain (selling
price less cost)

Two general classification of gains: BEFORE:

1. Capital gains — gain or income from sale or exchange of

}
capital assets
FMV 5% (first P100,
2. Ordinary gains — gains or income from sale or exchange of Whichever 000)
properties or services which are not considered as capital is higher Selling Price — COST X
assets (categorized as ordinary assets) between
Book Value 10% (excess of
P100, 000)
1. CAPITAL GAINS

* FMV is based on the zonal value (as determined by the CIR)

or the appraiser’s certificate
- gains or income from the sale or exchange of capital assets
- can be realized in relation to capital assets * zonal value will be used only when the corporation has real
properties

CAPITAL GAINS TAX

!!! NOW (BECAUSE OF TRAIN): !!!
- still an income tax; (C) Capital Gains from Sale of Shares of Stock not Traded in
- when transaction involves (sale or exchange of) capital assets, the Stock Exchange. — The provisions of Section 39(B)
and there is a gain or income, the income is subject to notwithstanding, a final tax at the rate of fifteen percent (15%)
Capital Gains Tax (CGT) is hereby imposed upon the net capital gains realized during the
taxable year from the sale, barter, exchange or other disposition
Generally, Capital Gains Tax is an income tax. However, it will of shares of stock in a domestic corporation, except shares sold,
have to be filed in a separate tax return. or disposed of through the stock exchange.

Three types of assets subject to capital gains: ‣ subject to CGT: final tax at 15%
1. Income from dealings in shares of stock of domestic

}
corporation whether or not through the stock exchange
FMV
2. Income from dealings in real property located in the Whichever
Philippines and is higher Selling Price — COST X 15%
3. Income from dealings in other capital assets other than (a) between
and (b). Book Value

(Capital assets discussion on the next page.) b. INCOME FROM DEALINGS IN REAL PROPERTY LOCATED IN THE
PHILIPPINES;
Capital Gains includes:
- Capital Asset; not used in trade or business; not primarily
a. INCOME FROM DEALINGS IN SHARES OF STOCKS OF held for sale
DOMESTIC CORPORATION WHETHER OR NOT THROUGH THE - CGT of 6% FMV or selling price, whichever is higher
STOCK EXCHANGE; - Cost is not deducted from the FMV or selling price when
multiplied by the rate of 6% to get the CGT of the capital
Sale of shares of stocks asset; cost is only deducted if it is classified as ordinary
asset.
a) LISTED AND TRADED IN THE LOCAL STOCK EXCHANGE
- exempt from CGT, but subject to Stock Transactions ‣ If the real property is classified as Capital Asset, it is
Tax (STT) — 1⁄2 of 1% Fair Market Value (FMV) of the
subject to CGT of 6% of the Gross Selling Price (GSP)
shares of stocks
or Fair Market Value (FMV) of the property at the time
- STT is a percentage tax, a business tax of sale, whichever is higher
- STT is automatically withheld or remitted by the stock
brokers ✏ Q. What if the real property is located abroad?
❖ Determine the owner of the real property. If owned by a
• means that the buying and selling happens in the PSE resident citizen or domestic corporation, it is 

• you use stockbrokers and underwriters in the sale taxable (worldwide). CGT? or ordinary income tax? They
• the tax is automatically withheld by the stockbrokers will form part of the ordinary income. Because they are
located outside the Philippines, even if they are NOT
• there is no need to report it as part of the income used in trade or business or is treated as capital assets if
they be situated in the Philippines, they are treated as
‣ Not subject to CGT but is subject to a percentage tax. normal income on the part of the domestic corporation
It is subject to 1⁄2 of 1% (or 0.5% or 0.005) of the or the resident citizen.
Gross Selling Price. This is also referred to as Stock ❖ Reason of the law: administration and implementation of
Transactions Tax. the law. How will the FMV be determined if it is located
outside the Philippines? And when we talk of CGT, it
b) NOT LISTED OR NOT TRADED IN THE LOCAL STOCK necessitates that you have to file a separate Tax Return.
EXCHANGE This case is difficult that the property may not be
declared to be part of the income.
- subject to CGT
- first P100, 000 – 5%; excess of P100, 000 – 10% (based
on the FMV [less cost] of the shares or the gain c. INCOME FROM DEALINGS IN OTHER CAPITAL ASSETS OTHER
[selling price THAN (A) AND (B)
- cost] of the shares or the Book Value, whichever is • this refers to properties which are not usually sold by the
higher) taxpayer (e.g., paintings, machineries, etc.)
- covers listed but not traded shares • can still be classified as capital asset; subjected to Capital
Gains Tax
• Not traded at all (e.g., family or closed corporations) • this is seldom used

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Capital assets are assets which are not used in business but
does not include enumerated ordinary assets. If not one of the
2. ORDINARY GAINS
ordinary assets, it is capital asset (opposites define each other).
- gains or income from the sale or exchange or property which
are not capital assets ORDINARY ASSET

Ordinary assets: (you earn an ordinary income, thus, it is

a. Business income — derived from business; merchandising, subject to ordinary tax rate)
manufacturing, exercise of profession;
- flow of wealth in the ordinary day-to-day transaction; 1) Stocks in trade — must be part of your inventory
- if the inflow is extraordinary, it will fall under capital gains. 2) Property primarily held for sale — (building house for the
- Q: if you are in a business of stock trading, your income purpose of selling it)
will not anymore fall under Capital Gains? 3) Property used in trade or business, subject to allowance for
→ Stock Brokers or Underwriters (business engaged in depreciation — (depreciable assets: machineries,
stock trading), whatever income they earned in stock equipments)
trading, they report it as their normal income. As to 4) Real property used in trade or business – (building used as
the corporations which listed there stocks in the PSE, display area for your merchandise or inventory; real estate 

are they into stock trading? No. thus, in so far as they dealers)
are concerned, even if their shares are listed, they will
report capital gains because their primary business
purpose is into telecommunications, manufacturing, Anything that does not fall under any of the enumeration above
mass media, etc. is considered as a Capital Asset.
b. Compensation income — presupposes EE-ER relationship
c. Passive income — received without any act from the It is important to classify if it is a capital asset or an ordinary
taxpayer (rent income, interest income) asset because if it is an ordinary asset, we will be using the
graduated tax rate; but if it is a capital asset, we will be using
d. Other income derived from whatever source. different rates.

TN: The above enumeration, for Ordinary Gains, is not From Tanya Notes:
exclusive.
1) STOCK IN TRADE INCLUDED IN THE INVENTORY AT THE END OF
TAXABLE YEAR
Illustration:
Shares of stocks is NOT LISTED and NOT TRADED Example 1: Stock of sardines

You originally have 100 cans of sardines. Then you are left with
2 cans of sardines at the end of the year.
FMV 2M
Cost (1M) ✏ What do you consider as ordinary assets?
Net Capital Gain 1M ❖ 2 cans of sardines because they are the only assets left in
your possession.
So therefore, 

5% x 100k* = 5K If sold or eaten, it can no longer be called your asset. Your
10% x 900k* = 90K assets are those which are included in your inventory at the
CGT* = 95K end of a taxable year. 


TN: If land, cannot be stocked and cannot fall under the first
*100K is the first 100,000 criterion. Instead it falls on the second one.
*900k (1M nga NCG minus 100K) is referring to the excess of
the first 100,000
*Capital Gains Tax 2) PROPERTIES PRIMARILY HELD FOR SALE TO CUSTOMERS IN
THE ORDINARY COURSE OF HIS TRADE OR BUSINESS.
Example 1: Sale of house and lot
CAPITAL ASSET
You have 10 houses, and you sold the one in Cebu in Cristina
Capital Asset (Sec. 39, NIRC) — the term “capital assets” means North but you are not engaged in real estate business. 

property held by the taxpayer (whether or not connected with
his trade or business), but does not include: [1-4 pertains to It will be considered capital because the asset is not primarily
Ordinary Assets] held for sale and it is not in the ordinary course of business
1. stock in trade of the taxpayer or other property of a kind because you are not engaged in real estate business.
which would property be included in the inventory of the
taxpayer if on hand at the close of the taxable year
Example 2: Shares of stocks.
2. property held by the taxpayer primarily for sale to customers
in the ordinary course of his trade or business Investment house, you ordinary sell securities. When you sell
shares of stock/securities, considered ordinary because these
3. property used in the trade or business of a character which is securities are primarily held for sale in the ordinary course of
subject to the allowance for depreciation provided in business.
Subsection(F) of Section34·
4. real property used in trade or business of the taxpayer
If engaged in real estate instead and you sell condo units in
Ayala and you were able to sell, these will be considered
The definition in Section 39 for capital assets is a residual ordinary. While they are real property but because you are
definition. In effect, it actually enumerates what are considered engaged in the business, this is primary held in the ordinary
as ordinary assets. course of your business.

TN: This gives a negative definition: “but does not include...” - Ex: Securities.

gives an enumeration of what are ordinary assets. If does not Falls here. You may be able to stock the certificates, but not the
fall under any, considered capital assets. For you to answer the stock themselves.
exam, MEMORIZE THE ORDINARY ASSETS.
3) PROPERTY USED IN TRADE OR BUSINESS SUBJECT TO
* the tax code does not define capital assets, instead it defines DEPRECIATION
ordinary assets, and if it does not fall as an ordinary asset, it is
a capital asset. — that is when there is a decline of value of property
because of passage of time or because of usage
Men don’t depreciate because we are not property. <3

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EH 405 (2017–2018)
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be thankful for until he has to pay taxes on it. Pa ge 61 of 78
Taxation 1 Mi dt e r m Atty. Ar ana s

- The enumeration is not exclusive.

Example of property that depreciates: cars, cellphones. - Special Items Treatment:
i. Self-help income — it is not subject to income tax
TN: Land does not depreciate, it ordinarily appreciates rather ii. Forgiveness/Condonation of Debt — if there is a
than depreciate. Most personal properties depreciate however. consideration, taxable; but if condonation is purely
Rolex watches and other luxury items does not. out of love and liberality, exempted
iii. Recovery of amounts previously written off — apply tax
✏ Is it automatic that they are considered ordinary assets benefit rule
because they don’t depreciate?
❖ No. It must be one which is used in trade or business. ✏ Q. Is this list an exclusive list?
❖ No. Because income tax is source blind. Even if it is an
illegal source provided inflow, it is a source of tax.
4) REAL PROPERTY USED IN TRADE OR BUSINESS 

Section 32 defined and at the same time gave an enumeration.
Example: Land even if not primarily held for sale.
 The list is not exclusive because of the phrase “including (but
If it is the building where your shipping business is located, still
not limited to)”.
ordinary assets because it is used in trade or business. 


Examples of those not enumerated but are excluded:

TAKE NOTE: 1) A debt being forgiven
Fats decided not to collect 1M debt of Feds. Is there income?
EVERYTHING USED IN TRADE OR BUSINESS FALLS UNDER
Yes, there is income but not subject to income tax because it
ORDINARY ASSETS. You just have to identify under which will be considered a donation. No consideration except for the
criteria it falls. Memorize the 4 because it will help you identify love and affection. But if Fats required Feds’ services, then it will
WON capital or ordinary assets
be subject to income tax because it will be considered as
compensation or profession tax.
If you earn income out of ordinary assets, you have ordinary
gains. But if you earn income with the conduct of business If a corporation extended a debt to one of its stockholders and
even without those materials enumerated above, considered then decided to forgive the debt, it will be considered an
ordinary gain.
income called dividend income; a type of indirect dividend. If it
is the other way around, it will be considered an additional
GR: Ordinary if in relation to earning an income not involving investment by the stockholder.
capital asset
2) Bad debts which are not collected
Examples of ordinary income Not paid for how many years so the creditor already considered
1) compensation income it as a deduction. BUT once the debtor decides to pay or is
2) Business income collected, it will now be considered income under the tax
benefit rule.
3) Professional
4) Passive – as a rule are ordinary, unless used as capital
A. COMPENSATION

XIV. GROSS INCOME COMPENSATION for services in whatever form paid, including,
but not limited to fees, salaries, wages, commissions, and
Refers to ordinary income. similar items;
✏ Is there a difference between a salary and a wage?
1. INCLUSIONS - SECTION 32A
❖ In the Labor Code, there is a difference; however, in the
Tax Code, these terms are used synonymously.
INCLUSIONS – Section 32A. CG2IR2DAP3
Sec. 32(A) – Except when otherwise provided in this Title, gross All remuneration for services performed by and EE for his ER
income means all income derived from whatever source, under an ER-EE relationship.
including (but not limited to) the following items:
(1) Compensation for services in whatever form paid,
- Wages and salaries, insofar as taxation is concern, are just the
same.
including, but not limited to fees, salaries, wages,
commissions, and similar items;
(2) Gross income derived from the conduct of trade or ✏ The important factor here is the ER-EE relationship. What if
business or the exercise of a profession; there is no ER-EE relationship and you received something?
❖ Then the relationship is that of a principal and contractor;
(3) Gains derived from dealings in property;
thus, you are receiving professional income rather than
(4) Interests; compensation income.
- Passive; Active (ordinary income)
- Must not be passive income, i.e lending or banking — ✏ Q. Why do you need to know if it is professional or ordinary?
interest income is subject to ordinary tax rate
❖ Because in the ITR, there is a different column (?)
(5) Rents;
- may be passive or active The remuneration referred here DOES NOT INCLUDE (Sec.
(6) Royalties; 78(a) of NIRC):
- may be passive or active; Note: Definition of wages under Section 78 (a), NIRC and
- covers intellectual property rights exclusions (insofar as withholding is concerned thereto.
- passive (if one time invention); active (franchising) (1) For agricultural labor paid entirely in products of the farm
(7) Dividends; where the labor is performed, or
- usually treated as passive (2) For domestic service in a private home, or
(8) Annuities; (3) For casual labor not in the course of the employer's trade or
(9) Prizes and winnings; business, or
- if not exceed 10,000 — part of the ordinary income (4) For services by a citizen or resident of the Philippines for a
- if it exceeds 10,000 — passive income tax rate which is foreign government or an international organization.
20% These are instances where there are no taxable information.
(10)Pensions; and
(11)Partner's distributive share from the net income of the 4th type: Found in treaties.
general professional partnership

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EH 405 (2017–2018)
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Taxation 1 Mi dt e r m Atty. Ar ana s

NOW: Train — Ceiling now is 90,000.

Sec. 78 (A), NIRC: The term “wages” means all the remuneration
(other than fees paid to a public official) for services performed
by an employee for his employer, including the cash value of all Backwages, allowances and benefits awarded in labor
remuneration paid in any medium other than cash, except that disputes-subject to withholding tax on wages.
such term shall not include remuneration paid: Different treatment when it comes to separation pay and
1)   For agricultural labor paid entirely in products of the farm retirement pay, will be discussed soon.
where the labor is performed, or
2) For domestic service in a private home, or PRIMARY METHOD OF COLLECTING TAX FROM
3) For casual labor not in the course of the employer’s trade or COMPENSATION INCOME
business, or
4) For services by a citizen or resident of the Philippines for a GR: Withholding by the employer
foreign government or an international organization.
If the remuneration paid by an employer to an employee for — EXCEPTION: Those employed by foreign embassies and
services performed during one-half (1/2) or more of any payroll diplomatic missions, aid agencies of foreign governments,
period of not more than thirty-one (31) consecutive days United Nations and Its specialized agencies who are
constitutes wages, all the remuneration paid by such employer exempted from withholding tax on their compensation
to such employee for such period shall be deemed to be wages; income. (Revenue Memorandum Circ. No. 31-2013)
but if the remuneration paid by an employer to an employee for
services performed during more than one- half (1/2) of any such Primary method of collecting tax from compensation income is
payroll period does not constitute wages, then none of the WITHHOLDING tax.
remuneration paid by such employer to such employee for such • It is being withheld by the ER for the benefit of the EE
period shall be deemed to be wages. because it is the ER who will have to understandably
remit it to the BIR.
• The goal there is that the total amount withheld by the ER
Please take note of the exclusions of the term “wages”. This
simply means to say that there is no need to withhold for the should equal to the total amount of annual income tax
wages or the money that has been received by those rendering payable of the EE.
the service.
Final — final and full payment of the tax
The compensation includes the cash value of all remuneration Withholding — those withheld by the employer
paid in any medium other than cash. Meaning to say, if you are
paid in property and not in cash, then the cash value of it should TWO TYPES OF WITHHOLDING:
still be included as part of the income subject to the income tax.
Do you need to include in you r income tax return? Yes, all you (1) Final Withholding Tax —
need is to include the cash value of the property received in lieu - final and full payment of the tax, no need to reflect in the
of cash as your salary. ITR
- taxes sa passive income
Includes the cash value of all remuneration paid in any medium - Final and full compliance of tax liability, no need to reflect
other than cash. in the itr
- Creditable is advance payment
- (like for example the ER pays you with properties or stock
options basta not cash, it is still considered as compensation
income and subject to income tax, just determine the cash (2) Creditable Withholding Tax —
value) - is advance payment;
- regular annual ITR, subject to the graduated tax rate (or
30% for corp.)
Types of Taxable income:
Salaries, wages, bonus, remuneration, honorarium, benefits and
allowances • So therefore, as a General Rule: withholding by the ER;
Exception: those employed by the foreign embassies and 

❊ longevity pay, 13th month pay, hazard pay. While the nature
diplomatic missions (RMC 31-2013)
there of “other benefits” it shall be excluded from
compensation income provided that the total amount does
not exceed Php 30,000 [effective 2015 — Php 82,000] Even if it is the employer who withholds the tax, the burden to
{effective 1/1/2018 — Php 90,000} pay the tax is still with the employee. The role of the employer is
simply to collect the tax in advance and remit the tax to the BIR.
TN: Refer to the REVENUE MEMORANDUM CIRCULAR NO.
Types of taxable compensation income: 31-2013
• Salaries • Those employed by Foreign Embassies/Diplomatic
• Wages Missions – who are exempted:
• Bonus ‣ Diplomatic agents who are not nationals or permanent
• Remuneration residents of the Philippines
• Honorarium ‣ Members of the family of a diplomatic agent forming
• Benefits and allowances part of his/her household who are not Philippine
• For government: Representation and Transportation nationals
Allowances (RATA); Personal Emergency Relief Allowance 
 ‣ Members of the administrative and technical staff of
(PERA) the mission together with members of their families
forming part of their respective households who are
• Longevity pay
not nationals or permanent residents of the
• Subsistence allowance Philippines
• Hazard pay ‣ Members of the service staff of the mission who are
• Annuities, pensions and etc. not nationals or permanent residents of the
Philippines
- Take note that salaries and wages refers to basic pay; these ‣ Private servants of members of the mission who are not
other benefits enumerated above are usually termed as nationals or permanent residents of the Philippines
“other benefits”; and these “other benefits” have a specific
amount which is considered excluded from the taxable Those employed by the United Nations and its Specialized
income and the ceiling amount is 30K. Meaning to say, so Agencies: of all the items discussed, this contains a provision
long as these allowances do not exceed 30K, it will not be wherein a Filipino might be exempted from income taxation if
subjected to tax but if it exceeds 30K, the excess is taxable. he/she is an official of the United Nations provided his/her

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EH 405 (2017–2018)
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name is being communicated to the government through the Pease take note that the second enumeration covers two types
DFA. of income: (1) Business Income and (2) Professional Income.

COMPENSATION VIS-À-VIS FRINGE BENEFITS: Compensation inc — no exemption

• To Supervisory and Managerial employees — subject to Prof/business — exemptions
Fringe Benefits Tax (FBT);
• To rank and file EE — de minimis benefits, exempted. 1. BUSINESS INCOME
However, if it exceeds 30K, it is taxable a. Manufacturing, merchandising, mining business

When you say Fringe Benefits, this refers to additional or extra Manufacturing, merchandising, mining business:
benefits aside from the compensation given to the employees.
GI = Total Sales – COGS + other income from other
investment /from incidental sources
Fringe Benefits — these are the benefits provided or granted to
the EE other than the basic pay; perks of your employment.
Gross Income = total sales – cost of goods sold + other income
from other investments/from incidental sources
Fringe Benefit Tax (FBT)
Before: 32% of the grossed up benefit;
If you want a detailed discussion on how to compute for the cost
Now (TRAIN): 35% of the grossed up monetary value of goods sold, you may refer to the book of Mamalateo. Take
note that the “total sales” is not really the total sales since in
✏ What is the manner of collecting the 35% tax? taxation, they call it “total sales” but in accounting, it actually
❖ Through final withholding. Payor (employer) will withhold refers to the “net sales”. Why net sales? It should be net already
of the discounts, allowances and sales returns.
✏ What is grossed up monetary value?
❖ One who shoulders is not the employee but the Service enterprises:
employer. It is not the employee who will pay but the GI = Total receipts – Direct costs and expenses
employer. (refer to RMC 4-2003 as amended by RMC 30-2008)
Service enterprises (like accounting firm, law firm, etc.)
☞ Example: Housing worth Php 500k
❖ Php 500k — Net of FBT. It is the 65%. The 35% is the
grossed up monetary value Professional Income:
❖ Php 500k x 65% = Php 325k is the grossed up fees received by a professional from the practice of his
profession, provided that there is no employer-employee
relationship.
Summary:
Not the same as compensation. Subject to different tax.
Difference b/w Professional income and Compensation income
is the fact that you earned professional income without any ER-
STOCK OPTIONS EE relationship. Professional income are fees received by a
Any income derived by the employees from their exercise of professional from the practice of his profession provided that
stock options is considered as compensation income subject there is no ER-EE relationship and thus considered as business
to withholding tax. income.

Subject to the following rules: Compensation — no allowable deduction

1. If granted to managerial or supervisory employees — subject Business or professional — there is allowable deduction
to FBT is considered Fringe Benefit
2. Additional Compensation is the difference between the BV/ ✏ Q. Can you deduct basic personal exemption and additional?
FMV of the shares whichever is higher at the time of the ❖ Yes if you earned before December 2017
exercise of the option. ❖ But if you earned after Jan 2018, there is no more
3. Subject to DST if considered as original issuance — taken exemption.
from unissued shares
Filing is April 15, 2018.
- No tax yet upon the grant it is only when exercises; If income is year 2017 — follow the previous law
- If granted to managerial subject to FBT Otherwise additional Jan 1, 2018 — annualize and file in 2019.
comp by deduction fmv and bv
✏ Q. Why did they repeal/remove the personal exemption? No
✏ Q. What is the indicator that it is FBT? more 50% or 25% per child
❖ If is not given to all. Only given to some managerial ❖ (possible) No more incentive if you give birth
employees. ❖ Primary reason: the bracket of income is increased
❖ If it is given to all, then it is compensation.

✏ Q. What is difference between the book value and fair market

C. GAINS DERIVED FROM DEALINGS IN PROPERTY

value? A. SHARES OF STOCK OF A DOMESTIC CORPORATION

❖ Book value — ascertained in the financial statements of
1. Capital asset if not a dealer in securities
the company
❖ Fair market value — by the market; would depend if listed
2. Listed AND traded in local stock exchange — 1/2 of 1%
based on GSP (based on listed price) — excess shall be
or not listed.
subject to donor’s tax
□ Listed
3. Not listed OR listed but NOT traded in local stock exchange
□ Not listed — similar with book value — 5% or 10% of the net capital gains.

B. GROSS INCOME
1) Capital asset if not a dealer in securities
GROSS INCOME/BUSINESS INCOME – gross income derived - A dealer in securities is the term used for an individual
from the conduct of trade or business or the exercise of a who is engaged in buying and selling of securities or
profession shares of stock

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EH 405 (2017–2018)
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- So if you’re a dealer in securities, the shares of stocks are What is the situs of taxation when it comes to real property?
considered as your ordinary asset, so subject to It is the place where the real property is located (Principle of
ordinary income tax rate Lex Rei Sitae).
- If NOT a dealer in securities, the shares of stocks are
considered as your capital asset, so subject to capital If the real property is located in the Philippines and is
gains tax classified as a capital asset, then it will be subjected to CGT.
But if the real property is located outside the Philippines
2) Listed AND traded in local stock exchange even if it is classified as capital asset, it will no longer be
- (discussed above) subjected to CGT. If the real property is located outside the
Philippines, we will no longer classify it as capital asset or
- Subject to Stock Transactions Tax of 1⁄2 of 1% based on ordinary asset.
gross selling price; but whatever is the excess there
maybe subject to donor’s tax
If you were able to sell your property located abroad, it will
only be reported as part of your income here in the
Percentage tax is different from CGT because the former is a Philippines, meaning you will be subjected to graduated
business tax; while, the latter is considered as income tax.
income tax for individuals and fixed 30% tax rate for
corporations. But this applies only to Resident Citizens and
The Gross Selling Price refers to the listed price of the share of Domestic Corporations.
stock. The FMV is based on the zonal valuation by the BIR, FMV
based on the tax declaration (which comes from the
3) NOT listed OR listed but NOT traded in local stock assessor of the locality) or based on the appraisal.
exchange
- (discussed above) Since the CGT is based on the GSP or the FMV, this means
- not over 100,000: 5% that you are not going to deduct the cost or the
- On any amount in excess of P100,000: 10% accumulated depreciation. This is because the real property
is considered as capital asset. If you are allowed to deduct
depreciation, then the property will be classified as ordinary
When the stocks are not listed or traded in the PSE, there is a asset.
need to submit a separate tax return. The BIR considers the
selling price, book value based on the Audited Financial
Statements (AFS), appraisal based on the Appraiser’s Let’s say, for example, that Ms. Curan is engaged in real property
Certificate or zonal value based on the Tax Declaration. business (purchasing, developing and selling of land). Will she
be subject to CGT? No, she will be subjected to the ordinary tax
Consideration of the Selling Price is not automatic because the
BIR will compare the Selling Price and the Fair Market Value (if individual, subject to graduated income tax rate; if
(FMV) of the shares of stocks. The FMV of the shares of stocks corporation, subject to fixed rate of 30%). This is because the
real property is classified as ordinary asset and not as capital
could be based on the zonal valuation by the BIR, the tax
declaration or the appraiser’s certificate. asset insofar as the type of business she is engaged in.
Why is there a need to determine the FMV of the property
when in fact you are only selling shares of stocks? It is because Take note of the difference between the CGT for the sale of
the BIR uses what we call as the Adjusted Net Asset Method. shares of stocks and the CGT for the sale of real property. In the
In this case, the BIR will appraise all the assets and all the sale of shares of stock, you base the tax on the Net Capital Gain,
liabilities of the corporation selling the particular shares of meaning to say you consider the cost; whereas, in the sale of
stock. real property classified as capital asset, you base the tax on the
GSP or FMV, meaning you do not consider the cost. This is
because, in the sale of real property classified as capital asset,
✏ How to compute the Fair Market Value (FMV)? you are not in the business of buying and selling real property;
❖ If listed but NOT traded, the FMV is: thus, what is considered is only the GSP or FMV, whichever is
□ The closing rate on the date of the transaction (ang higher.
closing rate kay kanang rate nga makit.an nimu sa
newspaper sa stock exchange section)
C. OTHER CAPITAL ASSETS
□ If no sale on the date of transaction, the basis of your
FMV would be the closing rate nearest to the date Other Capital Assets are those not held primarily for sale (e.g.,
of sale motor vehicle not used in business, short term commercial
❖ If NOT listed and NOT traded:
papers not considered deposit substitutes).
❖ Based on Net Capital Gains, so the BIR will compare the
selling price (SP); or the book value (BV) of the shares; or They do not have a special capital gains tax rate. They are
FMV subject to the graduated income tax rate (individuals) or
normal corporate tax rate (corporation).
* SP is the consideration or the amount of money that you
indicate in your deed of transfer or deed of sale
* BV of the shares is the based on the Audited Financial Holding period of other capital assets is material for “individual”
Statement (AFS) taxpayers ONLY (does not apply to corporate taxpayers).
* FMV can be based on the (1) zonal value as determined by
the BIR; (2) value as declared in the tax declaration by the ✏ What are these?
Assessor’s office; (3) appraiser’s certificate ❖ motor vehicles not used in business
❖ short term commercial papers not considered deposit
B. REAL PROPERTY substitute
- Located in the Philippines
○ The seller or transferor is a real estate dealer: ordinary ○ HOLDING PERIOD RULE:
asset, so subject to ordinary income tax * 50% of capital gain is taxable if the other capital asset is
○ The seller or transferor is NOT a real estate dealer: capital held more than 12 months (long term capital gain)
asset, so 6% based on SP or FMV, whichever is higher o * 100% of capital gain is taxable if held 12 months or less
However, if real property is sold during involuntary sales, (short term capital gain)
like foreclosure, taxes should be counted from the date the
right to redeem (1 year from the date of registration of the
Illustration:
certificate of sale) the property has expired and it is based
on the bid price, FMV or zonal value, whichever is higher 1/1/2014 – Mr. X purchased a car for 800K but instead of
registering the car on his name, Mr. X gave it to his son, Y.
7/22/2014 – Y purchased a new car and traded-in the old car
- Located outside the Philippines valued at 900K. So, is there a capital gain? If yes, how much of
○ Subject to graduated income tax for residents or normal the capital gain is taxable?
corporate income tax (NCIT) for corporations

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EH 405 (2017–2018)
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Taxation 1 Mi dt e r m Atty. Ar ana s

☞ Example 1: Mr. Sevilla is employed in a foreign corporation,

ANS: Yes, 100K. 900K - 800K = 100K is the capital gain. The and it asked you to come here in the Phils. and do some
capital gain is here short-term because the car was traded- in work here in behalf of the foreign corporation. Is Mr. Sevilla’s
less than 12 months or 6 months after its purchase. Therefore, compensation for the services rendered here in the
the 100% of the 100K is part of the income and is subject to the Philippines subject to income tax here in the Philippines
graduated income tax rate. even if the payor is a foreign corporation? Yes. The
residence of the payor will not matter, what matters is the
place where service is rendered. CIR vs Baier-Nickel
REMEMBER: Capital losses can be offset only against and to the
extend of the capital. Capital loss is different from ordinary loss.
Capital gain is different from ordinary gain. ☞ Example 2: Bench hired the services of the advertising
agency in Singapore to do advertisements in Singapore. Is
the advertising income of that advertising agency subject to
Example Problem: Mr. X purchased a car for 700K and gave it income tax here in the Phils.? No. it will not be subject to
to his son, Y, on Jan. 1, 2014. Y purchased a new car on July 26, income tax because the advertisement is not rendered here
2014 and traded-in his old car for 800K. The capital gain is but was rendered in Singapore. Even if the payor is a
100K (difference between the selling price and the cost). This is domestic corporation here in the Phils.
considered as income on the part of Y. This case relates to a
short-term capital gain because it was held for less than
12months; thus, the entire amount of 100K is subjected to tax. In the Baer case: the officer is receiving commission abroad but
service is rendered here in the Philippines. SC ruled that the
commission of a Non-Resident Alien is subject to the Philippine
TN: Capital losses can be offset only against and to the extent Income Tax since he renders services here in the Philippines
of capital gains; while, ordinary losses, can be offset only even if paid by the payor who is abroad.
against and to the extent of ordinary gains.

For example, if a domestic corporation hires the services of a

4. EXCLUSIONS - SECTION 32B
foreign corporation located in HK to do some advertisements in
HK. Is it subject to withholding tax on income or tax on
(Click here to go to discussion) advertisement services which are being withheld in HK? No,
because the service is rendered abroad (i.e., in HK), even if the
payor is a domestic corporation here in the Philippines.
XV. SITUS OF INCOME (SECTION 42)
1. Compensation Place where the service/s is/are rendered.
2. BUSINESS INCOME

Income a. Merchandising, Farming, Mining: tax situs is the place

where the business is undertaken
2. Business Merchandising, Farming, Mining
Income - Place where the business is undertaken.
b. Manufacturing:
Manufacturing • Goods manufactured and sold within the Philippines:
a. Goods manufactured and sold within the Philippines —
income derived purely within. income derived purely within
b. Goods manufactured & sold outside the Philippines — income • Goods manufactured and sold outside the Philippines:
derived purely outside. income derived purely outside
c. Goods manufactured within the Philippines and sold outside
the Philippines — income partly within and partly without. • Goods manufactured within the Philippines and sold
d. Goods manufactured outside the Philippines and sold within outside the Philippines: income partly within and partly
the Philippines — income partly within and partly without. without
• Goods manufactured outside the Philippines and sold
3. Income from 1. If it involves personal property — the place of sale
Sale or 2. In the case of sale of transport documents — the place where within the Philippines: income partly within and partly
Exchange of the transport document is sold without
Property 3. If it involves real property — the place or location of real
property
3. INCOME FROM SALE OR EXCHANGE OF PROPERTY

* bill of lading; airway bill; carrier’s certificate a. If it involves personal property: the place of the sale
4. Interest Income Residence of the debtor/borrower. b. In the case of sale of transport documents (e.g., bill of lading,
airway bill, etc.): the place where the transport document is
5. Rent Income Place where the property sold
* subject of the contract is located
* either personal or real property c. If it involves real property: the place or location of real
property
6. Royalties Place where the intangible property is used.

7. Dvidend 1. Received from domestic corporation – income purely within. 4. INTEREST INCOME

2. Received from foreign corporation outside the Philippines

and the income of the foreign corporation in the Philippines Tax Situs: residence of the debtor/borrower
during the last preceding 3 taxable years, following rules
shall apply, to wit—
a. The income is purely within if the income derived from In other words, if the creditor is a foreign corporation and the
the Philippines is more than 85%; debtor is a Filipino citizen residing here in the Philippines, then
b. It is purely without if the proportion of its Philippine the debtor must withhold the amount of tax upon payment to
income to the total income is less than 50%; the creditor.
c. There should be an allocation if it is 50% but not more
than 85%.
8. Annuities Place where the contract was made. 5. RENT INCOME

Tax Situs: place where the property subject of the contract is

9. Prizes and If on account of services rendered – place where the services
Winnings were rendered. located
If not on account of service rendered – place where the same is
given. TN: There is no qualification whether the property subject for
10. Pension Place where this may be given on account of services rendered. lease or rent is a personal property or a real property.

11. Professional Place where the exercise of profession is undertaken.

income of 6. ROYALTIES

professional
partners Tax Situs: place where the intangible is used

7. DIVIDEND

1. COMPENSATION INCOME
a. Received from a domestic corporation: income purely within
- Place where the service/s is/are rendered

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b. Received from foreign corporation outside the income of the

foreign corporation in the Philippines during the last taxpayer’s taxable income, due to the following reasons: (1) It is exempted
preceding 3 taxable years, the following rules shall apply, to by the fundamental law; (2) It is exempted by statute; and (3) It does not
wit: come within the definition of income (Sec. 61, Rev. Regs. No. 2) WHILE
deductions are the amounts which the law allows to be subtracted from
• The income is purely within if the income derived from the gross income in order to arrive at net income.
Philippines is more than 85%
b. Exclusions pertain to the computation of gross income WHILE deductions
• It is purely without if the proportion of its Philippine pertain to the computation of net income.
income to the total income is less than 50%
c. Exclusions are something received or earned by the taxpayer which do not
• There should be an allocation if it is equal to 50% to 85%
form part of gross income WHILE deductions are something spent or paid
of the foreign corporation’s income is derived within the in earning gross income.
Philippines (insofar as the dividend is concerned)
An example of an exclusion from gross income are life insurance proceeds, and
an example of a deduction are losses.
8. ANNUITIES

Tax Situs: place where the contract was made

EXCLUSIONS FROM GROSS INCOME
1. Proceeds of Life Insurance Policy
9. PRIZES AND WINNINGS
2. Amount Received as Return of Premium
a. If on the account of services rendered: place where the 3. Gifts, Bequests, Devises
services where rendered
4. Compensation for injuries or sickness
b. If not on account of service rendered: place where the same
is given 5. Income Exempt under treaty
6. Retirement benefits, Separation pay, Pensions, Gratuities
7. Miscellaneous Items
10. PENSION
a. Income Derived by Foreign Government
Tax Situs: place where this may be given on account of services b. Income Derived by the Government or its Political
rendered Subdivisions
c. Prizes and Awards
11. PROFESSIONAL INCOME OF PROFESSIONAL PARTNERS
d. Prizes and Awards in Sports Competition
Tax Situs: place where the exercise of profession is undertaken e. 13th Month Pay and Other Benefits
f. GSIS, SSS, Medicare and Other Contributions
g. Gains from the Sale of Bonds, Debentures or other
XVI. EXCLUSIONS FROM GROSS INCOME Certificate of Indebtedness
h. Gains from Redemption of Shares in Mutual Fund
EXCLUSIONS
Shall not be included in the gross income and shall be exempt
from taxation. 1. PROCEEDS OF LIFE INSURANCE POLICY

TN: The exclusions are exclusive because they construed strictly (1) Life Insurance. - The proceeds of life insurance policies paid
against the taxpayer while in favor of government. to the heirs or beneficiaries upon the death of the insured,
whether in a single sum or otherwise, but if such amounts are
held by the insurer under an agreement to pay interest thereon,
(LAGCIRM) the interest payments shall be included in gross income.
Sec 32 (B)
Exclusions from Gross Income. — The following items shall not
TN: NOT TAXABLE BECAUSE IT IS AN INDEMNITY IN LIEU OF
be included in gross income and shall be exempt from taxation DEATH.
under this Title:
1. Life Insurance
2. Amount Received by Insured as Return of Premium What it refers here in LIFE INSURANCE because there are
different kinds of insurance.
3. Gifts, Bequests, and Devises
4. Compensation for Injuries or Sickness. ✏ Q. Why is this excluded?
5. Income Exempt under Treaty ❖ Because this is deemed as INDEMNITY for the loss of life.
6. Retirement Benefits, Pensions, Gratuities, etc.
7. Miscellaneous Items. ✏ Q. Why all the proceeds are excluded?
❖ Because under insurance law, life is considered priceless.
(or use LAGCRIM — LAG sa CRIM) (oh master na kaau ninyu ang insurance, nya ang
taxation?) So the tax code cannot put a ceiling on the
amount because again life is priceless.
Exclusion from Gross Income Deduction from Gross Income
It will not matter whether you receive it in lump sum or
Flow of wealth to the taxpayer which are Amounts allowed by the law to be installment basis, so long as it is a life insurance policy, it is still 

not treated as part of gross income for deducted from the gross income to
purposes of computing taxable income arrive at net income excluded or exempted.
due to:
1. Exemption under fundamental law; However, the condition here is that the insured should have
2. Exemption by the statute
3. Does not come under the definition died. Because if the insured did not die, then not the entire
of an income proceeds is excluded, only up to the amount of the premium
paid is exempted if the insured outlives the insurance.
Pertains to computation of gross income Pertains to computation of net income
✏ Q. When do you get insurance?
Earned or received by the taxpayer but Something spent or paid in earning ❖ When someone dies.
does form part of the gross income gross income

Example: 13th month pay not exceeding Example: Business rent expense, salaries Non-life — may be subject to tax
the Php90,000 exclusionary threshold to employees, etc.
Traditional Example:
Kads secured a life insurance for the benefit of Marmie. Marmie
was designated as irrevocable beneficiary. If Kads dies, the life
24. Distinguish exclusions from deductions.
insurance will pay his beneficiary 10K every month to Marmie.
a. Exclusions from gross income refer to a flow of wealth to the taxpayer which
Is it taxable for income tax purposes? No.
are not treated as part of gross income for purposes of computing the

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Whether or not revocable, it does not matter. Whoever is the MR. A’s Case:
beneficiary, it does not matter. Still not subject to income tax. When he was alive and when he transferred his life insurance
policy to B, he was able to obtain 1 million pesos as his income.
TN: Life insurance is tradition it that you must die first before the This is so since Mr. A paid 4 million pesos for the Premium and
insurance is issued. (Unlike in an endowment fund – you pay he sold it to Mr. B for 5 million pesos. 4 million as the capital of
then you can get the investment if you outlive the insurance) Mr. A is deducted from 5 million which was how much he got
Whatever the proceeds of traditional life insurance – not from the transfer.
subject to income tax.
This 1 million is now Mr. A’s income which is CAPITAL INCOME
Company Insuring Employee Example from Capital GAIN (sale of other personal property)
If the company is the beneficiary = expenses (not taxable)

A company takes a life insurance for one of its employees MR. B’s Case:
because the latter has been such a great guy that they love When Mr. A transferred the policy to MR. B, latter now became
him. The company was named as the beneficiary – it will be the the beneficiary or the one who will reserve the 10 million pesos
only one benefitting from their beloved employee’s death. when MR. A dies. Mr. B gets the 10 million BUT that whole
amount is NOT taxable since Mr. B had to put in capital for the
The amount paid for the life insurance is now treated as an policy.
EXPENSE and the income that they get after the employee’s
death is not taxable because these are life insurance proceeds. Mr. B paid 5 million for the transfer from Mr. A to him and he
also paid 4 Million for the payment of the premium until the
The company may deduct it as an expense on their part. 8th year when Mr. A died. Therefore, Mr. B paid a total of 9
million pesos which is his capital which will now be subtracted
to 10 million pesos which Mr. B earned from the Insurance
If estate of the employee is the beneficiary = compensation Policy.
(taxable)
If the company makes the estate of the employee as the
beneficiary, the life insurance premium the company pays will Now, Mr. B actually has 1 million pesos as has income and now
now be treated as COMPENSATION on the part of the subject to tax.
employee and will be taxed yearly as compensation.
INCOME =
Insurance premium – Taxable Life Insurance Proceeds – (Purchase Price + Premiums Paid)
Life insurance proceeds – Still not taxable since the law does _______
not distinguish who the beneficiary is. Of the many types of insurance, what is excluded from income is
only the proceeds of a life insurance policy regardless if it is
TN: PROCEEDS OF LIFE INSURANCE ARE NEVER TAXABLE, received in lump sum or in installment. This is because it is
REGARDLESS OF THE BENEFICIARY. considered more of an indemnity rather than a gain on the part
of the recipient of the proceeds of life insurance. Under our law,
life is considered as priceless and beyond compensation.
Subject to tax if:
1. Insurer and insured agreed that the amount of the proceeds TN: The condition here is that the insured should have died.
shall be withheld by the insurer with the obligation to pay There are instances when the insured outlives the period of the
interest in the same, the interest will be subject to tax; insurance policy and after the lapse of the period, the insurance
2. There is transfer of the insurance policy. companies will give the insured the face value of the insurance.
In this case, that is still considered as proceeds of life insurance.
However, the entire proceeds will not be excluded. What will be
1. Insurer and insured agreed that the amount of the proceeds excluded is the equivalent value of the return of the premium;
shall be withheld by the insurer with the obligation to pay thus, whatever is received in excess of that will be subject to
interest in the same, the interest will be subject to tax;
income taxation. So basically, you get the difference between
the face value of the insurance policy and the total of the
Example: premium. The difference will form part of your gross income.
On Jan. 9, 2016, you got life insurance proceeds in the amount
of 1M but the insurance company will only pay you on Jan. 9,
2017. During this supervening period, there is interest of 20% 2. AMOUNT RECEIVED AS RETURN OF PREMIUM

so that when the time comes, you will get 1.2M by Jan 9, 2017.
Only 1M will be excluded. The 200,000 will be subject to tax (2) Amount Received by Insured as Return of Premium. - The
because this is the interest will be subject to tax. amount received by the insured, as a return of premiums paid
by him under life insurance, endowment, or annuity contracts,
2. There is transfer of the insurance policy. either during the term or at the maturity of the term mentioned
in the contract or upon surrender of the contract.
When one sells his insurance to another, the income that the
purchaser gains from the insurance is subject to tax. The
income derived from this is now taxable since the insured is Reason for exclusion: it represents a mere return OF capital.
now making a business out of the insurance policy.

This primarily is referring to life insurance

Illustrative Problem:
Mr. A is insured for a life insurance policy of 10 Million Pesos
which is due from payment for 10 years. From Year 1 to Year 4, Insurance premium is the consideration that you pay to the
Mr. A paid for the premium for 4 Million pesos. On the 4th year, insurer for bearing the risk of the specific peril.
Mr. A sold the Insurance Policy to Mr. B for 5 Million Pesos.
From 4th year to 8th Year, Mr. B paid for the Insurance Premium ✏ Q. Why is it exempted?
in the amount of 4 million pesos. ❖ Does not fall under the definition of income

On the 8th year, Mr. A dies which means Mr. B is happy since he • TN: What is excluded here is the return of premium still
can get the money in the amount of 10 million pesos. (and Mr. related to your life insurance and not just any other type of
B paid only 9M – 5M for the sale and 4M for the premiums) insurance
• Reason for exclusion: it represents a mere return of capital
What is TAXABLE? • Sec. 32 (B)(2), NIRC: The amount received by the insured, as
The Income the original beneficiary (Mr. A) got from transferring a return of premiums paid by him under life insurance,
his insurance AND the income the purchaser (Mr. B) gains from endowment, or annuity contracts, either during the term or
the Insurance Policy.

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at the maturity of the term mentioned in the contract or Gifts etc is under will if you are granted by some decedent
upon surrender of the contract. which takes effect only if someone dies. You earned something
but not because of your right to earn income but someone
☞ For example, Mr. Zabala took a life insurance of 50K per year. else’s right to transfer property. This act is taxable under estate
tax, not income tax.
❖ If after 10years, he died and his heirs received a total
amount of 1M. Insofar as the 1M is concerned, it will not
be subject to income tax and will not form part of the In the same way, if I am so generous to give you 1M. It
gross income of the heirs since this is considered as increased your net worth. It is because of my right to be
proceeds of a life insurance. generous not your right to earn income. If you are given gifts, it
❖ If after 10years, he outlives the insurance and received
will be subject to donor’s tax, not income tax. The donor, not
the face value of the insurance policy amounting to the donee, is subject to tax.
800K. The entire amount of 800K will not be subject to
tax. You need to get the difference between the face GIFTS

value of 800K and the return of premiums of 500K (10yrs

x 50K). In this case, only the 300K (800K less 500K) will Gifts are given purely out of love and liberality so if there is a
be subject to tax. consideration given then it is subject to income tax.
☞ Example 1: you are an EE of a corporation for 30 years and
the corporation gave you bonus gift of 5k per year of
Endowment funds/policy:
service, it is taxable because there is a consideration which is
Life insurance that allows you to get proceeds if you do not die your 30 years of service. But it is subject to the 30k
after a particular period. threshold.
☞ Example 2: in the internet, there’s a pop up window saying
Example: If you are required to pay for 100k per year for 20 “you are the 1000th visitor so you will receive an ipad”. You
years (total of 2 million pesos) and that you will receive 10M at receive the ipad, should you include the cash value of the
the end of that year, and then you outlive the policy after 20 ipad as part of your income and thus subject to tax? It is
years and you do not die, you will get it. subject to income tax because the act of visiting that
website is the consideration.
You will have an income of 8M.
BEQUESTS

This is because 10M (endowment) – 2M (how much you paid for Bequests, or commonly known as legacy, gifts of personal
20 years) = 8 Million pesos. property by virtue of a will and the recipient is called legatee.
This bequest is already subject to transfer taxes, which is why it
The 2 million pesos is return of premium/capital and not is not anymore subjected to income tax.
subject to tax. This will not fall under letter A because no one — Exceptions to the rule: the income or fruit of such
died here. money given by donation, bequests or devise.

3. GIFTS, BEQUESTS, DEVISES

TN: Under the Tax Code, the taxpayer can only be subjected to
one direct tax. That is why if it is already subjected to transfer
(3) Gifts, Bequests, and Devises. - The value of property tax, there will be no more income tax and vice versa. However, it
acquired by gift, bequest, devise, or descent: Provided, however, is possible that you can be subjected to many indirect taxes.
That income from such property, as well as gift, bequest, devise
or descent of income from any property, in cases of transfers. For example, Ms. Imperial has been with Fast Cargo for 10yrs.
For her 10th year with the company, she was given an award and
5K for every year of service or a total of 50K. In this case, the
Exceptions to the rule: the income or fruit of such money given amount is taxable because it is on account of services rendered
by donation, bequests or devise.
and not based on a pure act of liberality (the number of years of
Bequests - personal property service is the consideration).
Devise - real property
However, if the company gives Ms. Imperial 50K without any
Already subjected to transfer taxes. consideration and out of pure liberality, then the amount
received will not be subject to income tax but to transfer tax.
It is exempted because it is already subject to donor’s, transfer
or estate tax. The reason for this is that it is a rule under the Tax Another example, if you visited a site and you won an IPad, is the
Code that no taxpayer will be subjected to two direct taxes at cash value of the IPad taxable? It is not an act of pure liberality
the same time. Take note that donor’s, transfer and estate tax because there is an effort from the fact that you entered into
are direct tax. that particular website. It is not considered as a gift; thus, it is
taxable.
Gifts — donor’s tax
Bequests, devices — estate tax 4. COMPENSATION FOR INJURIES OR SICKNESS

There is last will and testament (4) Compensation for Injuries or Sickness. - amounts received,
through Accident or Health Insurance or under Workmen's
Bequest — involves personal property Compensation Acts, as compensation for personal injuries or
Device — involves real property sickness, plus the amounts of any damages received, whether by
suit or agreement, on account of such injuries or sickness.
If it derives income, like commercial building, it is subject to
income tax.
Reason for exclusion: this is just an indemnification for the
injuries or damages suffered (compensatory in nature).
• Reason: they are subject to another type of tax, specifically
The sources are:
the transfer tax (Donor’s tax or Estate tax)
a. The compensation may be paid by virtue of a suit; or
• Must be an act of pure liberality without any consideration
b. It may be paid by virtue of health insurance, accident
• Bequest or legacy: personal property – subject to Estate Tax
insurance or Workmen’s Compensation Act.
• Devise: real property – subject to Estate Tax

There is already direct tax due to it. There is no income to speak

✏ Q. Why excluded?
❖ To help the one who suffered that particular injury or
of. The right you are exercising here is not related to your right
to earn income but on some other rights. sickness. But you have to ascertain how much

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Illustration: Sir thinks that this should not be subject to tax because this was
Ms. Burdeos, kinsa imu gnhn patyun diri? Mr. Honculada sir. So, not borne out of your services rendered. It is just compensation
Mr. Honculada met a vehicular accident. His car was damaged because I was involved in an accident, forms part of physical
and Mr. Honculada was hospitalized, so he was not able to go injuries.
to work. So Mr. Honculada received the following: 

Other damages that you get is still taxable if not related to
Taxable (?) physical injury. Example: In labor case, payment of backwages,
100k — Hospital bills ✗ atty’s fees, moral damages, nominal damages will still be
50k — lost income* ✓ subject to tax because not physical injury.
10k — maintenance and medication ✗
1M — moral damages ✗ 5. INCOME EXEMPT UNDER TREATY

500k — attorney’s fees ✗

500k — car* valued at 200k ✓ (5) Income Exempt under Treaty. - Income of any kind, to the
extent required by any treaty obligation binding upon the
Government of the Philippines.
* lost income is taxable because under normal circumstances,
he would have earned the 50k, if he was not hospitalized and
was able to work. Reason for the exclusion:
* the car value was 200k but Mr. Honcx was able to receive ○ Treaty has the obligatory force of a contract
500k for the damage to the car. So the difference of the 500k ○ Concept of reciprocity and amity among nations
and 200k, which is 300k, is taxable because that is the extent — Exception: as may be provided in the treaty.
of the gain he got.

Atty. A: for moral damages and attorney’s fees, it is not taxable Basis: reciprocity among nations
because moral damages pertains to your non-physical injuries
related to your physical injuries. Like si Ron pagbangga niya Read: RMC No. 31-2013
nagka.umod-umod na siya didto nya perti na gubaa sa iya
dagway, dba? So moral damages daun. While for the attorney’s
Most favoured nation clause which is one way of preventing or
fees, it represents the actual fees you paid your lawyer which is
just refunded to you, so basically compensatory in nature. And avoiding international double taxation. It is an exclusion
because both sovereign states, being superior in their own
the hospital bills and medications are just refund for your
actual expenses. right, entered into an agreement.

We follow the pacta sunt servanda that we have to be in good

If it involves actual damages (actual, moral, exemplary
damages) faith whenever we deal with international personalities. So if we
agreed that no taxes will be paid so it is appropriate to exclude
them from taxes.
For example, assume that Mr. Emboy was involved in a car
accident and that he was not at fault. He sued the party at fault
and he was awarded the following: 1M for moral damages, 6. RETIREMENT BENEFITS, SEPARATION PAY,
100K for hospitalization expenses, 50K for medication, 150K for PENSIONS, GRATUITIES

Attorney’s fees, 300K representing his lost income for having

been hospitalized for 6months and 250K for the damaged car, (6) Retirement Benefits, Pensions, Gratuities, etc.-
although the value of the car at the time of the accident is 150K.
What are considered as compensation to injuries or sickness? a. Retirement benefits received under Republic Act No. 7641
What are considered as part of the gross income? and those received by officials and employees of private
firms, whether individual or corporate, in accordance
with a reasonable private benefit plan maintained by the
In this scenario, the following are excluded from the gross employer: 

income (as they are compensatory in nature or in the form of Provided, That the retiring official or employee has been in
reimbursement): the service of the same employer for at least ten (10) years
• Moral Damages and is not less than fifty (50) years of age at the time of his
• Hospitalization costs retirement: 

• Medication, Check-ups Provided, further, That the benefits granted under this
subparagraph shall be availed of by an official or
• Attorney’s Fees employee only once. 

• Value of the property damaged — only to the extent of the For purposes of this Subsection, the term 'reasonable
value of the car at the time of the accident private benefit plan' means a pension, gratuity, stock
bonus or profit-sharing plan maintained by an employer
The following will be included as part of your taxable income: for the benefit of some or all of his officials or employees,
• Lost income – represents the income that should have been wherein contributions are made by such employer for the
earned had you not met the accident officials or employees, or both, for the purpose of
• Value of property damaged – only to the extent of the distributing to such officials and employees the earnings
difference (100K) between the value of the car at the time of and principal of the fund thus accumulated, and wherein
the accident (150K) and the amount awarded (250K) its is provided in said plan that at no time shall any part
of the corpus or income of the fund be used for, or be
diverted to, any purpose other than for the exclusive
Generally not taxable benefit of the said officials and employees.
Only damages in relation to physical injuries are exempted
(moral damages are not exempted). It contemplates accidents b. Any amount received by an official or employee or by his
involving vehicles, someone will be held liable. heirs from the employer as a consequence of separation of
such official or employee from the service of the
employer because of death sickness or other physical
Example: If there is a manhole na natagak ka, granting disability or for any cause beyond the control of the said
someone was negligent, if ever you will receive damages in official or employee.
relation to the injury. Damages in relation to physical injury is
not subject to tax. c. The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement
gratuities, pensions and other similar benefits received by
Other damages that you will get is a gray area. For example, resident or nonresident citizens of the Philippines or
compensation for loss profit which forms parts of aliens who come to reside permanently in the Philippines
compensation income but this is a gray area. from foreign government agencies and other institutions,
private or public.
Sir’s opinion

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d. Payments of benefits due or to become due to any person Private Yrs. of Age at the time Taxable or
Benefit Plan Service of Retirement Not Taxable? Reason
residing in the Philippines under the laws of the United
States administered by the United States Veterans Complies with the
Administration. With Plan 15 yrs. 60 yrs. old Not Taxable necessary
e. Benefits received from or enjoyed under the Social requirements
Security System in accordance with the provisions of
Republic Act No. 8282.
Retirement benefit vs. Separation Pay?
f. Benefits received from the GSIS under Republic Act No. A retirement benefit is based on age and length of service. On
8291, including retirement gratuity received by the other hand, the separation pay is not based on age and
government officials and employees. length of service but due to sickness, physical disability, death
or any cause beyond the control of the employee (i.e.,
a. Retirement benefits under R.A. No. 7641 or a reasonable authorized causes).
private benefit plan
b. Separation pay — amount received by an official or an TN: If you receive a separation pay not due to a reason beyond
employee or by his heirs from the employer due to your control as an employee (i.e., just causes), then that will not
separation from service because of death, sickness, or other anymore be excluded from your gross income.
physical disability or for any cause beyond the control of
the official or employee. TN: The requirement as to age and number of service applies
c. Social security benefits, retirement gratuities, pensions and only to retirement benefits and not to separation pay.
other similar benefits received by resident or non-resident ___________
citizens or resident aliens from foreign institutions, whether From Tanya Notes
public or private.
d. US veterans benefit — benefit you receive from the United
States Veterans Administration Office Retirement plans covered by this provision:
1. Retirement Pay Law
e. SSS under R.A. 8282
2. CBA Retirement Plan
f. GSIS under R.A. 8291
3. Reasonable Private Benefit Plan 

Recipient: Private employees or official of private firm 
 Retirement Pay Law
Under the new retirement law, persons who are 60 years who
Requisites (for the retirement benefit to be excluded from have rendered service of 5 years, extendable until 65 years
gross income): mandatory retirement.
1. The private employee or official must be at least 50 years of
age at the time of his retirement;
CBA Retirement Plan
2. He must have rendered at least 10 years of service to the
Retirement Plan entered into by the employer and the labor
employer at the time of retirement; union. May provide different conditions, provided not more
3. There must be reasonable private benefit plan; burdensome than the Retirement Pay Law.
4. Reasonable private benefit plan may be in the nature of
pension plan, profit sharing plan, stock bonus plan or Reasonable Private Benefit Plan
gratuity;
Another retirement benefit plan which has more stringent
5. The reasonable private benefit plan must be approved by requirements. This becomes a separate fund of the company.
the BIR; The company cannot make use of it. In fact, there is an entity
6. The employer must give contribution and no amount shall that may be set up just for this – usually a bank.
inure to the benefit of a particular employee or officials;
7. This can be availed of once. The subsequent retirement
REQUIREMENTS OF A REASONABLE PRIVATE BENEFIT PLAN
benefits received from another private employer is no
longer exempt but subject to tax. However, if the second 1st — Must be reasonable private benefit plan
employer is a government entity or institution, still you can
avail of the exemption of the retirement benefit. 2nd — Reasonable private benefit plan is only in the form
pension, gratuity, stock bonus or profit sharing plan
A reasonable private benefit plan maintained by an employer
TN: The requisites enumerated will only be used when the
private employer does not have a collective bargaining for the benefit of some or all of his officials or employees,
agreement which specifies the retirement requirements of its wherein contributions are made by such for the purpose of
employees. distributing to such officials or employees, or both, and
employees the earnings and principal of the fund thus
Under a company’s private and Under a company without any accumulated, and wherein it is provided in said plan that at no
qualified retirement plan (R.A. 4917) retirement plan (R. A. 7641) time shall any part of the corpus or income of the fund be used
1. The retiring employee must have been Those relieved under existing collective for, or be diverted to, any purpose other than for the exclusive
in service of the employer for at least bargaining agreement and other benefit of the said officials and employees.
10 years agreements are exempted.
2. Not less than 50 years old at the time of
retirement In the absence of retirement plan or This becomes a separate fund of the company because the
agreement providing for retirement
3. The benefit is availed of only once company cannot make use of it. In fact, there is an entity that
benefits, the benefits are excluded from
4. The reason private benefit plan must be tax if: may be set up just for this usually a bank which will manage this
BIR approved 1. The retiring employee must have
5. Established for the common benefit of served for at least 5 years, and
the employee and officials 3rd — A contributory plan
2. Not less than 60 years of age but not
more than 65 years. There must also be a contribution on the part of the employer,
or employee, or both. No amount shall inure to the benefit of a
Example: particular employee or official and such must be established
Private Yrs. of Age at the time Taxable or Reason for the common benefit of the employees or officials
Benefit Plan Service of Retirement Not Taxable?
Falls short of the 4th — Reasonable private benefit plan must be approved by BIR
With Plan 9 yrs. 60 yrs. old Taxable required years of
service (i.e., 10yrs) Otherwise it will fall under the ordinary retirement law or RA
7641. The company is not considered to have successfully set
Falls short of the up a reasonable private benefit plan.
minimum age of
With Plan 11 yrs. 45 yrs. old Taxable retirement required
(i.e., 50 yrs. old) 5th — It must also be availed of only once by the employee in his
There is no lifetime
No Plan 4 yrs. 50 yrs. old Taxable reasonable private
benefit plan

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It is contained in the regulations, though not stated in the law. ❖ The separation pay will not be subject to tax as per (b).
The subsequent retirement benefits received from another ❖ No age requirement here. The requirement is only the
private employer is no longer exempt but subject to tax reason for separation WON it is for just or lawful causes.

6th — The retiree official or employee must be at least 50 years of It could fall under retrenchment, redundancy or other labor
age, with at least 10 years of service which is either continuous saving devices. Here, the reason for separation is involuntary or
or not because the law does not provide. beyond the control of official or employee. It could also be that
Illustration:
 the reason for termination is death, sickness, physical disability. 

In one company, you can work there for 5 years, leave the
company, go back to the company, and work for another 5 If it falls under any of these two, then your separation will not be
years. You then now comply with the requirement of 10 years taxable. But if severance is because you tendered your
of service. resignation, clearly it is taxable. That’s why some companies let
you enroll in their redundancy program if they like you, so not
IF Mr A is already 50 when he joined the company and stayed taxable. 

until he was 60 (optional retirement age), his retirement benefit
shall be excluded if the private benefit plan is approved by BIR The first retirement plan from XYZ is taxable because Mr. A is
only if this is the first time he will receive the benefit, because not yet 50.
he complied with the age requirement which is 50 years old, 

he was able to work for 10 years and it was approved by BIR. The last retirement plan is not taxable

10 years of service (5 plus 5 years) in ABC Corp plus 50 years
Effect of previous retirement plan obtained from the old therefore complied with the requirements. 

government
If same situation, prior to working in the private company, he Let us assume that the retirement plan for XYZ is subject to CBA
already received retirement benefit from the government which provides that you may retire at age 50 or after rendering
which he previously worked for, will he be exempt if he retires 10 years of service to the company, approved by BIR, this will
from the private company at age 60? Yes, because the first one not be taxable. The retirement plan under ABC will now be
that was availed of was given by the government and it will not taxable because it will now be the second time that he availed
be counted for purposes of the exclusion. of a retirement plan.

These employees are not covered by the labor code but TN: IT IS IMPORTANT THAT YOU KNOW WHAT THE
covered by the Civil Service Law. It is not covered on the law on REQUISITES ARE.
RA 7641 or new retirement plan. The reasonable private plan
benefit received is considered as the first time for the
application of this law. The retirement benefit received from the 7. MISCELLANEOUS ITEMS

government will not be counted for purposes of the exclusion

under NIRC, after all it is not private. (7) Miscellaneous Items.-
a. Income Derived by Foreign Government. - Income
Separation pay derived from investments in the Philippines in loans,
Amount received by an official or an employee or by his heirs stocks, bonds or other domestic securities, or from
from the employer due to separation from service because of interest on deposits in banks in the Philippines by (i)
death, sickness, or other physical disability or for any cause foreign governments, (ii) financing institutions owned,
beyond the control of the official or employee controlled, or enjoying refinancing from foreign
governments, and (iii) international or regional financial
institutions established by foreign governments.
Sec 32 b, 6

Social Security Benefits, retirement gratuities, pensions, and b. Income Derived by the Government or its Political
other similar benefits received by resident or non-resident Subdivisions. - Income derived from any public utility or
citizens or resident aliens from foreign institutions, whether from the exercise of any essential governmental function
public or private, are not taxable. accruing to the Government of the Philippines or to any
• SSS benefits under RA 8282 political subdivision thereof.
• GSIS benefits under RA 8291 c. Prizes and Awards. - Prizes and awards made primarily
in recognition of religious, charitable, scientific,
• US Veterans benefit educational, artistic, literary, or civic achievement but
only if:
Benefit you receive from the United States Veterans i. The recipient was selected without any action on his
Administration Office, Philippine Veterans benefits are also part to enter the contest or proceeding; and
exempted. 

ii. The recipient is not required to render substantial
future services as a condition to receiving the prize
✏ If you used to work in the US for 20 years and then you retire,
or award.
come back to the Philippines and you receive pension from
US social security services, will it be excluded? d. Prizes and Awards in Sports Competition. - All prizes
and awards granted to athletes in local and international
❖ Yes, under 32b6c. If you get benefit like pension, social
sports competitions and tournaments whether held in
security, retirement, gratuity and from a foreign
government, it is already excluded. 
 the Philippines or abroad and sanctioned by their
national sports associations.
General rule in fact is that everything for which you paid a e. 13th Month Pay and Other Benefits. - Gross benefits
contribution, if there are benefits from them, it is always received by officials and employees of public and private
exempted. Pag-ibig, Philihealth, GSIS, SSS are always entities: Provided, however, That the total exclusion
exempted whenever you get benefits. 
 under this subparagraph shall not exceed Thirty
thousand pesos (P30,000) which shall cover:
Illustration: i. Benefits received by officials and employees of the
Mr. A national and local government pursuant to
Republic Act No. 6686;
30 years ABC Company 5 years Separation Pay of P300K ii. Benefits received by employees pursuant to
Presidential Decree No. 851, as amended by
35 years XYZ Company 10 years Retirement Pay of P1M Memorandum Order No. 28, dated August 13,
1986;
45 years ABC Company 5 years Retirement Pay of P2M iii. Benefits received by officials and employees not
covered by Presidential decree No. 851, as
amended by Memorandum Order No. 28, dated
✏ Q. Will the following be subject to tax? August 13, 1986; and

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iv. Other benefits such as productivity incentives and B) PRIZES AND AWARDS IN SPORTS COMPETITIONS

Christmas bonus: Provided, further, That the

ceiling of Thirty thousand pesos (P30,000) may be Requisites:
increased through rules and regulations issued by i. Competition and tournament must be sanctioned or
the Secretary of Finance, upon recommendation of approved by the National Sports Association; and
the Commissioner, after considering among others, - (e.g., CVRAA, Palarong Pambansa, etc.)
the effect on the same of the inflation rate at the
end of the taxable year. ii. The competition and tournament must also be approved
f. GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, by the Philippine Olympic Committee, whether local or
Medicare and Pag-ibig contributions, and union dues of international, whether held in the Philippines or outside.
individuals. (like Palarong Pambansa, CVRAA, FIBA and etc.)
g. Gains from the Sale of Bonds, Debentures or other
Certificate of Indebtedness. - Gains realized from the TN: Exempted if award refers to tournaments or competitions
same or exchange or retirement of bonds, debentures or held in the Philippines or abroad.
other certificate of indebtedness with a maturity of more
than five (5) years.
Illustration:
h. Gains from Redemption of Shares in Mutual Fund. - • You joined the Brgy. Wasay-wasay Badminton competition
Gains realized by the investor upon redemption of and you won as champion with a prize or 10K. Is that 10K
shares of stock in a mutual fund company as defined in excluded or subject to tax?
Section 22 (BB) of this Code.
‣ If approved by the Philippine Olympic Committee, it is
exempted. But in reality, a barangay sports competition
MISCELLANEOUS ITEMS: does not have approval from the POC and thus your
A.Income derived by Foreign Government winning is subject to income tax.
B.Income derived by the Government or its Political
Subdivisions Exemptions are construed against the taxpayer. The last
C.Prize and Awards requisite is hard to prove.
D.Prizes and awards in Sports Competition
E.13th Month Pay and other Benefits C) INCOME DERIVED BY THE GOVERNMENT OR ITS
F. GSIS, SSS, Medicare and Other Contributions POLITICAL SUBDIVISIONS

G.Gains from the Sale of Bonds, Debentures or other Income derived by the Government or its political subdivisions
Certificates of Indebtedness from the exercise of any essential governmental function or
H.Gains from Redemption of Shares in Mutual Fund from any public utility

A. PRIZES AND AWARDS GIVEN IN RECOGNITION OF It is impractical if we subject this item to taxation because it will
RELIGIOUS, CHARITABLE, SCIENTIFIC, EDUCATIONAL, be just like transferring your own money from one pocket to
the other.
ARTISTIC, LITERARY, OR CIVIC ACHIEVEMENTS.

Conditions: There are 2 entities covered:

i. The recipient was selected without any action on his part 1. Government of the Philippines – refers to the National
to enter the contest or proceeding, and Government
ii. The recipient is not required to render substantial future 2. Any political subdivision – cities, provinces, municipalities
services as a condition to receiving the prize or award. and barangays. Any income earned by them in the exercise
of governmental function should not be subject to tax.
If the selection of the award recipient was done randomly and
you are not required to render future services to the How about GOCCs?
organization granting you that award, then the prize or award is
Distinguish whether the GOCC is exercising a government or
not subject to tax. However, if it is complied with through
proprietary function. It must be engaged in a commercial
application by the recipient, it is subject to tax. activity for it to be taxable.

Illustrations: Section 27c of the tax code provides that all corps, agencies,
• You won Ms. Wasay-wasay, Bohol 2014 and you receive 50K. and GOCCs, except SSS are taxable. As a rule, GOCCs are
Is that 50K taxable? The 50K is subject to income tax. subject to tax.
• You are an author of a fiction book, Adventures of Ms. Wasay-
wasay, Bohol and your book won as Best Fiction Book and
The exclusion under 32b 7b only pertains to subdivisions of the
you receive 100K as a prize. Is that prize taxable or not? You government. But must distinguish whether the GOCC is
qualify.
exercising a government or proprietary function.
‣ If you submitted your entry in that literacy contest, the
prize is taxable
Section 27c states that “upon their taxable income as are
‣ If it was randomly selected without any effort on your part
imposed by this Section upon corporations or associations
and without your knowledge, not taxable. engaged in a similar business, industry, or activity.” Meaning, it
must be a commercial activity for it to be taxable.
Requisites of exemption:
1. It must be related to recognition of religious, charitable, Example:
scientific, educational, artistic, literary, or civic achievement.
SSS are not subject to tax but had it not been provided in
2. No action in your part to enter in the contest or proceeding, Section 27c that they are exempt, they would have been
you never submitted any entry subject tax because they are doing what other private
3. Recipient is not required to render substantial future services corporations are doing.
as a condition to receiving the prize or award.
The act of loaning will be subject to tax had you been a
✏ Should Pia be exempted from taxes? corporation, even if a GOCC, is subject to tax. According to
❖ No. It satisfied the first condition because it is actually a BIR, BSP may be subjected to tax because its charter says that it
civil achievement. However, she had to join the contest can be subject to tax after a certain period which already
herself. She is even required to render future services for lapsed.
the entire duration of her reign. How can she be
exempted? Think about it. This might come out in the Side note: For Sir, it should not be the case. The act of loaning
next exam. of BSP is not commercial but governmental in essence
because it needs to maintain financial stability for the

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Philippines. Otherwise, all the banks will close. Unlike for E) GAINS DERIVED FROM REDEMPTION OF SHARES OF
commercial banks which purpose is really for profit.
STOCK ISSUED BY A MUTUAL FUND COMPANY

๏ Redemption – means you are going to buy back.

The fact that it is not taxable if it exercises governmental
๏ Mutual Fund – you have smalls funds and you pool it and you
functions will not fall under 32b7b because sec 32b7b only
says of political subdivision, so it (GOCC) will not fall under the make bigger investments. So if you redeem, it’s still excluded
exclusion. because its just considered as your return of capital. There’s
no income gained.
Sec 32b 7(b) only pertains to GOCCs providing public utilities.
But, for GOCCs in general, you refer to Sec. 27c of Tax Code When we say “Mutual Fund”, there is pooling of funds in order
where it specifically enumerates who are exempted from taxes. to make use of larger investments. Whatever gains you derive
It’s different for political subdivisions (national government, from there is considered excluded. When you redeem your
local government units, municipalities, cities, provinces and shares of stocks, it is like a return OF capital.
even barangays) – they are exempted from taxes which are
connected or related to governmental taxes. If they will engage ✏ Q. Why is it excluded?
in proprietary functions, they will be subject to tax. However, ❖ Investors are the one insuring themselves.
seldom does the BIR go after them. It may be taken against ❖ If there is gain, it is not subject to tax.
them as a body after all if the government produces income, it
❖ If there is loss, it is also not deductible
will still go to the government. It will just be turnaround of the
money.
Mutual fund – the public gets to be included in that fund.
At best, for the GOCC’s to be exempted, it should fall under
Sec 27c to be exempted since it states that GOCC’s are taxed There are businesses like PhilAm and most banks engage in
when performing commercial function. management of mutual fund because not everyone has the
technical know-how to trade in the capital market for shares,
Refer to Section 27 for legal basis for exemption
 bonds.
That is why PAGCOR is not there, it is already subject to tax. We
also learned that PAGCOR is only subject to tax for activities People trust the professionals and the experts (banks, etc) to
not related to gaming operations. Its franchise actually says that manage their funds. Small investments are pooled together
it is exempted. and then invested, perhaps in the stock market.

D)INCOME DERIVED FROM INVESTMENTS IN THE Illustration:

PHILIPPINES BY FOREIGN GOVERNMENT OR 38 people will invest 100,000 each which amounts to 3.8
FINANCING INSTITUTIONS
Million. Evidence of ownership of mutual funds is called shares
represented by a certificate. At the end of a certain period, you
Requisites: decide to sell it back to the fund.
i. Recipient must be a:
A. Foreign government; If you sell your shares to the fund and you gain and earn
B. Financing institution owned, financed or controlled by income, that income is tax exempt. This is done by the
foreign government; government to encourage people to invest in mutual funds
C. Regional financing institution, international financing and save their money. Mutual fund owners are protected
institution established by foreign government. because they are small time investors.
ii. It must be an income received from investment in the
Philippines. TAKE NOTE THAT IT HAS TO BE A MUTUAL FUND.

TN: The source of the income is the Philippines. F) CONTRIBUTIONS TO GSIS, SSS, PAG-IBIG, AND UNION
DUES

☞ Example: Financing institution being refinanced by the As to PAG-Ibig contributions, it only pertains to the minimum
Government of Japan. The financing institution made an contribution of 100. So if you increased your PAG-Ibig
investment here in the Philippines and earned profit. Is the contributions to 500, the excess of 400 will be taxable.
income earned by the financing institution, which is
refinanced by the Government of Japan, be excluded or
exempted from income taxation here in the Philippines? Yes. For SSS and GSIS, you are not allowed to increase your
Thus, financing institutions owned, financed, controlled or contributions since it will always be based on your monthly
enjoying refinancing by a foreign government – their salary.
income derived here in the Philippines will be excluded or
exempted from income taxation. Pag-ibig: Let’s say your salary is P10k and you want to avail of
higher loan, you can increase your contribution. Instead of
Atty. A: this is important, you have to remember that the one contributing the minimum contribution which is P100, you
who makes an investment in the Philippines is the foreign instructed your employer to increase your contribution to
government or financing institution which is owned, financed P500. Take note that whatever is the difference between your
or controlled by the foreign government. It is not just any minimum contribution and your increased contribution is
financing institution. Let’s say for example, when the problem already taxable because what is excluded from income tax is
states “Co. XYZ is a financing institution makes an investment in the minimum contribution which is P100, the excess of P400 is
the Philippines and earned 1M” kana lang… and you are asked now taxable as income on your part.
if the 1M is taxable, you have to qualify. Dapat si Co. xyz nga
financing institution is owned, financed or controlled by a
foreign government. It is also the same case if it company is a G)BENEFITS IN THE FORM OF 13TH MONTH PAY AND
RE-financing institution, qualify japun ka. OTHER BENEFITS

13 month pay: 1 month pay

Refinance — starts as private then was refinanced by a foreign Other benefits: Christmas bonus, Midyear bonus, loyalty award.
government
It is excluded as long as it does not exceed the ceiling or
✏ Q. Why is it excluded? threshold of P30,000. The excess shall be treated as taxable
❖ Foreign government is involved and is considered a compensation income.
sovereign state and is not under our control
✏ Q. How about the 14th month pay, 15th month pay, etc.?
❖ It is already subject to the P30k threshold because what
is excluded is only the 13th month pay.

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caused the US Subprime crisis because of lack of proper

Effective Jan 1, 2009 — Php 30,000 investigation and poor debt policy of lenders.
Effective Jan 1 2015 to Dec 31, 2017 — Php 82,000
NOW: Effective Jan 1 onwards — Php 90,000 XVII. ALLOWABLE DEDUCTIONS
Exclusion under Special Law — Personal Equity & 1. DEDUCTION VS. EXEMPTION

Retirement Account (PERA)

Deduction (outflow) vs. Exemption (inflow)
PERA or Personal Equity and Retirement Account is a voluntary
retirement savings account program that encourages Deductions — represent something which you let go (outflow).
individuals to save and plan for their retirement while enjoying Exemptions — are actually income but only the law deems it not
tax incentives both from the amount contributed and the subject to tax (inflow).
income from investments.

PERA is a product of Republic Act 9505 or the PERA Act of 2008 2. DEDUCTION VS. EXCLUSION

which was signed into law on August 22, 2008. Tax incentives
became effective starting January 1, 2009. Deduction (outflow) vs. Exclusion (inflow)

As a retirement savings program, the contributor is entitled to SIMILARITY

receive back the total amount contributed, plus all income Similarity between deductions, exemptions and exclusions —
associated with his or her PERA account, upon retirement. In
they cause a reduction in your taxable income; therefore, your
addition, the contributor receives the following benefits tax payable is decreased.
through PERA:
1. The maximum annual contribution until the age of 55, is
entitled to a 5% income tax credit DIFFERENCE

2. All income earned from the PERA investment upon reaching Difference between deductions, exemptions and exclusions:
retirement or death are tax exempt and • Deductions — expenses, outflows; refers to expenses or
3. Unlike in SSS or GSIS, the contributor makes all the outflows which causes a reduction in your gross income
investment decisions, with the help of the Investment
Managers, in choosing which investment assets to put his/
her money. • Exemptions — inflows not subject to tax because the law or
treaty expressly provides for its exemption; refers to inflow of
cash or wealth but by virtue of the Constitution, law or treaty,
De minimis benefits it has to be exempted or the state waives its right to collect
These are small amounts of benefits granted to employees. thereon
They are tax-exempt to a certain effect.
• Exclusions — inflows not subject to tax; does not necessarily
mean and inflow or income; refers to items that are not
H)GAINS DERIVED FROM THE SALE, EXCHANGE, taxable as an income because:
RETIREMENT BONDS DEBENTURES OR OTHER 1) these are not subject to income tax because it’s just a
CERTIFICATE OF INDEBTEDNESS WITH A MATURITY OF return of capital and not a return on capital which
MORE THAN FIVE (5) YEARS
means there is no gain or income.
The maturity should be more than 5 yrs for it to be excluded 2) it may already be subjected to other direct taxes as in
from gross income. the case of gifts, bequeaths, devises.
3) it may just be compensatory in nature; or the law or
Debentures - used for bonds, backed by general credit of the treaty provides that it is excluded from gross income
issuer rather than a particular assed, in short they are
unsecured liabilities. This is like a bank letting someone owe Atty. A: deduction is the word I use instead of minus.
money without any collateral
✏ Q. Is exclusion more or less the same as exemption?
Indebtedness may be exempted from tax if the maturity date is ❖ By nature, they are just the same. But as to items
more than 5 years. considered as excluded or items considered as
exempted, they are different.
✏ Q. How can debts be subjected to tax in the first place?
❖ Debts are not seen as debts but possible investments on
the person who lends the money. Debts may be 3. BASIC PRINCIPLES GOVERNING DEDUCTIONS

securitized which means it can be covered by a

certificate/evidence for which people can invest in. Double Nexus Rule
People are interested in investing in debts because it can
be at an amount lower than the face value Basic principles governing deductions
1. The taxpayer seeking deduction must point to some
Example specific provisions of the statute authorizing the deduction,
Mr. B’s Debt to Mr. A is 1 million and with a fixed interval and
payment of 100k/mo. The maturity is for or a period of more 2. He must be able to prove that he is entitled to the
than 5 years deduction authorized or allowed.
3. There should have been proper withholding if required
Mr. A can make a security (debt obligation) and he can assign under the law
such right to someone else and he or she can readily collect
the amount. But Mr. A sold this security to Mr. C for 900,000. Kinds of Allowable Deductions
The difference of P100,000 is the gain the other person will
obtain. i. Itemized Deductions (Section 34A-K and 34M)
ii. Optional Standard Deduction of forty percent (40%) of the
Gross income
If Mr. C sells it to someone for 1.1 Million, Mr. C earns 200,000.
That 200,000 can be excluded from taxes granting the bond is
good for 5 years, otherwise it is not exempted from taxes. 1. DOUBLE NEXUS RULE —
- magkuyog gyud ang duha. One will not work without the other
Bonds are debt securities while shares of stocks are equity
securities. It is this securitization of debt securities which

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a. The taxpayer seeking deduction must point to some ❖ But

before you can deduct rent expenses, you must be
specific provisions of the statute authorizing the able to prove that you have withhold such amount. No
deduction, and withholding = no deduction
b. He must be able to prove that he is entitled to the __________
deduction authorized or allowed. From Tanya Notes:

- If you failed to withhold, that could be a ground for MATCHING PRINCIPLE:

disapproval/disallow of the deduction.
Before income can be generated, you have to spend
something for it. You need to deduct your expenses from your
Illustration: income to arrive at your net taxable income.
Rent — withholding — 5%
Income Expense • Deductions represents something which you let go (outflow).
Lessor ← Lessee • Exemptions are actually income but only the law deems it not
subject to tax (inflow).
Rent Php 100,000
Less: Php 5,000 (5%) BASIC PRINCIPLES
Php 95,000 1. There must be a legal principle allowing deductions as
provided in Section 34 of the NIRC
If lessor will not withhold Php 5,000, the deductible expense of
Php 100,000 will be disallowed. 2. You must satisfy conditions in the law so that you can apply,
that deduction must be used or related to your trade or
If the employer fails to withhold salary of the employees, the business.
BIR will not go directly to the employees but will go after the
employer. The employer will now be liable for: Example: Your business is leasing out of real properties.
1. Pay the withholding You went to collect rents from your lessee. When you went
2. Disallow the deduction out, your child with you wanted to buy the very colourful
balloons. Can you deduct the cost of balloons? No, it is not
related to conduct of trade or business. There could be
2. Doubtful provisions pertaining to deductions are strictly
other conditions;
construed against the taxpayer and liberally construed
against the government
3. STRICTLY construed against the taxpayers, it has the effect of
lessening the taxes that the government can collect;
3. You must be able to follow statutory requirements

4. Withholding tax must be strictly imposed when required

☞ For example: For rent expense, the law requires the lessee to under law.
automatically withhold 5% from the amount of rental
payment. If your monthly rental is 50K, you have to withhold
5% of the monthly rental or 2.5K. Thus, the amount that you Example: If you do not withhold employees’
will remit to the lessor is only 47.5K (50K less the 5% compensation, you are not allowed by government to
withholding tax). If you did not withhold the amount of tax deduct the salaries from your gross income. If you have
required, you cannot claim the deduction for rent expense. 10M gross income with 1M salaries, di ka ka-minus sa 1M.
Also, there is a penalty equivalent to the amount not
withheld by the employer.
FORMULA:
Income
Less: Exclusions
4. KINDS OF ALLOWABLE DEDUCTIONS

Gross Income It would depend on whether you are an individual taxpayer or a

Less: Deductions/Exemptions corporate taxpayer
Net Income or Taxable Income
i. PERSONAL AND ADDITIONAL DEDUCTIONS/
Illustration 1: The act of withholding a particular payment. X is EXEMPTIONS (SECTION 35)

the seller and Y is the buyer. If it’s a sale of land and it’s a capital Personal and additional deductions/exemptions (Section 35)
asset, that’s 6% capital gains tax.
- Equivalent to P50k regardless of your civil status.
- Does not apply to corporate taxpayers.
✏ Q. Who pays this 6%?
❖ If there is no agreement, generally it should be withheld
- Additional deductions/exemptions pertains to your child.
‣ P25k per child
by Y, buyer. If the selling price is P1 million, Y should
remit to X P940,000 (P1 million less 6% or 94% of P1 ‣ Up to the 4th child.
million). The P60,000 will he withheld by Y, the buyer and - Estate: personal exemption up to P20k. (to be discuss later)
remitted automatically 

to the BIR. Basic personal exemption
❖ On the part of the buyer, the act of buying the lot can be 50K (presupposes that there is an income; granted to ALL
considered as an expense. Before this buyer can deduct individuals who are earning income; granted on the account
for expenditure in purchasing the land, he must be able that you are a person, to account for your living expenses)
to remit first the amount being withheld. If he failed to
remit the amount being withheld, can he claim that
expense for purchasing the lot? No. Additional exemption
25K per child, maximum of 4 children (Dili senior citizen, dili
mama ug papa)
Illustration 2: In cases of rents, the amount you should
withheld is 5%. You rent a specific stall in eMall. You pay a rent
of P10k per month. Requirements: (All must be complied with)
✏ Q. Will you automatically remit the entire P10k to eMall? 1. Dependent child - legitimate, illegitimate, or legally adopted
❖ No. Under the law, you should withhold at least 5% of child
P10k. On your part, you can recognize deduction for 2. Must be chiefly supported by the taxpayer (probably more
rent expenses. than 50% support)
3. Child must be living with the taxpayer
4. Must not be more than 21 years old

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5. Unmarried ———————
6. Must not be gainfully employed Before it was 10%.
— Exception: Even if more than 21 years old but incapable In 2012, it was increased to 40% of gross income.
of self-support, can still be considered dependent
when mentally incapacitated or with physical defect - ✏ Q. What is this optional standard deduction?
something born with ❖ This is an option on the part of the taxpayer if he chooses
optimized or itemized.
Physical disability - not something born with – out of
accident. Physical disability is not covered under this law ✏ Q. Who can avail of deduction?
❖ Who earns gross income from business or those who
‼ NOTE: ART. 35 OF NIRC HAS BEEN REPEALED BY TRAIN earns income from exercise of profession.
Sec. 12 of RA 10963 (TRAIN)
SECTION 12. Section 35 of the NIRC, as amended, is hereby ✏ Q. These individuals usually file their ITR quarterly. How many
repealed. times do they file?
❖ 4 times

ii. ITEMIZED DEDUCTIONS (SECTION 34A-K AND 34M)

✏ Q. How do you choose?
You are going to enumerate the expenses and losses related to ❖ In the ITR, there is a circle there if you choose itemized or
your business. OSD.
‼ NOT INCLUDED IN THE MIDTERM EXAM! ‼
Ex. In. Ta. Lo. Ba. CHa. Re. Pen. Pre. Dep. Dep. ✏ Q. If you left it blank, what is the default?
❖ Itemized deduction
SECTION 34. Deductions from Gross Income
A. Expenses ________________
B. Interest OPTIONAL STANDARD DEDUCTIONS
C. Taxes In lieu of the itemized deductions, you can opt for an automatic
D. Losses 40% Optional Standard Deduction. If your expenses does not
reach 40% just opt for the OSD.
E. Bad Debts
F. Charitable Contributions
A.For individuals – OSD is based on gross sales or receipts for
G. Research and Development
Individuals
H. Pensions
B.For corporations – OSD is based gross income.
I. Premium Payments on Health and/or Hospitalization
Insurance
J. Depreciation OSD FORMULA
K. Depletion Gross Sales xx (Basis for Individual OSD)
Less: Cost of Sales (xx)
TN: ONLY INDIVIDUALS/CORPORATIONS EARNING BUSINESS Gross Income xx (Basis for Corporate OSD)
INCOME CAN DEDUCT THESE.

If purely compensation income earner, one cannot deduct TN: NOT ALL CAN CLAIM: NON RESIDENT ALIENS CANNOT
these. However, to claim all these deductions, official receipts CLAIM.
are required to substantiate them, which is why most would
instead opt for Optional Standard Deduction instead. DIFFERENCE BETWEEN ITEMIZED AND OSD

Itemized — ascertain the deduction per line item basis

iii. OPTIONAL STANDARD DEDUCTION OF FORTY PERCENT OSD — just to compute how much is gross income and multiply
(40%) OF THE GROSS INCOME
by 40% and that 40% will be deducted. In short, taxable is 60%.

Note: Under the TRAIN Law (R.A. No. 10963), the provisions on ✏ Q. Is there need for substantiation in OSD?
Basic and Additional Hospitalization exemption, as well as, ❖ No.
deductions for Premiums on Health and/or Hospitalization has
been repealed. ✏ Q. When do you use gross sales?
❖ When you are in the sale of goods or properties
If you do not want to claim the itemized deduction, you may
claim the optional standard deduction which is 
 ✏ Q. When do you use gross Receipts?
equivalent to 40% of the gross income. ❖ Sale of service.

Both itemized deduction and optional standard deduction can Gross Sales/Receipts xx
be availed of by an individual taxpayer or by a corporation. Less: Cost of Sales/Direct Costs xx
Provided, that in the case of an individual taxpayer, you have
Gross Income xx
your business income or professional 

income, which means you are not a pure compensation
income earner. Less: Itemized Ex.In.Ta.Lo.Ba. xx

Cannot be claimed by a non-resident alien not engaged in ITEMIZED DEDUCTION:

trade or business. ✏ Q. When is it favorable to use allowable or optional?
There are many things to consider but primarily
It is actually a choice between the Itemized Deductions and the
OSD. When we talk of OSD, all you have to do is just to OSD:
compute 40% of your Gross Income. Therefore, the 60% of your
1. Not enough subsatiaion for your expesnes
Gross Income will be considered as your taxable income. The
Itemized Deductions and OSD options are given to both Expenses — disallow lang
corporate and individual taxpayers provided that the individual 1. Failed to withhold
taxpayer is earning business income. Thus, it does not apply to 2. No receipt
individual taxpayers who are earning purely compensation
income.

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2. Ascertain that your expenses is lower the 40% of your gross

income

✏ Q. Is it possible to have lesser than 40%?

Yes like for example rental of building. There is not much.

✏ Q. Who can avail of the Itemized or OSD?

INDIVIDUAL CORPORATE
NRA- NRA-
RC NRC RA DC RFC NRFC
ETB NETB
Itemized ✘ ✘
Deduction ✔ ✔ ✔ ✔ (GI) ✔ ✔ (GI)
OSD (40%) ✔ ✔ ✔ ✘ ✘ ✔ ✔ ✘

Individual
RC — YES
NRC — YES

NRC — net taxable income

RA — Net taxable income
Gross sales or receipts generated WITHIN the Philippines.
Itemized only on those incurred WITHIN the philippines.

NRANETB — OSD — NO. Follow the codal provision. Can only

avail of itemized deduction and not OSD.

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