Taxation – inherent power of the government to enforce proportional contribution from a person,

property or rights which used for necessary and legitimate expenses of government.

Inherent – attribute of sovereign, lifeblood of the government for it operates, it does not need a
law but for purposes of clarification on what tax should be implemented, how, and its rates, that
is where the law is needed.

Legislative Power – exclusive power to legislate tax law and determining power as to subject,
object, and purpose of such tax implementation

CIR vs. Algue – ordinary, necessary and reasonable expenses for the tax refund be granted (incurred in
same tax year, receipts), CIR disallowed because of uneffort to produce enterprise, a form of
compensation. CTA decided that the amount paid is for actual services rendered. Taxes are lifeblood of
the government because without taxes, government will be paralyzed and inexistent.

Power to tax involves power to destroy –

because the power to tax is unlimited in force in extent that the courts rarely
venture to its subject matter because it affects rights, property, and persons ( Chief
Justice Marshall) vs. power to tax is NOT power to destroy if the court sits (Justice
Holmes).

Reconciled: It is not so unlimited because the Constitution gives the courts to

inquire as to how such power should be used to people as such gives the court to
determine if in fact for public purpose or indeed uniform. The Court can declare a tax
law unconstitutional.

Lorenzo vs. Posadas – Benefits received theory, inheritance tax assessment, Lorenzo as administrator,
Posadas as the Commissioner of CIR, valid inheritance tax collection for taxes are lifeblood of the
government

Rationale of Taxation: SYMBIOTIC RELATIONSHIP – citizen benefits from the government,

government also benefits from its citizens

Ermita Malate vs. City of Manila –

Smart Communications vs. City of Davao – “in lieu of all taxes”, both national and local taxes be
exempted pursuant to their legislative franchise particularly stated in their non-impairment clause with
the government. The franchise tax imposed by the City is through the Local Government Code (RA 7160)

Can franchises be cancelled for non-impairment of contracts? In case of cancelled, could it be

violated the constitutional prohibition against non-impairment of contracts?

The franchise is bound to follow the LGC. The general rule follows that the tax imposition is
liberally construed in favor of the taxing authority and against the taxpayer. The said legislative
franchise only applies in national taxes other than the local taxes subject to alteration. Hence,
national taxes lang sila exempt.

Like NGCP, it is categorically stated na exempt sila to local and national taxes

Constitutional Prohibitions:

 Actual and exclusively used for religious, charitable, and educational institutions – it only
pertains to exemption to REAL PROPERTY TAXES under LGC

Lladoc vs. CIR – parish priest was charged for donation tax that came from the mayor but the
priest opposed the assessment because of religious exemption under the Constitution. Court
ruled that the “buildings, churches, and its improvements actual and exclusively used for
religious and charitable institution are the only exempt for REAL PROPERTY TAXES compared to
donation tax as EXCISE TAX”
 Abra Volley College vs. CIR – nullify the sale of in lieu of exemption of real property taxes. 2 nd
floor ng building nakatira si principal and family. Abra argued that principal use of the building is
actual and exclusive use for educational purposes thereof. The Court ruled that the exemption is
extend whenever there is an incidental use of the building other than the educational purpose
but in this case, the 1st floor had been used for commercial purposes as leased by the Northern
Marketing Corporation other than the educational use of the school.

Beneficial User Theory – if the property was used OTHER THAN the purpose which was
being stated religious, educational, and charitable institutions, therefore, it ceases from the
exemption thereof

Lung Center of the Philippines vs Quezon City – NON-STOCK corporation under Presidential
Decree, ground floor used as leased in canteen and small stores spaces for patients. Quezon City
assessed them for real property taxes whereas Lung Center argued that they fall under
CHARITABLE INSTITUTION as they accept paying and non-paying patients. City opposed as some
part of their property is being leased as canteen and small stores. CA dismissed Lung Center’s
argument for it was not used ACTUAL, DIRECTLY AND EXCLUSIVELY used for charitable
purposes, hence, it such purpose has been LOST for leasing the property.

The Court ruled that LUNG CENTER IS A CHARITABLE INSTITUTION within context of
the Constitution because of rendering SERVICES UNTO THE PUBLIC as they accept poor
or rich patients. However, despite of being charitable institution, they are not exempt
for real property taxes by the City because of the lease used by the private parties. The
Constitution provides that the exemption is for ACTUAL, DIRECTLY, AND EXCLUSIVELY
used for charitable purposes, hence, the portion of the property which has been leased
is not exempted from real property tax. In all foregoing, the Court remanded to case to
the trial court to determine the portions which are not exempted from real property
taxes.

 Exemption from Payment of Income Taxes

Religious Organization – because of

non-establishment clause – no law shall be made in respecting the establishment and
free exercise
free exercise clause –

American Bible Society vs. City of Manila – selling Bibles without City permit, City
argued that petitioner gain profits, hence, Society paid under protest and wanted to
declare the ordinance unconstitutional based on Constitutional prohibition of religions
are exempt for paying taxes

The Court ruled that the profit is used to exercise of religious freedom and free
exercise clause. It is paramount for free exercise their religion and minimal only.
On permit issue, there is no need because there should be a freedom for
religion, that, there should secure a permit before a religion can exercise their
religious activities.

Charitable Institution – generally because they do not accept payments, NON-STOCK and NON-
PROFIT under Article 14 of the Constitution except if derived already in profit

CIR vs. St. Lukes Hospital – NON-STOCK, NON-PROFIT institution, CIR assessed them for
income taxes, St. Lukes argued that while it is true that they accept PAYING PATIENTS, it
is not for the benefit of the individual but merely for their operations, they uplift facility
by buying equipments but that is for their CHARITY that applies for paying and non-
paying patients.
 The Court ruled that they are STILL CHARITABLE INSTITUTION because it is for
charity purposes actually. On the taxability issue, the Court ruled that if their
income is not taxable, it is tantamount to circumvent the law that they do not
actual, direct, and exclusively used their facilities in charitable purposes only
but also to PAYING PATIENTS which undetermined what equipments being
used in actual, direct, and exclusive for non-paying patients to be considered
them as charitable purposes only, hence, they are liable for paying 10% income
taxes under the Tax Code but generally, under the Constitution, charitable kayo.

Requisites of Valid Tax

 Uniform
 Public Purpose
 Levied by Proper Taxing Authority
 Taxing Authority has jurisdiction
 In Harmony of Due Process
 It should be Constitutional

Tax vs. Toll – enforced contribution for raising revenue for public purposes whereas income of toll
operators to defray to pay for maintainance of tollways and roads and considered as
REIMBURSEMENT.

Diaz vs. Secretary of Finance – questioning the EVAT to tollway operators whereby Diaz is a
former Senator and a Taxpayer whereas his co-plaintiff Timbol was the former official of Toll
Regulatory Board, EVAt will result to higher toll fees and tantamount to consumer’s protest
collectively. The petitioners argued that by imposing VAT in a toll fee which is also a tax, it is
tantamount to TAXING A TAX (double taxation).

The Court ruled that imposing VAT on a toll fee is not double taxation. Double taxation
means same nature, same taxing authority, same purpose, and same jurisdiction
wherein tax and toll has different purpose. Toll is not a tax because it defray expenses
for the maintainance of the roads and tollways for the usage of public or private, it is a
REIMBURSEMENT. VAT is being imposed as enforced contribution for raising revenue.

Tax vs. License Fee – license fee is being imposed to allow a business to operate business within a
certain jurisdiction whereas tax is imposed by the State

Progressive Development Corporation vs. Quezon City – operation of Farmer’s Public Market
wherein they were being taxed by the Local Government based on gross receipts on lease and
spaces privately owned market

Local Autonomy by the government to collect taxes. License Fee is being imposed for
regulation under the LGC whereas the tax is being imposed for exercising taxing power
of the State.

PRIMARY PURPOSE TEST – if the primary purpose is to generate revenue with

regulation, then it is a tax and regulation is only incidental whereas if it is a for
regulation and payment of fees and profit are incidental, then, it is a license fee

In this case, it is a license fee intended to regulate the sale of foods which being sold
to the public and such incidental profit is for the supervision and inspection of the
public stalls made by the Local Government.

LTO vs. City of Butuan – an Ordinance in question for which the tricycles for hire be subjected to
permit that possibly encroached the authority of the LTO. The issue raised that the authority to
issue permits by the LTO is being devolved to the Local Government.

The Court ruled that the grant of franchises over those kinds of vehicles is already
vested in the authority of LTFRB which should be the one to devolve its power to the
 LGU whereby the LTO’s power to issue licenses cannot delegate its power to issue
licenses

Special Assessment vs. Tax – special assessment is levied only to land assessed by the Local Government
whereas tax is levied on excise, persons, and property

Why there is a tax on the land? Because there are persons who benefit for such use of the land
(e.g land to construct roads for benefit of easier access to property as well as transportation and hence,
increases the value of the land)

Tax vs. Debt – tax is based on law, paid by money, sanctioned by imprisonment except of poll tax, and
generally not subject to set-off except if there is law that grants that the tax be set-off (DOMINGO vs.
GARLITOS) whereas debt is derived on expressed or implied contracts, paid by money or in kind, no
imprisonment for non-payment of debt, subject to set-off and legal compensation

Domingo vs. Garlitos – a claim by the administratrix against inheritance taxes from the
government for cadastral surveys that denied by CFI Judge Garlitos. A law the promulgated that
liquidated and recognized, and demandable. The Court applied legal compensation in this case
for the reason that legal compensation are present.

Caltex vs. Commissioner on Audit – Oil Price Stabilization Fund to immerse the oil companies to
recover for the reduction on petroleum domestic price. Caltex sought for recovery over the loss
over the gross sales but the government didn’t allow as there is no contract between them and
the government. The issue raised if the government allows the set-off taxes and legal
compensation.

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.

Tax vs. Penalty – for generating revenue for public purpose whereas penalty is to regulate conduct, a
form of punishment in a commission of a crime

CIR vs. Patanao – a criminal case filed but acquitted for non-payment of income taxes of
Patanao through heirs taxes wherein the Court allowed the collection of taxes over the estate
but does not include the payment of penalty

Kinds of Taxes as to Subject Matter or an Object

 Personal Taxes – tax levied to a person living in a community

 Property Taxes – tax levied upon a property within its jurisdiction (e.g real property tax)
 Privilege/Excise Taxes – tax levied on enjoyment or privilege of goods and services (e.g.
income and VAT)

City of Iriga vs. CASURECO III – CASURECO was charged over the national and local taxes
pursuant to the former Decree issued which was later on superseded by the Local Government
Code within the City and even outside of its jurisdiction or RINCOMEDA area. The governing rule
here is the principal place of business
Tax Avoidance and Tax Incidence

Tax Incidence – direct or indirect taxes

 Indirect Tax – demanded to a person carried the burden

Ultimate liable to pay taxes? Sellers as to tax burden, in incidence, the sellers can shift
the burden to the buyer
 Direct Tax – demanded to person who shoulder a tax

CIR vs. PLDT – tax credit from the CIR for payment of VAT invoking the phrase “in lieu of all
taxes” in their legislative franchise. Indirect Taxes wherein liability falls in one person which can
be shifted to someone else. PLDT is liable for VAT because of the construction being made and
failed to prove the exemption over this kind of tax. The Court reduced the payments with the
scope of sales tax and advance tax.

A tax exemption must be clear and unequivocal. In this case, it did not specifically state
in their franchise that they are exempt from paying VAT but only income tax

Tax as to Determine the Amount/Tax Rate

 Specific Tax – tax in a fixed amount (taxes for valuation like alcohol, liquors, cigarettes, wines-
taxed by alcohol content)

Liwayway Vinzons Chatto vs. Fortune Tobacco – producer of several tobacco products, they
were assessed for ad valorem tax equivalent to 20-45% for local brands and 55% of locally
manufactured cigarettes but foreign packaging. Fortune paid with protest. CTA granted the
refund on the ground that MC-39 is defective – imposes ad valorem for 55% and affirmed by CA
and SC. Fortune went to RTC for damages against Commissioner Liwayway in her private
capacity because under Article 32 of CC that grants damages who experienced violation of
Consti rights. Liwayway cannot be sued in her private capacity without bad faith. The SC pursued
liable Chato for damages who experience violation of Consti rights – right to property, due
process, and equal protection. Article 32 prevails (violation of Constitutional rights) over Admin
Code

 Mixed Tax – tax that has kinds of specific and ad valorem

 Ad Valorem Tax – tax based on fixed proportion of the amount or value of property

Tax as to Purpose

 General/Fiscal – a tax levied for ordinary or general purposes for generating revenue purposes
 Special/Regulation/Sanctuary – tax levied for special purposes to achieve economical or social
ends (ex: tariff taxes)

Tax as to Scope/Authority

 National Tax – imposed on national level (by Congress)

 Local Tax – imposed by LGU (ex: ordinances by enacted, real property tax)

Tax as to Graduation

 Progressive Tax – tax rate increases as tax base increases (ex: income tax)
 Regressive Tax – tax rate increases as tax base decreases(ex: real estate tax, VAT)

Doctrines in Taxation

 Lifeblood Theory
 Benefits-received
 Necessity Theory

Construe Tax Laws

 General Rule: The ULIMATE INTENT/PURPOSE of legislation carries out in construing tax laws

In case of doubt: in favor of the taxpayer and against the government

Tax Exemption: Strictissimi Juris – against the taxpayer and liberally construed in favor of the
government because of the LIFEBLOOD THEORY

Tax Laws: liberally construed in favor of the taxpayer and against the government because tax
laws should be clear because it puts the burden to the taxpayer (burdensome)

CIR vs. Philippine American Accident Insurance Company – domestic corporation doing
insurance business in the Philippines. PAAIC paid under protest of 3% tax because the
BIR interpreted because they are lending investors as the law provides. Lending
investors should pay the 3% tax from their gross income. Here PAAIC claiming refund
what they paid for which they didn’t availed of. On appeal to the CTA, PAAIC argued that
they are not lending investors because they are insurance company. The CTA ruled
PAAIC are not taxable because they are not lending investors but insurance company
which CA affirmed. Supreme Court ruled, that, PAAIC is not lending investors as meant
by the BIR.

The SC interpreted whether PAAIC is a lending investor based in the Tax Code.
The act of the respondent in providing loans in its clients is only INCIDENTAL
to their primary business which is investment company. The Court defined an
insurance company which not didn’t INTEND to include such company in
taxation provided under the provision of the Tax Code, hence IT HAS BEEN
INTERPRETED IN FAVOR OF THE TAXPAYER (it is unclear if investment company
is included as lending investor)

PLDT vs. City of Davao – PLDT enjoys their exemption under their legislative franchise of
3% from their gross receipts “in lieu of all taxes”. the City issued an ordinance in taxing
other entities except water districts and cooperatives. The City charged PLDT for local
franchise tax which contested therewith arguing that their legislative franchise gave
them franchise exemption. The Supreme Court ruled that it does not include local
franchise tax for “in lieu of all taxes” that only refers to National Tax. It should express
what it should be exempt, as such, the local franchise tax. TAX EXEMPTION MUST BE
CLEAR AND UNEQUIVOCAL, hence, tax exemption is against the taxpayer and liberally
construed against the government.

Prospectivity of Tax Laws

General Rule: Tax Laws are prospective in nature unless contrary is provided

Hydro vs. NIA – the contract is perfected prior to the promulgation of the Executive Order,
hence, Hydro should not be held liable in payment of 3% ad valorem tax. No retroactivity of law
shall be enacted unless expressly provided.

Does EX POST FACTO apply in tax laws? No, sa CRIMINAL LAW LANG TO APPLIED.

Exceptions to Non-Retroactivity of Tax Laws under the Tax Code:

1) When the taxpayer DELIBERATELY misstates or omits the MATERIAL facts

2) Subsequently gathered by the BIR to be MATERIALLY DIFFERENT
3) When the taxpayer committed BAD FAITH

Imprescriptibility of Taxes

No prescription applied to taxation because of the lifeblood theory

CIR vs. Ayala Securities – Ayala failed to file their income tax returns, hence, CIR assessed them
to be charge of 25% of surplus tax. Ayala opposed but denied by the CIR. CTA held that the
assessment has prescriptive period only of 5 years under the Internal Revenue Code, hence, it
 has no binding force and effect. CA affirmed. The Supreme Court ruled that the right of the CIR
to assess and collect taxes will not be presumed in the absence of clear legislation to the
contrary in which the government may recover for unpaid taxes is only through expressed
legislation.

Basis of Imprescriptibility? Because of lifeblood theory

Exception: If there is a provision under the Tax Law

Double Taxation

Tax Law is imposed upon the SAME SUBJECT for SAME PURPOSE charged by the SAME
AUTHORITY, and indirect in broad sense.

Why ALLOWED? It is not prohibited under the Constitution because one of the elements of
DIRECT TAXATION is not present (same authority).

Example: If you pay tax this year and pay again within a year, then, it is double taxation?

Elements of Direct Double Taxation:

1) Same subject matter or object

2) Same purpose
3) Same taxing authority
4) Same period
5) Same kind and character

Villanueva vs. City of Iloilo – the City issued an ordinance that imposed license tax fees on
tenement houses whereby petitioners were business owners of apartment houses. The owners
disputed the ordinance because they are already paying real estate taxes. There is no double
taxation because while it is true that they are being imposed by same taxing authority (LGU),
same object (property), but different purpose (you are paying real estate tax because you own a
real property while you are paying license tax fee because you managing the business for
operating apartments in that area), hence, it falls under INDIRECT DUPLICATE TAXATION

CIR vs. SC Johnson – landmark case on MOST FAVORED NATION CLAUSE.

Note: For a taxing authority will have jurisdiction over FOREIGN corporation at pwede
ring kumaso yung corpo na iyon, dati kelangan registered sila under the SEC pero
ngayon, they just needed an individual or even a domestic corporation acting as an
agent, called subsidiary that representing that foreign corporation (called now as
resident foreign corporation and the mother corpo became non-resident foreign
corporation), para magkaroon ng jurisdiction ang taxing authority In our country.

A domestic corporation under Philippine Law entered into a contract with SC Johnson
and Son for product distribution and hence obliged to pay royalties and tax on that
royalty payments. SC Johnson contended that they overpaid withholding tax because
they are bound only to pay the preferential tax rate of 10% due to MOST FAVORED
NATION CLAUSE – 10% preferential tax rate may be imposed on royalties if the sources
are derived from the Philippines and the one who will be paying the taxes is a resident
of US. The circumstances of the resident must be similar to the resident in West
Germany.

Sa RP-West Germany treaty, ganto lang tax rate tas sa RP-US ganito, dapat
apply natin mas magandang treaty.

The condition that the circumstances of the resident must be similar to the resident in
West Germany was not met because in Germany there is a provision for a 20% matching
credit. The purpose of matching credit: it is something that you can offset in taxes in
 input and output (a relief for double taxation- binayad mo sa ibang bansa e pwede mo
icredit dito)

2 kinds of taxpayer you can tax in the Philippines:

1) Resident citizen
2) Domestic Corporation

Example: Manny Pacquiao’s tax being taxed in US then here in the Philippines,
double taxation siya because while it is true that he had been taxed by different
taxing authority e dahil sa MABIGAT YON, hence, a relief from double taxation
(tax credit principle).

Whether preferential tax rate shall apply? No because there is no 20% matching credit
provision, hence, not the same as the West Germany. There is NO double taxation in
this case The Supreme Court discussed the double taxation because of the most favored
nation clause which is a relief from double taxation because you can detach your
income abroad and again tax here in the Philippines, eliminate double taxation.

Tax Credit – refers to the deduction to the tax liability of a taxpayer after the tax liability has been
computed

CIR vs. Central Luzon Drug Corporation – Central Luzon operated numerous stores in the
Philippines and pursuant to Senior Citizen Act, it grants 20% discount for its senior citizens
customer that subsequently incurred net loss and hence applying for reduction as to their tax
liability in a form of tax credit. The CA issued them tax credit however questioned by the CIR on
the ground that can avail tax deduction and not tax credit. The SC ruled that Senior Citizen Act
grants 20% discount of purchase of medicine from any private establishment in the country, tax
credit is used by private establishment only after tax is being computed. Difference tax credit
and deduction is that the latter is a legislative grant which the former is deducted to tax liability
after computation of the tax liability of the entity. This is the reason why that Central Luzon is
entitled for tax credit.

Deduction of Tax Liability of a Non-resident foreign corporation

It’s about the tax treaties – most favored nation clause that gives contracting parties that
enjoyed by the other state. Under the treaty of reciprocity, granting deduction on income tax
rates (25% tax rate based on gross income-does not include allowable deduction)

Tax Exemptions

Constitutional exemption are provisions which exempt some certain subjects on computation
of tax liabilities, immunities from taxation which originates from the Constitution.

Statutory Exemption – exemptions by existing laws granted by the legislative, emanated from
the Congress,

Express (granted by statute)

Implied (fall outside the scope of the taxing provision but are deemed exempt)

Principle Governing Tax Exemption

An entity or conduct is actually exempted from the payment of tax – clear and convincing or
categorical of the exemption being given to you by the Constitution or the statute

If there’s doubt, strictissimi juris – strictly against the taxpayer and in favor of the taxing
authority

How to Escape Taxation?

Tax Avoidance – is a legal way to reduce the tax liability of an entity, those exemptions granted
by various laws by Consti and statute

CIR vs. Estate of Toda Jr – Cibeles Corpo led by Toda Jr. sold the 16 storey building to
Altonaga then Altonaga sold twice to another entity from the value sold to him by Toda
Jr. that Altonaga paid his capital gains tax, hence, subjected also to 35% corporate tax.
When Toda was out of the company, prior to his death, he sold his all shares of stocks to
another person which led to payment supposedly of his capital gains tax.

On Toda’s death, CIR went to Cibeles and argued that there was a simulated sale to
prevent to pay taxes on the additional payment as to the price by the entity to Altonaga,
hence, not tax avoidance but a TAX EVASION.

Tax Avoidance can do if there is a proper planning.

In this case, the selling from CIbeles to Altonaga is questionable because of (1)
Toda owned the 99% of shares of stocks of the corporation, (2) Altonaga was
close friend, associate of the corporation, (3) financial capacity of Altonaga to
actually buy the building for a much high price, (4) evidence shown they were
discussions between CIC and the another entity as the final purchaser of the
property making some documents that such property should be actually
transferred to them, hence, forwarding the fact that it is a simulated sale. So
imbis 35% corporate tax magiging 5% nung twice ng value ng benta ni Altonaga
kay another entity which covered na ng capital gains tax – papasok as capital
asset bagaman ordinary asset yan dahil ginagamit sa araw araw na operation.

In the validity of shares of stocks sale, there was no question by the Court but
liable for the income tax because of the security made by Today before he
divested all his shares of stocks to another person, that, security, meaning, that
he disclosed to the corporation that there is no anymore tax liability upon his
exit and divesting his shares of stocks.

CAPITAL ASSET – property not used in ordinary course of business. Example: A

corporation has an IDLE land, pano magkaka idle land? Yung isang shareholder ibinigay
and isang lot in turn, pwede ring bumili ang corporation ng land for FUTURE USE.

MORE ON THE MITIGATION OF TAX LIABILITIES THAN OF LEGITIMATE PURPOSES

CONSTITUTES TAX EVASION

Tax Evasion – is an avoiding tax in an illegal or fraudulent means

CIR vs. Fortune Tobacco – relates to issuance of writ of execution filed by the CIR
against Fortune because they Fortune was charged of ad valorem tax on the cigarettes
that they were manufacturing but with a passage of a new law, it change from an ad
valorem to and EXCISE TAX, hence, the tax scheme change. The amount of tax that they
were being charged also changed (the effect is that Fortune had overpaid their excise
tax). Fortune filed a tax refund to the CTA on the specific overpaid excise taxes which
granted however refused by the CIR to comply with the order. Whether the tax refund
involving the overpaid excise tax should be given to Fortune? Supreme Court said that
Fortune is entitled for tax refund because of enormous payment of taxes has NO BASIS
(you cannot therefore enforce this case same as tax exemption). Remember, tax
exemption should be construed in strictissimi juris or against the taxpayer and liberally
in favor of the government/taxing authority. Fortune claiming for TAX REFUND and NOT
TAX EXEMPTION, hence, solution indebiti – unjust enrichment on the part of
government.

Requisites before a Quasi-Contract can be made

1) There was an illegal assessment and collection by the taxing authority

 2) Penalties imposed without authority
3) Sum which alleged to have been excessively paid were wrongfully collected

Equitable Recoupment – offsetting to tax liabilities to with regards to the overpayment of the taxpayer

CIR vs UST – a common law doctrine, di to aplikable dito sa Pinas, to effect that a claim for a
refund which is barred by prescription may be allow to offset to unsettled tax liabilities.

Prescriptive Period to Claim Refund? Normally 2 years even in the LGU

It only allows in income taxation which payment is made and underpayment is due. However, it
is not allow in our country because if this will be allowed, then the BIR and the taxpayer may
tend to delay and neglect to pursuit their respective claims within the period prescribed by law.

Prohibition of Compensation and Set-Off

General Rule: you are not allowed for compensation or set-off on the principle of lifeblood
theory

South African Airways vs. CIR – it is not permitted to do business in the Philippines. A foreign
corporation under the laws of South Africa. It has no landing rights in the country but general
sales agent – Aerotel. It sells documents for the flights of South African Airways. Petitioner is not
registered in SEC as a corporation and not license to do business in the Philippines. South
African filed its annual and quarterly returns for offline flights, petitioner claimed for refund
because they are erroneously charged of paying 5% Gross Philippine Billings (a special rate sa
mga airways-transport of passengers, cargoes, and goods-same with barko). BIR argued that
Airway is not entitled for refund because if you are not subject with GPB (e specific transaction
kase) then you are subject for income tax (32% from your sale of documents, sales ticket), yung
normal.

Whether petitioner as an offline international carrier, selling documents in the Philippines, is

subject to 32% tax?

Yes, a corporation that organized, authorized, doing business in the Philippines are liable to pay
taxes. GPB has different provision if not then subject ka for income tax, general rule-change of
passanger documents.

Offsetting – o di sige, ibawas nyo nalang don sa sobrang payment namen

Taxes cannot be subject to compensation. The tax refund can be offset if there is a tax
deficiency in a different year. The grant of a refund is founded on the assumption that
the tax return is valid, that is, the facts stated therein are true and correct. The
deficiency assessment, although not yet final, created a doubt as to and constitutes a
challenge against the truth and accuracy of the facts stated in said return which, by
itself and without unquestionable evidence, cannot be the basis for the grant of the
refund (CIR v CTA).

In this case, the petitioner's similar tax refund claim assumes that the tax return that it
filed was correct. Given, however, the finding of the CTA that petitioner, although not
liable under Sec. 28(A)(3)(a) based on Gross Philippine Bills of the 1997 NIRC, is liable
under Sec. 28(A)(1) based on taxable income, the correctness of the return filed by
petitioner is now put in doubt. As such, it cannot grant the prayer for a refund.

The CTA’s assailed decision fails to mention having computed for the tax due under
Sec. 28(A)(1) and the records are bereft of any evidence sufficient to establish
petitioner's taxable income. There is a necessity to receive evidence to establish such
an amount vis-à -vis the claim for refund. It is only after such an amount is established
that a tax refund or deficiency may be correctly pronounced.

Domingo vs. Garlitos – there’s a law that grant the legal compensation to them.
 Generally, Taxes cannot be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other and a claim for taxes is
not such a debt, demand, contract or judgment as is allowed to be set-off”.

In this case, the Court grants the claim against the government over the estate of
Domingo wherein there’s a law that grants it through its appropriations. Legal
compensation was applied

Requisites of Legal Compensation:

1) Both debts are due and demandable

2) Both are creditors and debtors with each other
3) Both are liquidated
4) Both are in the sum of money

Compromise

Contract where the parties by making reciprocal concessions to avoid litigation

What is the basis of the BIR to enter a compromise under the Tax Code and certain Revenue
Regulation with a taxpayer? (1) validity of the assessment, (2)financial capacity of the taxpayer

What are the things that cannot be compromise otherwise (Revenue Regulations 30-2022)?
(1)delinquent accounts, (2)cases under administrative protest, (3)issuance of the fund, (4)civil
tax cases disputed before the courts, (5)collection cases, (6)criminal violations, (7)other than
those filed in court involving tax fraud

Exception to the exception: (1)tax fraud cases, (2)criminal violations of taxes, (3)cases
where final reports were reinvestigation, (4)cases where final and executory , (5)estate taxes
were compromised on the ground of financial capacity

Tax Amnesty

Absolute waiver of the government of its right to collect the taxes which prejudicial thereto

Asia International Auctioneers vs. CIR – a corporation treaty under Subic Special Economic Zone
engaged in selling, producing, manufacturing motor vehicles. BIR assessed them deficiency in
VAT and excise tax with penalties. The basis: hindi nagfile ng protest si AIA, however, the CTA
told that there was no sufficient evidence to prove that it receive the copy of the protest. AIA
moved for the suspension of the proceedings because there was tax amnesty program which
was made pursuant to RA 9480 nung 2007 which AIA availed DURING THE PENDENCY OF THE
PROCEEDINGS.

Is AIA disqualified from availing the tax amnesty? NO, the SC ruled that under Section 8 of the
law, Withholding agents with respect to their withholding tax liabilities shall be disqualified to
avail tax amnesty.

HOWEVER, AIA was not being assessed as withholding agent which failed to withhold or remit
deficiency VAT and excise tax BUT as a taxpayer who is directly liable for the said taxes. BIR
SAID, WITHHOLDING AGENT YAN KASI VAT YAN IH. Pag VAT, me kinokolekta yan in behalf of the
customer,

SC said HINDE! A taxpayer who withholds or who charges VAT to the customer is not a
withholding agent but rather the taxpayer is LIABLE primary liable to pay VAT, hindi yan
withholding agent. Edi ba indirect tax yan? The burden can be shifted to another person but the
liability to pay the tax still belongs to the taxpayer, hence, it cannot fall to withholding agent
because if AIA falls under withholding agent, it cannot avail tax amnesty.

Banez

Taxpayer Suit
Filed by the taxpayers who are directly affected by the subject matter of the case

Landbank vs. Cacayuran

Remulla vs. Maliksi – a donation was made in the land, Vice Governor Cavite

Pascual vs. Secretary of Public Works – a law was passed appropriating a certain amount for
construction of roads in Pasig and Pascual who was the governor of Rizal asked for preliminary
injunction saying that his private property within a private subdivision. The owner of the
subdivision Zulueta said that he will donate the property but at the passage of the law, it was
not yet donated by Zulueta. After the law was passed, Zulueta made a donation but added that
it could only be used for creation of streets. Pascual alleged that the law passed was self-serving
that part of Senator Zulueta saying that the construction, goods into the subdivision, and taking
the value of the subdivision. Senator countered that once a law has been passed, it cannot be
illegal and there is no law that makes the appropriation of public funds for improvements for
private property and this had been dismissed by the CFI.

CAN A LAW BE PASSED WHICH APPROPRIATES PUBLIC FUNDS FOR PRIVATE PURPOSE? NO, the
legislature has no power to appropriate public revenue anything other than for public purpose
and that it cannot be for the advantage of private individuals.

On the issue when Governor Pascual has capacity to sue although not directly damaged by the
Bill? The SC ruled that Pascual has locus standi since he is a taxpayer who have sufficient
interest. Taxpayer having sufficient interest in illegal expenditure of money released. Taxation
could be questioned by constitutionality of the stature.

Requisites for an ordinary citizen to file taxpayer suit:

1) Money is being deflected from public purpose (improper purpose)

2) Money being extracted and spent in violation of constitutional protection against abuses of
legislative power
3) Money was improperly used
4) Petitioner seeks to claim use of taxpayer’s money
5) Tax measure is unconstitutional
6) Public funds is being Illegally disbursed