Taxation 101

Part 1 General Principles

A.
Taxation, defined
Taxation is the act of laying a tax, i.e., the process or means by which the sovereign,
through its law-making body, raises income to defray the necessary expenses of
government. It is merely a way of apportioning the cost of government among those
who in some measure are privileged to enjoy its benefits and, therefore, must bear its
burdens.
As a power, taxation refers to the inherent power of the state to demand enforced
contributions for public purpose or purposes.
Taxes enforced proportional contributions from persons and property levied by the
lawmaking body of the State by virtue of its sovereignty for the support of government
and for all public needs.
B.
Nature of the power of taxation
1. Inherent prerogative of the sovereignty an incident or attribute of sovereignty,
being essential to the existence of every government. It exists apart from constitutions
and without being expressly conferred by the people. Hence, it can be exercised by the
government even if the Constitution is entirely silent on the subject.
2. Legislative in character peculiarly and exclusively legislative and cannot be
exercised by the executive or judicial branch of the government. Only Congress can
impose taxes. Local legislative bodies can also impose taxes but subject to limitations
provided by law.
3. Subject to constitutional and inherent limitations not absolute; subject to
certain limitations or restrictions. The power to tax is said to be the strongest of all the
powers of government. It is unlimited, plenary, comprehensive and supreme, in the
absence of constitutional restrictions, the principal check on its abuse resting in the
responsibility of members of Congress to their constituents.
C.
Basis of taxation
1. Necessity to serve the people
2. Necessity to protect the people
3. (correlate with the lifeblood doctrine)
D.
Importance of taxes
Lifeblood doctrine the existence of government is a necessity; it cannot exist nor
endure without the means to pay its expenses; and for those means, the government
has the right to compel all its citizens and property within its limits to contribute in the
form of taxes.
E.
Theory of taxation
Benefits received or compensation theory Despite the natural reluctance to
surrender part of the taxpayers hard-earned income to the government, every person
who is able to must contribute his share in the running of the government. The
government, for its part, is expected to respond in the form of tangible and intangible
benefits intended to improve the lives of the people and enhance their moral and
material values.
Symbiotic relationship
1. Support by the taxpayers
2. Protection and benefits by the government
F.

Purpose and Objectives of Taxation

1. Primary: revenue raising
2. Secondary: non-revenue raising
a. Regulation e.g. protect local industries against unfair competition
Involves the power to destroy should be exercised with caution to minimize the
injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the hen that lays the golden egg.
Does not involve the power to destroy as long as the SC sits the two limitations on
the power of taxation are the inherent and constitutional limitations which are
intended to prevent abuse on the exercise of the otherwise plenary and unlimited

power. It is the Courts role to see to it that the exercise of the power does not
transgress these limitations.
b. Promotion of general welfare implementation of the police power
c. Reduction of social inequality progressive system of taxation prevents the
undue concentration of wealth in the hands of a few individuals. Progressivity is
keystoned on the principle that those who are able to pay shoulder the bigger
portion of the tax burden.
d. Encourage economic growth by granting incentives and exemptions
e. Protectionism to protect local industries from foreign competition.
G.
1.
2.
3.
4.

Scope of taxation
Unlimited
Comprehensive
Plenary
Supreme

H.
Scope of the legislative taxing power
1.
Determination of purpose(s) must be for a public purpose. The courts can
inquire into whether the purpose is really public or private. Judicial action is limited
only to a review where it involves: (a) the determination of the validity of the tax in
relation to constitutional precepts or provisions; or (b) the determination in an
appropriate case of the application of a tax law.
2.
Determination of the subjects and objects of taxation (within its
jurisdiction) refer to the coverage and the kind or nature of the tax. They may be
persons, (natural/juridical); property (real/personal, tangible/intangible); businesses,
transactions, rights, or privileges. Inequalities which result from a singling out of one
particular class for taxation or exemption infringe no constitutional limitation so long as
such exemption is reasonable and not arbitrary.
3.
Determination of the amount and rate of tax As a general, the legislature
may levy a tax of any amount or rate it sees fit. If the taxes are oppressive or unjust,
the only remedy is the ballot box and the election of new representatives.
Constitutionally, the rule of taxation shall be uniform and equitable.
4.
Determination of the kind of tax to be collected
5.

Determination of apportionment of the tax

6.

Determination of the manner and mode of enforcement & collection

7.
Determination of the situs of taxation In determining the situs of taxation,
you have to consider the nature of the taxes. Example: Community tax - Residence of
the taxpayer; Real property tax - Location of the property. We can only impose property
tax on the properties of a person whose residence is in the Philippines.
I.
Aspects of taxation
1.
Levy or imposition (legislation) refers to the enactment of a law by Congress,
imposing a tax
2.
Administration (tax administration) administration and implementation of
the tax law by the executive department through administrative agencies; assessment
and collection.
Agencies involved:
a. Bureau of Internal Revenue
b. Bureau of Customs
c. Provincial, City and Municipal Assessors and Treasurers
J.
Basic principles of a sound tax system
1.
Fiscal adequacy means that the sources of revenue, that is, receipts therefrom,
taken as whole, should be sufficient to meet the demands of public expenditure. It
means also that the revenues should be elastic or capable of expanding or contracting
annually in response to variations in public expenditures.
2.
Theoretical justice or equality (ability-to-pay doctrine) means that the tax
burden should be distributed in proportion to the taxpayers ability to pay. Similarly

situated taxpayers should pay equal taxes, while those who have more should pay
more. Taxation should be uniform as well as equitable.
3.
Administrative feasibility means that tax laws should be capable of
convenient, just and effective administration.
4.
Economic efficiency
K.

Taxation distinguished from police power and eminent domain

Taxation
Eminent Domain
Police Power
As to purpose
The property
The property is
The use of the
(generally money) is taken for public
property is
taken for the support use; it must be
regulated for the
of the government.
compensated
purpose of
promoting the
general welfare; it is
not compensable.
As to
It is assumed that
He receives the
The person affected
compensation
the individual
market value of the
receives indirect
receives the
property taken from benefits as may
equivalent of the tax him.
arise from the
in the form of
maintenance of a
protection and
healthy economic
benefits he receives
standard of society.
from the
government.
As to persons
Operates upon
Operates on an
Operates upon
affected
(1) A community; or individual as the
(1) A community; or
(2) Class of
owner of a particular (2)Class of
individuals.
property.
individuals.
As to the
May be exercised
May be:
May be exercised
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
subdivisions.
subdivisions;
subdivisions.
(2) Granted to public
service companies
or public utilities.
As to the
Generally, there is
No amount imposed Amount imposed
amount of
no limit on the
but rather the owner should not be more
imposition
amount of tax that
is paid the market
than sufficient to
may be imposed.
value of property
cover the cost of the
taken.
license and
necessary expenses.
As to the
Is subject to certain
Inferior to the
Relatively free from
relationship to
constitutional
impairment
constitutional
the
limitations.
prohibition;
limitations.
Constitutions
government cannot
expropriate private
property, which
under a contract it
had previously
bound itself to
purchase from the
other contracting
party.
Effect
Including the
There is a transfer of Is superior to the
prohibition against
the right to property. impairment of
impairment of the
contract provision.
obligation of
contracts.

L.

Taxes, defined

1.
Internal revenue taxes refers to taxes imposed by the legislature other than
duties on imports and exports.
2.
Local/Municipal taxes taxes imposed by municipal corporations or local
government units.
3.
Tariff and Customs duties the name given to taxes on the importation and
exportation of commodities, the tariff or tax assessed upon merchandise imported
from, or exported to, a foreign country.
4.
Taxes and tax incentives under special laws
M. Essential characteristics and attributes of taxation
1.
Enforced contribution A tax is not a voluntary payment or donation and its
imposition is in no way dependent upon the will or assent, open or implied, or the
person taxed.
2.
Generally payable in money unless qualified by law, taxes of tax is usually
understood to be a pecuniary burden an exaction to be discharged alone in the form
of money which must be in legal tender.
3.
Proportionate in character ordinarily based on ability to pay some people
pay very high taxes, others, very small amounts or none at all.
4.
Levied on persons, property or the exercise of a right or privilege in
each case, only a person pays the tax. The property is resorted to for the purpose of
ascertaining the amount of tax that must be paid and of enforcing payment in case of
default of the taxpayer. But not all who pay a tax shoulder the burden of the tax.
5.
Levied by the state which has jurisdiction over the subject or object of
taxation the object to be taxed must be subject to the jurisdiction of the taxing state
for taxes to be enforced. Although a state can tax all persons subject to its jurisdiction,
yet its taxing power necessarily stops at the state boundary lines. It cannot reach over
into another jurisdiction to seize upon person or property for purposes of taxation.
6.
Levied by the lawmaking body of the state under the Constitution, Congress
can exercise through the enactment of tax statutes; and, local legislative bodies are
now given direct authority to levy taxes, fees, and other charges subject to such
guidelines and limitations as may be provided by law.
7.
Levied for public purpose(s) imposed to provide income for the support of the
government, the administration of the law, or the payment of public expenses, not for
the exclusive benefit of private persons.
N.
Classification of taxes
1.
As to subject matter or object:
a. Personal, poll or capitation tax of a fixed amount imposed on persons residing
within a specified territory, whether citizens or not, without regard to their property or
the occupation or business in which they may be engaged. Taxes of a specified
amount imposed upon each person performing a certain act or engaging in certain
business or profession are not, however, poll taxes. (community tax)
b. Property excise tax imposed on property, whether real or personal, in proportion
either to its value, or in accordance with some other reasonable methods of
apportionment. The obligation to pay the tax is absolute and unavoidable and is not
based upon the voluntary action of the person assessed. (real estate tax)
2.
As to who bears the burden:
a. Direct tax which is demanded from the person who also shoulders the burden of
the tax; or tax for which the taxpayer is directly or primarily liable or which he cannot
shift to another. (corporate or individual income taxes; community tax; estate tax;
donors tax)
b. Indirect tax which is demanded from one person in the expectation and intention
that he shall indemnify himself at the expense of another, falling finally upon the
ultimate purchaser or consumer; or tax who ultimately pays for it not as tax but as
part of the purchase price. (VAT; percentage taxes; excise taxes on certain specific
goods; customs duties)
3.
As to the determination of amount:
a. Specific tax of a fixed amount imposed by the head or number, or by some
standard of weight or measurement; it requires no assessment (valuation) other than
a listing or classification of the objects to be taxed. (taxes on distilled spirits, wines,
and fermented liquors; cigars and cigarettes, and others)
b. Ad valorem (according to value) tax of a fixed proportion of the value of the
property with respect to which the tax is assessed; it requires the intervention of

assessors or appraisers to estimate the value of such property before the amount due
from each taxpayer can be determined. (real estate tax; excise taxes on automobiles,
non-essential goods such as jewelry and perfumes, and others; customs duties
[except cinematographic films])
4.
As to purpose:
a. General, fiscal or revenue tax imposed for the general purposes of the
government, i.e., to raise revenue for governmental needs. (income tax; VAT; and
almost all taxes)
b. Special or regulatory tax imposed for a special purpose, i.e., to achieve some
social or economic and irrespective of whether revenue is actually generated raised
or not. (protective tariffs or custom duties on imported goods to enable similar
products manufactured locally to compete with such imports in the domestic market.
Tariff duties intended mainly as a source of revenue are relatively low so as not to
discourage imports.)
5.
As to the scope or authority imposing the tax:
a. National tax imposed by the national government. (national internal revenue
taxes; customs duties; and national taxes imposed by special laws)
b. Municipal or Local tax imposed by municipal corporations or local government
units. (real estate tax; professional tax)
6.
As to graduation or rate:
a. Proportional (flat or uniform tax) tax based on a fixed percentage of the
amount of the property, receipts, or other basis to be taxed. The rate of the tax
remains constant for all levels of the tax base or any given income level. (real estate
taxes; VAT; and other percentage taxes)
b. Progressive tax the rate of which increases as the tax base or bracket increases.
(income tax; estate tax; donors tax)
c. Regressive tax the rate of which decreases as the tax base or bracket increases,
i.e., the tax rate and the tax base move in opposite directions. We have no regressive
taxes.
O.
1.

Taxes distinguished from other impositions

License or permit fee
Tax
Purpose
Imposed for revenue
purposes
Basis
Imposed under the power of
taxation
Amount
No limit as to the amount of
tax

Time of payment
Effect of nonpayment
Surrender

2.

License Fee
Imposed for regulatory
purposes
Imposed under the police
power of the State
Amount of license fee that
can be collected is limited to
the cost of the license and
the expenses of police
surveillance and regulation
Normally paid after the start Normally paid before the
of business
commencement of the
business
Failure to pay the tax does
Failure to pay a license fee
not make the business illegal makes the business illegal
Taxes, being the lifeblood of
License fee may with or
the State, cannot be
without consideration
surrendered excepts for
lawful considerations

Toll fee

Definition

Basis
Amount

Tax
Enforced proportional
contributions from persons and
property
A demand of sovereignty
No limit as to the amount

Toll
A sum of money for the use of
something, a consideration which
is paid for the use of a property
which is of a public nature; e.g.,
road, bridge
A demand of proprietorship
Amount of toll depends upon the
cost of construction or
maintenance of the public

improvement used
Authority
3.

May imposed only by the

government

May be imposed by the

government or private individuals
or entities

Compromise penalty
Tax
Enforced proportional
contributions from persons and
property

Definition

Purpose
Authority

Intended to raise revenue

May be imposed only by the
government

Special assessment-ordinance
Tax
Definition
Enforced proportional
contributions from persons and
property

Penalty
Sanction imposed as a
punishment for violation of a law
or acts deemed injurious; violation
of tax laws may give rise to
imposition of penalty
Designed to regulate conduct
May be imposed by:
(a) Government; or
(b)Private individuals or entities

4.

Basis
Subject

Scope

Based on necessity
Levied on:
(a) Persons;
(b)Property; or
(c) Acts.
Has general application

Person
Liable

It is a personal liability of the

taxpayer

5.

Special Assessment
An enforced proportional
contribution from owners of lands
especially benefited by public
improvements
Based wholly on benefits
Levied only on land

It is exceptional both to the time

and place
Not a personal liability of the
person assessed; his liability is
limited only to the land involved

Debt
Tax

Basis

Based on law

Effect of nonpayment

Taxpayer may be imprisoned

for his failure to pay the tax
(except poll tax)
Generally payable in money

Mode of
payment
Assignability
Interest
Authority
Prescription

Not assignable
Does not draw interest unless
delinquent
Imposed by public authority

Debt
Based on contract or
judgement
No imprisonment for failure to
pay a debt
May be payable in money,
property or services
Can be assigned
Draws interest if stipulated or
delayed
Can be imposed by private
individuals
Civil code governs the
prescriptive period of debts

Prescriptive periods for tax are

determined under the NIRC
Are taxes subject of a set-off or compensation?
Taxes for debts cannot be subject legal compensation or set-of, reason: the
government and taxpayer are not mutually creditors and debtors of each other.
Obligations in the nature of debts are due to the government in its corporate capacity,
while taxes are due to the government in its sovereign capacity.
Taxes for taxes general rule: not allowed to set-of excess taxes against other taxes
payable to the government. The Commissioner of Internal Revenue, however, is
authorized by law to grant refund or credit of taxes erroneously or illegally paid.
6.
Subsidy a pecuniary aid directly granted by the government to an individual or
private commercial enterprise deemed beneficial to the public; not a tax although a tax
may be imposed to pay it.

7.
Revenue refers to all the funds or income derived by the government, whether
from tax or from whatever source and whatever manner; refers to the amount
collected, tax refers to the amount imposed.
8.
Internal revenue refers to taxes imposed by the legislature other than duties
on imports and exports.
9.
Customs duties taxes imposed on goods exported from or imported into a
country. Taxes is broader in scope as it includes customs duties.
10. Tariff used interchangeably with customs duties in the Tariff and Customs
Code. The term may be used in one of three senses:
a. As a book of rates drawn usually in alphabetical order containing the names of
several kinds of merchandise with the corresponding duties to be paid for the same;
b. As the duties payable on goods imported or exported; or
c. As the system or principle of imposing duties on the importation (or exportation) of
goods.
P.
Limitations on the power of taxation
1.
Inherent limitations those which exist despite the absence of an express
constitutional provision thereon.
a. Public purpose can only be used in aid of a public object, an object which is
within the purpose for which government is established. It cannot be exercised in aid
of enterprises strictly private, for the benefit of individuals, though in a remote or
collateral way, the public may be benefited thereby. Tax proceeds must be used
1. for the support of the government; or
2. for any of the recognized objects of government; or
3. to promote the welfare of the community.
b. Non-delegation of the legislative power of tax Congress cannot delegate the
power to the other branches of government. Exception:
1. Delegation to the President for practicality and expediency, our Constitution
expressly allows a Congress to authorize the President to fix within specified limits,
and subject to such limitations and restrictions as it may impose, tariff rates, import
or export quotas, tonnage and wharfage dues and other duties or imposts.
2. Delegation to LGUs under the Constitution, each LGU is now expressly given
the power to create its own source of revenue and to levy taxes, subject to such
limitation as may be provided by law.
3. Delegation to administrative agencies certain aspects of the taxing process
that are not legislative may be vested in an administrative agency:
a. The power to value property for purposes of taxation pursuant to fixed rules;
b. The power to assess and collect the taxes; and
c. The power to perform any of the innumerable details of computation,
appraisement, and adjustment, and the delegation of such details.
The powers which cannot be delegated include the determination of the subjects
to be taxed, the purpose of the tax, the amount or rate of the tax, the manner,
means, and agencies of collection, and the prescribing of the necessary rules
with respect thereto.
c. Exemption from taxation of government entities reasons: to levy a tax upon
public property would render necessary new taxes on other public property for the
payment of the tax so laid and thus, the government would be taxing itself to raise
money to pay over itself; in order that the functions of government shall not be
unduly impeded; to reduce the amount of money that has to be handled by the
government in the course of its operations. The exemption applies only to
government entities through which the government immediately and directly
exercises its sovereign powers. GICCs performing proprietary functions are generally
subject to tax in the absence of tax exemption provisions in their charters or the
special laws creating them.
d. International comity the property of a foreign state or government may not be
taxed by another. This principle is based on any of the following grounds:
1. Sovereign equality among states under international law by virtue of which
one state cannot exercise it sovereign powers over another.
2. Usage among states when one enters the territory of another, there is an
implied understanding that the former does not intend to degrade its dignity by
placing itself under the jurisdiction of the latter.

3. A foreign government may not be sued without its consent it is useless to

assess a tax since anyway it cannot be collected.
e. Territorial jurisdiction A state may not tax property lying outside its border or
lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege
derived from the laws of another state and therein exercised. Persons, properties,
businesses, activities, and other transactions within the territorial boundary of the
State, which, and persons outside it, who, received benefits and protection from the
government, are subject to tax.
2.
Constitutional limitations
Direct
a. Revenue bill must originate exclusively in the House but the Senate may
propose with amendments (Art. 6, Sec. 24)
b. Concurrence by a majority of all members of Congress for the passage of a
law granting tax exemption No law granting any tax exemption shall be passed
without the concurrence of a majority of all the member of the Congress. (Art. 6,
Sec. 28[4]); majority of all the members of the Congress means at least one-half
plus one of all the members thereof, voting separately.
c. Rule of uniformity and equity in taxation:
(1)Uniformity: it implies that all taxable articles or properties of the same class shall
be taxed at the same rate.
(2)Equity: uniformity in taxation is effected through the apportionment of the tax
burden among the taxpayers which under the Constitution must be equitable;
based on the ability of the taxpayer to pay the tax.
d. Progressive system of taxation tax laws shall place emphasis on direct rather
than indirect taxation, with ability to pay as the principal criterion. As income
increases, so as the tax rate.
e. Exemption of religious, charitable & educational entities, non-profit
cemeteries, & churches from property taxation covers only property taxes and
not other taxes; it is the use of the property that is exempt, not the ownership;
property must be used actually, directly, and exclusively for religious, charitable, or
educational purposes; exemption extends to facilities which are incidental to or
necessary for the accomplishment of said purposes; self-executing provision of the
Constitution (Art. 6, Sec. 28[31])
f. Exemption of non-stock, non-profit EDUCATIONAL institutions from taxation
covers income, property, and donors taxes, and customs duties; the revenue,
assets, property or donations must be used actually, directly, and exclusively for
educational purposes; lands, buildings, and improvements actually, directly, and
exclusively used for educational purposes are exempt from property tax whether
the educational institution is proprietary or non-profit; self-executing provision of
the Constitution (Art. 14, Sec. 4[3,4])
g. Non- impairment of the jurisdiction of the SC in tax cases Congress cannot
take away from the SC the power given to it by the Constitution the power given to it
by the Constitution as the final arbiter of tax cases (Art. 8, Sec. 2, Sec 5[2,b])
Property Tax
Income Tax
Donors Tax
Customs
Duties
religious,
charitable
&

educational
entities, non-profit
cemeteries,
&
churches (RCE NPCC)
non-stock,
nonprofit

EDUCATIONAL
institutions (NS-NPEI)
Power of judicial review
Courts can determine public purpose, constitutionality or legality of a tax
Court cannot inquire into the wisdom of a taxing act/legislation
Indirect

a.
Due process of law No person shall be deprived of life, liberty, or property
without due process of law x x x (Art. 3, Sec. 1); deprivation of life, liberty, or
property is with due process if done with:
1. Substantive due process under the authority of a law that is valid; and
2. Procedural due process after compliance with fair and reasonable methods of
procedure prescribed by law.
b.
Equal protection of the laws x x x nor shall any person be denied the equal
protection of the laws. (Art. 3, Sec. 1); all persons subject to legislation shall be
treated alike under like circumstances and conditions both in the privileges conferred
and liabilities imposed; a violation of the inherent limitations on taxation would
contravene the constitutional injunction against deprivation of property without due
process of law.
c.
Non-impairment of the obligation of contracts the obligation of a contract
is impaired when its terms or conditions are changed by law, executive orders and
instructions from the President, administrative orders or circulars, or ordinances, or
by a party without the consent of the other, thereby weakening the position or rights
of the latter;
d.
Non-infringement of religious freedom No law shall be made respecting
the establishment of religion, or prohibiting the free exercise thereof. The free
exercise of and enjoyment of religious profession and worship, without discrimination
or preference, shall forever be allowed x x x. (Art. 3, Sec. 5); the Constitution does
not prohibit imposing a generally applicable tax on the sale of religious materials by a
religious organization.
e.
No appropriation for religious purposes No public money or property shall
be appropriated, applied, paid, or employed, directly or indirectly, for the use, benefit,
or support of any sect, church, denomination, sectarian institution, or system of
religion, or of any priest, preacher, minister or other religious teacher or dignitary as
such, except when such priest, preacher, minister, or dignitary, is assigned to the
armed forces, or to any penal institution, or government orphanage or leprosarium.
(Art. 6, Sec. 29[2]); taxes can only be levied for public purposes.
f. Non-infringement of the freedom of the press - The press is not exempt from
taxation; the sale of magazines or newspapers, maybe the subject of taxation; what
is not allowed is to impose tax on the exercise of an activity which has a connection
with freedom of the press (license fee); if we impose tax on persons before they can
deliver or broadcast a particular news or information, that is the one which cannot be
taxed.
TOLENTINO vs. SEC. OF FINANCE
What is prohibited by the constitutional guarantee of free press are laws which single
out the press or target a group belonging to the press for special treatment or which
in any way discriminates against the press on the basis of the content of the
publication.
g.
Power of the President to veto any particular item or items in a revenue
or tariff bill 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. (Art. 6, Sec 27[2]); the items vetoed by the
President shall not be given effect.
Q.
Situs of taxation
1.
Meaning of situs of taxation literally means place of taxation; basic rule: the
state where the subject to be taxed has a situs may rightfully levy and collect the tax;
the situs is necessarily in the state which has jurisdiction or which exercises dominion
over the subject in question; a person may be subject to taxation in several taxing
jurisdictions.
2.
Situs of subjects of taxation depends upon various factors including the
nature of the tax and the subject matter thereof (person, property, act, or activity), the
possible protection and benefit that may accrue both to the government and the
taxpayer, the residence or the citizenship of the taxpayer, and source of income.
a. Persons poll tax levied upon persons who are inhabitants or residents of the state
b. Real property subject to taxation in the state in which it is located whether the
owner is a resident or not and is taxable only there
c. Tangible personal property taxable in the state where it has actual situs
where is physically located although the owner resides in another jurisdiction; in the

Philippines: Real property as well as personal property is subject to the law of the
country where it is situated. (Art. 16, NCC); lex rei sitae
d. Intangible personal property for purposes of property taxation, general rule: at
the domicile of the owner; in accordance with the principle mobilia sequuntur
personam that the situs of personal property is the domicile of the owner. The
principle ,however, is not controlling when it is inconsistent with express provisions of
statute, or when justice does not demand that it be, as where the property has in fact
a situs elsewhere. (exc: section 104, ra 8424)
e. Income Income tax may properly be exacted form persons who are residents or
citizens in the taxing jurisdiction and even from those who are neither residents nor
citizens provided the income is derived from sources within the taxing state.
f. Business, occupation, and transaction general rule: the power to levy an excise
tax depends upon the place where the business is done, or the occupation is engaged
in, or the transaction took place.
g. Gratuitous transfer of property may be subject to taxation in the state where
the transferor is (was) a citizen or resident, or where the property is located.
3.
Multiplicity of situs
a. Effect due to the variance in the concept of domicile for tax purposes, and
considering the multiple distinct relationships that may arise with respect to
intangible personal property (e.g., debtor, creditor, trustee, etc.) and the use to which
the property may have been devoted, all of which may receive the protection of the
laws of jurisdiction other than the domicile of the owner thereto, the same income or
intangible may be subject to taxation in several taxing jurisdictions.
b. Remedy to avoid this or at least to reduce the consequent burden, the taxing
jurisdiction may:
1.
provide for exemptions or allowance of deduction or tax credit for foreign taxes;
or
2.
enter into treaties with other states
R.
Double taxation
1.
Meaning of double taxation
a. Strict sense (direct duplicate taxation/direct double taxation) (a) taxing
twice, (b) by the same taxing authority, (c) within the same jurisdiction or taxing
district, (d) for the same purpose, (e) in the same year [or taxing period], (f) some of
the property in the territory. Both taxes must be imposed on the same property or
subject matter.
b. Broad sense (indirect duplicate taxation/indirect double taxation) taxation
other than direct duplicate. It extends to all cases in which there is a burden of two or
more pecuniary impositions.
2.
Instances of double taxation:
a. A tax on a mortgage as personal property when the mortgaged property is also
taxed at its full value as real estate;
b. A tax upon a corporation for its property and upon its shareholders for their shares;
c. A tax upon a corporation for its capital stock as a whole and upon the shareholders
for their shares;
d. A tax upon depositors in a bank for their deposits and a tax upon the bank for the
property in which such deposits are invested;
e. An excise tax upon certain use of property and a property tax upon the same
property; and
f. A tax upon the same property imposed by two different states.
3.
Constitutionality of double taxation
a. General rule: not prohibited by the Constitution, hence, it may not be invoked as a
defense against the validity of a tax law.
b. Exception: though not forbidden, it is not favored. Such taxation, it has been held,
should, whenever possible, be avoided and prevented.
1.
Doubts as to whether double taxation has been imposed should be resolved in
favor of the taxpayer to avoid injustice or unfairness.
2.
Where double taxation (in its narrow sense) occurs, the taxpayer may seek
relief under the uniformity rule or the equal protection guarantee.
S.

Forms of escape from taxation

1.
Six (6) basic forms (1) shifting, (2) capitalization, (3) transformation, (4)
evasion, (5) avoidance, and (6) exemption.
2.
Definition of terms
a. Shifting, in general the transfer of the burden of a tax by the original payer or
the one on whom the tax was assessed or imposed to another or someone else.
1. Impact of taxation that point on which a tax is originally imposed. In so far as
the law is concerned, the taxpayer is the person who must pay the tax to the
government; also termed as statutory taxpayer the one on whom the tax is
formally assessed.
2. Incidence of taxation that point on which the tax burden finally rests or settles
down. It takes place when shifting has been effected from the statutory taxpayer to
another or someone else who cannot pass the burden further. But there may be
incidence without shifting, as in transformation.
3. Relations among impact, shifting and incidence the impact, the shifting,
and the incidence of a tax corresponds respectively to the imposition, the transfer,
and the settling or coming to rest, of the tax. The impact is the initial phenomenon,
the shifting is the intermediate process, and the incidence is the result. Thus, the
impact of sale tax is on the seller (manufacturer) who shifts the burden to the
customer who finally bears the incidence of the tax.
Forward shifting takes place when the burden of the tax is transferred from a
factor of production through the factors of distribution until it finally settles on the
ultimate purchaser or consumer; from manufacturer/producer to wholesaler, then to
the retailer and finally to the consumer.
Backward shifting effected when the burden of the tax is transferred from the
consumer or purchaser through the factors of distribution to the factor of
production.
Onward shifting occurs when the tax is shifted two or more time either forward
or backward. Thus, a transfer form producer to consumer or from seller to purchaser
involves one shift; from producer to wholesaler, then to retailer, we have two shifts;
and if the tax is transferred again to the purchaser by the retailer, we have three
shifts in all.
b. Capitalization 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; (special form of backward shifting) occurs when the tax falls on an incomeproducing property (e.g., commercial building). The buyer naturally takes into
account the taxes that he will be paying on the property when he becomes the owner
thereof in determining whether the price is reasonable or not. The burden of the tax
rests on the present owner (seller) if he reduces the price because of the tax; may be
considered as a special form of backward shifting except that while the latter involves
the throwing back of a whole series of taxes (e.g., real estate taxes which are payable
every year) and takes place before any of them, with the exception of the first is paid.
c. Transformation the method of escape from taxation whereby the manufacturer
or producer upon whom the tax has been imposed, fearing the loss of his market if he
should add the tax to the price, pays the tax and endeavors to recoup himself by
improving his process of production thereby turning out his units of products at a
lower cost. In such a case, the loss occasioned by the tax may be offset by the gains
resulting from the economics of production; the taxpayer escapes, not by shifting but
by transforming the tax into a gain through the medium of production.
d. Exemption the grant of immunity to particular persons or corporations 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; an
immunity or privilege; freedom from a financial charge or burden to which others are
subjected. Double nexus rule;
e. Tax avoidance (tax planning or tax minimization) the use by the taxpayer of
legally permissible alternative tax rate or methods of assessing taxable property or
income, in order to avoid or reduce tax liability. Here, the taxpayer uses tax saving
device or means sanctioned or allowed by law, so no law is violated in any way. (tax
minimization)
f. Tax evasion (tax dodging) the use by the taxpayer of illegal or fraudulent means
to defeat or lessen the payment of a tax; punishable by law, subjecting the taxpayer
to civil and criminal liabilities.
3.
Distinction between tax evasion and tax avoidance

Tax Evasion
The escape from taxation accomplished
by breaking the letter of the tax law
deliberate omission to report a taxable
item for example.

Tax Avoidance
Covers escape accomplished by legal
procedures or means which may be
contrary to the intent of the sponsors of
the tax law but nevertheless violate the
letter of the law.

4.
Elements of tax evasion
a. The end to be achieved the payment of less than that known by the taxpayer to be
legally due, or in paying no tax when it is shown that a tax is due;
b. An accompanying state of mind which described as being evil, in bad faith,
willful, or deliberate and not accidental; and
c. A course of action (or failure of action) which is unlawful.
5.
Evidence to prove tax evasion
Since fraud is a state of mind, it need not be proved by direct evidence but may be
inferred from the circumstances of the case. Thus:
a. The failure of the taxpayer to declare for taxation purposes his true and actual
income derived from his business for two (2) consecutive years has been held as an
indication of his fraudulent intent to cheat the government of its due taxes. (Republic
v. Gonzales, 13 SCRA 633, April 30, 1965)
b. The substantial under declaration of income in the income tax returns of the
taxpayer for four (4) consecutive year coupled with his intentional overstatement of
deductions justifies the finding of fraud. (Perez v. CTA, 103 Phil 1167 [1958])
T.
Exemption from taxation
1.
Exemption, defined
Exemption from taxation is defined as the grant of immunity to particular persons or
corporations 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; an immunity or privilege; freedom from a financial charge or burden to which
others are subjected.
2.
Nature of tax exemption
a. Personal privilege cannot be transferred or assigned by the person to whom it is
granted without the consent of the legislature.
b. Generally revocable unless the exemption is founded on a contract which is
protected form impairment; but the contract must contain the essential elements of
other contracts, such as, for example, a valid cause or consideration.
c. Waiver on the part of the government the right to collect what is due to it.
Hence, it exists only by virtue of an express grant and must be strictly construed.
d. Not necessarily discriminatory so long as the exemption has a reasonable
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 rule.
3.
Nature of the power to grant tax exemption
a. National government Like the inherent power to tax, the power to exempt from
taxation is an attribute of sovereignty for the power to prescribe who or what
property shall be taxed implies the power to prescribe who or what property shall not
be taxed. It is inherent in the exercise of the power to tax that the sovereign state be
free to select the subjects of taxation and to grant exemptions therefrom; unless
restricted by the Constitution, the legislative power to exempt is as broad as its power
to tax.
b. Local governments unlike a sovereign state, they are clothed with no inherent
power to tax. Hence, they have also no inherent power to exempt from taxation. But
the moment the power to impose particular tax is granted, they have also the power
to grant exemption therefrom unless forbidden by some provision of the Constitution
or law; the legislature may delegate its power to exempt from taxation to the same
extent that it may itself exercise the power to exempt.
4.
Rationale of tax exemption

a. Principle of public policy that can support a presumption that the public interest will
be subserved by the exemption allowed; rests upon the theory that such exemption
will benefit the body of the people, and not upon any idea of lessening the burden of
the individual owners of property.
b. Its avowed purpose is some public benefit or interest, which the lawmaking body
considers sufficient to offset the monetary loss entailed in the grant of exemption.
Thus, where the exemption serves the public, and not a private interest, it cannot be
regarded as a gift or donation of public funds to, or in aid of, the individual,
association, or corporation in whose favor the exemption is declared.
5.
Grounds for tax exemption
a. Contract where the public is represented by the government, and suppose to
receive a full equivalent therefor. Ordinarily, the provisions of a contract of exemption
from taxation are contained in the charter of the corporation to which the exemption
is granted.
b. Public policy for example, to encourage new and necessary industries, or foster
charitable and other benevolent institutions; or such as, at least makes the public at
large interested in encouraging or favoring the class or interest in whose behalf the
exemption is made. In this case, the government need not receive any consideration
in return for the tax exemption.
c. Reciprocity may be created by treaty to lessen the rigors of international double
or multiple taxation which occurs where there are many taxing jurisdictions, as in the
taxation of income and intangible personal property.
6.
Kinds of tax exemption
a. As to manner of creation
1. Express or affirmative exemption when certain persons, property, or
transactions are, by express provision, exempted from all or certain taxes, either
entirely or in part; may be made by provisions of the Constitution, statutes, treaties,
ordinances, franchises, or contracts; and
2. Implied exemption or exemption by omission occurs when a tax is levied
on certain classes of persons, properties, or transactions without mentioning the
other classes. Every tax statute, in a very real sense, makes exemptions since all
those not mentioned are deemed exempted. The omission may be either accidental
or intentional.
Exemptions are not presumed, but when public property is involved, exemption is the
rule, and taxation, the exception.
b. As to scope or extent
1. Total exemption only direct taxes. when certain persons, property, or
transactions are exempted, expressly or impliedly, form all taxes; and
2. Partial exemption when certain persons, property, or transactions are
exempted expressly or impliedly, from certain taxes, wither entirely or in part. ,
certain tax only
c. As to object
1. Personal those granted directly in favor of such persons as are within the
contemplation of the law granting the exemption; and
2. Impersonal those granted directly in favor of a certain class of property.
There can be no simultaneous exemptions under two laws, where one grants partial
exemption while the other grants total exemption.
7.
Examples of tax exemptions
a. As provided for in the Constitution
1.
From property tax charitable institutions, churches and personages
or convents appurtenant thereto, mosques, and non-profit cemeteries, and all lands,
buildings, and improvements actually, directly, and exclusively used for religious,
charitable, or educational purposes (Art, 6, Sec. 28[31]); and
2.
From taxes and duties all revenues and assets of non-stock, nonprofit educational institutions used actually, directly, and exclusively for educational
purposes, and, subject to conditions prescribed by law, all grants, endowments,
donations, or contributions used actually, directly, and exclusively for educational
purposes. (Art.14, Sec. 4[3,4])
b. As provided for the tax code (see p. 77, De Leon)
1. From income tax (tax on net or gross income realized during a certain period)
2. From estate tax (tax on the privilege of a deceased person to transmit his
property to his heirs or beneficiaries)

3. From donors tax (tax on the privilege of an owner to transfer his property
without consideration)
c. As provided for under special laws
1.
From income tax
2.
From donors tax
3.
From estate tax
4.
From real property tax
8.
Construction of tax exemption statutes
a. General rule: exemptions are not favored and construed strictly (strictissimi juris =
by the most strict right or law) against the taxpayer; cannot be permitted to exist
upon vague implication or inference. 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.
b. Exceptions:
1. when the law itself expressly provides for a liberal construction, that is, in case of
doubt, it shall be resolved in favor of exemption; and
2. when the exemption is in favor of the government itself or its agencies, or of
religious, charitable, and educational institutions because the general rule is that
they are exempt from tax.
If there is an express mention or if the taxpayer falls within the purview of the
exemption by clear legislative intent, the rule on strict construction does not apply.
9.
Tax amnesty, defined
A general pardon or intentional overlooking by the State of its authority to impose
penalties on persons otherwise guilty of tax evasion or violation of a revenue or tax
law; partakes of an absolute forgiveness or waiver 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 a
clean slate; not favored nor presumed in law; if granted by statute, terms of the
amnesty must be construed strictly against the taxpayer and liberally in favor of the
government.
10. Tax remission or tax condonation, defined
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 the exclusion of taxes already collected does not constitute 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 taxpayers belonging to one class were not
treated alike. [Juan Luna Subd. v. Sarmiento, 91 Phil 370]; The condition of a tax
liability is equivalent to and is in the nature of a tax exemption. Thus, it should be
sustained only when expressly provided in the law. [Surigao Consolidated Mining v.
Commissioner of Internal Revenue, 9 SCRA 728]
There is a tax condonation or remission when the State desists or refrains from
exacting, inflicting or enforcing something as well as to reduce what has already been
taken. The condonation of a tax liability is equivalent to and is in the nature of a tax
exemption. Thus, it should be sustained only when expressed in the law.
U.
Nature, construction, application of tax laws
1.
Nature of internal revenue law
a. Not political in nature Internal revenue laws are not political in nature. They are
deemed to be laws of the occupied territory and not of the occupying enemy. Thus,
our tax laws continued in force during the Japanese occupation. (Hilado v. Collector,
100 Phil. 288); It is well known that our internal revenue laws are not political in
nature and, as such, continued in force during the period of enemy occupation and in
effect were actually enforced by the occupation government. Income tax returns that
were filed during that 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.
b. Civil not penal in nature Tax laws are civil and not penal in nature, although
there are penalties provided for their violation. 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. (Republic v. Oasan, 99 Phil 934); The
war profits tax is not subject to the prohibition on ex post facto laws as the latter
applies only to criminal or penal matters. Tax laws are civil in nature.

2.
Construction of tax laws
a. Rule when legislative intent is clear: Tax statutes are to receive a reasonable
construction with a view to carrying out their purpose and intent.They should not be
construed as to permit the taxpayer easily to evade the payment of taxes.
b. Rule when there is doubt: No person or property is subject to taxation unless within
the terms or plain import of a taxing statute. In every case of doubt, tax statutes are
construed strictly against the government and liberally in favor of the taxpayer.
Taxes,being burdens, are not to be presumed beyond what the statute expressly and
clearly declares.
c. Where language is plain: the words employed are to be given their ordinary
meaning
d. Provisions granting tax exemptions: Such provisions are construed strictly against
the taxpayer claiming tax exemption.
3.
Application of tax laws
a. General rule: Tax laws are prospective in operation because the nature and amount
to the tax could not be foreseen and understood by the taxpayer at the time the
transactions which the law seeks to tax was completed
b. Exception: While it is not favored, a statute may nevertheless operate retroactively
provided it is expressly declared or is clearly the legislative intent. But a tax law
should not be given retroactive application when it would be harsh and oppressive.
4.
Mandatory and directory provisions of tax laws
a. Directory provisions are those designed merely for the information or direction
of office or to secure methodical and systematic modes of proceedings.
b. Mandatory provisions are those intended for the security of the citizens or
which are designed to ensure equality of taxation or certainty as to the nature and
amount of each persons tax.
The omission to follow mandatory provisions renders invalid the act or proceeding to
which it relates while the omission to follow directory provisions does not involve
such consequence. (Roxas v. Raferty, 37 Phil 958)
5.
Authority of the Secretary of Finance to promulgate rules and regulations
Sec. 244, NIRC the Sec. of Finance, upon recommendation of the Commissioner of
Internal Revenue, shall promulgate all needed rules and regulations for the effective
enforcement of the provisions of the Tax Code.
Revenue Regulations pronouncement by the DoF; define rules for the effective
enforcement of the Tax Code and related statutes.
BIR rulings state the official position of the BIR to queries raised by a taxpayer or on
certain specific issues of law or administration in relation to the provisions of the Tax
Code, relevant laws and other issuances of the BIR, clarifying or interpreting them.
The power to recommend the promulgation of internal revenue rules and regulations
by the Sec. of Finance is given only to the Commissioner. He is not allowed by law to
delegate such power to any of his subordinates.
6.
Nature of power to make regulations
Not the power to legislate, but only to be exercised for the purpose of implementing
the law or putting it into effect; statutes being administered may not be altered or
added to by the exercise of a power to make regulations therunder. Such regulations
cannot increase or decrease the requirements of the law, nor embrace matters not
covered or intended to be covered by the statute, otherwise, they are invalid for being
in conflict with the law.
7.
Necessity and function of regulations
Regulations are deemed necessary to the proper enforcement and execution of laws;
they are intended to clarify or explain the law and carry into effect its general
provisions by providing the details of administration and procedure; through rules and
regulations, an administrative body, like the BIR, may implement broad policies laid
down in a statute it is entrusted to enforce, by filling in the details which the
legislature, may neither have the time nor expertise to provide.
8.
Requisites for validity and effectivity of regulations
a. Requisites:
1.
not contrary to law and the Constitution; and
2.
published in the Official Gazette
b. Effectivity - Fifteen (15) days from the date of filing of three (3) certified copies in
the UP Law Center, unless a different date is fixed by law, or specified in the rule in

cases of eminent danger to public health, safety and welfare, the existence of which
must be expressed in a statement accompanying the rule.
9.
Force and effect of regulations
Regulations established and found to be in consonance with the general purposes and
objects of the law have the force and effect of law. Its as if it has been written in the
law itself. In case of conflict with the law, rules and regulations are null and void. They
are invalidated only when the conflict is clear and unequivocal.
10. Administrative rulings and opinions
The power to interpret the provisions of the Tax Code and other tax laws is under the
exclusive and original jurisdiction of the Commissioner of Internal Revenue subject to
review by the Sec. of Finance. Rulings in the form of opinion on tax questions are also
given by the Sec. of Justice who is the chief legal officer of the government. These
rulings or opinions take on the character of substantive rules and are generally binding
and effective if not otherwise contrary to law and the Constitution.
11. Administrative interpretation and the courts
Administrative interpretations by executive officers are entitled to great respect but not
conclusive and will be ignored if judicially found to be erroneous.
12. Power of the Sec. of Finance to revoke the rulings of his predecessors
The Sec. of Finance has the power to revoke, repeal or abrogate the acts or previous
rulings of his predecessors in office if the former becomes satisfied that a different
construction should be given.
13. Non-retroactivity of repeal regulations or rulings, and its exceptions
No retroactivity if the repeal, revocation, modification or reversal of regulations or
rulings is prejudicial to the taxpayer.
Exception:
a.
Where the taxpayer deliberately misstates or omits material facts from
his return or in 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; and
c.
Where the taxpayer acted in bad faith.
14. Decisions of the Supreme Court and Court of Tax Appeals
Decisions of the SC applying and interpreting tax laws have the force and effect of
laws. They are what the law means. Decisions of the CTA are the same as that of the
SC but subject to review by latter by way of certiorari.
V.
Sources of tax laws
1.
Constitution
2.
Legislations/statutes (RA,PD, EO on taxation & tax ordinances)
3.
Administrative rules and regulations, rulings or opinions of tax officials
(Commissioner of Internal Revenue & Sec. of Justice)
4.
Judicial decisions
5.
Tax treaties or agreements have the force and effect as statutes; entered into for
the avoidance of double taxation.