Taxation Law

1. General principles
A. Taxes v Set Off/Legal Compensation

Definitions
Taxes Set Off Compensation
The enforced proportional Allows taxpayers to reduce Takes place when two
contributions from persons their overall tax burden by persons are creditors and
& property levied by the applying certain debtors of each other
lawmaking body of the deductions or credits
state by virtue of its against their taxable
sovereignty for the support income or tax liability
of the government & all
public needs

Compensation
3 reasons why compensation does not apply in taxation

Category of law Category of obligation Public Policy

The applicable laws are What is referred to in Art Taxes are the lifeblood of
different. Compensation is 1278 is ordinary the government. They are
governed by the Civil Code obligations where there is an integral and
of the Ph but taxation, its a creditor and a debtor independent obligation.
collection and other and both of them are Their speedy collection
aspects thereof are creditors and debtors of and their availability are
governed by the National each other. In the case of an imperious need.
Internal Revenue Code tax laws, the government
(NIRC) as amended and and the taxpayers are not
other tax laws. creditors and debtors
because tax is not a debt.

Set off
“A taxpayer may not offset taxes due from the claims that he may have against the
government. 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.” (Caltex v
Commission on Audit)
Exception
Only when both the claims of the government and the taxpayer against each other
have already become due and demandable as well as fully liquidated.
B. Equitable Recoupment
The doctrine of equitable recoupment refers to a case where a taxpayer has a claim for
refund but was not able to file a written claim due to the lapse of the prescription
period w/in which to make a refund is allowed. Under this doctrine, the taxpayer is
allowed to credit such refund to his existing lax liability.
- This is not allowed in the Philippines
C. Theories and Basis of Taxation

Lifeblood Theory Necessity Theory Benefits Protection Jurisdiction over

Theory (Symbiotic Subject and
Relationship Objects
Doctrine)
Taxes are the The exercise of the Every person who is The power to
lifeblood of the power to tax able must contribute tax can only be
government and so emanates from his share in the exercised w/in
should be collected necessity, because burden of running the territorial
without unnecessary without taxes, the government. jurisdiction of a
hindrance. government cannot The government for taxing authority.
fulfill its mandate of its part is expected
W/o taxes, the promoting the to respond in the Exception
government would general welfare and form of tangible and except when
be paralyzed for lack well being of the intangible benefits there exists
of the motive power people. intended to improve privity of
to activate and the lives of the relationship
operate it people and enhance between the
their material and taxing state and
Taxes are the moral values. This the object of
lifeblood of the symbiotic tax.
government. W/o relationship is the (privity is a
taxes, the rationale of taxation. relation
government can between two
neither exist nor parties that is
endure. The exercise recognized by
of taxing power law)
derives its source
from the very
existence of the
State whose social
contract with its
citizens obliges it to
promote public
interest and the
common good.

D. The power to tax involves the power to destroy

This maxim only means that the power to tax includes the power to regulate even to
the extent of prohibition or destruction of businesses. The reason is that the legislature
has the inherent power to determine who to tax, what to tax and how much tax is to be
imposed. Pursuant to the regulatory purpose of taxation, the legislature may impose
tax in order to discourage or prohibit things or enterprises inimical to the public
welfare.

E. Kinds of Double Taxation

Double taxation
The same taxpayer is taxed twice when he should be only taxed once:
a. For the same purpose
b. By the same taxing authority
c. Within the same jurisdiction
d. During the same taxing period
e. And the taxes are of the same kind or character
 - Legal but not favored

Direct Duplicate Taxation (strict sense) Indirect Double Taxation (broad sense)
The taxpayer is taxed twice by the same This extends to all cases in which there is
taxing authority, within the same taxing a burden of two or more impositions. It is
jurisdiction, for the same property and the double taxation other than those
same purpose. covered by direct double taxation.

F. Kinds of Tax Exemptions

Implies a waiver on the part of the government of its right to collect what otherwise
would be due to it, and so is prejudicial thereto.
Not transferrable except if the law expressly provides so.

Revocation of Tax exemptions

May be withdrawn at the pleasure of the taxing authority
Exception
Where the exemption is granted to private parties based on material consideration of a
mutual nature, which then becomes contractual and is thus covered by the non-
impairment clause of the Constitution

Individual Tax Exemptions

Minimum Wage PWDs Senior Citizens OFWs
Earners
Those earning the PWDs are entitled to Individuals who are OFWs are
statutory minimum special deductions at least 60 years old generally
wage are exempt from in addition to the and have retired are exempt from
income tax. This basic personal exempt from tax on paying
extends to holiday exemptions granted certain types of Philippine
pay, overtime pay, to all individual income, like income tax on
and other monetary taxpayers. pensions. income earned
benefits that do not abroad.
exceed the
established threshold.

Corporate Tax Exemptions

GOCCs Educational Institutions Religious Organizations
Most GOCCs are exempt Educational institutions Income derived from
from corporate income tax, which are non-profit are activities related to the
but not all exempted from tax on exercise of their functions
income used for is tax-exempt.
educational purposes.

Special Laws and Treaties

Investment Incentives Treaties
Various special economic zones and The Philippines has tax treaties with
industries targeted for development offer several countries, potentially exempting
 tax exemptions and other fiscal foreign nationals from certain taxes or
incentives to entice investment. allowing them to avail of reduced tax
rates.

G. Principles/Interpretations/Construction on Tax Laws and Tax Exemption

Tax Laws Tax Exemption

Should be interpreted liberally in favor of By reason of lifeblood doctrine, liberal
the taxpayer and strictly against the construction of tax laws does not apply to
Government tax exemptions which should be
construed in strictissimi juris against the
It is the general rule in the interpretation taxpayer
of statutes levying taxes or duties not to
extend their provisions beyond the clear A claim of tax exemption must be clearly
import of the language used shown and based on language in law too
plain to be mistaken. The burden of proof
In every case of doubt, such statutes are rests upon the party claiming the
construed most strongly against the exemption to prove that it is in fact
Government and in favor of the citizen, covered by the exemption so claimed
because burdens are not to be imposed,
nor presumed to be imposed, beyond
what the statutes expressly and clearly
import

H. Doctrines in Taxation

Prospectivity of Tax Laws Revenue Regulations (non- BIR/Administrative Rulings

retroactivity)
Tax laws operate While revenue regulations “any revocations,
prospectively, whether as a general rule have no modification, or reversal of
they enact, amend, or retroactive effect, if the any of the rules and
repeal, unless the purpose revocation is due to the regulations promulgated,
of the legislature to give fact that the regulation is or any of the rulings or
retrospective effect is erroneous or contrary to circulars promulgated by
expressly declared or may law, such revocation shall the CIR shall not be given
be implied from the have retroactive operation retroactive application if
language used as to affect past the revocation,
transactions, because a modification, or reversal
wrong construction of the will be prejudicial to the
law cannot give rise to a taxpayers
vested right that can be
invoked by the taxpayer Exception (may be given
retroactive application if)
a. Where the taxpayer
deliberately
misstates or omits
material facts from
his return or any
document required
of him by the BIR
b. Where the facts
subsequently
gathered by the BIR
are materially
different from the
facts on which the
 ruling is based
c. Where the taxpayer
acted in bad faith

I. Prescriptibility/Imprescriptibility of Taxes

Prescriptibility Imprescriptibility
For the purpose of safeguarding Taxes are imprescriptible except when
taxpayers from any unreasonable provided otherwise by the tax law itself.
examination, investigation or
assessment, our tax law provides a The doctrine of imprescriptibility means
statute of limitations in the collection of that the government's right to assess and
taxes. Thus the law on prescription, being collect taxes does not prescribe or
a remedial measure, should be liberally become obsolete over time unless
construed in order to afford such specified by tax law.
protection
It is a well-settled doctrine both in this
Exception jurisdiction as well as in that of the United
Exceptions to the law on prescription States, that, unless expressly provided by
should perforce be strictly construed law, the statutes of limitation do not run
against the State. This principle is
applicable to actions brought for the
collection of taxes.

Prescriptive period if assessment and collection of taxes

Section 203 NIRC Section 222 NIRC

Period of Limitation Upon Exceptions as to Period of Limitation
Assessment and Collection. - Except of Assessment and Collection of
as provided in Section 222, internal Taxes. -
revenue taxes shall be assessed within a. In the case of a false or fraudulent
three (3) years after the last day return with intent to evade tax or of
prescribed by law for the filing of the failure to file a return, the tax may be
return, and no proceeding in court without assessed, or a proceeding in court for the
assessment for the collection of such collection of such tax may be filed
taxes shall be begun after the expiration without assessment, at any time within
of such period: Provided, That in a case ten (10) years after the discovery of the
where a return is filed beyond the period falsity, fraud or omission: Provided, That
prescribed by law, the three (3)-year in a fraud assessment which has become
period shall be counted from the day the final and executory, the fact of fraud
return was filed. For purposes of this shall be judicially taken cognizance of in
Section, a return filed before the last day the civil or criminal action for the
prescribed by law for the filing thereof collection thereof.
shall be considered as filed on such last b. If before the expiration of the time
day. prescribed in Section 203 for the
assessment of the tax, both the
Commissioner and the taxpayer have
agreed in writing to its assessment after
such time, the tax may be assessed
within the period agreed upon.
The period so agreed upon may be
extended by subsequent written
agreement made before the expiration of
the period previously agreed upon.
c. Any internal revenue tax which has
been assessed within the period of
limitation as prescribed in paragraph (a)
hereof may be collected by distraint or
levy or by a proceeding in court within
five (5) years following the assessment of
 the tax.
d. Any internal revenue tax, which has
been assessed within the period agreed
upon as provided in paragraph (b)
hereinabove, may be collected by
distraint or levy or by a proceeding in
court within the period agreed upon in
writing before the expiration of the five
(5) -year period.
The period so agreed upon may be
extended by subsequent written
agreements made before the expiration
of the period previously agreed upon.
e. Provided, however, That nothing in the
immediately preceding and paragraph
(a) hereof shall be construed to authorize
the examination and investigation or
inquiry into any tax return filed in
accordance with the provisions of any tax
amnesty law or decree.

J. Principle of Exhaustion of Administrative remedies in taxation

Under the doctrine of exhaustion of administrative remedies, before a party is allowed
to seek the intervention of the court, he or she should have availed himself or herself of
all the means of administrative processes afforded him or her. Section 228 of the Tax
Code requires taxpayers to exhaust administrative remedies by filing a request for
reconsideration or reinvestigation within 30 days from receipt of the assessment.

SEC. 228. Protesting of Assessment. - When the Commissioner or his duly

authorized representative finds that proper taxes should be assessed, he shall first
notify the taxpayer of his findings: Provided, however, that a preassessment notice
shall not be required in the following cases:
(a) When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or(b) When a
discrepancy has been determined between the tax withheld and the amount actually
remitted by the withholding agent; or(c) When a taxpayer who opted to claim a refund
or tax credit of excess creditable withholding tax for a taxable period was determined
to have carried over and automatically applied the same amount claimed against the
estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable
year; or(d) When the excise tax due on excisable articles has not been paid; or(e) When
the article locally purchased or imported by an exempt person, such as, but not limited
to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or
transferred to non-exempt persons.
The taxpayers shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void.
Within a period to be prescribed by implementing rules and regulations, the taxpayer
shall be required to respond to said notice.
If the taxpayer fails to respond, the Commissioner or his duly authorized representative
shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of the assessment
in such form and manner as may be prescribed by implementing rules and regulations.
Within sixty (60) days from filing of the protest, all relevant supporting documents shall
have been submitted; otherwise, the assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred
eighty (180) days from submission of documents, the taxpayer adversely affected by
 the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days
from receipt of the said decision, or from the lapse of one hundred eighty (180)-day
period; otherwise, the decision shall become final, executory and demandable.

K. Double Taxation

Direct Double Taxation Indirect Double Taxation Tax Pyramiding

involves the imposition of arises when some Tax pyramiding occurs
two taxes on the same elements of direct double when the same final good
subject matter, meeting taxation are absent, often or service is taxed multiple
specific criteria necessitating methods for times along the production
elimination through tax process
treaties

L. Modes of Eliminating Double Taxation

1.Tax Exemption (as to form) 2.Tax Credit 3.Tax

Deduction
Express Implied Contractual A person is An amount is
Expressly When Are those allowed to subtracted
granted by the particular agreed to by deduct an from the gross
Constitution, persons, the taxing amount from amount
statutes, properties, or authority in his tax liability
treaties, exercise are contract
franchises or deemed lawfully
similar exempt as they entered into by
legislative acts. fall outside the them under
scope of the enabling laws.
taxing
provision itself.

4.Tax Discount 5.Tax Treaties 6.Principle of Reciprocity

Refers to a reduction in the Agreement entered into Refers to the concept that
amount of tax owed, often between sovereign states the tax privileges or
granted as an incentive or exemptions granted to
benefit under specific Entered into to reconcile foreign individuals or
conditions. This can the national fiscal entities by the Philippines
include discounts for early legislations of the should be reciprocated by
payment of taxes, tax contracting parties and, in their home countries
incentives for certain turn, help the taxpayer
industries, or exemptions avoid simultaneous
for particular types of taxations in two different
income jurisdictions

M. Escape from Taxation

Shifting of Tax Burden Tax Avoidance Tax Evasion

the burden of payment is transferred a legal way for The crime of tax
from the statutory taxpayer to another taxpayers to avoid evasion is
without violating the law (e.g., VAT); paying taxes. committed by a
Forward Backward Onward taxpayer who
Shifting Shifting Shifting They can do so by knowingly and
When the When the the tax is using the tax credits, willfully files a
burden of burden is shifted two deductions, and fraudulent return
exclusions that are with intent to
 tax is transferred or more part of the tax code evade and defeat
transferred from the times either to their advantage. a part or all of the
from a consumer forward or Using these tax
factor of through the backwards strategies can help
production factors of them either avoid No tax evasion if
through the distribution paying taxes there is no fraud in
factors of to the altogether or lower filing of the tax
distribution factors of their tax liability. return
until it production
finally
settles on
the ultimate
purchaser or
consumer.

N. Difference between Tax Evasion vs Tax Avoidance

Tax Evasion Tax Avoidance

Scheme used outside of those lawful Tax-saving device within the means
means and when availed of, it usually sanctioned by law. This method should
subjects the taxpayer to further or be used by the taxpayer in good faith
additional civil or criminal liabilities and at arm’s length

Connotes the integration of three factors

1. The end to be achieved, i.e., the
payment of less than that known by
the taxpayer to be legally due
2. An accompanying state of mind
which is described as evil, in bad
faith, willful, or deliberate and not
accidental
3. A course of action or failure of
action which is unlawful

O. Tax Amnesty
Absolute waiver by a sovereign of its right to collect taxes and power to impose
penalties on persons or entities guilty of violating a tax law. Tax amnesty aims to grant
a general reprieve to tax evaders who wish to come clean by giving them an
opportunity to straighten out their records

An absolute relinquishment by the government of its right to collect what is due it and
to give tax evaders who wish to relent a chance to start with a clean slate

P. Compromise vs Abatement

Compromise Abatement
involves the payment of a certain cancellation so there will be no payment
percentage of the tax liability of the tax liability

an agreement between the taxpayer and diminution or decrease in the amount of

the BIR to settle a tax liability for less tax imposed, such that to abate is to
than the full amount owed. “nullify or reduce in value or amount

It typically occurs when a taxpayer no mutual concessions between the

demonstrates an inability to pay the full taxpayer and the CIR are made
amount due, often due to financial
hardship. The compromise must be It can be applied in situations where the
 approved by the BIR and is intended to tax is found to be erroneously assessed,
resolve disputes amicably. where there are legitimate reasons for
non-payment, or when the taxpayer has
provided sufficient justification

Q. Taxpayer’s Suit
A taxpayer is allowed to sue where there is a claim that public funds are illegally
disbursed, or that the public money is being deflected to any improper purpose, or that
there is wastage of public funds through the enforcement of an invalid or unconstitutional
law.
A person suing as a taxpayer, however, must show that the act complained of directly
involves the illegal disbursement of public funds derived from taxation. He must also prove
that he has sufficient interest in preventing the illegal expenditure of money raised by
taxation and that he will sustain a direct injury because of the enforcement of the
questioned statute or contract.
For a taxpayer's suit to prosper, two requisites must be met:
(1) public funds derived from taxation are disbursed by a political subdivision or
instrumentality and in doing so, a law is violated or some irregularity is committed
(2) the petitioner is directly affected by the alleged act.

R. Nature of Taxation

It is inherently legislative It is for a public purpose It is territorial in

application
because law must set A tax is for the public Taxation is an act of
determine the coverage, purpose where it is for the sovereignty which could
object, nature, extent and support of the only be exercised within a
situs of the tax. This does government, or any of the country's territorial limits.
not mean that taxation recognized object of the This is based on the theory
cannot exist w/o law government, or where it that taxes are paid for the
will directly promote the protection and services
it does exist w/o legislation welfare of the community provided by the taxing
but legislation is required in equal measure authority which could not
to set parameters in the be provided outside the
imposition of tax. The territorial boundaries of
Executive Branch collects the taxing State.
tax but it cannot do so w/o
a law requiring it
It is subject to international It is an exaction payable in It is subject to limitations
comity money and restrictions
International comity is a It is a compulsory financial Constitutional Limits:
principle of international charge imposed by a Uniformity and
law relating to rules of government on individuals Equitability: The
international courtesy, or entities to fund public Constitution mandates
etiquette, or good-will services and activities. that taxes must be uniform
which are in fact, or which and equitable, meaning
ought to be, observed by Taxes can take various similar taxpayers should
states in their mutual forms, including income be taxed similarly.
relations. tax, property tax, sales Non-impairment of
tax, and others, and they Contracts: The
Under international comity, are typically required to be government cannot
a state must recognize the paid in cash or cash impose taxes that would
generally accepted tenets equivalents. While some impair existing contracts.
of international law, among taxes may allow for non-
which are the principles of monetary payments in Legislative Authority:
sovereign equality among specific circumstances Taxation powers are
states and of their freedom (such as through in-kind primarily vested in
from suit without their contributions), the Congress, which means
consent. standard practice involves taxes can only be imposed
monetary payments. or altered through
This principle, therefore, legislation.
limits the authority of a
government, i.e., the Non-retroactivity:
Philippine Government, to Generally, tax laws cannot
effectively impose taxes on apply retroactively unless
a sovereign state and its explicitly stated. This
instrumentalities, as well protects taxpayers from
as on its property held, and being taxed under new
activities undertaken, in laws for actions taken
that capacity before the law was
enacted.

Exemptions:
Certain entities (e.g.,
religious organizations,
non-profits) and
transactions (e.g., sales of
agricultural products) may
be exempt from specific
taxes as provided by law.
Taxpayer Rights:

Taxpayers have rights that

protect them from
arbitrary actions by the
government, such as the
right to due process and
the right to appeal.
Limitations on Tax
Assessments:
The government must
adhere to specific
procedural requirements
when assessing taxes, and
there are statutes of
limitations on how long the
government can assess
unpaid taxes.

Special Laws and

Regulations:
Some regions may have
local taxation rules and
regulations, but these
must align with national
laws and the Constitution.

International Treaties:
The Philippines is bound by
international tax treaties
that can affect taxation,
particularly for foreign
entities and individuals.