TAX 1

PURPOSE

AMOUNT OF
EXACTION

TAXATION
For
revenue
raising
No limits

POLICE POWER
Promote
public
welfare
through
regulation
Limited to cost of
regulation,
issuance
of

Page

A. Definition and concept of taxation

a. Definition
i. Taxation is a mode revenue raising for
public purpose
b. Concepts of taxation
i. Power to tax
ii. The act or process by which the taxing
power is exercised
B. Nature of taxation
a. Inherent power an attribute of sovereignty,
belonging as a matter of right to every
independent
government
without
being
expressly granted by the people.
b. Legislative power-generally vested to the
legislature.
C. Characteristics of taxation
a. Forced charge, imposition or contribution
b. Assessed in accordance to the taxpayers
ability to pay
c. Pecuniary burden payable in money, but
backpay certificates may be used in payment
d. Imposed by the state on persons, property, or
exercises its jurisdiction , in accordance with
the principle of territoriality (territorial)
e. Levied by the legislative body
f. Levied for public purpose
g. It is personal to the taxpayer
D. Power of taxation compared with other powers

Pinedapcg,rn,man 2015
BENEFITS

SUPERIORITY
OF CONTRACTS

TRANSFER OF
PROPERTY
RIGHTS

No direct benefits
is received by the
taxpayer
other
than
that
the
government
secures to the
citizen
that
general
benefit
resulting
from
protection of his
person
and
property
and
welfare of all
Recognizes
the
obligations
imposed
by
contracts
Paid to form part
of public funds

TAXATION
PURPOSE
COMPENSATION

PERSONS

Raised for public

revenue
Payment of taxes
accrues to the
general benefit of
the citizens
All

persons,

license,
or
surveillance
No direct benefit
are
received
through
the
exercise of PP, yet
a
healthy
economic
standard
of
society
is
maintained

Does not apply to

PP

Allows merely the

restraint on the
exercise
of
property rights
EMINENT
DOMAIN
Taking of property
for public use
Compensation is
given
to
the
owner
of
the
expropriated
property
Particular

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TAX 1

property and end property

is
exercise
which comprehended
are
subject
thereto
E. Purpose of taxation
a. Revenue raising-primary purpose is to raise
funds or property to enable the state to
promote the general welfare and protection of
its citizen
b. Non-revenue/special or regulatory (Secondary)
i. Reduction of social inequity through
progressive system of taxation
ii. Encourage growth of Local Industries
through incentives or tax exemptions to
encourage investment in our local
industry thereby promoting economic
growth.
iii. Protect our Local industry against unfair
competition
through
imposition
of
certain taxes upon imported goods or
articles to further protect our local
industries
iv. As an implement of police power
(Regulatory Measure)
F. Principles of a sound tax system
a. Principle
of
fiscal
adequacy-sources
of
revenues must be adequate to meet
government expenditures and their variations.
b. Principle of administrative feasibility-requires
that tax law must be capable of convenient,
just and effective administration. Taxes should
be capable of being effectively enforced.
c. Principle of equality or theoretical justice-tax
imposed must be proportionate to taxpayers
ability to pay.

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AFFECTED

Pinedapcg,rn,man 2015
G. Theory and basis of taxation
The power to tax is an attribute of sovereignty
emanating from necessity. It is a necessary burden to
preserve the States sovereignty.
Taxation is a symbiotic relationship whereby in
exchange of the benefits and protection that the citizens
get from the government, taxes are paid.
a. Lifeblood theory-taxes are the lifeblood of the
Government. Without taxes, the government
cannot fulfill its mandate of promoting the
general welfare and wellbeing of the people.
b. Necessity
theory-the
existence
of
a
government is a necessity. It has the right to
compel all citizens and property within its limits
to pay taxes.
c. Benefits-protection
theory
(symbiotic
relationship)-Taxes are what we pay for a
civilized
society.
Without
taxes,
the
government will be paralyzed for lack of motive
power to activate and operate it.
Hence
despite the natural reluctance to surrender part
of their hard earned income to the
government, every person who is able to must
contribute his share in the running of the
government. The government in return, 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. This symbiotic
relationship is the rationale of taxation and
should dispel the erroneous notion that it is an
arbitrary method of exaction by those in the

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Page

seat of power. (Commissioner of Internal

Revenue vs Algue, 158 SCRA 9).
d. Jurisdiction over subjects and objects-the State
may impose on persons, property, or exercises
its jurisdiction , in accordance with the principle
of territoriality (territorial)
H. Doctrines of taxation
a. Prospectivity of tax laws-general rule under the
Civil Code that laws shall have prospective
application applies to tax laws. Retroactive
application of the revenue law may be allowed
id it will not amount to denial of due process.
There is violation of due process when the tax
law imposes harsh and oppressive tax.
b. Imprescribility-as
a
rule,
taxes
are
imprescriptible as they are the lifeblood of the
government. However tax statutes may
provide for statute of limitation.
i. NIRC (3 years), Tariff and Custom Code
(impliedly) (3 years see sec 4 RA 9135),
LGC (5 years from the date they became
due. 10 {years from discovery of fraud}
in case of fraud and intent to evade
payment of charges) provides for
prescriptive periods for both assessment
and collection of taxes.

Pinedapcg,rn,man 2015

*Although NIRC provides for prescriptive period it is

applicable only to those taxes that were returnable. The
prescriptive period shall start from the time the taxpayer
files the tax return and declares his liability
c. Double Taxation-Taxing the same subject or
object within the same taxable period or taxing
the same subject or object twice by the same

taxing power within the same taxable period

for the same purpose.
i. Strict
Sense
(Direct
duplicate
taxation/Obnoxious)-the
objectionable
kind or double taxation in its prohibited
sense, since it violates the equal
protection clause of the Constitution.
Elements are the following
1. The same property or subject
matter is taxed twice when it
should only be taxed only once.
2. Both taxes are levied for the
same purpose.
3. Imposed by the same taxing
authority;
a. Within
the
same
jurisdiction
b. During the same taxing
period
c. Covering the same kind or
character of tax
ii. Broad
sense
(Indirect
Duplicate
Taxation)-the permissible kind of double
taxation. This arises in the absence of
one or more of the above-mentioned
elements of direct double taxation
iii. Constitutionality of double taxation-is
not
expressly
forbidden
in
our
Constitution,
but
the
Court
has
recognized it as obnoxious where the
taxpayer is taxed twice for the benefit of
the same governmental entity or by the
same jurisdiction or for the same
purpose. However DT will not be

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TAX 1

Page

allowed if it results to violation of equal

protection clause.
iv. Modes of eliminating double taxation
(CD-RET)
1. Tax Credit-an amount subtracted
from the individual or entitys tax
liability to arrive at a total tax
liability
2. Tax Deductions-an amount of tax
is written off or treated from an
individuals or entitys GROSS
INCOME
on
which
resulting
amount the tax liability is
calculated.
3. Reduction
of
the
Philippine
income tax rate-an example is
the Tax Sparring Rule wherein
the dividend earned by a nonresident foreign corporation w/in
the Philippines is reduced by
imposing a lower rate of 15%.
4. Tax
Exemptions-grant
of
immunity to particular persons or
corporations from the obligation
to pay taxes.
5. Tax Treaties-agreement between
two countries specifically what
items of income will be taxed by
the authorities of the country
where the income is earned.
I. Escape from taxation
a. Shifting of tax burden-it is the transfer of the
burden by the original payer or the one on
whom the tax was assessed (impact of
taxation/statutory taxpayer) or imposed to

Pinedapcg,rn,man 2015
another or someone else (incidence of
taxation)
i. Ways of shifting tax burden;
1. Forward shifting-when the burden
of tax is transferred from a factor
of production through the factors
of distribution until it finally
settles down on the ultimate
purchaser or consumer.
2. Backward
shifting-when
the
burden
is
transferred
from
consumer through the factors of
distribution to the factors of
production.
3. Onward shifting-when the tax is
shifted 2 or more times either
forward or backward.
ii. Taxes that can be shifted-only indirect
taxes may be shifted. Indirect taxes are
those that are demanded in the first
instance from one person in the
expectation or intention that he can shift
the burden to someone else, not as tax
but as a part of the purchase price.
(e.g. VAT, excise tax, other percentage
tax, documentary stamp.) The liability
for the payment of the tax remains with
the taxpayer but the burden thereof is
shifted or passed on the purchaser.
iii. Meaning of Impact and incidence of
taxation
1. Impact of taxation-is the point on
which tax is originally imposed or
the one whom the tax is formally
assessed.

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Pinedapcg,rn,man 2015
iii. A course of action which is unlawful.
(CIR vs Estate of Benigno Toda Jr. Gr No.
147188, September 14, 2004).

2. Incidence of taxation-is the point

which the tax burden finally rest
or settles.
b. Tax avoidance-Also called tax minimization, it is
the exploitation by the taxpayer of legality
permissible alternative tax rates or methods of
assessing taxable property or income, in order
to avoid or reduce tax liability. It is a tax saving
device within the means sanctioned by law and
should be used by the taxpayer in good faith
and at arms length. (CIR vs Estate of Benigno
Toda Jr. Gr No. 147188, September 14, 2004).
c. Tax evasion-it is an illegal means of escaping
taxation. It connotes fraud through the use of
pretenses and forbidden devices to lessen or
defeat taxes. (Yutivo Sons Hardware vs CTA, Gr
No. L-13203, January 28, 1961). Hence, it
subjects the taxpayer to further or additional
civil or criminal liabilities. Tax evasion is
sometimes referred to as tax dodging.

Page

TAX 1

TAX AVOIDANCE
Legal and not subject to
criminal penalty
Minimization of taxes
Lessening of tax liabilities
through maximization of
deductions, exclusions, and
exemptions,
and
minimization of income by
legal means. Should be
used by tax payers in good
faith and at arms length

ELEMENTS OF TAXATION
Tax evasion connotes the integration of three
factors (ESC)
i. End to be achieved, i.e. payment of less
than that known by the taxpayer to be
legally due, or paying no tax when it is
shown that the tax is due.
ii. An accompanying state of mind which is
described as being evil, in bad faith,
willful or deliberate and not coincidental

J.

TAX EVASION
Illegal
and
subject
to
criminal penalty
Absence of tax payment
Scheme used outside of
those lawful means when
availed of to lessen or to
get way of his tax liabilities

Exemption from taxation

a. Meaning of exemption from taxation-a grant of
Immunity , express or implied (or contractual),
to particular persons or corporations or to
persons and corporations of particular class
from tax which persons or corporations
generally within the same state or taxing
district are obliged to pay. It is freedom from a
charge or burden to which others are subject
(Greenfield vs Meer, 77 Phil. 394).
b. Nature
of
taxation-laws
granting
tax
exemption are construed in strictissimi juris
against the taxpayer and liberally in favor of
the taxing power. Taxation is the rule and
exemption is the exception. The law does not
look with favor on tax exemptions and that he
would seek to be thus privileged must justify it

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by words to plain to be mistaken and too

categorical to be misinterpreted (Sealand
Service v CA, GR No. 57828, June 14,1993)
c. Kinds of tax exemption
i. Express-when exemptions are expressly
granted by the Constitution, statutes,
treaties, franchises or similar legislative
acts
ii. Implied-whenever particular persons,
properties or excises are deemed
exempt as they fall outside the scope of
the taxing provision itself
iii. Contractual-exemptions in consideration
of a contractual agreement with the
government.

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TAX 1

Note: Contractual tax exemptions must not be confused with

the tax exemptions granted under franchises which are not
contracts within the purview of the non-impairment clause of
the Constitution. A franchise is a special privilege conferred
by the governmental authority, acting as such on an
undertaking that is within the scope of governmental
functions. Contractual tax exemptions covering matters that
are not essentially governmental in nature, such as those
contained in the government bonds and debentures, unlike
in franchises, may not be revoked without impairing
obligations of contracts.(Vitug and Acosta, Tax Law and
Jurisprudence2006 ed p35).
d. Rationale/grounds for exemption-the inherent
power of the state to impose taxes naturally
carries within it the power to grant exemptions.
The power to exempt from taxation as well as
the power to tax, is an essential attribute of
sovereignty and may be exercised in the

K.

Constitution expressly or by implication

prohibits action by the legislature on the
subject. It may arise through valuable
consideration;
the
government
cannot
unilaterally revoke the tax exemption.
e. Revocation of tax exemption- a grant of an
exemption is an act of liberality which could be
taken back by the environment. Because
taxation is the rule and exception, the
exemption may thus be withdrawn at the
pleasure of the taxing authority (Mactan Cebu
International Airport Authority vs Marcos, et al
GR No 120082, September 11, 1996). However
if the tax exemption constitutes a binding
contract and for valuable consideration, the
government cannot unilaterally revoke the tax
exemption.
Compensation and set-of

Compensation or set-off takes place when two

persons, in their own right, are creditors and debtors of
each other (Art 1278 New Civil Code)
The doctrine presupposes mutual obligation
between the parties. In taxation, the concept of set-off
arises where a taxpayer is liable to pay tax but the
government for one reason or another, is indebted
to the said taxpayer.
GENERAL RULE: No set-off is admissible against the
demands for taxes levied for general or local government
purposes since tax liability is legal, not contractual,
obligation. Taxes are not in the nature of contracts
between the parties but grow of duty to and are positive
acts of the government to the making and enforcing of

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L.

Compromise

d. Local Government Code-no provisions regarding

compromise, however tax (not criminal) liability is
not prohibited from being compromised (Arts 2034
and 2035, NCC)
M. Tax Amnesty

Page

which, the personal consent of the individual tax payer is

not required (RP vs Mambulao, Gr No L-17725.

Compromise is an agreement between two or more

persons who, to avoid lawsuit, amicably settle their
differences on such terms as they can agree on. A
compromise by its very nature implies mutual agreement
by the parties in regard to the thing or subject matter
which is to be compromised.
Compromises are allowed and enforceable when the
subject matter thereof is not prohibited from being
compromised and the person entering into it is duly
authorized to do so (Vitug and Acosta, Tax Law and
Jurisprudence, 2006 ed,p.48).

Tax amnesty is the general or intentional overlooking

of the State of its authority to impose penalties on
persons otherwise guilty of evasion or violation of a
revenue or tax law. It is a general pardon to taxpayers
without having to go through the tedious process of a tax
case. It only applies to past tax periods, hence of
retroactive application
TAX AMNESTY

TAX EXEMPTION

IMMUNITY

Both criminal and

civil

Civil only

PERSON
AFFECTED

Pardon given
all tax payers

An immunity or
privilege,
a
freedom
from
charge or burden
of which others
are subjected

APPLICATION

Retrospective

Persons allowed to enter into compromise?

The following are allowed to enter into compromise in behalf
of the government
a. Commissioner of Internal Revenue-may enter,
under certain conditions into a compromise for
both the civil and criminal
b. Collector of Customs-with respect to customs
duties limited to cases were legitimate authority is
specifically granted, such as in the remission of
duties (Sec 709 TCC)
c. Customs Commissioner-subject to the approval of
the Secretary of Finance, on cases involving the
imposition of fines, surcharges or forfeitures (Sec
2316, TCC)

to

Prospective

ACTUAL
REVENUE LOSS
N. Construction and interpretation of:
a. Tax laws
i. General rule: Laws are construed
strictly against the government and

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liberally in favor of the taxpayer. (Manila

Railroad Co. vs Coll. Of Customs, 52
Phil. 950, 1929)
ii. No person or property is subject to
taxation unless within the terms or plain
import
of
a
taxing
statute.
(Commissioner or Internal Revenue vs
CA, 204 SCRA 182, 189, 1991)
iii. Taxes being burdens, they are not to be
presumed beyond what the statute
expressly and clearly declares. (Coll vs
La Tondena, 5 SCRA 665, 1962) Thus, a
tax payable by individuals does not
apply to corporations
iv. Tax statutes offering rewards are
liberally construed in favor of informers.
(Penid vs Virata121 SCRA 166, 1983)
1. Exceptions:
The
strict
construction is not applicable
where the language of the statute
is plain and there is no doubt as
to the legislative intent.
2. The rule does not apply where
the taxpayer claims exemption
from the tax
b. Tax exemption and exclusion
i. General rule: Tax exemption and
exclusion are regarded as derogation of
sovereign authority and to be construed
strictissimi juris against the person or
entity claiming the exemption.
1. Tax exemptions must be shown to
exist clearly and categorically
and supported by clear legal
provisions (NPC vs Albay)

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TAX 1

2. Claims for exemption must be

able to point out some provision
of law creating the right and
cannot be allowed to exist upon a
mere
vague
implication
of
inference. (Floro Cement vs
Gorospe)
3. Refunds are in the nature of
exemption
and
must
be
construed
against
the
grantee/taxpayer.(CIRvsCA)
4. 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.
(Comm. Vs Keiner Co. Ltd.
65SCRA 142,1975)
ii. Exemption:
1. When
the
statute
granting
exemption provides for liberal
construction thereof;
2. In case of special taxes relating to
special cases affecting only
special classes of persons;
3. If exemption refer to public
property;
4. In cases of exemptions granted to
traditional exemptees, such as
religious,
charitable
and
educational institutions;

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5. In cases of exemptions in favor of

the government, its political
subdivisions or instrumentalities;
or
6. If the taxpayer falls within the
purview of exemption by clear
legislative intent.
c. Tax rules and regulations
i. General rule: construed strictly against
the government and liberally in favor of
the taxpayer.
d. Penal provisions of tax laws
i. General
rule:
Must
be
strictly
construed. It is not legitimate to stretch
the language of a rule, however
beneficent its intention, beyond the fair
and ordinary meaning of its language.
ii. Construed strictly against the state and
in favor of the accused.
e. Non-retroactive application to taxpayers
i. General rule: Tax laws are prospective
in operation. The reason is that the
nature and amount of tax could not be
foreseen and understood by the
taxpayer at the time the transaction
which the law seeks to tax was
completed
ii. Exemption: Tax laws may be applied
retroactively provided it is expressly
declared or clearly the legislative intent
(Lorenzo vs Posadas, 64 Phil 353, 1937)
iii. Exception to the exemption: A law
should
not
be
given
retroactive
application when it would be so harsh
and oppressive for in such case, the

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TAX 1

constitutional limitation of due process

would
be
violated.
(Republic
vs
Fernandez,1956)
O. Scope and limitation of taxation
a. Inherent limitations (SPINE)
o Situs or territoriality
o Public Purpose
o International Comity
o Non-delegability of the taxing power
o Exemption of the government
i. Public purpose: Jurisprudence states
that public purpose should be given a
broad interpretation. It does not only
pertain to those purposes which are
traditionally
viewed
as
essentially
government functions, such as building
roads and delivery of basic services, but
also includes purposes designed to
promote
social
justice.
(Planters
Products Inc vs Fertiphil Corporation, GR
no. 166006, March 14, 2008)
1. Test in Determining Public
Purpose
a. Duty test Whether the
thing to be furthered by
the appropriation of public
revenue
is
something
which is the duty of the
State ass a government to
provide.
b. Promotion of General
Welfare Test Whether
the proceeds of the tax will
directly
promote
the

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welfare of the community

in equal measure.
c. Character of the Direct
Object
of
the
Expenditure

It
is
essential character of the
direct
objet
of
the
expenditure which must
determine its validity as
justifying a tax and not
the magnitude of interests
to be affected nor the
degree
to
which
the
general advantage of the
community, and thus the
public welfare, may be
ultimately benefited by
their promotion. Incidental
advantage to the public or
to the State, which results
from the promotion of
private
enterprise
or
business, does not justify
their
aid
with
public
money. (Pascual vs Sec. of
Public /Works, GR no. L10405,
December
29,
1960)
ii. Inherently Legislative
1. General Rule: The power to tax
is exclusively vested in the
legislative body.
2. Exception:
a. Delegation
to
Local
Governments

The

10

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Constitution grants each

LGU the power to create
its own sources of revenue
and to levy taxes, fees and
charges which shall accrue
exclusively to the LGU
(Sec 133, LGC)
b. Delegation
to
the
President Delegation of
(TEE)
i. Tarif powers by
Congress
under
the Flexible Tarif
Clause (Sec 28 (2),
Art
VI,
1987
Constitution)
ii. Emergency
powers (Sec 23(2),
ibid) and
iii. Enter
into
Executive
agreements
and
to ratify treaties
which may contain
tax
exemption
provisions
subject
to the concurrence
by the Senate in the
ratification made by
the President.
c. Delegation
to
Administrative
Agencies Also known as
the power of subordinate

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legislation subject to the

following test:
i. Completeness
Test The law must
be complete in its
essential terms and
conditions when it
leaves
the
legislature so that
there will be thing
left for the delegate
to
do
when
it
reaches him EXCEPT
to enforce it (Cruz,
Political Law, 2002
ed. P103)
ii. Sufficient
Standard Test
the law must offer
the
sufficient
standard to specify
the limits of the
delegates authority,
announce
legislative
policy,
and
specify
conditions
under
which it is to be
implemented (Cruz,
Political Law, 2002
ed. Pp 36-37)

11

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iii. Territorial
1. Situs of taxation is the place
or authority that has the right to

impose and collect taxes (CIR vs

Marubeni Corp, GR no. 137377,
December 18, 2007)
a. Factors that Determine
Situs
i. Nature of the tax
ii. Subject matter of
the tax (person,
property,
act
or
activity)
iii. Possible protection
and benefit that
may accrue both to
the government and
the taxpayer
iv. Citizenship of the
tax payer
v. Sources of income
2. Situs of income tax
a. From sources within the
Philippines all kinds of
taxpayers are subject to
income tax on income
derived
from
sources
within
the
Philippines.
Income is derived from the
Philippines if it is derived
from activity within the
Philippines
b. From sources without
the Philippines only
Resident
Citizens
and
domestic corporation are
liable to income tax on
income
derived
from

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sources
without
the
Philippines
c. Party within and party
without the Philippines

taxable
income
attributable to the sources
within the Philippines may
be determined by process
or formula of general
apportionment prescribed
by
the
Secretary
of
Finance Gains, profits, and
income from the sale of
personal
property

12

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produced (in whole or in

part) by the taxpayer
within and sold without the
Philippines, or produced (in
whole/in part) by the
taxpayer without and sold
within the Philippines, shall
be treated as derived
partly from sources within
and partly from sources
without the Philippines.

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