Taxation 1 REVIEWER (Lambda Notes)

Lambda Rho Beta and Lambda Rho Sigma
Notes in TAXATION 1
April Rose Maliwanag, Jandaryll Iringan,
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Lance Bryan Tan, Angelique Ashley Martin
ARELLANO UNIVERSITY SCHOOL OF LAW

TAXATION I
ATTY. ESTHER IBANEZ
Part 1 – General Principles of Taxation
A. Concept, Underlying Basis, and Purpose
1. Taxation Defined
 Taxation is the act of levying the tax, i.e., the process or means by which the sovereign,
through its law-making body, raises income to defray the necessary expenses of the
government. It is merely a way of apportioning the cost if the government among
those who in some measures are privileged to enjoy its benefits and, therefore, must
bear its burdens. (71 Am Jur. 2nd 342)
2. Theory and Basis of Taxation
a. Lifeblood Theory
 The power of taxation is essential because the government can neither exist nor endure
without taxation. Taxes are the lifeblood of the government and their prompt and
certain availability is an imperious need.
b. Necessity Theory
 Taxation, is a power predicated upon necessity. It is a necessary burden to preserve the
State’s sovereignty and a means to give the citizenry an army to resist aggression, a navy
to defend its shores from invasion, a corps of civil servants to serve, public
improvements for the enjoyment of the citizenry, and those which come within the
State’s territory and facilities and protection which a government is supposed to
provide.
c. Benefits-Protection Theory
 Bases the power of the Sate to demand and receive taxes on the reciprocal duties of support
and protection. The citizen supports the State by paying the portion from is property that is
demanded in order that he may, by means thereof, be secured in the enjoyment of the
benefits of an organized society. Thus, the taxpayer cannot question the validity of the tax
law on the ground that payment of such tax will render him impoverished, or lessen his
financial or social standing, because the obligation to pay taxes is involuntary and
compulsory, in exchange for the protection and benefits one receives from the government.
3. Purpose of Taxation
a. Primary
 To raise or generate revenues and to mobilize resources
b. Secondary or Regulatory
 To regulate the conduct of businesses or professions
 To achieve economic and social stability
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 To protect local industries

c. Compensatory
 Reduce inequalities in wealth distribution
 Key instrument of social control
 Strengthens anemic enterprises
 Provides incentives
 Check inflation
 Tools on international bargains
 Promotes science and inventions
 Use as an implement in the exercise of police power to promote general welfare
4. Nature and Extent of Power to Tax

a. Scope
 It is supreme, comprehensive, unlimited, and plenary. It includes the power to
destroy.
b. Objects
 Businesses
 Interests
 Transactions
 Rights
 Acts
 Persons (natural or juridical)
 Properties (real or personal, tangible or intangible)
 Privileges
5. Essential Characteristics of Tax

a) It is imposed by the state which has jurisdiction over the person, property, or exercises
b) It is levied by the law-making (Legislative) body of the state.
c) It is an enforced contribution.
d) It is generally payable in money.
e) It is proportionate in character.
f) It is levied on persons, property, and excise.
g) It is levied for public purpose/s.
h) It is paid at regular periods or intervals.
i) It is personal to the taxpayer.
6. Elements of a Valid Tax

a) It must not violate the constitutional, inherent, and/or contractual limitations of the power
of taxation;
b) It must be uniform and equitable, not unjust, excessive, oppressive, confiscatory or
discriminatory;
c) It must be for a public purpose;
d) The power imposing it must have jurisdiction over the object of taxation;
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e) It must be proportionate in character;

f) Generally payable in money, at regular interval (not a regular payment); and
g) Levied by the legislature that has jurisdiction.
7. Phases of Taxation
a) Levy or Imposition
 It includes the selection of coverage, object, nature, extent and situs in taxation, its
purpose and prescribing the rules in general
b) Assessment or Collection
 Delegable via a valid statute
c) Payment of the Tax
 Response of the people to the revenue bill duly enacted by the legislative body of
the government in exercise of its power of taxation
8. Elements of the Tax System

a. Tax Structure
 Refers to the tax rates, tax base, tax subjects and other taxable events as they relate
to revenue productivity, tax progressivity, equity and the political, social and
economic goals of the government.
b. Tax Administration
 It is the system involving assessment, collection and enforcement of taxes, including
the execution of judgment in all tax cases decided by the courts in favor of the
government. It includes the organizational structure, personnel set-up, operational
procedures and financing of the tax implementation agency.
c. Public Tax Consciousness
 This is related to the level of voluntary and honest compliance of tax obligations by
the people.
9. Principles of a Sound Tax System
a. Fiscal Adequacy
 That the sources of revenues must be adequate to meet government expenditures,
and other public needs. This is in consonance with the doctrine that taxes are the
lifeblood of the Government.
b. Administrative Feasibility
 Tax laws must be capable of effective and efficient enforcement. They must not
obstruct business growth and economic development.
c. Theoretical Justice
 The tax burden should be in proportion to the taxpayer’s ability to pay (ability-to-
pay principle). This suggests taxation must be progressive conformably with the
constitutional mandate that Congress shall evolve a progressive system of taxation.
(Sec. 28[1], Art. VI, 1987 Constitution)
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 The rule of taxation must be uniform and equitable. (Sec. 28[1], Art. VI, 1987
Constitution). Taxation is said to be equitable when its burden falls on the better
able to pay; taxation is progressive when its rate goes up depending on the
resources of the person affected.
10. Definition of Taxation, Eminent Domain, and Police Power

a. Taxation
 It is the power to take property for the support of the government and for public
purpose.
b. Eminent Domain
 It is the power to take private property for public use upon payment of just
compensation.
c. Police Power
 It is the power to enact laws to promote the general welfare of the people. It is
wider in application because it is the general power to make laws.
11. Similarities between Taxation, Eminent Domain, and Police Power

a) All three are necessary attributes of sovereignty, resting upon necessity.
b) All are inherent powers of the government.
c) All are legislative in nature.
d) They are ways by which the state interferes with private rights and properties.
e) They exist independently of the Constitution although the condition for their exercise may
be prescribed or limited by the Constitution.
f) They all presuppose an equivalent compensation received by the persons affected by the
exercise of the power. Whether directly or indirectly, immediate or remote.
g) The exercise of these powers by the local government units may be limited by national
legislature.
12. Differences between Taxation, Eminent Domain, and Police Power
Power of Taxation Power of Police Power Power of Eminent

Domain
As to purpose revenue and support of Property is taken for Property is taken for
the government public use public use
As to persons affected Community of class Community of class Operates on the owner

individuals individuals of the property
As to the authority that government government Government or private

exercises the power individuals or
corporations
As to necessity of No delegation is There must be due There must be due

delegation necessary because it is delegation before local delegation before local
government may government or private
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inherent exercise it party may exercise it
As to the effect or Money paid as taxes There is no transfer of There is transfer of right
transfer of property becomes part of the title, at most there is to property whether it be
rights public funds restraint on the injurious ownership or lesser right.
use of the property.
As to benefits Presumption of receipt No direct and immediate The person affected

of benefits to every benefits received by the receives just
person person affected compensation for the
property taken from him
As to limitation The exercise in Limited to public interest Limited to public

constitutionally and and the requirement of purpose and just
inherently limited or due process compensation
restricted
As to amount of No limit Sufficient to cover cost of No imposition, the

imposition regulation owner is paid the FMV of
his property
As to importance Most important of the Most superior of the

three three
As to relationship to the It is inferior to the Non- Superior of the Non- Superior and may
Constitution impairment clause” of impairment clause” of override the Non-
the Constitution. The the Constitution. impairment clause”
power of taxation cannot because the welfare of
be exercised to impair the State is superior to
the “Obligations and any private contract.
Contracts” clause
CASES:
CIR vs Pineda 21 SCRA 105
 Taxes are the lifeblood of government and their prompt and certain availability is an imperious
need.
CIR vs Algue 158 SCRA 9
 Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be achieved.
Municipality of Makati vs CA 190 SCRA 206

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 Municipal revenues derived from taxes, licenses and market fees, and which are intended
primarily and exclusively for the purpose of financing the governmental activities and functions
of the municipality, are exempt from execution.
Sison vs Ancheta 130 SCRA 654
 The power to tax moreover, to borrow from Justice Malcolm, “is an attribute of sovereignty. It is
the strongest of all the powers of government.” It is, of course, to be admitted that for all its
plenitude, the power to tax is not unconfined. There are restrictions. The Constitution sets forth
such limits. Adversely affecting as it does property rights, both the due process and equal
protection clauses may properly be invoked, as petitioner does, to invalidate in appropriate
cases a revenue measure. If it were otherwise, there would be truth to the 1803 dictum of Chief
Justice Marshall that “the power to tax involves the power to destroy.” In a separate opinion in
Graves v. New York, Justice Frankfurter, after referring to it as an “unfortunate remark,”
characterized it as “a flourish of rhetoric [attributable to] the intellectual fashion of the times
[allowing] a free use of absolutes.” This is merely to emphasize that it is not and there cannot be
such a constitutional mandate. Justice Frankfurter could rightfully conclude: “The web of
unreality spun from Marshall’s famous dictum was brushed away by one stroke of Mr. Justice
Holmes’s pen: ‘The power to tax is not the power to destroy while this Court sits.’ ” So it is in the
Philippines.
B. Principles of a Sound Tax System
Sec 28, Art. VI, Philippine Constitution
(1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation.
(2) The Congress may, by law, authorize the President to fix within specified limits, and subject
to such limitations and restrictions as it may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts within the framework of the
national development program of the Government.
(3) Charitable institutions, churches and parsonages or convents appurtenant thereto,
mosques, non- profit cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes shall be
exempt from taxation.
(4) No law granting any tax exemption shall be passed without the concurrence of a majority of
all the Members of the Congress.
C. Scope and Limitation of Taxation

1. Inherent Limitations
a. Taxation is territorial in character.

b. Taxation is inherently legislative in character.
c. Taxation is subject to international comity.
d. Taxation is for a public purpose.
e. Tax exemption of the government.
f. Non-delegation of the power of taxation.
CASES:
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Pascual vs Secretary of Public Works 110 Phil 331

 It is a general rule that the legislature is without power to appropriate public revenues
for anything but a public purpose. It is the essential character of the direct object of the
expenditure which must determine its validity as justifying a tax and not the magnitude
of the 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 interests, and the prosperity of private enterprises or business,
does not justify their aid by the use of public money. Generally, under the express or
implied provisions of the constitution, public funds may be used only for a public
purpose. The right of the legislature to appropriate public funds is correlative with its
right to tax, and, under constitutional provisions against taxation except for public
purposes and prohibiting the collection of a tax for one purpose and the devotion
thereof to another purpose, no appropriation of state funds can be made for other than
a public purpose.
Lutz vs Araneta 98 Phil 148

 It is inherent in the power to tax that a state be free to select the subjects of taxation,
and it has been repeatedly held that “inequalities which result from a singling out of one
particular class for taxation or exemption infringe the constitutional limitation.
City of Baguio vs De la Rosa 97 Phil 994

 The City of Baguio has the power to enact an ordinance levying a tax on any business
undertaken within the city such as theaters or theatrical performance for purposes of
revenue. The manner the tax may be levied or collected is incidental for it may take the
form of a fixed amount or it may be fixed on percentage basis. The essence of the tax
lies in that what is burdened is the business itself. Such is the character of the ordinance
in question, The tax is levied on the moviehouses themselves only that they are allowed
to charge the increase in the price which would represent the tax to the public. It is
therefore incorrect to contend that said ordinance levy a poll or capitation tax.
Gomez vs Palomar 25 SCRA 827

 The imposition of a flat rate rather than a graduated tax does not infringe the rule of
uniformity and equality of taxation. A tax need not be measured by the weight of the mail or
the extent of the service rendered. Considerations of administrative convenience and cost
afford an adequate ground for classification. The same considerations may induce the
legislature to impose a flat tax which in effect is a charge for the transaction, operating
equally on all persons with the class regardless of the amount involved.
Tio vs Videogram Regulatory Board 151 SCRA 208

 Tax on Sale, Lease or Disposition of Videograms. Notwithstanding any provision of law to the
contrary, the province shall collect a tax of thirty percent (30%) of the purchase price or
rental rate, as the case may be, for every sale, lease or disposition of a videogram containing
a reproduction of any motion picture or audiovisual program. Fifty percent (50%) of the
proceeds of the tax collected shall accrue to the province, and the other fifty percent (50%)
shall accrue to the municipality where the tax is collected; PROVIDED, That in Metropolitan
Manila, the tax shall be shared equally by the City/Municipality and the Metropolitan Manila
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Commission. x x x x” The foregoing provision is allied and germane to, and is reasonably
necessary for the accomplishment of, the general object of the DECREE, which is the
regulation of the video industry through the Videogram Regulatory Board as expressed in its
title. The tax provision is not inconsistent with, nor foreign to that general subject and title.
 As a tool for regulation it is simply one of the regulatory and control mechanisms scattered
throughout the DECREE. The express purpose of the DECREE to include taxation of the video
industry in order to regulate and rationalize the heretofore uncontrolled distribution of
videograms is evident from Preambles 2 and 5, supra. Those preambles explain the motives
of the lawmaker in presenting the measure. The title of the DECREE, which is the creation of
the Videogram Regulatory Board, is comprehensive enough to include the purposes
expressed in its Preamble and reasonably covers all its provisions. It is unnecessary to
express all those objectives in the title or that the latter be an index to the body of the
DECREE.
 The power to impose taxes is one so unlimited in force and so searching in extent, that the
courts scarcely venture to declare that it is subject to any restrictions whatever, except such
as rest in the discretion of the authority which exercises it. In imposing a tax, the legislature
acts upon its constituents. This is, in general, a sufficient security against erroneous and
oppressive taxation.
 The tax imposed by the DECREE is not only a regulatory but also a revenue measure
prompted by the realization that earnings of videogram establishments of around P600
million per annum have not been subjected to tax, thereby depriving the Government of an
additional source of revenue. It is an end-user tax, imposed on retailers for every videogram
they make available for public viewing, It is similar to the 30% amusement tax imposed or
borne by the movie industry which the theater-owners pay to the government, but which is
passed on to the entire cost of the admission ticket, thus shifting the tax burden on the
buying or the viewing public. It is a tax that is imposed uniformly on all videogram operators.
 The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need
for regulating the video industry, particularly because of the rampant film piracy, the
flagrant violation of intellectual property rights, and the proliferation of pornographic video
tapes. And while it was also an objective of the DECREE to protect the movie industry, the
tax remains a valid imposition.
2. Taxation is Inherently Legislative

Luzon Stevedoring vs CTA 163 SCRA 647
 Any claim for exemption from the tax statute should be strictly construed against the
taxpayer. Where a provision of law speaks categorically, the need for interpretation is
obviated, no plausible pretense being entertained to justify non-compliance. All that has to
be done is to apply it in every case that falls within its terms. Statutes are to be construed in
the light of purposes to be achieved and the evils sought to be remedied.
The legislature, in amending Section 190 of the Tax Code of Republic Act 3176, intended
to provide incentives and inducements to bolster the shipping industry and not the business
of stevedoring. This Court will not set aside the conclusion reached by an agency such as the
Court of Tax Appeals which is by the very nature of its function; dedicated exclusively to the
study and consideration of tax problems and has necessarily developed an expertise on the
subject unless there has been an abuse or improvident exercise of authority.
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NPC vs Province of Albay 186 SCRA 198

 The FIRB, under its charter, Presidential Decree No. 776, had been empowered merely to
Recommend’’ tax exemptions. By itself, it could not have validly prescribed exemptions or
restore taxability. Hence, as of June 11, 1984 (promulgation of Presidential Decree No.
1931), NAPOCOR had ceased to enjoy tax exemption privileges.
 Taxes are the lifeblood of the nation. Their primary purpose is to generate funds for the
State to finance the needs of the citizenry and to advance the common weal.
Lozano vs Energy Regulatory Board 192 SCRA 363

 When revenue is earned by the government from the consuming public (except when only
licenses are concerned), there is an exercise of the taxing power. Anent the unconstitutional
use of the taxing power, the decision of the majority says that "the Board Order authorizing
the proceeds generated by the increases" is "authorized by Presidential Decree No. 1456, as
amended by Executive Order No. 137". Assuming that such is authorized by law, still a law,
no matter how imperative, cannot prevail over the Constitution which grants only to
Congress the power to tax. And indeed, there can be no denying the fact that when revenue
is earned by the government from the consuming public (except when only licenses are
concerned) there is an exercise of the taxing power.
Petron vs Pililla 198 SCRA 82

 The exercise by local governments of the power to tax is ordained by the present
Constitution. To allow the continuous effectivity of the prohibition set forth in PC No. 26-73
(1) would be tantamount to restricting their power to tax by mere administrative issuances.
Under Section 5, Article X of the 1987 Constitution, only guidelines and limitations that may
be established by Congress can define and limit such power of local governments.
Maceda vs ERB 199 SCRA 454

 The ERB’s order authorizing the proceeds generated by the increase in oil prices to be
deposited to the OPSF is not an act of taxation, but is authorized by Pres. Decree No. 1956,
as amended by E.O. 137.
 In G.R. No. 96349, petitioner Original additionally claims that if the price increase will be
used to augment the OPSF this will constitute illegal taxation. In the Maceda case, (G.R. Nos.
95203-05, supra) this Court has already ruled that “the Board Order authorizing the
proceeds generated by the increase to be deposited to the OPSF is not an act of taxation but
is authorized by Presidential Decree No. 1956, as amended by Executive Order No. 137.
Victorias Milling vs Philippine Ports Authority 153 SCRA 317

 As to the requirement to remit 10% of the handling charges, Section 6b-(ix) of the
Presidential Decree No. 857 authorized the PPA "To levy dues, rates, or charges for the use
of the premises, works, appliances, facilities, or for services provided by or belonging to the
Authority, or any organization concerned with port operations." This 10% government share
of earnings of arrastre and stevedoring operators is in the nature of contractual
compensation to which a person desiring to operate arrastre service must agree as a
condition to the grant of the permit to operate.
Cuunjieng vs Patstine 42 Phil 818

 In the absence of special authority to impose a license fee or tax for revenue, the fee for
licenses for the regulation of useful occupations or enterprises may only be of a sufficient
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amount to include the expense of issuing the license and the cost of the necessary
inspection and police surveillance, taking into account not only the expense of direct
regulation but also incidental con-sequences.
 License fees for revenue rest upon the taxing power as distinguished from the police power,
and the power of the municipality to exact such fees must be ex-pressly granted by charter
or statute and is not to be implied from the conferred power to license and regulate merely.
Cervantes vs Auditor General 91 Phil 359

 The rule is that so long as the Legislature "lays down a policy and a standard is established
by the statute" there is no undue delegation. (11 Am. Jur. 957). Republic Act No. 51, in
authorizing the President of the Philippines to make reforms and changes in government-
controlled corporations, lays down a standard and policy that the purpose shall be to meet
the exigencies attendant upon the establishment of the free and independent Government
of the Philippines and to promote simplicity, economy and efficiency in their operations. The
standard was set and the policy fixed. The President had to carry out the mandate, and this
he did by promulgating Executive Order (No. 93) in accordance with Republic Act No. 51,
which, tested by the said rule, does not constitute an undue delegation of legislative power.
Maceda vs Macaraig 197 SCRA 771

 It is important to note that when P.D. Nos. 1931 and 1955 were issued by President Marcos,
the rule under the 1973 Constitution was that “no law granting a tax exemption shall be
passed without the concurrence of a majority of all the members of the Batasang
Pambansa.” (Art. VIII, Sec. 17[4]). Laws are usually passed by only a majority of those
present in the chamber, there being a quorum, but not where it grants a tax exemption. This
requires an absolute majority. Yet, despite this stringent limitation on the national
legislature itself, such stricture does not inhibit the President and the FIRB in the exercise of
their delegated power. It would seem that the delegate has more power than the principal.
Significantly, this limitation is maintained in the present Constitution under Article VI,
Section 28(4).
3. Taxation is Territorial
Wells Fargo Bank & Union Trust Co. vs Collector 70 Phil 325
 In the instant case, the actual situs of the shares of stock is in the Philippines, the
corporation being domiciled therein. And besides, the certificates of stock have remained in
this country up to the time when the deceased died in California, and they were in
possession of one S. McK, secretary of the Benguet Consolidated Mining Company, to whom
they have been deli-vered and indorsed in blank. This indorsement gave S. McK. the right to
vote the certificates at the general meetings of the stockholders, to collect dividends
thereon, and dispose of the shares in the manner she may deem fit, without prejudice to her
liability to the owner for violation of instructions. For all practical purposes, then, S. McK.
had the legal title to the certificates of stock held in trust for the true owner thereof. In
other words, the owner residing in California has extended here her activities with respect
to her intangibles so as to avail herself of the protection and benefit of the Philippine laws.
Accordingly, the jurisdiction of the Philippine Govern-ment to tax must be upheld.
Meralco vs Yatco 69 Phil 89

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 Where the insured is within the Philippines, the risk insured against also within the
Philippines, and certain incidents of the contract are to be attended to in the Philippines,
such as, payment of dividends when received in cash, sending of an adjuster into the
Philippines in case of dispute, or making of proof of loss, the Commonwealth of the
Philippines has the power to impose the tax upon the insured, regardless of whether the
contract is executed in a foreign country and with a foreign corporation. Under such
circumstances, substantial elements of the contract may be said to be so situated in the
Philippines as to give its government the power to tax. And, even if it be assumed that the
tax imposed upon the insured will ultimately be passed on to the insurer, thus constituting
an indirect tax upon the foreign corporation, it would still be valid, because the foreign
corporation, by the stipulation of its contract, has subjected itself to the taxing jurisdiction of
the Philippines. After all the Commonwealth of the Philippines, by protecting the properties
insured, benefits the foreign corporation, and it is but reasonable that the latter should pay
a just contribution therefore. It would certainly be a discrimination against domestic
corporations to hold the tax valid when the policy is given by them and invalid when issued
by foreign corporations.
CIR vs Marubeni Corp G.R. No. 137377

 Clearly, the service of “design and engineering, supply and delivery, construction, erection
and installation, supervision, direction and control of testing and commissioning,
coordination . . .” of the two projects involved two taxing jurisdictions. These acts occurred
in two countries—Japan and the Philippines. While the construction and installation work
were completed within the Philippines, the evidence is clear that some pieces of equipment
and supplies were completely designed and engineered in Japan. The two sets of ship
unloader and loader, the boats and mobile equipment for the NDC project and the ammonia
storage tanks and refrigeration units were made and completed in Japan. They were already
finished products when shipped to the Philippines. The other construction supplies listed
under the Offshore Portion such as the steel sheets, pipes and structures, electrical and
instrumental apparatus, these were not finished products when shipped to the Philippines.
They, however, were likewise fabricated and manufactured by the sub-contractors in Japan.
All services for the design, fabrication, engineering and manufacture of the materials and
equipment under Japanese Yen Portion I were made and completed in Japan. These services
were rendered outside the taxing jurisdiction of the Philippines and are therefore not
subject to contractor’s tax.
4. Taxation is Subject to International Comity
Pepsi Cola vs Municipality of Tanauan 69 SCRA 460
 The power of taxation x x x may be delegated to local governments in respect of matters of local
concern. This is sanctioned by immoral practice. By necessary implication, the legislative power
to create political corporations for purposes of local self-government carries with it the power to
confer on such local governmental agencies the power to tax. x x x The plenary nature of the
taxing power thus delegated, contrary to plaintiff-appellant’s pretense, would not suffice to
invalidate the said law as confiscatory and oppressive. In delegating the authority, the State is
not limited to the exact measure of that which is exercised by itself. When it is said that the
taxing power may be delegated to municipalities and the like, it is meant taxes there may be
delegated such measure of power to impose and collect taxes as the legislature may deem
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expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public
policy the State has not deemed wise to tax for more general purposes.
II. Constitutional Limitations
1. Due Process
2. Equal Protection of Law
3. Uniformity
4. Progressive System of Taxation
5. Non-impairment of contracts
6. Non-imprisonment for non-payment of poll tax
7. Appropriation, revenue and tariff bills must originate exclusively in the House of
Representatives
8. Presidential Veto
9. Presidential Power to fix tariff rates
10. Freedom of the Press
11. Freedom of Religion
12. Exemption from property tax of religious, educational and charitable institutions
13. Tax exemption granted to a non-stock, non-profit educational and charitable institutions
14. No public money or property shall be used for a particular sect, priest, religious
ministers, etc.
15. Grant of Tax Exemptions
16. Grant of power to tax to local government units
17. Money collected for a special purpose shall be considered as public fund; and
18. Exclusive appellate jurisdiction of the Supreme Court over judgment of lower courts
involving the legality of taxes, imposts, assessments, fees and penalty.
a. Provisions Directly Affecting Taxation
 Sec 20, Article III, Philippine Constitution
No person shall be imprisoned for debt or non-payment of a poll tax.
 Sec 28, par 1, Article VI, Philippine Constitution
The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation.
CASES:
Juan Luna Subdivision vs Sarmiento 91 Phil 371
 The remission of taxes due and payable to the exclusion of taxes already collected does not
constitute unfair discrimination. Each 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.
City of Baguio vs De Leon 25 SCRA 938
 Equality and uniformity in taxation means that all taxable articles or kind or property of the
same class shall be taxed at the same rate. A tax is considered uniform when it operates
with the same force and effect in every place where the subject may be found. Where the
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statute or ordinance in question applies equally to all persons, firms and corporations placed
in similar situation there is no infringement of the rule on equality. Inequalities which result
from a singling out of one particular class for taxation or exemption infringe no
constitutional limitation.
CIR vs Lingayen Gulf Electric 164 SCRA 27
 A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found. Uniformity means that all property belonging to the same class shall be
taxed alike The Legislature has the inherent power not only to select the subjects of taxation
but to grant exemptions. Tax exemptions have never been deemed violative of the equal
protection clause. It is true that the private respondents municipal franchises were obtained
under Act No. 667 of the Philippine Commission, but these original franchises have been
replaced by a new legislative franchise, i.e. R.A. No. 3843. As correctly held by the
respondent court, the latter was granted subject to the terms and conditions established in
Act No. 3636, as amended by C.A. No. 132. These conditions Identify the private
respondent's power plant as falling within that class of power plants created by Act No.
3636, as amended. The benefits of the tax reduction provided by law (Act No. 3636 as
amended by C.A. No. 132 and R.A. No. 3843) apply to the respondent's power plant and
others circumscribed within this class. R.A-No. 3843 merely transferred the petitioner's
power plant from that class provided for in Act No. 667, as amended, to which it belonged
until the approval of R.A- No. 3843, and placed it within the class falling under Act No. 3636,
as amended. Thus, it only effected the transfer of a taxable property from one class to
another.
Pepsi Cola vs City of Butuan 24 SCRA 789
 In the present case the tax prescribed in section 3 of Ordinance No. 110 of the City of
Butuan, as originally approved, was imposed upon dealers "engaged in selling" soft drinks or
carbonated drinks. Thus, it would seem that the intent was then to levy of tax upon the sale
of said merchandise. As amended by Ordinance No. 122, the tax is, however, imposed oriLy
upon "any agent and/or consignee of any person, association, partnership, company or
corporation engaged in selling x x x soft drinks or carbonated drinks."
 As a consequence, merchants engaged in the sale of soft drinks or carbonated drinks, are
not subject to the tax, unless they are agents and/or consignees of another dealer, who, in
the very nature of things, must be one engaged in business outside the City. Besides, the tax
would not be applicable to such agent and/or consignee, if less than 1,000 cases of soft
drinks are consigned or shipped to him every month. When we consider, also, that the tax
"shall be based and computed from the cargo manifest or bill of lading x x x showing the
number of cases"—not sold—but "received" by the taxpayer, the intention to limit the
application of the ordinance to soft drinks and carbonated drinks brought into the City from
outside thereof becomes apparent. Viewed from this angle, the tax partakes of the nature of
an import duty, which is beyond defendant's authority to impose by express provision of law
(Sec. 2[1], Rep. Act 2264; Panaligan v. City of Tacloban, L-9319, Sept. 27, 1957, 102 Phil.
1162; East Asiatic Co. v. City of Davao, L-16253, Aug. 21, 1962).
 Even, however, if the burden in question were regarded as a tax on the sale of said
beverages, it would still be invalid, as discriminatory, and hence, violative of the uniformity
Notes in TAXATION 1
14
required by the Constitution and the law therefor, since only sales by "agents or consignees"
of outside dealers would be subject to the tax. Sales by local dealers, not acting for or on
behalf of other merchants, regardless of the volume of their sales, and even if the same
exceeded those made by said agents or consignees of producers or merchants established
outside the City of Butuan, would be exempt from the disputed tax.
 It is true that the uniformity essential to the valid exercise of the power of taxation does not
require identity or equality under all circumstances, or negate the authority to classify the
objects of taxation. The classification made in the exercise of this authority, to be valid,
must, however, be reasonable and this requirement is not deemed satisfied unless: (1) it is
based upon substantial distinctions which make the real differences; (2) these are germane
to the purpose of the legislation or ordinance; (3) the classification applies, not only to
present conditions, but, also, to future conditions substantially identical to those of the
present; and (4) the classification applies equally to all those who belong to the same class.
 These conditions are not f fully met by the ordinance in question. Indeed, if its purpose were
merely to levy a burden upon the sale of soft drinks or carbonated beverages, there is no
reason why sales thereof by dealers other than agents or consignees of producers or
merchants established outside the City of Butuan should be exempt from the tax.
Eastern Theatrical Company vs Alfonso 83 Phil 852
 Appellants point out to the fact that the ordinance in question does not tax "many more
kinds of amusements" than those therein specified, such as "race tracks, cockpits, cabarets,
concert halls, circuses, and other places of amusement." The argument has absolutely no
merit. The fact that some places of amusement are not taxed while others, such as
cinematographs, theaters, vaudeville companies, theatri-cal shows, and boxing exhibitions
and other kinds of amuse-ments or places of amusement are taxed, is no argument at all
against the equality and uniformity of the tax imposition. Equality and uniformity in taxation
means that all taxable arti-cles or kinds of property of the same class shall be taxed at the
same rate. The taxing power has the authority to make reason-able and natural
classifications for purposes of taxation; and the appellants cannot point out what places of
amusement taxed by the ordinance do not constitute a class by themselves and which can
be confused with those not included in the ordinance.
Basco vs PAGCOR 197 SCRA 52
 Petitioners next contend that P.D. 1869 violates the equal protection clause of the
Constitution, because “it legalized PAGCOR—conducted gambling, while most gambling are
outlawed together with prostitution, drug trafficking and other vices” (p. 82, Rollo). We,
likewise, find no valid ground to sustain this contention. The petitioners’ posture ignores the
well-accepted meaning of the clause “equal protection of the laws.” The clause does not
preclude classification of individuals who may be accorded different treatment under the
law as long as the classification is not unreasonable or arbitrary (Itchong v. Hernandez, 101
Phil. 1155).
 A law does not have to operate in equal force on all persons or things to be conformable to
Article III, Section 1 of the Constitution (DECS v. San Diego, G.R. No. 89572, December 21,
Notes in TAXATION 1
15
1989). The “equal protection Petitioners next contend that P.D. 1869 violates the equal
protection clause of the Constitution, because “it legalized PAGCOR—conducted gambling,
while most gambling are outlawed together with prostitution, drug trafficking and other
vices” (p. 82, Rollo). We, likewise, find no valid ground to sustain this contention. The
petitioners’ posture ignores the well-accepted meaning of the clause “equal protection of
the laws.” The clause does not preclude classification of individuals who may be accorded
different treatment under the law as long as the classification is not unreasonable or
arbitrary (Itchong v. Hernandez, 101 Phil. 1155). A law does not have to operate in equal
force on all persons or things to be conformable to Article III, Section 1 of the Constitution
(DECS v. San Diego, G.R. No. 89572, December 21, 1989).
 The “equal protection clause” does not prohibit the Legislature from establishing classes of
individuals or objects upon which different rules shall operate (Laurel v. Misa, 43 O.G. 2847).
The Constitution does not require situations which are different in fact or opinion to be
treated in law as though they were the same (Gomez v. Palomar, 25 SCRA 827). Just how
P.D. 1869 in legalizing gambling conducted by PAGCOR is violative of the equal protection is
not clearly explained in the petition. The mere fact that some gambling activities like
cockfighting (P.D. 449) horse racing (R.A. 306 as amended by RA 983), sweepstakes, lotteries
and races (RA 1169 as amended by B.P. 42) are legalized under certain conditions, while
others are prohibited, does not render the applicable laws, P.D. 1869 for one,
unconstitutional. “If the law presumably hits the evil where it is most felt, it is not to be
overthrown because there are other instances to which it might have been applied.” (Gomez
v. Palomar, 25 SCRA 827) “The equal protection clause of the 14th Amendment does not
mean that all occupations called by the same name must be treated the same way; the state
may do what it can to prevent which is deemed as evil and stop short of those cases in
which harm to the few concerned is not less than the harm to the public that would insure if
the rule laid down were made mathematically exact.” (Dominican Hotel v. Arizana, 249 U.S.
2651).
Assoiation of Custom Brokers vs. Municipality of Manila et al., 93 Phil 107
 The said ordinance in-fringes also the rule of uniformity of taxation ordained by our
Constitution. It exacts the tax upon all motor vehicles operating within the City of Manila. It
does not distinguish between a motor vehicle for hire and one which is purely for private
use. Neither does it distinguish between a motor vehicle registered in the City of Manila and
one registered in another place but occasionally comes to Manila and uses its streets and
public highways. There is no pretense that the ordinance equally applies to motor vehicles
which come to Manila for a temporary stay or for short errands, and it cannot be denied
that they contribute in no small degree to the deterioration of the streets and public
highways. As they are benefited by their use they should also be made to share the
corresponding burden. This is an inequality which is found in the ordinance in question and
which renders it offensive to the Constitution.
Shell Company vs Vano 94 Phil 389
 Even if an installation manager is a salaried employee, still his employment is an occupation,

and one occupation or line of business does not become exempt by being conducted with
some other occupation or business for which taxes have been paid and the occupation tax
Notes in TAXATION 1
16
must be paid by each individual engaged in a calling subject thereto. The mere fact that
there is no other person in the locality who exercises the privilege of installation manager
does not make the ordinance discriminatory and hostile inasmuch as it is and will be
applicable to any person or firm who exercises such calling or occupation named or
designated as "installation manager."
Phil Trust Company vs Yatco 69 Phil 420
 A tax is considered uniform when it operates with the same force and effect in every place
where the subject may be found. (State vs. Railroad Tax Cases, 92 U. S., 575, 595, 612; 23
Law. ed., 363, 373.) Section 1499 of the Revised Administrative Code, as amended, applies
uniformly to, and operates on, all banks in the Philippines without distinction and
discrimination, and if the National City Bank of New York is exempted from its operation
because it is a federal instrumentality subject only to the authority of Congress, that alone
could not have the effect of rendering it violative of the rule of uniformity. In every well-
regulated and enlightened state or government, certain descriptions of property and also
certain institutions are exempt from taxation, but these exemptions have never been
regarded as disturbing the rules of taxation, even where the fundamental law had ordained
that it should be uniform. (Des Moines Bank vs. Fairweather, 263 U. S., 103, 118.) The rule of
uniformity does not call for perfect uniformity or perfect equality, because this is hardly
attainable.
(3) Sec 28, par 2, Article VI, Philippine Constitution
The Congress may, by law, authorize the President to fix within specified limits, and subject to such
limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and
wharfage dues, and other duties or imposts within the framework of the national development program
of the Government.
Sec 401 Tariff and Customs Code
Sec. 401. Flexible Clause. —
a) In the interest of national economy, general welfare and/or national security, and subject to the
limitations herein prescribed, the President, upon recommendation of the National Economic and
Development Authority (hereinafter referred to as NEDA), is hereby empowered: (1) to increase,
reduce or remove existing protective rates of import duty (including any necessary change in
classification). The existing rates may be increased or decreased to any level, in one or several stages
but in no case shall the increased rate of import duty be higher than a maximum of one hundred
(100) per cent ad valorem; (2) to establish import quota or to ban imports of any commodity, as may
be necessary; and (3) to impose an additional duty on all imports not exceeding ten (10%) per cent
ad valorem whenever necessary; Provided, That upon periodic investigations by the Tariff
Commission and recommendation of the NEDA, the President may cause a gradual reduction of
protection levels granted in Section One Hundred and Four of this Code, including those
subsequently granted pursuant to this section.
b) Before any recommendation is submitted to the President by the NEDA pursuant to the provisions of
this section, except in the imposition of an additional duty not exceeding ten (10) per cent ad
valorem, the Commission shall conduct an investigation in the course of which they shall hold public
Notes in TAXATION 1
17
hearings wherein interested parties shall be afforded reasonable opportunity to be present, produce
evidence and to be heard. The Commission shall also hear the views and recommendations of any
government office, agency or instrumentality concerned. The Commission shall submit their findings
and recommendations to the NEDA within thirty (30) days after the termination of the public
hearings.
c) The power of the President to increase or decrease rates of import duty within the limits fixed in
subsection "a" shall include the authority to modify the form of duty. In modifying the form of duty,
the corresponding ad valorem or specific equivalents of the duty with respect to imports from the
principal competing foreign country for the most recent representative period shall be used as bases.
d) The Commissioner of Customs shall regularly furnish the Commission a copy of all customs import
entries as filed in the Bureau of Customs. The Commission or its duly authorized representatives shall
have access to, and the right to copy all liquidated customs import entries and other documents
appended thereto as finally filed in the Commission on Audit.
e) The NEDA shall promulgate rules and regulations necessary to carry out the provisions of this
section.
f) Any Order issued by the President pursuant to the provisions of this section shall take effect thirty (3)
days after promulgation, except in the imposition of additional duty not exceeding ten (10) per cent
ad valorem which shall take effect at the discretion of the President.
(4) Sec 28, par 3, Article VI, Philippine Constitution
Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for
religious, charitable, or educational purposes shall be exempt from taxation.
 Provisions Indirectly Affecting Taxation
(4) ARTICLE VI, SECTION 28, PAR.3
 (3) Charitable institutions, churches and parsonages or convents appurtenant thereto,

mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes shall be
exempt from taxation.
CASES:
C.N. Hodges vs. Municipal Board, Iloilo City, et al. 19 SCRA 28(1967)
 Power to impose sales tax.—The grant of power to tax to chartered cities under Section 2 of
the Local Autonomy Act is sufficiently plenary to cover everything, excepting those which
are mentioned therein, subject only to the limitation that the tax so levied is for public
purposes, just and uniform. (Nin Bay Mining Co. vs. Municipality of Roxas, Palawan, L-20125,
July 20, 1965). Where there is no showing that the real property sales tax in question comes
within the exception, it must be regarded as coming within the purview of the general rule
(Exceptio firmat regulam in casibus non exceptis). Since its public purpose, justness and
uniformity of application are not disputed, the tax so levied must be sustained as valid.
Notes in TAXATION 1
18
 Taxing power of the City of lloilo.—Under its charter the City of lloilo may impose municipal
licenses, taxes or fees upon any person engaged in any occupation or business, or exercising
any privilege, in the city; regulate and impose reasonable fees for services rendered in
connection with any business, profession or occupation conducted within the city and levy
for public purposes just and uniform taxes, licenses and fees. It may impose a sales tax on
the selling price of any motor vehicle sold in the city of the City of Iloilo, L-18129, January 31,
1963). It may also impose a tax on the sale of real property situated in the city.
Apostolic Prefect etc. vs. The Treasurer etc. 71 Phil. 547(1941)
 TAXES ;. SPECIAL CONTRIBUTIONS - is a well-established rule on taxation that special

contributions that are created and charged to recoup extra costs that result works such as
drainage and sewerage system to benefit in a special way to the people, is not a tax on its
legal sense. According to the special tax ordinance that claimed to properties located in
Baguio City, was created to recoup the extra costs caused the drainage and sewerage system
to be built, work especially benefit of all owners city. If the special contribution that claimed
the appellant is not strictly speaking a tax whose payment is exempt it is evident that neither
under the ordinance nor the Constitution referred the appellant is exempt from payment of
the special contribution.
 Further in accordance with the stipulation of facts, the appellant cannot successfully invoke
the exemption established by the Constitution, because it has been admitted or proved that
their properties paid the special tax is used exclusively for religious purposes. True, it was
stipulated that the properties were devoted to religious purposes, but not agreed nor
proved that such use was exclusive and may therefore happen that the properties more
room devoted to religious purposes be earmarked and also will use for other purposes
nonreligious.
Herrera vs. Quezon City Board of Assessment 3 SCRA 186(1961)]
 Taxation; Real estate taxes; Charitable hospitals and educational institutions; When
benevolent character of hospitals not detracted by admission of pay patients.—The
admission of paypatients does not detract from the charitable character of a hospital, if all
of its funds are devoted “exclusively to the maintenance of the institution” as a “public
charity” (84 C.J.S., 617; see, also, 51 Am. Jur. 607; Cooley on Taxation, Vol. 2, p. 1562; 144
A.L.R., 1489-1492). In other words, “where rendering charity is its primary object, and the
funds derived from payments made by patients able to pay are devoted to the benevolent
purposes of the institution, the mere fact that a profit has been made will not deprive the
hospital of its benevolent character” (Prairie Du Chian Sanitarium Co. vs. City of Prairie Du
Chian, 242 Wis. 262, 7 NW [2d] 832, 144 A.L.R. 1480). The fact, therefore, that in the case at
bar, St. Catherine’s Hospital, which is a charitable institution, admits pay-patients, does not
bar it from claiming that it is devoted exclusively to benevolent purposes, it being admitted
that the income derived from pay patients is devoted to the improvement of the charity
wards, which represent almost two-thirds (2/3) of the bed capacity of the hospital, aside
from “out-charity patients” who come only for consultation.
 Extent of exemption.—The exemption in favor of property used exclusively for charitable or
educational purposes is “not limited to property actually indispensable” therefor (Cooley on
Taxation, Vol. 2, p. 1430), but extends to facilities which are “incidental to and reasonably
necessary for” the accomplishment of said purposes, such as, in the case of hospitals, “a
Notes in TAXATION 1
19
school for training nurses, a nurses’ home, property used to provide housing facilities for
interns, resident doctors, superintendents, and other members of the hospital staff, and re-
 Lands, buildings and improvements beyond the taxing power irrespective of profits.—The
existence of “St. Catherine’s School of Midwifery”, with an enrollment of about 200
students, who practice partly in St. Catherine’s Hospital and partly in St. Mary’s Hospital,
which, likewise, belongs to petitioners, does not, and cannot affect the exemption to which
St. Catherine’s Hospital is entitled under the Constitution. The fact that the size of the
enrollment and the students, aside from the amount they paid for board and lodging,
warrant the belief that a substantial profit is derived from the operation of the said school, is
immaterial to the issue of whether or not real estate taxes should be paid, because “all
lands, buildings and improvements used exclusively for religious, charitable or educational
purposes shall be exempt from taxation”, pursuant to the Constitution, regardless of
whether or not material profits are derived from the operation of the institutions in
question. In other words, Congress may, if it deems fit to do so, impose taxes upon such
“profits”, but said “lands, buildings and improvements” are beyond its taxing power.
 Factors that do not affect the charitable character of a hospital.—The fact that a garage
located in the hospital was being used in the operation of the school of midwifery because
the students enrolled therein were entitled to transportation and that the hospital
directress who received no compensation, and her family, resided in the building, were
incidental to the operation of the hospital, and, accordingly, did not affect the charitable
character of the hospital and the educational nature of the school.
Prairie Du Chien Sanitarium Co. vs Prairie Du Chien 242 Wis. 262 (Wis. 1943)
 Appellant paid the personal property and real-estate taxes under protest and sues to
recover them, alleging that it is exempt under sec. 70.11(4), Stats., as a "benevolent
association." The trial court found that the association was not within the statutory
exemption and dismissed the complaint.
 Appellant contends that under the provisions of see 70.11(4), Stats., its real and personal
property is exempt from taxation. This statute provides exemption for — "Personal property
owned by any . . . benevolent association . . . which is used exclusively for the purposes of
such association, and the real property necessary for the location and convenience of the
buildings of such . . . association and embracing the same, not exceeding ten acres;
provided, such real or personal property is not leased or otherwise used for pecuniary profit.
. . ."
 In order for appellant's contention to be sustained it must appear that,
(1) appellant is a benevolent association;
(2) the personal property is used exclusively for the purposes of such association;
(3) the real and personal property is not used for pecuniary profit.
 The fact the hospital receives and is dependent on donations indicates a benevolent
character, as does the fact that it takes all patients who apply, regardless of their ability to
pay, or at least that it does take a fair number of charity patients. A final and most important
test is whether the members of the corporation render services without compensation.
Abra Valley College, Inc. vs. Aquino 162 SCRA 106(1988)

Notes in TAXATION 1
20
 Taxation; Test of exemption from taxation.—The test of exemption from taxation is the use
of the property for purposes mentioned in the Constitution.
 Phrase “exclusively used for educational purposes” clarified.—The phrase “exclusively used
for educational purposes” was further clarified by this Court in the cases of Herrera vs.
Quezon City Board of Assessment Appeals, 3 SCRA 186 [1961] and Commissioner of Internal
Revenue vs. Bishop of the Missionary District, 14 SCRA 991 [1965], thus“ “Moreover, the
exemption in favor of property used exclusively for charitable or educational purposes is
‘not limited to property actually indispensable’ therefor (Cooley on Taxation, Vol. 2, p.
1430), but extends to facilities which are incidental to and reasonably necessary for the
accomplishment of said purposes, such as in the case of hospitals, ‘a school for training
nurses, a nurses’ home, property use to provide housing facilities for interns, resident
doctors, superintendents, and other members of the hospital staff, and recreational facilities
for student nurses, interns, and residents’ (84 CJS 6621), such as ‘athletic fields’ including ‘a
firm used for the inmates of the institution.’ ”
 The exemption extends to facilities which are incidental to and reasonably necessary for the
accomplishment of the main purpose the lease of the first floor to the Northern Marketing
Corporation cannot by any stretch of the imagination be considered incidental to the
purposes of education;
 Trial Court correct in imposing the tax not because the second floor is being used by the
Director and his family for residential purposes but because the first floor is being used for
commercial purposes.
Catholic Church vs. Hastings 5 Phil. 701(1906)
 TAXATION; EXEMPTION.—It being the theory of the Government that all property shall
contribute equally, in proportion to its value, to the support of the Government, a law
exempting property from taxation must be strictly construed.
 In order that property which is adjacent shall be exempt from taxation because of that fact,
the word "adjacent" should be construed to mean adjoining- or contiguous property only.
 The provisions of a statute subjecting some residences of ministers to taxation and
exempting others, and differentiating the two classes in accordance with the physical
relation they bear to their respective churches, are not based on the same grounds of public
policy as the exemptions in favor of churches and property dedicated exclusively to religious
purposes.
 The true policy of the law in exempting parsonages and conventos adjacent to their
respective churches was one of convenience, expediency, and necessity, in view of the
unavoidable difficulties which would attend an attempt to impose and collect taxes on
conventos abutting on churches or situated on the same integral lot therewith.
 The exemption as to churches, with their adjacent parsonages and conventos, contained in
Act No. 183, does not extend to parsonages and conventos which do not stand on the same
integral lot with their respective churches.
Bishop of Nueva Segovia vs. Prov. Board of Ilocos Norte 51 Phil. 352(1927)
 LAND TAX; EXEMPTION; CONVENT; VEGETABLE GARDEN.—The exemption from the

payment of the land tax in favor of the convent includes not only the land actually occupied
by the building, but also the adjacent ground or vegetable garden destined to the incidental
use of the parish priest in his ordinary life.
Notes in TAXATION 1
21
 CEMETERY NOT USED AS SUCH.—The lot which was formerly a cemetery and which is no
longer used as such, but is not used for commercial purposes, serving solely as a sort of
lodging place for those who participate in the religious festivities, is also exempt from the
land tax, because this constitutes an incidental use in religious functions.
(5) ARTICLE VI, SECTION 28 par.4
 (4) No law granting any tax exemption shall be passed without the concurrence of a majority of
all the Members of the Congress.
(6) ARTICLE VI, SECTION 29, PAR. 3
 (3) All money collected on any tax levied for a special purpose shall be treated as a special fund
and paid out for such purpose only. If the purpose for which a special fund was created has been
fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the
Government.
CASE:
Gaston vs. Republic Planters Bank 158 SCRA 626(1988)
 Taxation; Levy; The stabilization fees collected are in the nature of a tax which is within the
power of the state to impose for the promotion of the sugar industry; The levy is primarily in the
exercise of the police power of the state.—The stabilization fees collected are in the nature of a
tax, which is within the power of the State to impose for the promotion of the sugar industry
(Lutz vs. Araneta, 98 Phil. 148). They constitute sugar liens (Sec. 7[b], P.D, No. 388). The
collections made accrue to a "Special Fund," a "Development and Stabilization Fund," almost
identical to the "Sugar Adjustment and Stabilization Fund" created under Section 6 of
Commonwealth Act 567, The tax collected is not in a pure exercise of the taxing power. It is
levied with a regulatory purpose, to provide means for the stabilization of the sugar industry.
The levy is primarily in the exercise of the police power of the State (Lutz vs. Araneta, supra).
 The stabilization fees are levied by the state for the special purpose of financing the growth and
development of the sugar industry and all its components, stabilization of the domestic market
including the foreign market; Revenues collected treated as special fund to be administered in
trust for the purpose intended.—The stabilization fees in question are levied by the State upon
sugar millers, planters and producers for a special purpose—that of "financing the growth and
development of the sugar industry and all its components, stabilization of the domestic market
including the foreign market." The fact that the State has taken possession of moneys pursuant
to law is sufficient to constitute them state funds, even though they are held for a special
purpose (Lawrence vs. American Surety Co,, 263 Mich 586, 249 ALR 535, cited in 42 Am. Jur. Sec.
2, p. 718), Having been levied for a special purpose, the revenues collected are to be treated as a
special fund, to be, in the language of the statute, "administered in trust" for the purpose
intended. Once the purpose has been fulfilled or abandoned, the balance, if any, is to be
transferred to the general funds of the Government. That is the essence of the trust intended.
 Revenues derived from tax cannot be used for purely private purposes or for the exclusive benefit
of private persons.—To rule in petitioners' favor would contravene the general principle that
revenues derived from taxes cannot be used for purely private purposes or for the exclusive
benefit of private persons. The Stabilization Fund is to be utilized for the benefit of the entire
sugar industry, "and all its components, stabilization of the domestic market including the
Notes in TAXATION 1
22
foreign market," the industry being of vital importance to the country's economy and to national
interest.
(7) ARTICLE VI, SECTION 27, PAR. 2
 (2) The President shall have the power to veto any particular item or items in an appropriation,
revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object.
(8) ARTICLE VIII, SECTION 5, PAR. 29 (b)
 (2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of
Court may provide, final judgments and orders of lower courts in:
(b) All cases involving the legality of any tax, impost, assessment, or toll, or any penalty
imposed in relation thereto.
(9) ARTICLE X, SECTION 6
 Local government units shall have a just share, as determined by law, in the national taxes which
shall be automatically released to them.
(10) ARTICLE XIV, SECTION 4, PAR. 3
 (3) All revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon
the dissolution or cessation of the corporate existence of such institutions, their assets shall be
disposed of in the manner provided by law.
B. PROVISIONS INDIRECTLY AFFECTING TAXATION
1. POLICE POWER AND EMINENT DOMAIN

CASES:
Garces vs. Estenzo 104 SCRA 510(1981)
 Barangays; Churches; A resolution of the Barangay Council for soliciting contributions to buy
a statue of the barangay’s patron saint and the use of such fund for said purpose does not
violate the Constitution’s provision prohibiting use of public funds for religious purposes.—
The questioned resolutions do not directly or indirectly establish any religion, nor abridge
religious liberty, nor appropriate public money or property for the benefit of any sect, priest
or clergyman. The image was purchased with private funds, not with tax money. The
construction of a waiting shed is entirely a secular matter.
 Manifestly puerile and flimsy is petitioners’ argument that the barangay council favored the
Catholic religion by using the funds raised by solicitations and donations for the purchase of
the patron saint’s wooden image and making the image available to the Catholic church.
 The wooden image was purchased in connection with the celebration of the barrio fiesta
honoring the patron saint, San Vicente Ferrer, and not for the purpose of favoring any
religion nor interfering with religious matters or the religious beliefs of the barrio residents.
One of the highlights of the fiesta was the mass. Consequently, the image of the patron saint
had to be placed in the church when the mass was celebrated.
 There can be no question that the image in question belongs to the barangay council. Father
Osmeña’s claim that it belongs to his church is wrong. The barangay council, as owner of the
image, has the right to determine who should have custody thereof.
Notes in TAXATION 1
23
American Bible Society vs. City of Manila 101 Phil. 386(1957)
 MUNICIPAL TAX; RETAIL DEALERS IN GENERAL MERCHANDISE; ORDINANCE PRESCRIBING

TAX NEED NOT BE APPROVED BY THE' PRESIDENT TO BE EFFECTIVE.—The business of "retail
dealers in general merchandise" is expressly enumerated in subsection (o), section 18 of
Republic Act No. 409: hence. an ordinance prescribing a municipal tax on said business does
not have to be approved by the President to be effective, as it is not among those
businesses referred to in subsection (ii) Section 18 of the same Act subject to the approval of
the President.
Grosjean vs. American Press Co. 287 US 233
 A State license tax imposed on the owners of newspapers for the privilege of selling or
charging for the advertising therein, and measured by a percent of the gross receipts from
such advertisements, but applicable only to newspapers enjoying a circulation of more than
20,000 copies per week, held unconstitutional.
2. MANDATORY CHARACTER OF CONSTITUTIONAL PROVISIONS
CASE:
Marcelino vs. Cruz, Jr. 121 SCRA 51(1983)
 Judgments; Courts; The 90-day period for trial courts to decide cases is counted from
rendition of judgment, not the date of promulgation.—Undisputed is the fact that on
November 28, 1975, or eighty-five [85] days from September 4, 1975 the date the case was
deemed submitted for decision, respondent judge filed with the deputy clerk of court the
decision in Criminal Case No. 5910. He had thus veritably rendered his decision on said case
within the three-month period prescribed by the Constitution.
 The constitutional provision requiring that trial judges shall decide a case within 90 days
from submission is merely a procedural rule and is not mandatory, but only directory.—To
Our mind, the phraseology of the provision in question indicates that it falls within the
exception rather than the general rule. By the phrase “unless reduced by the Supreme
Court,” it is evident that the period prescribed therein is subject to modification by this
Court in accordance with its prerogative under Section 5[5] of Article X of the New
Constitution to “promulgate rules concerning pleading, practice and procedure in all courts x
x x.” And there can be no doubt that said provision, having been incorporated for reasons of
expediency, relates merely to matters of procedure. Albermarle Oil & Gas Co. v. Morris,
declares that constitutional provisions are directory, and not mandatory, where they refer to
matters merely procedural.
 Judges; Failure of judge to decide a case within 90 days does not divest him of his
jurisdiction.—One last point. Notwithstanding Our conclusion that courts are not divested of
their jurisdiction for failure to decide a case within the ninety-day period, We here
emphasize the rule, for the guidance of the judges manning our courts, that cases pending
before their salas must be decided within the aforementioned period. Failure to observe
said rule constitutes a ground for administrative sanction against the defaulting judge. In
fact, a certificate to this effect is required before judges are allowed to draw their salaries.
D. ASPECTS OF TAXATION
Notes in TAXATION 1
24
1. LEVY
 The levy is for a public purpose if:
i. It is for the welfare of the nation or greater portion of the population.
ii. It affects the area as a community rather than as individuals.
iii. It is designed to support the services of the government for some of the recognized
objects of the country.
CASES:
CIR vs Botelbo Shipping Corp. 20 SCRA 487
 Levy is the act of imposition by the legislature such as by its enactment of the law. The term is
understood to include not only the mandate on when and how the tax is imposed but also,
whenever it may be appropriate, the grant of tax exemptions, tax amnesties or tax
condonations. The latter (tax exemptions, etc.), like tax impositions, are subject to the due
observance of the limitations of taxation.
CLASSIFICATION OF TAXES
 Taxes, which are the imposed burdens in the exercise of the power of taxation, maybe grouped into the
following kinds or categories, viz.:
1.) According to Subject Matter or Object
a) Personal, capitalization or poll taxes- taxes of fixed amounts upon residents or persons of a
certain class without regard to their property or business (e.g., the basic community tax).
b) Property taxes- Taxes assessed on things or property of a certain class (e.g., real estate taxes).
c) Excise or license taxes- Taxes on privilege, occupation or business not falling under the
classification of poll taxes or property taxes (e.g., "internal revenue taxes" and customs duties).
2.) According to Burden or Incidence:

a. Direct Taxes- Taxes which are demanded from persons who are primarily burdened to pay
them (e.g., income, estate and donor's taxes).
i. It is imposed on the person obliged to pay the same and this burden cannot be
passed or shifted on to another.
b. Indirect Taxes- Taxes levied upon transactions or activities before the articles subject matter
thereof reach the consumers to whom the burden of the tax may ultimately be charged or
shifted (e.g., VAT).
i. The payment is demanded from a person who is allowed to transfer the burden of
taxation to another.
CASES:
Maceda vs Macaraig, Jr. (223 SCRA 217)
 "A direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in."
Examples are the customs duties and ad valorem taxes paid by the oil companies to the Bureau of
Customs for the importation of crude oil, and the specific and ad valorem taxes they pay to the BIR
upon converting the crude oil into the petroleum products. On the other hand, "indirect taxes are taxes
primarily paid by persons who can shift the burden upon someone else." For example the excise and ad
valorem taxes that oil companies pay to the BIR upon removal of petroleum products from its refinery
can be shifted to its buyer by adding said taxes to the cash cost and/or selling price.
Notes in TAXATION 1
25
NOTA BENE:
 If end-user is tax exempt:

a) the exemption applies only to direct taxes and the buyer cannot claim tax refund on
those taxes that were passed-on to him;
b) The seller cannot claim exemption as well. (Phil. Acetelyn case)
 Remedy of seller if the buyer is enjoying both exemptions from direct and indirect taxes- Avail
the remedy of tax refund from the government. (Gotamco case)
 In indirect taxes, the person authorized to claim for the refund is the payor not the end
consumer. (American rubber case , 18 SCRA 82, Cebu Portland Cement Co. Vs Collector, 25
SCRA 789)
 If the seller is VAT-exempt and the purchaser is non-VAT, the purchaser is still VATABLE because
the VAT is merely added as part of the purchase price and not as a tax because the burden is
merely shifted. The seller is still exempt because it could pass on the burden of paying the tax
to the purchaser.
3.) According to determination of amount (tax rates):
a) SPECIFIC TAXES- Taxes imposed per head, unit or number, or weight or volume and which
require no assessment beyond a listing and classification of the subjects or articles to be
taxed.
-fixed amount based on volume, weights or quantity of goods as measured by tools,
instruments or standards. It requires no assessment as the subject of taxation is often listed
according to their general classification. (Ex. Tax on gasoline, LPG, petroleum products,
wires)
CASE:
Tan vs Municipality of Pagbilao 7 SCRA 887
 "A tax which imposes a specific sum by the head or number, or some standard weight or measurement,
and which requires no assessment beyond listing and classification of the objects to be taxed is specific
tax."
b) AD VALOREM TAXES - taxes based upon the value of the article subject to tax. Assessment is
necessary to determine the amount payable. (E.g. Tax on automobile and properties)
4.) According to purpose:

a) GENERAL OR FISCAL - taxes imposed for the general purposes of the government. (E.g.,
income taxes).
-they are levied without specific or pre-determined purpose.
b) SPECIAL, REGULATORY OR SUMPTARY -taxes imposed for a particular legitimate object of
government. (E.g., the educational fund tax under Real Property Taxation of the Local
Government Code).
-those intended to achieve some social or economic goals.
CASES:
Notes in TAXATION 1
26
Calalang vs Lorenzo 97 Phil 212
 The charges prescribed by the Revised Motor vehicle Las for the registration of Motor vehicles are taxes
and may, therefore, be paid with a back pay certificate of indebtedness.
 An imposition may partake the nature of both a revenue measure and a regulatory fee. In such a case,
the real intendment and the primary and substantial purpose of the law must be inquired into from
which it may be held to be one or the other depending on the statute's predominant objective.
Philippine Airlines vs Romeo Edu, et al., 164 SCRA 320
 In exempting the Philippine Airlines (which was by its Charter exempt from all taxes) from motor
vehicle registration fees, the Court held that since the fees imposed are mainly used for revenue and
only a fifth thereof is retained by the Land Transportation Commission for regulation, the same
should be considered as taxes rather than as license fees.
Villegas vs Hsiu 86 SCRA 270
 Only a portion of a permit fee in excess of the cost of regulation was held to be a tax. The contention
that Ordinance. No. 6537 is not a purely tax or revenue measure because its principal purpose is
regulatory in nature has no merit. While it is true that the first part which requires that the alien shall
ensure an employment permit from the Mayor involves the exercise of discretion and judgment in
the processing and approval or disapproval of applications for employment permits and therefore is
regulatory in character, the second part which requires the payment of php 50.00 as employee's fee
is not regulatory but revenue measure. There is no logic or justification in exacting php 50.00 from
aliens who have been cleared for employment. It is obvious that the purpose of the ordinance was to
raise money under the guise of regulation.
Esso Standard Eastern, Inc vs CIR 175 SCRA 149
 A margin levy on foreign exchange was held to be a police power measure to strengthen our
country's international reserve rather than tax.
Lozano vs Energy Regulatory Board 192 SCRA 363, Dec 18, 1990
 An amount imposed by the Energy Regulatory Board on petroleum products to augment the
resources of the price Stabilization Fund under Pres. Decrees No. 1956 was not considered, with
Justice Paras dissenting, as an act of taxation.
5.) According to Scope or Authority Imposing the tax

a. National Taxes imposed by the national government (e.g., internal revenue taxes and customs
duties).
CASE:
Meralco Securities vs Central Board of assessment Appeals 114 SCRA 260 May 31, 1982
 The real property tax under the then Property Tax Code, the Supreme Court held in this case that it is
a national tax since the tax has always been imposed by the national government and enforced
throughout the Philippines.
b. Municipal or Local
Notes in TAXATION 1
27
o Taxes imposed by local governments (e.g., business tax that maybe imposed under the Local
Government Code)
Nota bene:
 It is important to know whether certain taxes are internal revenue (IR) taxes or not because in case if
it is an IR tax, the provisions on refund, prescription, payment, assessment, redemption, distraint,
and levy etc. of the NIRC shall apply. Thus, license fees imposed by the local governments, not being
IR taxes, are not governed by the NIRC. e.g., tax refund does not apply to license fees.
 In addition, it is likewise important to know whether a tax is national or local in scope:
a. To be able to apply the correct administrative rules for the enforcement and collection of
said tax,
b. To be able to determine the correct prescriptive periods for the assessment and collection of
the same, and
c. The tax remedies applicable thereto.
6.) According to Graduation (Tax base and Tax Rate):

a. Progressive- The tax rate increases as the tax base increases.(e.g., income tax)
b. Regressive- The tax rate decreases as the tax base increases.
c. Mixed- The tax rates are partly progressive and partly regressive.
d. Proportionate or flat rate- The tax rates are fixed (in amounts or in percentage) on a flat tax
base.
e. Degressive- The increase in tax rate is not proportionate to the increase of tax base.
DISTINGUISHED FROM CERTAIN KINDS OF EXACTIONS
A tax should be distinguished from other forms of exactions, such as:
1. License Fee- which is imposed for the regulation of lawful business or occupation in the exercise of a
police power, the amount of which is invariably limited to cover the expenses of issuing the license
and the cost of the necessary surveillance, inspection or supervision by the Government.
DIFFERENTIATE
TAX LICENSE
 it is for revenue purposes  it is for purposes of regulation
 Taxing power of the Government  police power of the Government
 No limit as to amount  has limit based on the necessity to carry
out the regulation
 Person, property, business, rights,  is required for the commencement of a
interests, privileges, acts and business or profession or to exercise a
transactions.(as to subject or object of right/privilege
imposition)
 it has a nature of permanence  always revocable
 the power to tax includes the power to  the power to license does not include the
license power to tax
 post-activity imposition  pre-activity imposition
 current data ( as to basis of imposition)  Preceding year's or quarter's data. If new
business, based on capitalization. (As to
basis of computation)
Notes in TAXATION 1
28
 it is self-assessing  not self-assessing

 the power to tax is subject to  The power to license is not subject to the 3
constitutional, inherent and contractual limitations because it is an exercise of a
limitations police power to guard and safeguard the
interest and welfare of the public.
 Exemption from tax does not include  Exemption from regulatory fees is not
exemption from regulatory fees. allowed.
FACTORS THAT DETERMINE WHETHER AN IMPOSITION IS A TAX OR A LICENSE:
a. Amount of the imposition

b. Intent of the imposition
c. Effect of the imposition
KINDS OF LICENSES
(a) Those that are imposed to regulatory useful occupation

(b) Those that are imposed to regulate non-useful or less desirable occupation.
(c) Those that are imposed for revenue only (called license tax)
CASES:
City of Ozamis vs Lumapos and Hon. Morave 65 SCRA 33
 The City of Ozamis has been clothed with full power to control and regulate its streets for the
purpose of promoting health, safety and welfare. Indeed, municipal power to regulate the use of
street is a delegation of Police power of the national Government and in the exercise of such power,
a municipal corporation can make all necessary and desirable regulations which are reasonable and
manifestly in the interest of public safety and convenience.
Procter and Gamble vs Municipality of Jagna 94 SCRA 894
 A municipality is authorized to impose 3 kinds of licenses:

(1) A license for regulation of useful occupation or enterprises;
(2) License for restriction or regulation of non-useful occupations or enterprises; and
(3) License for revenue.
Morcon vs City of Manila 1 SCRA 310
 For non-useful occupations, a wider degree or latitude of discretion is generally conceded in the
determination of the amount.
Golden Ribbon Lumber vs City of Butuan 12 SCRA 611
 If unpaid, the business or activity itself subject to the license fee can become illegal, unlike, generally,
that of the non-payment of tax.
TOLL
 An act or demand on proprietorship or ownership. Its imposition is generally contractual in

nature, and it maybe demanded by private persons or entities.
Notes in TAXATION 1
29
SPECIAL ASSESSMENT OR LEVY
 A demand for contribution to help defray the cost of improvement on real property owners of a
particular locale directly benefited by such improvement. It is not a personal liability of the
person assessed but one assessable on the property itself.
DEBT OR AN ORDINARY OBLIGATION
 Is based upon a juridical tie, created by law, contracts, quasi-contracts, delicts or quasi-delicts
between the parties for their private interest or resulting from their own acts or omissions.
DIFFERENTIATE:
TAX TOLL
 it is a demand of sovereignty  it is a demand for proprietorship
 it is one's support for the government  it is a compensation for the use of
somebody else's property
 it is imposed only by the government  it may be imposed by the government or by
private individual
 it is based on Governmental needs  it is determined by the cost of property or
improvement thereon
 it is a demand of sovereignty  it is a demand for proprietorship
DIFFERENTIATE:
TAX DEBT
 it is based on law  it is based on contract
 not assignable  it is assignable
 Non-payment covers imprisonment except  no imprisonment for non-payment
poll tax as it is sanctioned by law.
 generally payable in money  maybe paid in cash or in kind
 generally not subject to set-off  subject to set-off
 does not earn interest except when  draws interest when stipulated or when in
delinquent default
 Its prescriptive periods are those provided  prescriptive periods are those provided
under the NIRC. under the Civil Code or the Rules of Court
WHEN A TAX IS CONSIDERED A DEBT:
(a) when the tax is secured by a bond

(b) when its collection is being enforced by court action
(c) When the tax is the subject of a compromise agreement validly entered into between the
government and the taxpayer.
(d) interest on delinquency is considered as interest on indebtedness
Consequences if tax is a debt:

Notes in TAXATION 1
30
1. When taxes are considered debts, the prescriptive periods for their collection are governed by
those provided in the general laws(NCC and Rules of Court) and NOT those provided under the
Tax Code.
2. In case of appeal, it is the CA that has jurisdiction and not the CTA.
NOTA BENE: (2010 BAR)
 When the Government and the tax payer entered into a valid compromise agreement, the tax due
from the taxpayer is considered a debt. Hence, in the event of appeal, the CA (NOT the CTA) has the
power to review the compromise agreement forged by the CIR and the tax payer.
DIFFERENTIATE:
TAX SPECIAL ASSESSMENT

 levied on business, interests, transactions,  levied on land
rights, persons, properties or privileges
 maybe made a personal liability of the  cannot be made the personal liability of the
person assessed person assessed, because it is the land that
answers for the liability
 based on necessity with no hope of direct  based wholly on benefits received
or immediate benefit to the taxpayer
 the power to tax carried with it the power  exemption is qualified
to levy special assessment
 exemption from taxes does not include  maybe imposed by the national or local
exemption from special assessment government
 an imposition of a charge on all property,  it is exceptional in application for the
real and personal in a prescribed area is a recovery of costs and/or maintenance of
tax and not an assessment, although the improvement
purpose is to make a local improvement on
a street or highway
 it is of general application  levied on land
DISTINCTIONS BETWEEN TAX AND SUBSIDY
I. Subsidy is a pecuniary aid directly granted by the government to an individual or private commercial
enterprises deemed beneficial to the public.
II. It is a grant of funds or property from a government to a private person or company to assist in the
establishment or support of an enterprise deemed advantageous to the public either as a simple
gift or a payment of an amount in excess of the usual charged for a service
III. It is not a tax although a tax may have to be imposed to pay it.
DIFFERENTIATE:
TAX PENALTY
 it is imposed to raise revenue  it is imposed to regulate conduct through
punishment and suppression of injurious
act
 it is imposed only by the government  may be imposed by the government or by
private individuals
 it arises from law  it may arise from law or from contract
Notes in TAXATION 1
31
 Generally, payable in money  maybe paid in money or in kind
DISTINCTION BETWEEN TAX AND FRANCHISE TAX
 A tax is a forced charge, imposition or contribution. It operates in invitium and is in no way

dependent upon the will or contractual assent, express or implied of the person taxed while a
FRANCHISE TAX is in consideration of the granting of the franchise and it operates because a person
taxed assents expressly or impliedly. Hence, there is contractual assent to be covered by the
imposition of franchise taxes.
DISTINCTIONS BETWEEN TAX AND MARGIN FEE
 MARGIN FEE is not a tax but a mere measure (regulatory fee) designed to curb the excessive
demands upon our foreign reserves. It is imposed for the purpose of stabilizing currency whereas, a
TAX id an exaction imposed by the government in the exercise of one of its inherent functions for the
purpose of raising revenue for its support.
DIFFERENTIATE:
DELINQUENT TAX DEFICIENCY TAX

 the entire amount of the tax liability has  that remaining portion of the whole tax
not been paid at all liability which remains still unsettled
 assessment is not necessary in certain  assessment is mandatory prior to its
cases collection and taxpayer may dispute the
deficiency tax assessment
 filing of civil action for the collection of the  collection maybe done administratively or
delinquent tax in the ordinary court is the judicially
proper remedy to enforce collection
 is subject to the administrative penalties of  -is generally NOT subject to surcharge but
25% surcharge, 20% interest per annum only to interest and compromise penalty
and compromise penalty
NOTA BENE
 Taxes are personal.

(a) The burden of taxation cannot be transferred from one person to another by private
agreement as this is determined by law, unless otherwise allowed.
(b) The tax delinquency of the corporation cannot be enforced against its stockholders,
however, the latter maybe held liable for the unpaid taxes of a dissolved corporation if it
appears that the corporate assets have passed into their hands.
CASES:
Victoria Milling vs Philippine Ports Authority 153 SCRA 317, Aug 27, 1987
 An imposition by the ports authority of 10% government share on earnings of arrastre and
stevedoring operators was held to be contractual compensation rather than a tax. But for certain
purposes, taxes may be considered debts, in the generic sense, such as their (taxes) collection being
enforceable by a court action; in the application of certain statutes of limitation; and in the matter of
deductible items from gross income.
Notes in TAXATION 1
32
Sambrano vs Court of Tax Appeals 101 Phil 1
 Taxes due, in a broad sense, are debts.-Although taxes already due have not, strictly speaking, the
same concept as debts, they are, however, obligations that may be considered as such.
Republic vs Far East American Co. 7 SCRA 339
 An action to recover deficiency sales taxes, surcharges and penalty on gross sales, which was the
subject matter of a compromise agreement entered into by and between the Commissioner of
Internal Revenue and a taxpayer and payment thereof being guaranteed a bond, is one arising from
contract and not a tax collection. Consequently, the prescriptive period that would bar the action is
not that provided or prescribed by the National Internal Revenue Code but the Civil Code.
Commissioner of Internal Revenue vs Prieto 109 Phil 592
 For interest to be allowed as deduction from gross income, it must be shown that there be
indebtedness, that there should be interest upon it, and that what is claimed as an interest
deduction should have been paid or accrued within the year.
 Although interest payment for delinquency taxes is not deductible as tax under section 30(c) of the
tax code and section 80 of the Income Tax Regulations, the taxpayer is not precluded thereby from
claiming said interest payment as deduction under Section 30(b) of the same code.
INTERPRETATION AND CONSTRUCTION OF TAX STATUTES
 It is a well settled rule in taxation that tax statute will not be construed as imposing a tax unless it
does so clearly, expressly, and unambiguously. It is construed most strongly in favor of the citizen
because burdens are not to be imposed beyond what the statutes expressly and clearly import.
HORNBOOK DOCTRINE
 A tax cannot be imposed without clear and express words for the purpose and the provisions of a
taxing act are not to be extended by implication, thus-
(a) it is the duty of the courts to adopt a construction of a tax statute which will bring it into
harmony with the constitution;
(b) tax laws must be interpreted in connection with other legislation;
PRINCIPLE OF PARI-MATERIA
 Different statutes referring to the same object should be construed with reference
to each other as that all provisions may be given effect.
(c) it must be given reasonable construction with the view of carrying out their purpose and
intent;
(d) it must be construed to avoid the possibilities of tax evasion;
(e) as in other laws, the legislative intent must be determined and should prevail;
(f) where there are (2) possible construction of a tax statute, that one which does not produce
unfair, arbitrary or oppressive results should be preferred;
(g) doubts as to the legislative intent must be resolved liberally in favor of the taxpayer and
construed strictly against the government, in as much as revenue laws impose special
burden upon the taxpayer;
Notes in TAXATION 1
33
(h) every doubt in the statute in regard to the power to tax is to be construed in favor of the
State;
(i) doubts on the validity of the tax measure are resolved in favor of the government;
(j) exceptions are construed strictly against the taxpayer
 In the case of Macran Cebu vs Marcos, 261 SCRA 667, the SC held that: "since
taxation is a destructive power that interfered with the personal and property rights
of the people and takes from them a portion of their property for the support of the
Government, tax statutes must be construed strictly against the government and
liberally in favor of the taxpayer. But since taxes are what we pay for a civilized
society, or are the lifeblood of the nation, the law frowns against exemptions from
taxation and statutes granting tax exemptions are thus construed strictissimi juris is
against the taxpayer and liberally in favor of the taxing authority."
(k) legislative or judicial history may be an interpretative aid where the meaning of the statute
is doubtful;
(l) penal provisions of revenue statute are not too he rigidly construed;
(m) Non-retroactivity of rules and regulations promulgated by the CIR when prejudicial to the
taxpayer.
(n) administrative interpretation applied over a long period of time by administrative agencies
in charge of the enforcement of revenue laws is given great weight and although not
conclusive should be followed, unless it is shown to be erroneous
CASES:
Commissioner of Internal Revenue vs Fireman's Fund Insurance Co., 148 SCRA 315
 The established rules in statutory construction are equally applicable to tax statutes; after all, the
primordial consideration is, every time, the legislative intent. But where doubts exist in determining
that intent, the doubt must be resolved liberally in favor of the taxpayers and strictly against the
taxing authority.
Commissioner of Internal Revenue vs CA., Central vegetable Mftg. Co., Inc and CTA, GR NO. 122161, Feb.
23, 1999
 It bears stressing that the tax burdens are not to be imposed, nor presumed to be imposed beyond
what the statute expressly and clearly imports, tax statutes being construed strictissimi juris against
the government.
Floro Cement Corporation vs Gorospe 200 SCRA 480, Aug 12, 1991
 on the exemption claimed by the petitioner, this court has laid down the rule that as the power of
taxation is a high prerogative of sovereignty, the relinquishment is never presumed and any
reduction or diminution thereof with respect to its mode or its rate, must be strictly construed and
the same must be coached in clear and unmistakable terms in order that it may be applied.
Luzon Stevedoring Corporation vs. Court of Tax 163 SCRA 647(1988)
 Tax Exemption interpretation - Any claim for exemption from the tax statute should be strictly
construed against the taxpayer. Where a provision of law speaks categorically, the need for
Notes in TAXATION 1
34
interpretation is obviated, no plausible pretense being entertained to justify non-compliance. All that
has to be done is to apple it in every case that falls within its terms. Statutes are to be construed in
the light of purposes to be achieved and the evils sought to be remedied.
People vs Castaneda Jr. 165 SCRA 327
 Tax Amnesty under PD No. 370; Compliance with all requirements for availment of tax amnesty
under PD No. 370 would have the effect of condoning not only the income tax liabilities but also all
internal revenue taxes, including increments or penalties on account of non-payment as well as all
criminal, civil or administrative liabilities under the Internal Revenue Code,. Thus, entitlement to
benefits of PD 370 would have the effect of condoning or extinguishing the liabilities consequent
upon possession of false and counterfeit internal revenue labels; the manufacture of alcoholic
products subject to specific tax without having paid the annual privilege tax therefor, and the
possession, custody and control of locally manufacture articles subject to specific tax on which the
taxes had not been paid in accordance with the law, in other words, the criminal liabilities sought to
be imposed upon the accused respondents by the several information quoted above.
 Extinction of Liability under PD 370 – to be entitled to the extinction of liability under PD 370, the
claimant must have voluntarily disclosed his previously untaxed income or wealth and paid the
required 15% tax on such previously untaxed income or wealth. In the instant case, the claimant is
not entitled to such extinction since the disclosure of the previously untaxed income was not
voluntary but was rather a result of tax cases already pending.
CIR vs Mitsubishi Metal Corporation 181 SCRA 214
 It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting
exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the
taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon
the party claiming exemption to prove that it is in fact covered by the exemption so claimed, which
onus petitioners have failed to discharge. Significantly, private respondents are not even among the
entities which, under section 29 (b) (7) (A) of the tax code, are entitled to exemption and which
should indispensably be the party in interest in this case.
Republic vs IAC 196 SCRA 335
 The rule is that in case of doubt, tax statutes are to be construed strictly against the Government and
liberally in favor of the taxpayer strictissimi juris for taxes, being burdens, are not to be presumed
beyond what the applicable statute (in this case P.D. 213) expressly and clearly declares.
CIR vs Guerrero
 Sec 142 of the NIRC, allowing Filipinos a refund of 50% of the specific tax paid on aviation oil, cannot
be availed of by aliens in the absence of showing that their country grants similar exemption to
Filipino citizens; and where no such evidence was presented, the case should be remanded to the
court a quo for further proceedings
Manila Electric Company vs. Misael P. Vera
 One who claims to be exempt from the payment of a particular tax must do so under clear and
unmistakable terms found in the statute. Tax exemptions are strictly construed against the taxpayer,
they being highly disfavored and may almost be said "to be odious to the law." He who claims an
Notes in TAXATION 1
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exemption must be able to print to some positive provision of law creating the right; it cannot
be allowed to exist upon a mere vague implication or inference.
Wonder Mechanical Engineering Corporation vs.. The Hon. Court Of Tax Appeals
 Tax Exemption must be clearly expressed and cannot be established by implication. Exemption from
a common burden cannot be permitted to exist upon vague implication
CIR vs Gotamco and Sons
 The 3% contractor’s tax imposed upon petitioner is covered by the “direct and indirect tax
exemption” granted to WHO. Hence, petitioner cannot be held liable for such contractor’s tax. The
Supreme Court explained that direct taxes are those that are demanded from the very person who, it
is intended or desired, should pay them; while indirect taxes are those that are demanded in the first
instance from one person in the expectation and intention that he can shift the burden to someone
else. While it is true that the contractor's tax is payable by the contractor, However in the last
analysis it is the owner of the building that shoulders the burden of the tax because the same is
shifted by the contractor to the owner as a matter of self-preservation. Thus, it is an indirect tax
against the WHO because, although it is payable by the petitioner, the latter can shift its burden on
the WHO.
CIR vs CA, CTA, ADMU
 To impose the three percent contractor’s tax on Ateneo’s Institute of Philippine Culture, it should be
sufficiently proven that the private respondent is indeed selling its services for a fee in pursuit of an
independent business. Records do not show that Ateneo’s IPC in fact contracted to sell its research
services for a fee. In the first place, the petitioner has presented no evidence to prove its bare
contention that, indeed, contracts for sale of services were ever entered into by the private
respondent. Funds received by the Ateneo de Manila University are technically not a fee. They may
however fall as gifts or donations which are tax-exempt. Another fact that supports this contention is
that for about 30 years, IPC had continuously operated at a loss, which means that sponsored funds
are less than actual expenses for its research projects.
TAX EXEMPTION
I. CLASSIFICATION OF TAX EXEMPTION

a. Express Tax Exemption – those expressly granted by Constitution, statutes, treaties,
franchises or similar legislative acts
b. Implied Tax Exemption – whenever a particular person, property, excises, are deemed
exempt as they fall outside the scope of the taxing provision itself.
c. Constitutional Tax Exemption
d. Statutory Tax Exemption
e. Contractual Tax Exemption – tax exemption are those entered into by them under enabling
laws. These exemptions must not be confused with tax exemptions granted under franchises
which are not contracts within the purview of the non-impairment clauses of the
constitution.
f. Total Tax Exemption
g. Partial Tax Exemption
II. DEFINITION:
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TAX EXEMPTION
 Freedom, Immunity or privilege from the burden of taxation to which others are subjected
 The grant of immunity, express or implied or contractual to particular persons or corporations or
to persons or corporations of a particular class from a tax which persons or corporations
generally within the same state or taxing district are obliged to pay
 REASON: the inherent power of the state to impose taxes naturally carries with it the power to
grant tax exemptions. The power to exempt from taxation is an essential attribute of
sovereignty, and may be exercised in the constitution expressly or by implication.
TAX EVASION (tax dodging)
 It is resorting to acts or devices that illegally reduces or totally escape the payment of taxes that
are due to the taxpayers.
 Prohibited by law and therefore subjected to civil and criminal penalties
FACTORS OF TAX EVASION:

1. The 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
2. An accompanying state of mind which is described as being evil, in bad faith, willful, or deliberate
and not coincidental
3. A course of action which is unlawful
PROOF OF TAX EVASION

1. Failure to declare for taxation purposes true and actual income derived from business of two
consecutive years
2. Substantial under-declaration of income in the consecutive years coupled with intentional
overstatement of deductions
TAX AVOIDANCE (tax minimization scheme)
 It is the reduction or total escaping of payment of taxes through legally permissible means, that
are not prohibited and therefore are not subject to penalties
DIFFERENTIATE:
TAX AVOIDANCE:
o Legal and not subject to criminal prosecution
o Minimization of taxes
TAX EVASION
o Illegal and subject to criminal prosecution
o Almost always results in the absence of tax payments
III. NATURE
 It is inherent. It has the exclusive power to prescribe who and what property shall be taxed and
those that shall be exempt.
IV. CHARACTERISTIC OF A TAX EXEMPTION PRIVILEGE:
a. It is personal to the grantee. Hence, it is non-transferable

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b. It is a mere privilege of the grantee, thus, revocable unless founded on a contract

c. It implies a waiver on the part of the government to its right to collect what otherwise would be due
to it. (Must be strictly construed)
d. It is required that it be based upon substantial differences between those exempted from those
covered or subject thereto.
V. GROUNDS FOR TAX EXEMPTION
a. It may be based on a contract

b. It may be based on grounds of public policy
c. It may be based on some grounds to foster charitable and other benevolent institutions
d. It may be created under a treaty on grounds of reciprocity
e. It may be created to lessen the rigors of international double or multiple taxation
VI. PRINCIPLE GOVERNING TAX EXEMPTION
PRINCIPLE OF STRICTISSIMI JURIS
 Laws granting tax exemption are construed in stricissimi juris against the taxpayer and liberally in
favor of the taxing power. Taxation is the rule and the exemption is the exception.
Reason:
a) Life blood theory

b) To minimize differential treatment and foster impartiality and fairness and equality of
treatment among taxpayers
c) Taxation is a high prerogative of sovereignty whose relinquishment is never presumed
Exception:
a) When the statute granting exemption provides for liberal construction thereof
b) In case of special taxes relating to special cases and affecting only special classes of persons
c) If exemption refer to the public property
d) In cases of exemptions granted to religious, charitable and educational institution or their
property
e) In case of exemptions in favor of the government, its political subdivision or
instrumentalities
f) If there is an express mention or if the taxpayer falls within the purview of the exemption by
clear legislative intent
DOCTRINE OF USAGE
 This is a test of exemption on real properties which mandates that such properties must be
actually, directly and exclusively used for religious, charitable or educational purposes. The
gauge of the exemption is the USE of the property and not the OWNERSHIP
VII. CONSTUCTION OF TAX EXEMPTION STATUTES
 In applying the principles of tax exemption without first applying the well-settled doctrine of
strict interpretation in the imposition if taxes. It is both illogical and impractical to determine
who are exempted without first determining who are covered by the aforesaid provision. As
such, it must be determined first if the person is covered by the tax law, applying the rule of
Notes in TAXATION 1
38
strict interpretation of laws imposing taxes and other burdens on the populace, before asking
the same person to prove his exemption therefor.
VIII. EXTENT OF TAX EXEMPTION:
a) Tax exemption does not include exemption from license fee or charges
b) Tax exemption does not include exemption from special assessment
c) Tax exemption does not include an exemption from payment of a toll
d) Tax exemption does not include an exemption from a margin fee
e) Exemptions from fixed taxes do not include or cover exemption from income tax
f) Tax exemption granted to a corporation does not extend to stockholders
g) Exemption from taxes and assessment foes not include exemption from permit fees
h) Tax exemption granted to the traditional exemptees does not include exemption from building
permit fees on any improvement to be constructed on their properties
i) A buyer exempted from tax does not mean that the seller or manufacturer is also exempted
j) A person or entity exempt from national taxes is not exempt from local taxes and vis-à-vis
k) Exemption granted to Meralco from local taxes does not extend to real property taxes
l) The exemption of GOCCs from real property tax in the use of realty properties owned by the
government does not include the realty tax on improvement
IX. THE “IN LIEU OF ALL TAXES” CLAUSE DEFINE:
 The clause applies only to national internal revenue taxes and not to local taxes, unless the
exemption clearly provides for exemption from both taxes.
X. TAX AMNESTY
 It is 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 tax law. The purpose is to give the
erring taxpayer a chance to reform and become part of the society with a clean slate
RULES:
a) Tax amnesty, like tax exemption, is never favored or presumed in law and if granted by statute
must be strictly construed against the taxpayer who must show compliance with the law
b) The government is not estopped from questioning the tax liabilities even if the amnesty tax
payments were already made and received by the BIR because erroneous application and
enforcement of the law by public officer does not preclude subsequent correct application of the
statute. However, if the taxpayer has complied with all requirements of law under the tax
amnesty program, he shall be exempt from assessment and investigation.
c) Defense of tax amnesty is a personal defense. It relates to circumstances of a particular accused
and not to the character of the acts charged in the information.
d) In case of doubt, tax amnesty statutes are strictly construed, because taxes, being burdens are
not to be presumed beyond what tax amnesty expressly and clearly declares.
XI. DIFFERENCE BETWEEN TAX EXEMPTION AND TAX AMNESTY
TAX EXEMPTION
1. there is immunity from tax

2. the grantee does not need to pay anything
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3. can be availed of by any qualified taxpayer

4. prospective in application
5. tax liability does not attach to one enjoying a privilege of tax exemption
6. immunity from civil liability only
7. tax exemption requires no payment of tax
TAX AMNESTY
1. Connotes condonation from payment of an existing tax liability

2. Grantee pays a portion
3. Not always available
4. Retroactive in application
5. Tax liability attaches to a taxpayer who wants to avail of tax amnesty
6. Immunity from criminal, civil and administrative liability
7. Tax amnesty requires the payment of certain percentage of unpaid taxes
CASES (Exemption from tax):
Express
NPC vs RIC 190 SCRA 477
 Petitioner alleges that what has bee withdrawn is its exemption from taxes, duties, and fees which
are payable to the national government while its exemption from taxes, duties and fees payable to
government branches, agencies and instrumentalities remains unaffected. Considering that real
property taxes are payable to the local government, NAPOCOR maintains that it is exempt
therefrom. We find the above argument untenable. It reads into the law a distinction that is not
there. It is contrary to the clear intent of the law to withdraw from all units of government; including
government-owned or controlled corporations their exemptions from all kinds of taxes. Had it been
otherwise, then the law would have said so. Not having distinguished as to the kinds of tax
exemptions withdrawn, the plain meaning is that all tax exemptions are covered. Where the law
does not distinguish, neither must we.
Implied
SSS vs Bacolod City 115 SCRA 412
 Whether a government owned and controlled corporation is performing governmental or

proprietary function is immaterial. Section 29 of the Charter of Bacolod City does not contain any
qualification whatsoever in providing for the exemption from real estate taxes of "lands and
buildings owned by the Commonwealth or Republic of Philippines." Hence, when the legislature
exempted lands and buildings owned by the government from payment of said taxes, what it
intended was a broad and comprehensive application of such mandate, regardless of whether
such property is devoted to governmental or proprietary purpose
Bisaya Land Transportation vs CIR 105 PHIL 1338

 Income tax returns contain a statement of the taxpayer’s income for a given year. The taxpayer is not
supposed to declare in said returns that he has purchased or received “from without the
Philippines”, commodities or merchandise that are subject to the compensating tax. Generally, such
purchases are not “income,” and, hence, have no place in income tax returns.
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40
Contractual
Cagayan Electric Co. vs CIR 138 SCRA 629
 Congress could impair the company’s legislative franchise by making it liable for income tax from
which heretofore it was exempted by virtue of the exemption provided for in section 3 of its
franchise. The Constitution provides that a franchise is subject to amendment, alteration or repeal by
the Congress when the public interest so requires (Sec. 8, Art. XIV, 1935 Constitution; Sec. 5, Art. XIV,
1973 Constitution). Section 1 of the company’s franchise, RA 3247, provides that it is subject to the
provisions of the Constitution and to the terms and conditions established in Act 3636 whose section
12 provides that the franchise is subject to amendment, alteration or repeal by Congress.
Prov of Misamis Oriental vs Cagayan Electric 181 SCRA 38

 Local Tax Regulation 3-75 issued by the Secretary of Finance in 1976 made it clear that the franchise
tax provided in the Local Tax Code may only be imposed on companies with franchise that do not
contain the exempting clause, i.e. “in-lieu-of-all-taxes-proviso.” CEPALCO’s franchise i.e. RA 3247,
3571 and 6020 (Section 3 thereof), uniformly provides that “in consideration of the franchise and
rights hereby granted, the grantee shall pay a franchise tax equal to 3% of the gross earnings for
electric current sold under the franchise, of which 2% goes to the national Treasury and 1% goes into
the treasury of the municipalities of Tagoloan, Opol, Villanueva, Jasaan, and Cagayan de Oro, as the
case may be: Provided, that the said franchise tax of 3% of the gross earnings shall be in lieu of all
taxes and assessments of whatever authority upon privileges, earnings, income, franchise and poles,
wires, transformers, and insulators of the grantee from which taxes and assessments the grantee is
hereby expressly exempted.
CIR vs CTA 195 SCRA 445
 The franchise was in the form of a contract between the sovereign power and the private
respondents. The Corporation Law requiring the 60% Filipino ownership is a general statute while
the grant of the franchise is a special law.
 Therefore the private respondent has properly been paying it’s taxes, however it may also still be
taxed for income derived within the Philippines such as the rendering of managerial services to other
domestic companies. This is to prevent mass tax evasion
Penid vs Virata 121 SCRA 1-6

 Statutes offering reward must be liberally construed in favor of informers and with regard to the
purpose for which they are intended, with mere technicality yielding to the substantive purpose of
the law. Otherwise, the government would lose a positive and effective means of checking the
anomalies that are committed to the detriment of the finances of the state.
TAX AMNESTY
CASES:
CIR vs CA ROH Auto Products and CTA 240 SCRA 398
 A tax amnesty, being a general pardon or intentional overlooking by the state its authority to
impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax
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law, partakes of an absolute forgiveness or waiver by the government itself of its right to collect
what otherwise would be due it, and in this sense, prejudicial thereto, to give tax evaders, who wish
to relent and are willing to reform a chance to do so and thereby become a part of the new society
with a clean slate.
Asia International Auctioners, Inc vs CIR GR 179115
 Under Section 8 (a) of the RA 9480 withholding agents with respect to their withholding tax liabilities
shall be disqualified to avail of the tax amnesty. In this case, AIA was not being assessed as
withholding agent that failed to withhold or remit the deficiency VAT and excise tax but as a taxpayer
who is directly liable for the said taxes. Moreover, RA 9480 does not exclude from its coverage
taxpayers operating within special economic zones. Hence, AIA is qualified to avail of the Tax
Amnesty under RA 9480
DOCTRINES AND PRINCIPLES IN TAXATION
I. PROSPECTIVITY OF TAX LAWS
 Taxes must only be imposed prospectively, unless otherwise provided by such law
 The legislative intent evincing that a tax statute should operate retroactively should be explicit and
perfectly clear.
 Retroactive effect of revenue laws may also be allowed if it will not deny due process. There is
violation of due process if the tax law imposes harsh and oppressive tax
 When a tax law imposes a criminal liability it cannot be given retroactive effect because that would
violate the ex post facto law, but if it imposes civil penalties like fines and forfeiture. It can be given
retroactive effect unless it produces harsh consequences, its validity may be questioned on grounds
of equity and due process
EXCEPTIONS:
a) The retroactive application is necessarily implied from the language used
b) It involves income tax
c) The retroactive application is clearly the intent of the congress
II. IMPRESCRIPTIBILITY OF TAXES
GR: taxes (right to assess and collect taxes) are imprescriptible
X: when the law otherwise provide
EXAMPLES:
a) NIRC – which provides for the prescriptive period of making tax assessment and collection
b) TARIFF AND CUSTOM CODE – provides a period within which the entry and passage of goods are
free of duty or upon payment of duties shall become final and conclusive
c) LOCAL GOVERNMENT – provides for the prescriptive period of making assessment of local taxes,
fees or charges
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III. DOUBLE TAXATION
 Taxing the object/subject within the territorial jurisdiction twice by the same taxing authority for the
same period, purpose and involving the same kind of tax
KINDS OF DOUBLE TAXATION:
a) Direct duplicate taxation – This is objectionable and prohibited because it violates the constitutional
provision on uniformity and equality. It happens the same subject/object of taxation is taxed twice
when it should be taxed once.
b) Indirect duplicate taxation - No constitutional violation. Such as taxing the same property by 2
different taxing authority.
DOMESTIC DOUBLE TAXATION
 The subject matter of taxation is taxed by both the national and the local government at the same
time within the same tax period
INTERNATIONAL JURIDICAL DOUBLE TAXATION
 Takes place when a person is a resident of the first contracting state and derives income from, or
owns capital in the second contracting state and both state impose taxes on such income or capital.
In order to eliminate double taxation, a tax treaty is entered into by the two contracting state
 Reason in avoiding International juridical taxation – to encourage free flow of goods and services
and the movement of capital, technology and persons between countries, conditions deemed vital in
creating robust and dynamic economy
METHODS USED IN TAX TREATIES TO AVOID INTERNATIONAL DOUBLE TAXATION
a) First method –setting out the respective rights to tax of the state of source or situs and of the state
of residence with regard to certain classes of income or capital. In some cases, an exclusive right to
tax is conferred on one of the contracting states. However, for other items of income or capital both
states are given the right to tax, although the amount of tax that may be imposed by the state of
source is limited.
b) Second Method – whenever the state of source is given a full or limited right to tax together with the
state of residence. In this case, the treaties make it incumbent upon the state of residence to allow
relief in order to avoid double taxation.
Two methods of Relief:
I. Exemption Method - the income or capital which is taxable in the state of source or situs is
exempted in the state of residence, although in some instances it may be taken into account
in determining the rate of tax applicable to the taxpayer’s remaining income or capital
II. Credit Method – although the income or capital which is taxed in the state of source is still
taxable in the state of residence, the tax paid in the former is credited against the tax levied
in the latter. The basic difference between the two methods is that in the exemption
method, the focus is on the income or capital itself whereas, the credit method focuses
upon the tax
Notes in TAXATION 1
43
REMEDIES AGAINST DOUBLE TAXATION
a. Provision for tax exemption

b. Allowance of tax credit for foreign taxes paid
c. Allowance of deduction for foreign taxes paid
d. Application of principle of reciprocity
e. Enter into treaties and agreement with foreign government
f. Allowance and application for tax incentives
g. Reduction of Philippine tax rate
METHODS OF REDUCING THE RIGORS OF DOUBLE TAXATION (BEDA MEM-AID)
a) Tax credit – an amount is subtracted from an individual’s or entity’s tax liability to arrive at the total
tax liability
b) Tax deduction – the amount of tax is written off or treated as deductions from an individual’s or
entity’s gross income on which the resulting amount the tax liability is calculated
c) Reduction of the Philippine Income Tax Rate - example is Tax Sparring Rule, wherein the dividend
earned by a non-resident foreign corporation (NRFC) within the Philippines is reduced by imposing a
lower rate of 15% (in lieu of 30%) on the condition that the country to which the NRFC is domiciled
shall allow a credit against the tax due from the NRFC, which taxes are deemed to have been paid in
the Philippines
d) Tax exemptions – a grant of immunity to particular persons or corporations from the obligation to
pay
e) Tax treaties – agreement between two countries specifying what items of income will be taxed by
the authorities of the country where the income is earned
IV. POWER TO TAX INVOLVES THE POWER TO DESTROY
 The power to tax must be exercised with caution to minimize injury to the proprietary rights of a
taxpayer
 If the tax is lawful and violative of any of the inherent and constitutional limitations, the fact alone
that it may destroy an activity or object of taxation will not entirely permit the courts to afford any
relief
 A subject or object that may not be destroyed by the taxing authority may not likewise be taxed
 It must be exercised fairly, equally and uniformly, lest the tax collector kills the hen that lays the
golden egg and in order to maintain the general public’s trust and confidence in the Government,
this power must be used justly and not treacherously
CASES:
I. Prospectivity of tax laws
Hydro Resources vs CA 192 SCRA 604
 EO 860 which was the basis for the imposition of the ad valorem duty took effect December 1982.
The importations were effected in 1978 and 1979 by NIA. It is a cardinal rule that laws shall have no
Notes in TAXATION 1
44
retroactive effect unless contrary is provided. EO 860 does not provide for its retroactivity. The
Deputy Minister of Finance even clarified that letters of credit opened prior to the effectivity of EO
860 are not subject to its provisions.
Hidalgo vs Collector, 100 Phil 288
 The secretary of finance is vested with authority to revoke, repeal or abrogate the acts or previous
rulings of his predecessors in office because the construction of a statute by those who administer it
is not binding on their successors if thereafter the latter becomes satisfied that a different
construction should be given.
Central Azucarera de Don Pedro vs CTA 20 SCRA 344
 It appearing that the new Section 51 (d) under Republic Act 2343 expressly provides that the interest
on deficiency shall be assessed at the same time as the deficiency income tax; and that respondent
Commissioner of Internal Revenue imposed and sought to collect the interest only from June 20,
1959, which was the date of effectivity of said Republic Act No. 2343; that the deficiency income
taxes in question were assessed and unpaid when said Act was already in force, the Tax Court
correctly held that said Section 51 (d), as amended, is not being applied retroactively as contended
by petitioner herein.
 The SC ruled that the collection of interest is not penal in nature but a just compensation to the state
for the delay in paying the tax and for the concomitant use by the tax payer of funds that rightfully
should be in the government’s hands. The fact that the interest charged is made proportionate to
the period of delay constitutes the best evidence that such interest is not penal but compensatory.
Fernandez vs Fernandez 99 PHIL 934
 The uniform ruling of the courts in the United State has been to reject the contention that the
retroactive application of revenue acts is a denial of the due process guaranteed by the Fifth
Amendment. In order to declare a tax as transgressing the constitutional limitation, it must be so
harsh and oppressive in its retroactive application. Far from being unjust or harsh and oppressive our
war profit tax is both wise and just.
Lorenzo vs Posadas 64 Phil 353
 The respondent levied and assessed the inheritance tax collected from the petitioner under the
provisions of section 1544 of the Revised Administrative Code as amended by Act No. 3606.
However, the latter only enacted in 1930 – not the law in force when the testator died in 1922. Laws
cannot be applied retroactively. The Court states that it is a well-settled principle that inheritance
taxation is governed by the statue in force at the time of the death of the decendent. The Court
also emphasized that “a statute should be considered as prospective in its operation, unless the
language of the statute clearly demands or expresses that it shall have retroactive effect.
II. IMPRESCRIPTIBILITY OF TAXES
CIR vs Ayala Securities Corp 101 SCRA 231
 There is no such time limit on the right of the Commissioner to assess the 25% surtax since there is
no express statutory provision limiting such right or providing for its prescription. Hence, the
collection of surtax is imprescriptible. The underlying purpose of the surtax is to avoid a situation
Notes in TAXATION 1
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where the corporation unduly retains its surplus earnings instead of declaring and paying dividends
to its shareholders. SC reverses the ruling of the CTA.
COLLECTOR VS BISAYA LAND TRANSPORTATION CO. L-12100
 Income tax returns contain a statement of the taxpayer’s income for a given year. The taxpayer is not
supposed to declare in said returns that he has purchased or received “from without the
Philippines”, commodities or merchandise that are subject to the compensating tax. Generally, such
purchases are not “income,” and, hence, have no place in income tax returns.
CIR vs CA GR No. 104171
 President does not have the power to repeal an existing tax. Therefore, he could not have repealed
the 2% caterer’s tax
III. DOUBLE TAXATION
Villanueva vs City of Iloilo 26 scra 578
 Taxes could not be the subject of a set-off or legal compensation for the simple reason that the
government and the taxpayer are not mutual creditors and debtors of each other. Claims for taxes
are neither debts nor contracts. A taxpayer cannot refuse to pay his taxes when they fall due simply
because he has a claim against the government that the collection of the tax is contingent on the
result of the lawsuit it filed against the government. In the case at bar, the claims of Philex for VAT
refund is still pending litigation. Moreover, taxes are the lifeblood of the government and should be
collected without unnecessary hindrance
Proctor & GAMBLE, Phil vs Mun of Jagna 94 SCRA 894
 It is immaterial what the business of the petitioner is. The tax is, as said, for the privilege to
store copra in their bodega which is entirely different from a tax on petitioner’s products. For double
taxation to exist, the same thing must be taxed twice within the same jurisdiction, which is not the
case here.
CIR vs Lednicky 11 SCRA 603
 Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the
same governmental entity. In the present case, although the taxpayer would have to pay two taxes
on the same income but the Philippine government only receives the proceeds of one tax, there is no
obnoxious double taxation.
Pepsi-cola vs Tanauan 69 SCRA 460
 Double taxation, in general, is not forbidden by our fundamental law, so that double taxation
becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental
entity or by the same jurisdiction for the same purpose, but not in a case where one tax is imposed
by the State and the other by the city or municipality.
 The ordinances do not partake of the nature of a percentage tax on sales, or other taxes in any form
based thereon. The tax is levied on the produce (whether sold or not) and not on the sales. The
volume capacity of the taxpayer's production of soft drinks is considered solely for purposes of
Notes in TAXATION 1
46
determining the tax rate on the products, but there is not set ratio between the volume of sales and
the amount of the tax.
POWER TO TAX INVOLVES POWER TO DESTROY
Sison vs Ancheta 130 SCRA 654
 There is a need for proof of such persuasive character as would lead to a conclusion that there was a
violation of the due process and equal protection clauses. Absent such showing, the presumption of
validity must prevail. Equality and uniformity in taxation means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate. The taxing power has the authority to
make reasonable and natural classifications for purposes of taxation. Where the differentiation
conforms to the practical dictates of justice and equity, similar to the standards of equal protection,
it is not discriminatory within the meaning of the clause and is therefore uniform.
Roxas vs CTA 23 SCRA 276
 It was the duty of the Government to pay the agreed compensation after it had persuaded Roxas y
Cia. to sell its haciendas, and to subsequently subdivide them among the farmers at very reasonable
terms and prices. But due to the lack of funds, Roxas y Cia. shouldered the Government's burden,
went out of its way and sold lands directly to the farmers in the same way and under the same terms
as would have been the case had the Government done it itself
 The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly
McCulloch vs Maryland 51 Am Jur 80
 The Bank of the United States has a right to establish its branches within any state. The States have
no power, by taxation or otherwise, to impede or in any manner control any of the constitutional
means employed by the U.S. government to execute its powers under the Constitution. This principle
does not extend to property taxes on the property of the Bank of the United States, nor to taxes on
the proprietary interest which the citizens of that State may hold in this institution, in common with
other property of the same description throughout the State.
Pan Handle Oil vs Mississippi 77 US 21
 A state tax imposed on dealers in gasoline for the privilege of selling, and measured at so many cents
per gallon of gasoline sold, is void under the federal Constitution as applied to sales to
instrumentalities of the United States, such as the Coast Guard Fleet and a Veterans' Hospital. P. 277
U. S. 222.
 The substance and legal effect is to tax the sale, and thus burden and tax the United States, exacting
tribute on its transactions for the support of the state. Id.
 Such an exaction infringes the right of the dealer to have the constitutional independence of the
United States in respect of such purchases remain untrammeled.
Tokyo Shipping Co. Ltd, GR 68252

Notes in TAXATION 1
47
 Pursuant to Section 24 (b) (2) of the National Internal Revenue Code which at that time, a resident
foreign corporation engaged in the transport of cargo is liable for taxes depending on the amount of
income it derives from sources within the Philippines. Thus, before such a tax liability can been
forced the taxpayer must be shown to have earned income sourced from the Philippines .Indeed, a
claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris
against the taxpayer. And Tokyo has the burden of proof to establish the factual basis of its claim for
tax refund.
Bd. Of Assessment Appeals vs CTA 8 SCRA 225
 Republic Act No. 470 makes no distinction between property held in a sovereign, governmental or
political capacity and those possessed in a private, proprietary or patrimonial character. And where
the law does not distinguish neither may we, unless there are facts and circumstances clearly
showing that the lawmaker intended the contrary, but no such facts and circumstances have been
brought to our attention. Indeed, the noun "property" and the verb "owned" used in said section
3(a) strongly suggest that the object of exemption is considered more from the view point of
dominion, than from that of domain
V. ESCAPE FROM TAXATION
FORMS OR ESCAPES OF TAXATION
a) Those that will not result in loss of revenue of the government

1. Shifting – the process of transferring the tax burden from the statutory taxpayer to another
without violating the law. E.g. VAT
i. Forward shifting – when the burden of tax is transferred from a factor of
production through the factors of distribution until it finally settles on the ultimate
purchaser or consumer
ii. Backward shifting – When the burden is transferred from the consumer through
the factors of distribution to the factors of production
iii. Onward shifting – When the tax is shifted two or more times either forward or
backward
2. Capitalization – the seller is willing to lower the price of the commodity provided the taxes
will be shouldered by the buyer
3. Transformation – the manufacturer absorbs the additional taxes imposed by the
government without passing it to the buyers for fear of lost of his market. Instead, he/it
increases quantity of production, thereby turning their units of production at a lower cost
resulting to the transformation of the tax into a gain through the medium of production
b) Those that will result in loss of revenue to the government
1. Tax exemption
2. Tax evasion
3. Tax avoidance
CASES:
Commissioner of Internal Revenue vs. Norton & Harrison Company 11 SCRA 714 (1964)
 Taxation; Corporate fiction may not be used to evade taxes.—the revenue officers, in proper cases,
may disregard the separate corporate entity where it serves but as a shield for tax evasion.
Notes in TAXATION 1
48
 When sales taxes to be based on sale to the public and not on intermediate sale to another
corporation.—Where it is proven that two corporations are in reality but one entity and that the veil
of corporate fiction is being used as a shield for tax evasion by making it appear that the original sale
was that from one corporation to the other in order to gain a tax advantage, it is held that the basis
of the sales tax should be the sale by the latter corporation to the public.
Commissioner of Internal Revenue vs. Rufino 148 SCRA 42 (1987)
 A corporate merger where new corporation continued to operate the business of the old corporation
is not subject to capital gains tax.
 The merger however, must be undertaken for a bona fide business purpose and not solely for the
purpose of escaping the burden of taxation.—the basic consideration, of course, is the purpose of the
merger, as this would determine whether the exchange of properties involved therein shall be
subject or not to the capital gains tax. The criterion laid down by the law is that the merger "must be
undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden
of taxation." We must therefore seek and ascertain the intention of the parties in the light of their
conduct contemporaneously with, and especially after, the questioned merger pursuant to the Deed
of Assignment of January 9, 1959. It has been suggested that one certain indication of a scheme to
evade the capital gains tax is the subsequent dissolution of the new corporation after the transfer to
it of the properties of the old corporation and the liquidation of the former soon thereafter. This
highly suspect development is likely to be a mere subterfuge aimed at circumventing the
requirements of Section 35 of the Tax Code while seeming to be a valid corporate combination.
Delpher Trades Corp. vs. Intermediate Appellate 157 SCRA 349(1988)
 Tax Avoidance; The legal right of a taxpayer to decrease the amount of what otherwise could be his
taxes or altogether avoid them, by means which the law permits, cannot be doubted.—The records
do not point to anything wrong or objectionable about this “estate planning” scheme resorted to by
the Pachecos. “The legal right of a taxpayer to decrease the amount of what otherwise could be his
taxes or altogether avoid them, by means which the law permits, cannot be doubted.”
VII. DOCTRINE OF EQUITABLE RECOUPMENT
 Where the refund of a tax illegally or erroneously collected or overpaid by a taxpayer is barred by
prescription, a tax presently being assessed against a taxpayer may be recouped or set-off against
the tax already barred by prescription.
 This doctrine is applicable only to taxes arising from the same transaction on which an overpayment
is made and underpayment is due.
When available: Equitable recoupment is allowed only in common law countries NOT in the Philippines.
VII. SET-OFF OF TAXES
COMPENSATION OR SET-OFF
 COMPENSATION shall take place when two person in their own right, are creditors and debtors of
each other. (Art. 1278, CC)
 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.
Notes in TAXATION 1
49
 General Rule: No set-off is admissible against the demands for taxes levied for general or local
governmental purposes.
o Because taxes and debts are of different nature and character. The taxes assessed are the
obligations of the taxpayer arising from law, while the money judgment against the
government is an obligation arising from contract, whether express or implied.
 Exception: When the set-off took place because both the claim of the government for inheritance
taxes and the claim of the estate for services rendered have already become overdue and
demandable and fully liquidated. Further, an amount for the claim of the estate had already been
appropriated by the government by virtue of a law.
o There can be legal compensation for tax purposes as long as all the requisites under Art.
1279 of the Civil Code are present. The claims of the taxpayer and the government.
CASES:
Republic vs. Mambulao Lumber Company 4 SCRA 622 (1962)
 Internal Revenue Taxes.—Internal Revenue Taxes, such as forest charges, cannot be the subject of
set-off or compensation. It is because taxes are not in the nature of contracts between the parties
but grow out of a duty to, and are positive acts of, the Government, to the making and enforcing of
which, the personal consent of the individual taxpayer is not required
Domingo vs. Garlitos 8 SCRA 443(1963)
 Compensation between taxes and claims of intestate recognized and appropriated for by law.—The
fact that the court having jurisdiction of the estate had found that the claim of the estate against the
Government has been appropriated for the purpose by a corresponding law (Rep. Act No. 2700)
shows that both the claim of the Government for inheritance taxes and the claim of the intestate for
services rendered have already become overdue and demandable as well as fully liquidated.
Compensation, therefore, takes place by operation of law, in accordance with the provisions of
Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount.
Francia vs. Intermediate Appellate Court 162 SCRA 753(1988)
 Requisites of Legal Compensation under Arts. 1278 and 1279 of Civil Code;—Francia contends that his
tax delinquency of P2,400.00 has been extinguished by legal compensation. He claims that the
government owed him P4,116.00 when a portion of his land was expropriated on October 15, 1977.
Hence, his tax obligation had been set-off by operation of law as of October 15, 1977. There is no
legal basis for the contention. By legal compensation, obligations of persons, who in their own right
are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The
circumstances of the case do not satisfy the requirements provided by Article 1279, to wit:
o (1) that each one of the obligors be bound principally and that he be at the same time a
principal creditor of the other; xxx xxx xxx “
o (3) that the two debts be due. xxx xxx xxx.
 Internal Revenue Taxes cannot be subject of setoff or compensation.—This principal contention of
the petitioner has no merit. We have consistently ruled that there can be no off-setting of taxes
against the claims that the taxpayer may have against the government. A person cannot refuse to
pay a tax on the ground that the government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of a lawsuit against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue
Notes in TAXATION 1
50
Taxes cannot be the subject of set-off or compensation. We stated that: “A claim for taxes is not such
a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which
are construed uniformly, in the light of public policy, to exclude the remedy in an action or any
indebtedness of the state or municipality to one who is liable to the state or municipality for taxes.
Neither are they a proper subject of recoupment since they do not arise out of the contract or
transaction sued on. x x x (80 C.J.S., 73-74). ‘The general rule based on grounds of public policy is
well-settled that no set-off is admissible against demands for taxes levied for general or local
governmental purposes. The reason on which the general rule is based, is that taxes are not in the
nature of contracts between the party and party but grow out of duty to, and are the positive acts of
the government to the making and enforcing of which, the personal consent of individual taxpayer is
not required. x x x’ ”
Philex Mining Corporation vs. Commissioner of Internal Revenue 294 SCRA 687(1998)
 Taxes cannot be subject to compensation for the simple reason that the government and the
taxpayer are not creditors and debtors of each other; Debts are due to the Government in its
corporate capacity, while taxes are due to the Government in its sovereign capacity.—In several
instances prior to the instant case, we have already made the pronouncement that taxes cannot be
subject to compensation for the simple reason that the government and the taxpayer are not
creditors and debtors of each other. There is a material distinction between a tax and debt. Debts
are due to the Government in its corporate capacity, while taxes are due to the Government in its
sovereign capacity. We find no cogent reason to deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically held that
taxes cannot be subject to set-off or compensation, thus: “We have consistently ruled that there can
be no off-setting of taxes against the claims that the taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground that the government owes him an amount equal to
or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit
against the government.”
 The holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc., 28 SCRA 867 (1969),
that a pending refund may be set off against an existing tax liability even though the refund has not
yet been approved by the Commissioner, has no longer any support in statutory law.—Further,
Philex’s reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc.,
wherein we ruled that a pending refund may be set off against an existing tax liability even though
the refund has not yet been approved by the Commissioner, is no longer without any support in
statutory law. It is important to note that the premise of our ruling in the aforementioned case was
anchored on Section 51(d) of the National Revenue Code of 1939. However, when the National
Internal Revenue Code of 1977 was enacted, the same provision upon which the Itogon-Suyoc
pronouncement was based was omitted. Accordingly, the doctrine enunciated in Itogon-Suyoc
cannot be invoked by Philex.
Republic vs. Ericta and Sampaguita Pictures 172 SCRA 623(1989)
 Demandability of Obligations; It is useless to argue as to when the 10-year period is to be counted for
purposes of determining the demandability of the obligation, when such 10-year period had long
expired.—What has just been said confutes the petitioner’s second argument that redemption of the
Notes in TAXATION 1
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certificates of indebtedness was not yet demandable of it because “there is no certainty when the
certificates are actually redeemable, within the meaning of the law.” It is true that, as the Solicitor
General contends, “the law does not say that they are redeemable from its approval on June 18,
1958 but ‘within ten years from the date of issuance’ of the certificates,” the ineludible, ineluctable
fact is that more than ten (10) years have already elapsed since their issuance and demand for
payment had been made within said 10-year period. It is useless to quibble about the precise time
“within ten years” when an obligation becomes demandable, when that period of ten years has
already expired. Whatever inexactitude might inhere in the phrase, “within ten years,” as fixing the
time of exibility of the obligation in question, there can be no debate about the proposition that the
obligation became due and demandable after ten years. It would be absurd and unfair to sanction
the theory subsumed in the Republic’s petition that its obligation was not demandable within ten
years because of inexactitude, yet became time-barred upon the lapse of that selfsame period.
Commissioner of Internal Revenue vs. Esso Standard Eastern, Inc 172 SCRA 364(1989)
 Civil Law; Obligations and Contracts; The obligation to pay money mistakenly paid arises from the
moment said payment was made, and not from the time that the payee admits the obligation to
reimburse.– The fact is that, as respondent Court of Tax Appeals has stressed, as early as July 15,
1960, the Government already had in its hands the sum of P221,033.00 representing excess
payment. Having been paid and received by mistake, as petitioner Commissioner subsequently
acknowledged, that sum unquestionably belonged to ESSO, and the Government had the obligation
to return it to ESSO. That acknowledgment of the erroneous payment came some four (4) years
afterwards in nowise negates or detracts from its actuality. The obligation to return money
mistakenly paid arises from the moment that payment is made, and not from the time that the
payee admits the obligation to reimburse. The obligation of the payee to reimburse an amount paid
to him results from the mistake, not from the payee’s confession of the mistake or recognition of the
obligation to reimburse. In other words, since the amount of P221,033.00 belonging to ESSO was
already in the hands of the Government as of July, 1960, although the latter had no right whatever to
the amount and indeed was bound to return it to ESSO, it was neither legally nor logically possible
for ESSO thereafter to be considered a debtor of the Government in that amount of P221,033.00;
and whatever other obligation ESSO might subsequently incur in favor of the Government would
have to be reduced by that sum, in respect of which no interest could be charged.
VIII. TAY PAYER’S SUIT
 It is a class suit brought by one or more taxpayers (natural or juridical) on behalf of themselves and
as representation of a class of taxpayers situated within a taxing district and for the purpose of
seeking relief from illegal or unauthorized acts of the government or its tax officials which acts are
injurious to their common interest as taxpayers.
 A Taxpayer has the right to file an action to question the validity, or constitutionality of a statute or
law.
Basis: the right is based on the fact that expenditure of public funds by an officer for the
purpose of administering or implementing an invalid or unconstitutional law is a misapplication of
such funds.
When available: It only when an act complained of, which may include a legislative
enactment, directly involves the illegal disbursement of public funds derived from taxation that the
taxpayer’s suit may be allowed.
Notes in TAXATION 1
52
o When there is a waste or unlawful use of public funds or property.

o The illegal actions of public officials are in some way injurious to municipal and public
interest and if allowed to continue it will result in increased burden or disadvantage to the
taxpayers.
o To obtain a relief and not to stop the imposition of a burden.
o Parties suing as taxpayers must specifically prove sufficient interest in preventing illegal
expenditures of money raised by taxation.
o As long as taxes are involved, people have a right to question contracts entered into by the
government.
o May include a legislative enactment or an ordinance that is directly involved in the illegal
disbursement of public funds derived from taxation.
REQUISITES OF A TAXPAYER’S SUIT:
1. Tax money is being exacted and spent in violation of specific constitutional protections against
abuses of legislative power.
2. Public money is being deflected to any improper purpose.
3. The petitioners seek to restrain respondents from wasting public funds through enforcement of
an invalid or unconstitutional law because they will be affected by the alleged act.
CASES:
Pascual vs. Secretary of Public Works 110 Phil. 331(1960)
 LEGISLATIVE POWERS; APPROPRIATION OF PUBLIC REVENUES ONLY FOR PUBLIC PURPOSES; WHAT
DETERMINES VALIDITY OF A PUBLIC EXPENDITURE.—"It is a general rule that the legislature is
without power to appropriate public revenues for anything but a public purpose. * * * It is the
essential character of the direct object of the expenditure which must determine its validity as
justifying a tax and not the magnitude of the 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 interests, and the prosperity of private enterprises or business, does not justify their aid by
the use of public money."
 RIGHT OF TAXPAYERS TO CONTEST CONSTITUTIONALITY OF A LEGISLATION.—The relation between
the people of the Philippines and its taxpayers, on the one hand, and the Republic of the Philippines,
on the other, is not identical to that obtaining between the people and taxpayers of the U.S. and its
Federal Government. It is closer, from a domestic viewpoint, to that existing between the people and
taxpayers of each state and the government thereof, except that the authority of the Republic of the
Philippines over the people of the Philippines is more fully direct than that of the states of the Union,
insofar as the simple and unitary type of our national government is not subject to limitations
analogous to those imposed by the Federal Constitution upon the states of the Union, and those
imposed upon the Federal Government in the interest of the states of the Union. For this reason, the
rule recognizing the right of taxpayers to assail the constitutionality of a legislation appropriating
local or state public funds—which has been upheld by the Federal Supreme Court (Crampton vs.
Zabriskie, 101 U.S. 601)—has greater application in the Philippines than that adopted with respect to
acts of Congress of the United States appropriating federal funds.
Lozada vs. Commission on Elections 120 SCRA 337(1983)

Notes in TAXATION 1
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 Election Law; Action; Mandamus; A taxpayer has no personality to sue the COMELEC to compel
the latter to hold a special election for the Interim Batasang Pambansa.—As taxpayers,
petitioners may not file the instant petition, for nowhere therein is it alleged that tax money is
being illegally spent. The act complained of is the inaction of the COMELEC to call a special
election, as is allegedly its ministerial duty under the constitutional provision above cited, and
therefore, involves no expenditure of public funds. It is only when an act complained of, which
may include a legislative enactment or statute, involves the illegal expenditure of public money
that the so-called taxpayer suit may be allowed. What the case at bar seeks is one that entails
expenditure of public funds which may be illegal because it would be spent for a purpose—that
of calling a special election—which, as will be shown, has no authority either in the Constitution
or a statute.
 A voter has no personality to sue the COMELEC and compel it to hold a special election for the
Interim Batasang Pambansa.—As voters, neither have petitioners the requisite interest or
personality to qualify them to maintain and prosecute the present petition. The unchallenged
rule is that the person who impugns the validity of a statute must have a personal and
substantial interest in the case such that he has sustained, or will sustain, direct injury as a result
of its enforcement.
 In the case before Us, the alleged inaction of the COMELEC to call a special election to fill-up the
existing vacancies in the Batasan Pambansa, standing alone, would adversely affect only the
generalized interest of all citizens. Petitioners’ standing to sue may not be predicated upon an
interest of the kind alleged here, which is held in common by all members of the public because
of the necessarily abstract nature of the injury supposedly shared by all citizens. Concrete injury,
whether actual or threatened, is that indispensable element of a dispute which serves in part to
cast it in a form traditionally capable of judicial resolution. When the asserted harm is a
“generalized grievance” shared in substantially equal measure by all or a large class of citizens,
that harm alone normally does not warrant exercise of jurisdiction.
Dumlao vs. COMELEC 95 SCRA 392(1980)
 The Supreme Court will not rule on constitutionality of a provision of the Election Code disqualifying
from running for a public office persons found disloyal to the State where said issue is raised merely
by a taxpayer who is not affected by said prohibition.—In the case of petitioners Igot and Salapantan,
it was only during the hearing, not in their Petition, that Igot is said to be a candidate for Councilor.
Even then, it cannot be denied that neither one has been convicted nor charged with acts of
disloyalty to the State, nor disqualified from being candidates for local elective positions. Neither one
of them has been alleged to have been adversely affected by the operation of the statutory
provisions they assail as unconstitutional. Theirs is a generalized grievance. They have no personal
nor substantial interest at stake. In the absence of any litigable interest, they can claim no locus
standi in seeking judicial redress.
Gonzales vs. Marcos 65 SCRA 624(1975)
 Taxpayer has no legal standing to question executive acts that do not involve the use of public
funds.—It may not be amiss though to consider briefly both the procedural and substantive grounds
that led to the lower court’s order of dismissal. It was therein pointed out as “one more valid reason”
why such an outcome was unavoidable that “the funds administered by the President of the
Philippines came from donations [and] contributions [not] by taxation.” Accordingly, there was that
absence of the “requisite pecuniary or monetary interest.” The stand of the lower court finds
Notes in TAXATION 1
54
support in judicial precedents. This is not to retreat from the liberal approach followed in Pascual vs.
Secretary of Public Works, foreshadowed by People v. Vera, where the doctrine of standing was first
fully ‘discussed. It is only to make clear that petitioner, judged by orthodox legal learning, has not
satisfied the elemental requisite for a taxpayer’s suit.
Maceda vs. Macaraig, Jr. 197 SCRA 771(1991)
 Parties; Taxpayer’s Suit; Petitioner, as a taxpayer, has the personality to file the instant petition, as
the issue involved herein, pertains to illegal expenditure of public money.—In the petition it is alleged
that petitioner is “instituting this suit in his capacity as a taxpayer and a duly-elected Senator of the
Philippines.” Public respondent argues that petitioner must show he has sustained direct injury as a
result of the action and that it is not sufficient for him to have a mere general interest common to all
members of the public.
 The Court however agrees with the petitioner that as a taxpayer he may file the instant petition
following the ruling in Lozada when it involves illegal expenditure of public money. The petition
questions the legality of the tax refund to NPC by way of tax credit certificates and the use of said
assigned tax credits by respondent oil companies to pay for their tax and duty liabilities to the BIR
and Bureau of Customs.
IX. COMPROMISES
 A contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end to
one already commenced.
 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.
PERSONS ALLOWED TO COMPROMISE:
1. Commissioner of Internal Revenue - may enter under certain conditions into a compromise for both
the civil and criminal liabilities of the taxpayer. (NIRC, SEC. 204)
2. Collector of Customs – with respect to customs duties limited to cases where legitimate authority is
specifically granted, such as in the remission of duties. (TCC, SEC.709)
3. Customs Commissioner – subject to the approval of the Secretary of Finance, on cases involving the
imposition of fines, surcharges and forfeitures. (TCC, SEC.2316)
4. Local Government Code – no provision regarding compromise, however, tax (not criminal) liability is
not prohibited from being compromised. (CC, Arts. 2034 & 2035)
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PART II- NATIONAL TAXATION
A. THE BUREAU OF INTERNAL REVENUE
COMPOSITION OF THE BIR (Sec. 2, CA NO. 466)

 The Bureau of Internal Revenue shall have one chief and one assistant chief to be known,
respectively, as the Collector of Internal Revenue and the Deputy Collector of Internal
Revenue.
I. POWERS AND DUTIES OF THE BIR
1. Assessment and collection of taxes

2. Enforcement of all forfeitures, penalties, fines and judgments in all cases decided in its
favor by the Courts;
3. Giving effects to and administering the supervisory and police powers conferred to it by
the NIRC and/or other laws;
4. Assignment of internal revenue officers and other employees to other duties;
5. Provisions and distribution to proper officials of forms, receipts, certificates, stamps,
etc.;
6. Issuance of receipts and clearances;
7. Submits annual report, pertinent information to Congress and reports to the
Congressional Oversight Committee in matters of taxation.
8. Execution of judgment by the Supreme Court and Court of Appeals
9. Promulgation of rulings
CASES:
Sy Po vs. Court of Tax Appeals 164 SCRA 524(1988)
 Taxation; Court of Tax Appeals; Factual findings of the Court of Tax Appeals are binding upon
the Supreme Court, and can only be disturbed on appeal if not supported by substantial
evidence.—Settled is the rule that the factual findings of the Court of Tax Appeals are
binding upon this Honorable Court and can only be disturbed on appeal if not supported by
substantial evidence.
 Rule on the “best evidence obtainable,” when applicable.—the law is specific and clear. The
rule on the “best evidence obtainable” applies when a tax report required by law for the
purpose of assessment is not available or when the tax report is incomplete or fraudulent.
Central Azucarera Don Pedro vs. Court of Tax 20 SCRA 344(1967)
 Time for payment of tax.—Under the old section 51 (a) of the Tax Code, the Collector of
Internal Revenue was required to assess the income tax due, based on the taxpayer's return,
and to notify the taxpayer of said assessment. However, the time for payment was fixed,
whether or not a notice of the assessment was given to the taxpayer. Under the amended
section 51, the time for payment is also fixed and predetermined (usually coinciding with the
filing of the return) without the necessity of giving notification of the assessment to the
taxpayer by the Commissioner of Internal Revenue.
Notes in TAXATION 1
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Collector of Internal Revenue vs. Benipayo 4 SCRA 182(1962)
 Amusement taxes; Fraud should be supported by clear and convincing proof.—To sustain the
deficiency assessed against respondent would amount to a finding that he had, for a
considerable period of time, cheated and defrauded the government by selling to each adult
patron two children's tax-free tickets instead of one ticket subject to the amusement tax
provided for in Section 260 of the National Internal Revenue Code. Fraud is a serious charge
and, to be sustained, must be supported by clear and convincing proof which, in this case, is
lacking.
Collector of Internal Revenue vs. Bohol Land Trans. Co. 107 Phil. 965(1960)
 PRESUMPTION IN FAVOR OF CORRECT TAX ASSESSMENT.—All presumptions are in favor of

the correctness of tax assessments. The good faith of tax assessors and the validity of their
actions are presumed. They will be presumed to have taken into consideration all the facts
to which their attention was called. No presumption can be indulged that all of the public
officials of the state in the various counties who have to do with the assessment of property
for taxation will knowingly violate the duties imposed upon them by law
 BURDEN OF PROOF ON COMPLAINING PARTY.—As a logical outgrowth of the presumption in
favor of the validity of assessments, when such assessments are assailed, the burden of
proof is upon the property owner clearly to show that the assessment was erroneous, in
order to relieve himself from it.
Meralco Securities Corporation vs. Savellano 117 SCRA 804(1982)
 Matters involving failure or refusal of the Commissioner of Internal Revenue to make a tax
assessment belongs to the jurisdiction of the Court of Tax Appeals, not the CFI.—Respondent
judge has no jurisdiction to take cognizance of the case because the subject matter thereof
clearly falls within the scope of cases now exclusively within the jurisdiction of the Court of
Tax Appeals. Section 7 of Republic Act No. 1125, enacted June 16, 1954, granted to the
Court of Tax Appeals exclusive appellate jurisdiction to review by appeal, among others,
decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties imposed in relation
thereto, or other matters arising under the National Internal Revenue Code or other law or
part of law administered by the Bureau of Internal Revenue. The law transferred to the
Court of Tax Appeals jurisdiction over all cases involving said assessments previously
cognizable by courts of first instance, and even those already pending in said courts. The
question of whether or not to impose a deficiency tax assessment on Meralco Securities
Corporation undoubtedly comes within the purview of the words "disputed assessments" or
of "other matters arising under the National Internal Revenue Code . . . ."
Sanson vs. Barrios 63 Phil. 198(1936)
 MANDAMUS; ONLY SPECIFIC LEGAL RIGHTS ARE ENFORCEABLE BY THE WRIT; WILL NOT
ISSUE IN CASES WHERE THE RIGHT is DOUBTFUL.—It is well established that only specific
legal rights are enforceable by mandamus, that the right sought to be enforced must be
certain and clear, and that the writ will not issue in cases where the right is doubtful.
 DUTIES TO BE PERFORMED MUST BE ENJOINED BY LAW OR BY REASON OF OFFICIAL
STATION.—It is also a fundamental principle governing the issuance of mandamus that the
Notes in TAXATION 1
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duties to be performed must be such as are clearly and peremptorily enjoined by law or by
reason of official station. The record does not show that the right the petitioner seeks to
enforce and the duty claimed to devolve upon the respondent judge are of such character.
Lemi vs. Valencia 26 SCRA 203(1968)
 Mandamus; Essential requisites for its issuance; Meaning of discretion; Case at bar.—It is
essential for a writ of mandamus to issue, that the plaintiff has a legal right to the thing
demanded and that it is the imperative duty of the defendant to perform the act required.
The legal right of the plaintiff to the thing demanded must be well-defined clear and certain.
The corresponding duty of the defendant to perform the required act must also be clear and
specific. Mandamus will not issue in doubtful cases, as it simply commands the exercise of a
power already possessed or to perform a duty 31, 1963. Mandamus will he to compel
action, or to remedy official inaction.
People vs. Rubio 57 Phil. 384(1932)
 While the place to be searched and the property to be seized under a search warrant must
be particularly de-scribed in the warrant, yet the description is required to be specific only in
so far as the conditions will ordinarily allow.
 Search warrants may not be used as a means of gaining access to a man's house or office
and papers solely for the purpose of making search to secure evidence to be used against
him in a criminal or penal proceeding, but they may be resorted to only when a primary right
to such search and seizure may be found in the interest which the public or the complainant
may have in the property to be seized, or in the right to the possession of it, or when a valid
exercise of the police power renders possession of the property by the accused unlawful,
and provides that it may be taken.
 Books of account, invoices, and records may be so used as instruments or agencies for
perpetrating frauds upon the government as to give the public an interest in them which
would justify the search for and seizure of them, under a properly issued search warrant, for
the purpose of preventing further frauds.
Molo vs. Yatco 63 Phil. 644(1936)
 SElZURE OF DOCUMENTS AND PAPERS BY THE COLLECTOR OF INTERNAL REVENUE.—

Although the Collector of Internal Revenue is authorized by section 1434 of the
Administrative Code to make seizures for the violation of any penal law or regulation
administered by the Bureau of Internal Revenue, inasmuch as the documents and papers in
question are in the custody of the Court of First Instance of Rizal through its agent the Anti-
Usury Board, said Collector of Internal Revenue could not seize said documents and papers
without authority of said court because it would amount to an undue interference by an
administrative official in the affairs of a court official. Neither could the Anti-Usury Board
retain said documents for itself because, being a mere agent of said court, it was not
authorized by its principal to dispose of them.
Bache & Co. (Phil.), Inc. vs. Ruiz 37 SCRA 823(1971)]
 Search warrant; Procedure for the issuance warrant; Examination of the complainant and
witnesses by the judge himself.—The examination of the complainant and the witnesses he
may produce, required by Art. 111, Sec. 1, par. 3, of the Constitution, and Secs. 3 and 4, Rule
Notes in TAXATION 1
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126 of the Revised Rules of Court, should be conducted by the judge himself and net by
others. The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more
emphatic and candid, for it requires the judge, before issuing a search warrant, to personally
examine on oath or affirmation the complainant and any witnesses he may produce.
Personal examination by the judge of the complainant and his witnesses is necessary to
enable him to determine the existence or non-existence of a probable cause, pursuant to
Art. 111, Sec. 1, par. 3, of the Constitution, and Sec. 3, Rule 126 of the Revised Rules of
Court, both of which prohibit the issuance of warrants except “upon probable cause.” The
determination of whether or not a probable cause exists calls for the exercise of judgment
after a judicial appraisal of facts and should not be allowed to be delegated in the absence
of any rule to the contrary.
 A search warrant should particularly describe the place to be searched and the things to be
seized. The evident purpose and intent of this requirement is to limit the things to be seized
to those, and only those, particularly described in the search warrant—to leave the officers
of the law with no discretion regarding what articles they shall seize, to the end that
“unreasonable searches and seizures may not be made,—that abuses may not be
committed.
Stonehill vs. Diokno 20 SCRA 383(1967)
 Search warrants; Corporations; Only party affected may contest legality of seizure effected
by search warrants.—Officers of certain corporations, from which documents, papers and
things were seized by means of search warrants, have no cause of action to assail the
legality of the seizures because said corporations have personalities distinct and separate
from those of said officers. The legality of a seizure can be contested only by the party
whose rights have been impaired thereby. The objection to an unlawful search is purely
personal and cannot be availed of by third parties.
 Officers of certain corporations cannot validly object to the use in evidence against them of
the documents, papers and things seized from the offices and premises of the corporations
since the right to object to their admission in evidence belongs exclusively to the
corporations, to which the seized effects belong, and may not be invoked by the corporate
officers in proceedings against them in their individual capacity.
 Abandonment of Moncado ruling; Illegally seized documents are not admissible in
evidence.—The Moncado ruling, that illegally seized documents, papers and things are
admissible in evidence, must be abandoned. The exclusion of such evidence is the only
practical means of enforcing the constitutional injunction against unreasonable searches and
seizures. The non-exclusionary rule is contrary to the letter and spirit of the prohibition
against unreasonable searches and seizures. If there is competent evidence to establish
probable cause of the commission of a given crime by the party against whom the warrant is
intended, then there is no reason why the applicant should not comply with the
constitutional requirements If he has no such evidence, then it is not possible for the judge
to find that there is a probable cause, and, hence, no justification for the issuance of the
warrant. The only possible explanation for the issuance in that case is the necessity of fishing
for evidence of the commission of a crime. Such a fishing expedition is indicative of the
absence of evidence to establish a probable cause.
Notes in TAXATION 1
59
Medina vs. Collector of Internal Revenue 1 SCRA 302(1961)
 Taxation; Sales tax; Sales between husband and wife.—Sales made by the husband to the
wife are void. Being void, they were correctly disregarded by the Commissioner of Internal
Revenue.
 Best evidence rule.—Where not every copy of a supposed antenuptial agreement had been
accounted for as lost, then, under the best evidence rule, little or no credence can be given
to the oral testimony as secondary evidence, to prove the due execution and contents of the
alleged agreement.
 Husband and wife; Antenuptial agreement; Evidence; Sales between husband and wife.—The
facts of the case negative the existence of an antenuptial agreement between husband and
wife. Where the husband, in 1953, was already apprised that his sales of logs to his wife
were void under article 1400 of the New Civil Code, and it was only in 1954 that he claimed
that there was an agreement between him and his wife for separation of property, such an
allegation cannot be given credence.
Uy vs. Bureau of Internal Revenue 344 SCRA 36(2000)
 Search Warrants; Certiorari; The issuing judge’s disregard of the requirements for the
issuance of a search warrant constitutes grave abuse of discretion, which may be remedied
by certiorari.—The applicable case is Marcelo vs. De Guzman, where we held that the issuing
judge’s disregard of the requirements for the issuance of a search warrant constitutes grave
abuse of discretion, which may be remedied by certiorari.
 Requirements for Issuance of Search Warrants.—A search warrant must conform strictly to
the requirements of the foregoing constitutional and statutory provisions. These
requirements, in outline form, are: (1) the warrant must be issued upon probable cause; (2)
the probable cause must be determined by the judge himself and not by the applicant or any
other person; (3) in the determination of probable cause, the judge must examine, under
oath or affirmation, the complainant and such witnesses as the latter may produce; and (4)
the warrant issued must particularly describe the place to be searched and persons or things
to be seized.
Vera vs. Cuevas 90 SCRA 379(1979)
 Taxation; Sec. 169 of the Tax Code requiring milk manufacturers to print on labels of their
milk products the words: “This milk is not suitable for nourishments for infants less than one
year of age or words with equivalent import” has already been repealed.—The lower court
did not err in ruling that Section 169 of the Tax Code has been repealed by implication.
Section 169 was enacted in 1939, together with Section 141 (which imposed a specific tax on
skimmed milk) and Section 177 (which penalized the sale of skimmed milk without payment
of the specific tax and without the legend required by Section 169). However, Section 141
was expressly repealed by Section 1 of Republic Act No. 344, and Section 177, by Section 1
of Republic Act No. 463. By the express repeal of Sections 141 and 177, Section 169 became
a merely declaratory provision, without a tax purpose, or a penal sanction.
POLICE POWERS OF THE BIR
1. Authority of the internal revenue officers to make arrest and seizure

2. Authority of the internal revenue to administer oaths and take testimony
Notes in TAXATION 1
60
3. Authority of tax officials in searching taxable articles

4. Remedy for enforcement of forfeiture
5. Authority to sell and/or destroy forfeited property
NON-DELEGABLE POWERS OF THE CIR
 the power to recommend the promulgation of rules and regulations to the secretary of
finance
 the power to issue ruling of first impression or to reverse, revoke or modify any existing
ruling of the bureau
 the power to compromise
 to abate any tax liability under section 204 (a) and (b) of the Tax Code
 the power to assign and reassign internal revenue officers to establishments where articles
subject to excise tax are produced or kept
TWO KINDS OF POWERS OF ADMINISTRATIVE AGENCIES
1. QUASI-LEGISLATIVE OR THE RULE-MAKING POWER – the power to make rules and regulations which
results in delegated legislation that is within the confines of the granting statute and the doctrine of
non-delegability and separability of powers.
Includes the issuance of:
- Supplementary detailed legislation

- Contingent legislation
- Interpretative rule
2. QUASI-JUDICIAL OR THE ADMINISTRATIVE ADJUDICATORY POWER - .the power to adjudicate the

rights of persons before it. It is the power to hear and determine question of fact to which the
legislative policy is to apply and to decide in accordance with the standards laid down by the law
itself in enforcing and the administering the same law.
POWERS OF THE REVENUE REGIONAL DIRECTORS:
(a) Implement laws, policies, plans, programs, rules and regulations of the department or agencies in
the regional area;
(b) Administer and enforce internal revenue laws, and rules and regulations, including the
assessment and collection of all internal revenue taxes, charges and fees.
(c) Issue Letters of authority for the examination of taxpayers within the region;
(d) Provide economical, efficient and effective service to the people in the area;
(e) Coordinate with regional offices or other departments, bureaus and agencies in the area;
(f) Coordinate with local government units in the area;
(g) Exercise control and supervision over the officers and employees within the region; and
(h) Perform such other functions as may be provided by law and as may be delegated by the
Commissioner.
POWERS OF THE REVENUE DISTRICT OFFICERS OF THE BIR:
 It shall be the duty of every Revenue District Officer or other internal revenue officers and
employees to ensure that all laws, and rules and regulations affecting national internal revenue are
Notes in TAXATION 1
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faithfully executed and complied with, and to aid in the prevention, detection and punishment of
frauds of delinquencies in connection therewith.
 It shall be the duty of every Revenue District Officer to examine the efficiency of all officers and
employees of the Bureau of Internal Revenue under his supervision, and to report in writing to the
Commissioner, through the Regional Director, any neglect of duty, incompetency, delinquency, or
malfeasance in office of any internal revenue officer of which he may obtain knowledge, with a
statement of all the facts and any evidence sustaining each case.
II. BIR RULES AND REGULATIONS
CASES:
Commissioner of lnternal Revenue vs. Court of Appeals 240 SCRA 368(1995)
 Tax Amnesty; Administrative Law; Administrative issuances must not override but must remain
consistent and in harmony with the law they seek to apply and implement.—The authority of the
Minister of Finance (now the Secretary of Finance), in conjunction with the Commissioner of Internal
Revenue, to promulgate all needful rules and regulations for the effective enforcement of internal
revenue laws cannot be controverted. Neither can it be disputed that such rules and regulations, as
well as administrative opinions and rulings, ordinarily should deserve weight and respect by the
courts. Much more fundamental than either of the above, however, is that all such issuances must
not override, but must remain consistent and in harmony with, the law they seek to apply and
implement. Administrative rules and regulations are intended to carry out, neither to supplant nor to
modify, the law;
 Statutes; E.O. 41; Executive Order No. 41 has been designed to be in the nature of a general grant of
tax amnesty subject only to the cases specifically excepted by it.—We agree with both the Court of
Appeals and Court of Tax Appeals that Executive Order No. 41 is quite explicit and requires hardly
anything beyond a simple application of its provisions. If, as the Commissioner argues, Executive
Order No. 41 had not been intended to include 1981–1985 tax liabilities already assessed
(administratively) prior to 22 August 1986, the law could have simply so provided in its exclusionary
clauses. lt did not. The conclusion is unavoidable, and it is that the executive order has been
designed to be in the nature of a general grant of tax amnesty subject only to the cases specifically
excepted by it.
Arches vs. Bellosillo 20 SCRA 32(1967)
 Taxation; Approval of tax suit by Commissioner is not a jurisdictional requirement.—The approval by

the Commissioner of Internal Revenue of a civil action for the recovery of taxes (Sec. 308, Tax Code)
is not a jurisdictional requirement. It relates to capacity to sue or it affects the cause of action only.
 Certiorari; Error of judgment is not correctible by certiorari.—The error, if any, of the municipal court
in upholding a tax suit, although there was no showing that it was approved by the Commissioner of
Internal Revenue, is merely an error of judgment not correctible by certiorari.
 Grave abuse of discretion; Effect of revenue regulation.—The municipal court did not act with grave
abuse of discretion in ruling that express approval of a tax suit by the Commissioner of Internal
Revenue was not necessary. The ruling was based on a regulation, issued by the Commissioner and
approved by the Secretary of Finance. In said regulation the Commissioner delegated to Regional
Directors his functions regarding administration and enforcement of revenue laws and regulations,
which powers are broad enough to cover approval of tax suits. To rely upon such regulation would
not be tantamount to a whimsical, capricious and arbitrary exercise of judgment.
Notes in TAXATION 1
62
 Regional Director's approval of tax suit.—The verification by the Revenue Regional Director of a
complaint for the collection of uncontested deficiency taxes constitutes a sufficient approval thereof
within the meaning of section 308 of the Tax Code.
Commissioner of lnternal Revenue vs. Court of Appeals 261 SCRA 236(1996)
 Taxation; The CIR may not disregard legal requirements or applicable principles in the exercise of its
quasi-legislative powers.—Petitioner stresses on the wide and ample authority of the BIR in the
issuance of rulings for the effective implementation of the provisions of the National Internal
Revenue Code. Let it be made clear that such authority of the Commissioner is not here doubted.
Like any other government agency, however, the CIR may not disregard legal requirements or
applicable principles in the exercise of its quasi-legislative powers.
Commissioner of Internal Revenue vs. Burroughs Limited 142 SCRA 324(1986)
 Taxation; Corporations; The 15% tax on branch profits remitted abroad applies to the profit actually
remitted, not the amount applied for remittance.—We rule in the affirmative. The pertinent
provision of the National Revenue Code is Sec. 24 (b) (2) (ii) which states: “Sec. 24. Rates of tax on
corporations. x x x (b) Tax on foreign corporations. x x x (2) (ii) Tax on branch profits remittances.—
Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent
(15%) x x x.”
 In a Bureau of Internal Revenue ruling dated January 21, 1980 by then Acting Commissioner of
Internal Revenue Hon. Efren I. Plana the aforequoted provision had been interpreted to mean that
“the tax base upon which the 15% branch profit remittance tax x x x shall be imposed x x x (is) the
profit actually remitted abroad and not on the total branch profits out of which the remittance is to
be made.”
 B.I.R rulings cannot, as a rule, be given retroactive effect-Exceptions.—Petitioner contends that
respondent is no longer entitled to a refund because Memorandum Circular No. 8-82 dated March
17, 1982 had revoked and/or repealed the BIR ruling of January 21, 1980. The said memorandum
circular states—“Considering that the 15% branch profit remittance tax is imposed and collected at
source, necessarily the tax base should be the amount actually applied for by the branch with the
Central Bank of the Philippines as profit to be remitted abroad.” Petitioner’s aforesaid contention is
without merit. What is applicable in the case at bar is still the Revenue Ruling of January 21, 1980
because private respondent Burroughs Limited paid the branch profit remittance tax in question on
March 14, 1979. Memorandum Circular No. 8-82 dated March 17, 1982 cannot be given retroactive
effect in the light of Section 327 of the National Internal Revenue Code.
ABS-CBN Broadcasting Corp. vs. Court of Tax Appeals 108 SCRA 142(1981)
 Taxation; Statutory Construction, Retroactivity; BIR circulars or rulings have no retroactive effect
where their application would be prejudicial to taxpayers.—It is clear from the foregoing that rulings
or circulars promulgated by the Commissioner of Internal Revenue have no retroactive application
where to so apply them would be prejudicial to taxpayers. The prejudice to petitioner of the
retroactive application of Memorandum Circular No. 4-71 is beyond question. It was issued only in
1971, or three years after 1968, the last year that petitioner had withheld taxes under General
Circular No. V-334. The assessment and demand on petitioner to pay deficiency withholding income
tax was also made three years after 1968 for a period of time commencing in 1965. Petitioner was no
longer in a position to withhold taxes due from foreign corporations because it had already remitted
all film rentals and no longer had any control over them when the new Circular was issued. And in so
Notes in TAXATION 1
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far as the enumerated exceptions are concerned, admittedly, petitioner does not fall under any of
them.
 Principle of legislative approval of administrative interpretation by re-enactment; Case at bar.—The
principle of legislative approval of administrative interpretation by re-enactment clearly obtains in
this case. It provides that “the re-enactment of a statute substantially unchanged is persuasive
indication of the adoption by Congress of a prior executive construction.” Note should be taken of
the fact that this case involves not a mere opinion of the Commissioner or ruling rendered on a mere
query, but a Circular formally issued to “all internal revenue officials” by the then Commissioner of
Internal Revenue.
SOURCES OF REVENUE:
SEC. 21. Sources of Revenue - The following taxes, fees and charges are deemed to be national
internal revenue taxes:
a) Income tax;
b) Estate and donor's taxes;
c) Value-added tax;
d) Other percentage taxes;
e) Excise taxes;
f) Documentary stamp taxes; and
g) Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal
Revenue.
B. INCOME TAXATION
 A tax on all yearly profits, income, gains, emoluments and the like of persons (individual and/or
judicial) arising from property, profession, trades, offices and activities whether gross or net
depending on the class of the taxpayer and of the kind of income.
REQUISITES FOR TAXABILITY ON INCOME:
1. There must be a gain or profit whether in cash or its equivalent;

2. The gain must be realized or received – when income is actually or physically transferred to
a person, or constructively received by him.
NATURE OF INCOME TAX:
1. It is self-assessing or self-computed
2. It is a national tax
3. It is generally regarded as an excise tax because it is actually a levy upon the right to earn an
income
4. It is a direct tax
5. It is general tax
6. It is not covered by the principle of territoriality
INCOME EXEMPT FROM INCOME TAX:
1. Those income received but enumerated under the term “exclusions”

2. Those considered mere return of capital
Notes in TAXATION 1
64
3. Those exempted under laws, special laws or treaties

4. Gains realized from the sale, exchange or retirement of bonds with maturity of more than 5
years is exempt from income tax.
5. Those covered by the employer’s convenience rule
6. Those already subjected to the final withholding tax
EMPLOYER’S CONVENIENCE RULE:
 This refers to the allowances in kind furnished to the employee for and as a necessary incident to
the performance of his duties which directly benefits the employer more than it does the
employee. The value of the benefit is not taxable to the employee.
METHODS USED BY THE CIR TO DETERMINE INCOME SUBJECT TO TAX:
a) NET WORTH METHOD (assets – liabilities = net worth)

 The taxpayer’s net worth at the beginning of taxable year is compared with his net
worth at the end of the year. Money and other assets in excess of liabilities of the
taxpayer not accounted for by his income tax return, leads to the inference that
that part if his income has not been reported.
b) NET WORTH EXPENDITURES METHOD

 When during a taxable period a taxpayer incurs expenditures the source of which
could not be explained, such amount spent is presumed to be income for the
taxable year subject to income tax.
c) PERCENTAGE METHEOD
 The taxpayer’s gross receipts during the taxable year is determined by the tax
official and applies the gross profits normally enjoyed by other firms engaged in
similar undertaking.
d) BANK DEPOSIT METHOD

 Unexplained increases in bank deposits during the taxable year raise the
presumption that the growth is unreported income subject to tax.
e) Such other methods as in the opinion of the CIR may clearly reflect the income of the
taxpayer.
GROSS INCOME
 All income, gain or profit subject to tax, whether the same is realized from legal or illegal
activities. Unless exempt under the Constitution, tax treaty or statute, or considered mere return
of capital.
NET INCOME
 Gross income less allowable deductions and exemptions.

Notes in TAXATION 1
65
GROSS INCOME TAXATION VS. NET INCOME TAXATION
GROSS INCOME TAXATION NET INCOME TAXATION

The income tax is fixed or computed without The gross income of the taxpayer is reduced by
allowable deductions. allowable deductions.
Applies to: Applies to:
a. Compensation income earners a. Self-employed taxpayers in business or
b. Non-resident aliens not engaged in trade exercise of profession
or business b. Domestic corporation
c. Special aliens c. Resident corporation
d. Non-resident foreign corporations. d. Some special corporation
A final tax is imposed on the gross amount of Where certain deductions are allowed and
specifies types of income, such as interest, subtracted from the aggregate of income not to
royalties, prize, dividend and capital gains. final tax and the tax is computed on the resulting
net income therefrom.
Grants no exceptions. Exemption are granted.
Tax base is the gross income. Tax base is the net income.
INCLUSIONS INTO THE GROSS INCOME OF A TAXPAYER:
1. Compensation for services in whatever form paid, including, but not limited to fees, salaries,
commissions and similar items;
2. Gross income derived from conduct of trade, business or the exercise of a profession;
3. Gains derived from dealings in property;
4. Interest;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and
11. Partner’s distributive share from the net income of the general professional partnership.
I. FEATURES OF INCOME TAX LAW

 It is progressive and ideally based on the Ability-to-pay principle.
 The global tax system is applicable to taxable corporation, whereas, the schedular tax system is
applied to the taxable individuals;
 It uses the gross compensation tax system for salaried individuals.
 It has adopted the most comprehensive tax situs.
FEATURES OF PHILIPPINE INCOME TAX
 DIRECT TAX – tax burden is borne by the income tax recipient upon whom the tax is imposed
 PROGRESSIVE TAX – tax rate increases as the tax base increases. It is founded on the ability
to pay principle.
 COMPREHENSIVE SYSTEM – adopts the citizenship principle, the residence principle, and the
source principle.
 SEMI-SCHEDULAR OR SEMI-GLOBAL
Notes in TAXATION 1
66
 AMERICAN IN ORIGIN
CITIZENSHIP OR NATIONALITY PRINCIPLE – A citizen taxpayer is subject to income tax:
e. On his worldwide income, if he resides in the Philippines

f. Only on his income from sources within the Philippines. IF he qualifies as a non-resident
citizen. Hence, his income from sources outside the Philippines shall be exempt from
Philippine income tax.
RESIDENCE PRINCIPLE OR DOMICILE PRINCIPLE – A resident alien is liable to pay income tax on
his income from sources within the Philippines but exempt from income tax on his income from
sources outside the Philippines.
SOURCE PRINCIPLE – A non-resident alien is subject to Philippine Income Tax because he derives
income from sources within the Philippines such as dividend, interest, rent, or royalty.
PROGRESSIVE SYSTEM OF TAXATION
 This is the application of the income tax rates to the taxable income of a taxpayer which
must be proportionate in character and shall be used as an instrument to promote social
justice to achieve social equity and must not be regressive.
 It is the constitutional mandate that will correct the inequalities in taxation by equitably
distributing the tax burden based upon the ability to pay principle.
KINDS/TYPES OF INCOME TAX UNDER RA. 8424
A. Graduated Income tax on Individuals

a. Net income tax
b. Gross income tax
B. Normal corporate income tax on corporations
C. Final withholding tax system on certain passive investment income paid to residents
D. Final withholding tax on income payments made to non-residents
E. Capital gains tax on sale or exchange of real property classified as a capital asset
F. Branch profit remittance tax
G. Tax in improperly accumulated earning of corporations
H. Fringe benefit tax on fringe benefits of supervisory managerial employees
I. Preferential rates or special rates of income tax on individuals or corporations
J. Minimum corporate income tax
K. Optional corporate income tax
IN THE PHILIPPINES, INCOME TAX IS IMPOSED ON:
 Net income
 Gross income
 Final tax
INCOME TAX SYSTEMS IN THE PHILIPPINES
1. GLOBAL TAX SYSTEM – is one where the taxpayer is required to report all income earned during
a taxable period in one income tax return, which income shall be taxed under the same rule of
income taxation.
Notes in TAXATION 1
67
- The tax system views indifferently the tax base and generally treats in common all categories of
taxable income of the individual. It taxes all categories of income except certain passive incomes
and capital gains.
2. SCHEDULAR TAX SYSTEM – is one that requires a separate return for each type of income and
the tax is computed on per return or per schedule basis and it provides for different tax
treatment of different types on income.
-system employed where the income tax treatment varies and made to depend on the kind or
category of taxable income of the taxpayer. It itemizes the different incomes and provides for
varied percentages of taxes to be applied thereto.
3. SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM – under this system, the compensation income,
business or professional income, capital gains and passive income not subject to final tax and
other income are added together to arrive at the gross income after deducting the sum of
allowable deductions is subjected to one set of graduated tax rates.
-However, passive investment income subject to final tax and capital gains from the sale or
transfer of shares of stocks of a domestic corporation and real properties remain subject to
different sets of tax rates and covered by different tax return.
II. INCOME TAXPAYERS
(A) Individual taxpayers

i. Citizen
1. Resident
2. Non-resident
ii. Aliens
1. Resident alien
2. Non-resident alien
a. Engaged in trade or business within the Philippines
b. Not engaged in trade or business within the Philippines
(B) Corporations
i. Domestic
1. Domestic corporations
2. Special domestic corporations
ii. Foreign
1. Resident foreign corporations
2. Special resident foreign corporations
a. International carriers
b. Offshore banking units authorized by BSP
c. Resident depositary banks
d. Regional or are headquarters of multinational company
e. Regional operating headquarters of multinational company
3. Non-resident foreign corporation
a. Nonresident foreign corporations
b. Special nonresident foreign corporations
Notes in TAXATION 1
68
i. Non-resident cinematographic film owners, lessors or

distributors
ii. Non-resident owner or lessor of vessels chartered by
Philippine nationals
iii. Non-resident owner or lessor of aircraft and other
equipment
(C) Estates and trusts
(D) Partnerships
GENERAL PRINCIPLES OF INCOME TAXATION (memorize)
SEC. 23. General Principles of Income Taxation in the Philippines- Except when otherwise provided in
this Code:
a. A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines;
b. A nonresident citizen is taxable only on income derived from sources within the Philippines;
c. An individual citizen of the Philippines who is working and deriving income from abroad as
an overseas contract worker is taxable only on income derived from sources within the
Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as an overseas contract worker;
d. An alien individual, whether a resident or not of the Philippines, is taxable only on income
derived from sources within the Philippines;
e. A domestic corporation is taxable on all income derived from sources within and without the
Philippines; and
f. A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines.
WHO IS A CITIZEN OF THE PHILIPPINES?

 According to Article IV of the 1987 Philippine Constitution:
Section 1. The following are citizens of the Philippines:
[1] Those who are citizens of the Philippines at the time of the adoption of this
Constitution;
[2] Those whose fathers or mothers are citizens of the Philippines;
[3] Those born before January 17, 1973, of Filipino mothers, who elect Philippine
citizenship upon reaching the age of majority; and
[4] Those who are naturalized in accordance with law.
Section 2. Natural-born citizens are those who are citizens of the Philippines from birth
without having to perform any act to acquire or perfect their Philippine citizenship. Those
who elect Philippine citizenship in accordance with paragraph (3), Section 1 hereof shall be
deemed natural-born citizens.
Section 3. Philippine citizenship may be lost or reacquired in the manner provided by law.
Notes in TAXATION 1
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Section 4. Citizens of the Philippines who marry aliens shall retain their citizenship, unless by
their act or omission, they are deemed, under the law, to have renounced it.
Section 5. Dual allegiance of citizens is inimical to the national interest and shall be dealt
with by law.
DUAL CITIZENSHIP LAW (RA.9225)
 Native born Filipinos who lost their Philippine Citizenship may now engage in business or
buy real properties in the Philippines. If they do, they shall be taxed as non-resident citizen
whenever income from sources within the Philippines is realized.
CASES:
Evangelista, et al. vs. Coll. of Int. Rev., et al. 102 Phil. 140
 Tax on corporations includes organizations which are not necessarily partnership.—"Corporations"

strictly speaking are distinct and different from "partnerships." When our Internal Revenue Code
includes "partnerships" among the entities subject to the tax on "corporations", it must allude to
organizations which are not necessarily "partnerships" in the technical sense of the term.
 As defined in section 84 (b) of the Internal Revenue Code "the term corporation includes
partnerships, no matter how created or organized," This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard forms, or in conformity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted for
purposes of the tax on corporations.
 Pursuant to Section 84 (b) of the Internal Revenue Code, the term "corporation" includes, among
others, "joint" and "associations", none of which has a legal personality of its own independent of
that of its members. For purposes of the tax on corporations, our National Internal Revenue Code
includes these partnerships.—with the exception only of duly registered general partnerships—
within the purview of the term "corporation." Held: That the petitioners in the case at bar, who are
engaged in real estate transactions for monetary gain and divide the same among themselves,
constitute a partnership, so far as the said Code is concerned, and are subject to the income tax for
corporation.
 Corporation; partnership without legal personality subject to residence tax on corporation.—The
pertinent part of the provision of Section 2 of Commonwealth Act No. 465 which says: "The term
corporation as used in this Act includes joint-stock company, partnership, joint account (cuentas en
participación), association or insurance company, no matter how created or organized" is analogous
to that of Sections 24 and 84 (b) of our National Internal Revenue Code, which was approved the day
immediately after the approval of said Commonwealth Act No. 465. Apparently, the terms
"cor'poration" and "Partnership" are used in both statutes with substantially the same meaning,
Held: That the petitioners are subject also to the residence tax for corporations.
Obillos, Jr. vs. Commissioner of Internal Revenue, 139 SCRA 436
 Taxation; The dictum that the power to tax involves the power to destroy should be obviated.—To
regard the petitioners as having formed a taxable unregistered partnership would result in
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oppressive taxation and confirm the dictum that the power to tax involves the power to destroy.
That eventuality should be obviated.
 Where the father sold his rights over two parcels of land to his four children so they can build their
residence, but the latter after one (1) year sold them and paid the capital gains, they should not be
treated to have formed an unregistered partnership and taxed corporate income tax on the sale and
dividend income tax on their shares of the profit's from the sale.
Pascual vs. Commissioner of Internal Revenue 166 SCRA 560(1988)
 Taxation; Co-ownership; Unregistered Partnership; Elements of Partnership; Case at bar.—In the

present case, there is no evidence that petitioners entered into an agreement to contribute money,
property or industry to a common fund, and that they intended to divide the profits among
themselves. Respondent commissioner and/ or his representative just assumed these conditions to
be present on the basis of the fact that petitioners purchased certain parcels of land and became co-
owners thereof. In Evangelista, there was a series of transactions where petitioners purchased
twenty-four (24) lots showing that the purpose was not limited to the conservation or preservation
of the common fund or even the properties acquired by them. The character of habituality peculiar
to business transactions engaged in for the purpose of gain was present.
 The sharing of returns does not in itself establish a partnership; Reasons.—“In order to constitute a
partnership inter sese there must be: (a) An intent to form the same; (b) generally participating in
both profits and losses; (c) and such a community of interest, as far as third persons are concerned
as enables each party to make contract, manage the business, and dispose of the whole property.’
 In the present case, there is clear evidence of co-ownership between the petitioners. There is no
adequate basis to support the proposition that they thereby formed an unregistered partnership.
The two isolated transactions whereby they purchased properties and sold the same a few years
thereafter did not thereby make them partners. They shared in the gross profits as co-owners and
paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have formed an unregistered partnership which is
thereby liable for corporate income tax, as the respondent commissioner proposes.
 And even assuming for the sake of argument that such unregistered partnership appears to have
been formed, since there is no such existing unregistered partnership with a distinct personality nor
with assets that can be held liable for said deficiency corporate income tax, then petitioners can be
held individually liable as partners for this unpaid obligation of the partnership. However, as
petitioners have availed of the benefits of tax amnesty as individual taxpayers in these transactions,
they are thereby relieved of any further tax liability arising therefrom.
Afisco Insurance Corporation vs. Court of Appeals, 302 SCRA 1(1999)
 The Philippine legislature included in the concept of corporations those entities that resembled them
such as unregistered partnerships and associations.— Ineludibly, the Philippine legislature included
in the concept of corporations those entities that resembled them such as unregistered partnerships
and associations. Parenthetically, the NLRC’s inclusion of such entities in the tax on corporations was
made even clearer by the Tax Reform Act of 1997, which amended the Tax Code.
 Section 24 of the Tax Code (as worded in 1975) covered unregistered partnerships and even
associations or joint accounts, which had no legal personalities apart from their individual
members.—The Court in Evangelista v. Collector of Internal Revenue held that Section 24 covered
these unregistered partnerships and even associations or joint accounts, which had no legal
personalities apart from their individual members. The Court of Appeals astutely applied Evangelista:
Notes in TAXATION 1
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“x x x Accordingly, a pool of individual real property owners dealing in real estate business was
considered a corporation for purposes of the tax in Sec. 24 of the Tax Code in Evangelista v. Collector
of Internal Revenue, supra. The Supreme Court said: ‘The term ‘partnership’ includes a syndicate,
group, pool, joint venture or other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on.
 The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto
remains unproven and unsubstantiated. It is axiomatic in the law of taxation that taxes are the
lifeblood of the nation. Hence, “exemptions therefrom are highly disfavored in law and he who
claims tax exemption must be able to justify his claim or right.” Petitioners have failed to discharge
this burden of proof. The sections of the 1977 NIRC which they cite are inapplicable, because these
were not yet in effect when the income was earned and when the subject information return for the
year ending 1975 was filed.
 Section 24 (b)(1) pertains to tax on foreign corporations; hence, it cannot be claimed by the ceding
companies which are domestic corporations. Nor can Munich, a foreign corporation, be granted
exemption based solely on this provision of the Tax Code, because the same subsection specifically
taxes dividends, the type of remittances forwarded to it by the pool. Although not a signatory to the
Pool Agreement, Munich is patently an associate of the ceding companies in the entity formed,
pursuant to their reinsurance treaties which required the creation of said pool. Under its pool
arrangement with the ceding companies, Munich shared in their income and loss. This is manifest
from a reading of Articles 3 and 10 of the Quota-Share Reinsurance Treaty and Articles 3 and 10 of
the Surplus Reinsurance Treaty. The foregoing interpretation of Section 24 (b)(1) is in line with the
doctrine that a tax exemption must be construed strictissimi juris, and the statutory exemption
claimed must be expressed in a language too plain to be mistaken.
FORMS OF INCOME
1. Cash
2. Property
3. Money
TESTS ON REALIZATION OF INCOME
 Severance Test – in order that income may exist, there must be a separation of capital and gain.
 Substantial Alteration Test Theory – there must be an exchange of something received which is
essentially different from which was parted to the extent of benefit received
 Flow of Wealth Theory – taxation is established on a realization, rather than on an accrual basis. The
increase in the value of the capital asset are taxed only when the property is sold and the increased
value is reflected in a flow of money to the owner, rather than on the basis of annual revaluation of
assets.
 Doctrine of Ownership, Command or Control of Income – he who exercises the power to dispose of
income shows ownership thereof. The income tax applies to those who earn or otherwise create the
right to receive it and enjoy the benefit of it when paid.
 Doctrine of Propriety Interest – where shares of stocks, options or other assets are transferred by an
employer to an employee to secure better services they are plainly compensation which is taxable
income.
 Claim of Right Doctrine – a taxable gain is conditioned upon the presence of a claim or right to the
alleged gain and the absence of a definite unconditional obligation to return or repay that which
would otherwise constitute a gain. The person who receives it has no restriction as to its disposition.
Notes in TAXATION 1
72
 Doctrine of Involuntary Conversion of Property – if the property is involuntarily converted into cash
and the money is used for buying another land, the ownership of the other land is a continuity of the
ownership of the first lot. The involuntary disposition of the property and the acquisition of a like
kind do not make the money a realized property. But such money must be used for the acquisition of
a like kind of property.
 Doctrine of Cash Equivalent – payment in the form of services, land or “in kind” is considered as
realized income. The amount is the cash equivalent of the thing received in kind.
TAX BASE AND TAX RATES APPLICABLE TO INDIVIDUALS
1. Resident citizens are taxed on their compensation, business and other income derived
from sources within and without the Philippines as follows:
 On compensation income
 On taxable net income
o TAXABLE NET INCOME – means compensation as well as all taxable non-

compensation income derived by self-employed and professionals, such as those
arising from business, trade, or exercise of profession and other income, but
excluding any income subject to final tax, less allowable deductions and for personal
and additional exemptions.
 On passive income
o a final tax is imposed on the following classes of income derived from sources
within the Philippines:
 Royalties (20%) except on books as well as other literary works and musical
compositions, which is subject to tax at 10%. Prizes exceeding 10,000 and
other winnings except PCSO and lotto winnings (20%)
 Interest on bank accounts (20%)
 Interest under the expanded foreign currency deposit system (7.5%)
 Interest from long term deposits (5 years or more) or investment with bank
at denominations of P10,000 or otherwise, as approved by BSP, shall be
exempt.
 Dividends from domestic corporation or from a joint stock company,
insurance or mutual fund company and a regional operating headquarters
of a multinational company or on the share of an individual in the
distributable net income after tax of a partnership of which he is a partner,
or on the share of an individual in the net income after tax of an
association, a joint account, or a joint venture or consortium taxable as a
corporation of which he is a member or a co-venturer.
 Capital gains from the sale of real property located in the Philippines (6%
on the fair market value or gross selling price whichever is higher)
 The sale of shares of stock of domestic corporations listed in, and sold
through, the local stock exchange are exempt from income tax but subject
to stock transactions tax of ½ of 1% of the gross selling price.
 Sale of shares of stock not traded in the stock exchange(5%)
 Cash rewards of informers.
Notes in TAXATION 1
73
o Any income or gain derived on which a final tax is imposed shall no longer be
included in the taxable net income of the taxpayer.
o The final tax is imposed without any deduction.
 Non-resident aliens not engaged in trade or business in the Philippines – are subject to tax
on their gross income at 25% thereof. They are not entitled to any personal or additional
exemptions.
o Aliens employed by regional o are headquarters of multi-national corporations
o Aliens employed by offshore banking units
o Aliens employed by petroleum service contractors and subcontractors.
TAX BASE AND TAX RATES APPLICABLE TO CORPORATIONS
 Domestic corporations or corporations duly organized and existing under Philippine law – are taxed
on their income derived from sources within and without the Philippines.
o A corporation under the tax code is any association of persons, natural or juridical,
for profits. The term includes partnerships, joint stock companies, joint accounts,
associations, or insurance companies.
CASES:
N.V. Reederij "Amsterdam" vs. Comm'r. of Internal Revenue 162 SCRA 487
 Petitioner N.V. Reedeij “Amsterdam” is a foreign corporation not authorized or licensed to do

business in the Philippines; A casual activity in the Philippines by a foreign corporation as in the
present case does not amount to engaging in trade or business in the Philippines for income tax
purposes.
 A domestic corporation is taxed on its income from sources within and without the Philippines, but a
foreign corporation is taxed only on its income from sources within the Philippines.
 However, while a foreign corporation doing business in the Philippines is taxable on income solely
from sources within the Philippines, it is permitted to claim deductions from gross income but only
to the extent connected with income earned in the Philippines.
 Foreign corporations not doing business in the Philippines are taxable on income from all sources
within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual or periodical
casual gains, profits and income and capital gains. The tax is 35%R of such gross income.
 Foreign corporation engaged in trade or business in the Philippines is taxed on its total net income
received from all sources within the Philippines at the rate of 25% upon the amount but which
taxable net income does not exceed P100,000 and 35% upon the amount but which taxable net
income exceeds P100,000 while corporation not engaged in trade or business within the Philippines
is taxed on income received from all sources within the Philippines at the rate of 35% of the gross
income.
Gatchalian vs. Collector of Internal Revenue No. 45425
 According to the stipulated facts the plaintiffs organized a partnership of a civil nature because each
of them put up money to buy a sweepstakes ticket for the sole purpose of dividing equally the prize
which they may win, as they did in fact in the amount of P50,000 (article 1665, Civil Code). The
Notes in TAXATION 1
74
partnership was not only formed, but upon the organization thereof and the winning of the prize, J.
G. personally appeared in the office of the Philippine Charity Sweepstakes, in his capacity as
co-partner, as such collected the prize, the office issued the check for P50,000 in favor of J. G. and
company, and the said partner, in the same capacity, collected the check. All these circumstances
repel the idea that the plaintiffs organized and formed a community of property only.
 Having organized and constituted a partnership of a civil nature, the said entity is the one bound to
pay the income tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833,
as amended by section 2 of Act No. 3761. There is no merit in plaintiffs' contention that the tax
should be prorated among them and paid individually, resulting in their exemption from the tax.
Commissioner of Internal Revenue vs. Suter, 27 SCRA 152(1969)
 Partnership has distinct and separate personality from that of its partners; Section 24 of Internal
Revenue Code is exception to the rule.— section 24 of the Internal Revenue Code merges registered
general co-partnerships with the personality of the individual partners for income tax purposes. But
this rule is exceptional in its disregard of a cardinal tenet of our partnership laws, and cannot be
extended by mere implication to limited partnerships.
 Change in membership does not remove partnership from coverage of section 24.—The limited
partnership is not a mere business conduit of the partner-spouses; it was organized for legitimate
business purposes; it conducted its own- dealings with its customers prior to appellee’s marriage,
and had been filing its own income tax returns as such independent entity. The change in its
membership, brought about by the marriage of the partners and their subsequent acquisition of all
interest therein is no ground for withdrawing the partnership from the coverage of Section 24 of the
tax code, requiring it to pay income tax. As far as the records show, the partners did not enter into
matrimony and thereafter buy the interests of the remaining partner with the premeditated scheme
or design to use the partnership as a business conduit to dodge the to laws. Regularity, not
otherwise, is presumed. The limited partnership is taxable on its income and to require that income
to be included in the individual tax return of respondent is to overstretch the letter and intent of the
law.
Collector of Int. Rev. vs. Batangas Trans. Co., et al. 102 Phil. 822
 The Tax Code defines the term "corporation" as including partnership no matter how created or
organized, thereby indicating that a joint venture need not be undertaken in any of the standard
forms, or in conformity with the usual requirements of the law on partnerships, in order that one
could be deemed constituted for purposes of the tax on corporations.
 In the case at bar, while the two respondent companies were registered and operating separately,
they were placed under one sole management called the "Joint Emergency Operation" for the
purpose of economizing in overhead expenses. Although no legal personality may have been created
by the Joint Emergency Operation, nevertheless, said joint management operated the business
affairs of the two companies as though they constituted a single entity, company or partnership,
thereby obtaining substantial economy and profits in the operation. The joint venture, therefore,
falls under the provisions of section 84 (6) of the Internal Revenue Code, and consequently, it is
liable to income tax provided for in Section 24 of the same Code.
Commissioner of Internal Revenue vs. Norton & Harrison Company 11 SCRA 714
 Taxation; Corporate fiction may not be used to evade taxes.—The revenue officers, in proper cases,
may disregard the separate corporate entity where it serves but as a shield for tax evasion.
Notes in TAXATION 1
75
 Where it is proven that two corporations are in reality but one entity and that the veil of corporate
fiction is being used as a shield for tax evasion by making it appear that the original sale was that
from one corporation to the other in order to gain a tax advantage, it is held that the basis of the
sales tax should be the sale by the latter corporation to the public.
Commissioner of Internal Revenue vs. Philippine Planters Investment Co., Inc. 56 SCRA 194
 Taxation; Privilege Tax; Managing corporations are not commercial brokers subject to percentage
tax.—A managing corporation that was employed not to sell sugar but to manage a sugar central and
its related activities cannot be considered a commercial broker under section 194 (t) of the Revenue
Code subject to the broker’s percentage tax.
 Findings of fact of the tax court not subject to review if based on substantial evidence.—The factual
findings of the Court of Tax Appeals being based on substantial evidence are not subject to review by
the Supreme Court as provided in Rule 44, section 2. In a decision earlier promulgated, the Court had
occasion to reiterate this settled rule that the tax court’s decision and findings on factual matters will
not be reviewed by this Court absent any showing of gross error or abuse on the part of the tax
court.
EXEMPT CORPORATIONS FOR PROFIT:
 The only associations for profit which are not so taxed as corporations are general professional
partnerships formed for the sole purpose of exercising a common profession, no part of the income
of which is derived from its engaging in any trade or business and joint ventures formed to
undertake construction projects.
 In the case of a general professional partnership, the partners themselves and not the partnership
are liable for income tax only in their separate and individual capacities on their shares in the profits,
whether distributed or not.
DIVIDEND TAX
 The stockholders of taxable domestic corporations are not liable to pay income tax unless and until
the profits are distributed to them by way of dividends.
 Once so distributed, the dividends or shares in partnership profits shall constitute a part of the
annual income of the distributee for the taxable year the dividends or profits were received.
o DOCTRINE OF CONSTRUCTIVE RECEIPT – taxes income before income is actually earned.
 Dividends received by non-resident aliens whether engaged in business or not, are subject to final
tax.
CORPORATE TAX RATES
 On domestic corporations, an income tax of 35% is improved upon taxable income from all sources
within and without the Philippines from until year 2008. However, RA 9337 introduced a tax rate of
30% starting Jan. 1, 2009.
o These rates generally applies, except to:
 Taxable proprietary educational institutions
 Hospitals which are non-profit.
o The President of the Philippines, upon recommendation of the Secretary of Finance, may
allow corporations the option to be taxed 15% of gross income after the following
conditions are met:
 A tax effort ratio of 20% of the GNP
Notes in TAXATION 1
76
 A ratio of 40% of income tax collection to total tax revenues

 A VAT tax effort of 4% of GNP
 A 0.9% ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.
This option is available to firms whose ratio of cost of sales to gross sales or receipts from all sources does not
exceed 55%.
Upon Election of the gross income tax option, it shall be irrevocable for 3 consecutive taxable years during
which the corporation is qualified.
o Minimum Corporate Income Tax Return

 RA 8424 prescribed a minimum corporate income tax of 2% of the gross income as
of the end of the taxable year on a corporation, beginning on the fourth taxable
year immediately following the year in which such corporation commenced its
business operations, when the minimum income tax is greater than the tax
computed under the ordinary corporate tax rates.
 Any excess of the minimum corporate income tax over the normal income tax shall
be carried forward and credited against the normal income tax for 3 immediately
succeeding taxable years.
1. May be suspended by the Secretary of Finance on any corporation which
suffers losses on account of prolonged labor dispute, or because of force
majeure, or because of legitimate business reverses.
Applicable only to domestic corporations and resident foreign corporations.
o Proprietary Educational Institutions and Hospitals

 Non-profit proprietary educational institutions and hospitals shall pay a tax of 10%
of their taxable income except those subject to final taxes, provided that if the gross
income from unrelated trade, business or other activity exceeds 50% of the total
gross income derived by any educational institutions or hospitals from all sources,
the regular or normal corporate tax rates are imposed on the entire taxable income
of the educational institution or hospitals.
o Government-owned or controlled corporations, agencies or instrumentalities

 Generally, all corporate taxpayers not specifically exempt under the Code are
subject to tax under the applicable corporate income tax rates.
 All corporations, agencies, or instrumentalities owner or controlled by the
Government, except:
1. GSIS
2. SSS
3. PHIC
4. PCSO
5. PAGCOR
6. Government educational institutions
Shall pay such rate of tax upon their taxable income imposed upon associations or
corporations engaged in a similar business, industry, or activity.
Notes in TAXATION 1
77
o Mutual Life Insurance Companies

 Subject to 30% regular corporate tax rate
CASE:
Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc. 682 SCRA 66
 The Supreme Court holds that Section 27(B) of the National Internal Revenue Code (NIRC) does not
remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G).
 Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together
without the removal of such tax exemption. The effect of the introduction of Section 27(B) is to
subject the taxable income of two specific institutions, namely, proprietary non-profit educational
institutions and proprietary non-profit hospitals, among the institutions covered by Section 30, to
the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the
last paragraph of Section 30 in relation to Section 27(A)(1).
 Section 27(B) of the National Internal Revenue Code (NIRC) imposes a 10% preferential tax rate on
the income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit
hospitals.
 The only qualifications for hospitals are that they must be proprietary and non-profit. “Proprietary”
means private, following the definition of a “proprietary educational institution” as “any private
school maintained and administered by private individuals or groups” with a government permit.
“Non-profit” means no net income or asset accrues to or benefits any member or specific person,
with all the net income or asset devoted to the institution’s purposes and all its activities conducted
not for profit. “Non-profit” does not necessarily mean “charitable.” Charity is essentially a gift to an
indefinite number of persons which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which would otherwise fall on the
shoulders of government; the government forgoes taxes which should have been spent to address
public needs, because certain private entities already assume a part of the burden.
 Charitable institutions are not ipso facto entitled to a tax exemption. The requirements for a tax
exemption are specified by the law granting it.
 The Supreme Court finds that St. Luke’s is a corporation that is not “operated exclusively” for
charitable or social welfare purposes insofar as its revenues from paying patients are concerned;
Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to
income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant
to Section 27(B).
FINAL TAXES ON DOMESTIC CORPORATIONS
(a) Interest from deposits and yield on any other monetary benefits from deposit substitutes and from
trust funds and similar arrangement and royalties.
 Interest on Philippine currency bank deposits and yield on any other monetary benefit from
deposit substitutes and from trust fund and similar arrangements received by domestic
corporations, and royalties, derived from sources within the Philippines are subject to 20%
final tax.
 Interest income derived by domestic corporation from a depository bank under the
expanded foreign currency deposit system are subject to 7.5% final tax.
(b) Capital gains from sales of shares of stock not traded in the stock exchange.
Notes in TAXATION 1
78
 Net capital gains realized during each taxable year from sale or exchange or other
disposition of shares of stock not traded through a local stock exchange:
i. Not over P100,000 – 5%
ii. Over P100,000 – 10%
 Shares listed and traded through the local stock exchange are exempt from income tax
subject to percentage tax of ½ of 1% of the gross selling price or gross value in money of said
shares of stock.
(c) Tax on Income derived under the Expanded Foreign Currency Deposit System.
 income derived by a depository bank under the expanded foreign currency deposit system
bank under the expanded foreign currency deposit transactions with non-residents, off-
shore banking units in the Philippines, local commercial banks, including branches of foreign
banks that may be authorized by the Bangko Sentral ng Pilipinas to transact business with
foreign currency deposit system units and other depository banks under the expanded
foreign currency deposit system, should be exempt from all taxes, except net income from
such transactions as may be specified by the Secretary of Finance, upon recommendation by
the Monetary Board to be subject to the regular income tax payable by banks.
 However, interest income from foreign currency loans granted by such depository banks
under the expanded system to residents other than offshore units in the Philippines to the
depository banks under the suspended system shall be subject to a 10% tax.
 Any income of non-residents, whether individuals or corporations, from transactions with
depository banks under the expanded system is exempt from income tax.
(d) Intercorporate dividends
 Not subject to tax
(e) Capital gains realized from the sale, exchange, or disposition of lands and/or buildings
 Gains presumed to have been realized on the sale, exchange or disposition of lands and/or
buildings which are not actually used in the business of a corporation and are treated as
capital assets is subject to a 6% tax based on the gross selling price or fair market value
whichever is higher, of such lands and/or buildings.
 The 20% final tax on interest on bank deposits and on royalties is applicable to domestic, as
well as a foreign, corporations. However, a final tax on the sale of real property constituting
a capital asset is applicable only to domestic corporations.
SURTAX ON UNDISTRIBUTED PROFITS
 Under RA 8424, Sec. 29, an improperly accumulated earnings tax equal to 10% of the improperly
accumulated taxable income is hereby imposed for each taxable year on the improperly accumulated
taxable income of each corporation.
 The improperly accumulated earnings tax shall apply to every corporation formed or availed for the
purpose of avoiding the income tax with respect to its shareholders or shareholders of any other
corporation, by permitting earnings and profits to accumulate instead of being divided or distributed,
except as to:
(a) Publicly-held corporations
(b) Banks and other non-bank financial intermediaries; and
(c) Insurance companies
 the term “improperly accumulated taxable income” means taxable income adjusted by:
(a) income exempt from tax
(b) income excluded from gross income
Notes in TAXATION 1
79
(c) income subject to final tax

(d) the amount of net operating loss carry-over deducted
and reduced by the sum of:
(a) dividends actually or constructively paid
(b) income tax paid for the taxable year.
 However, for corporations using the calendar year basis, the accumulated earnings tax shall not
apply on improperly accumulated income.
 In the case of corporations adopting the fiscal year accounting period, the improperly accumulated
income not subject to this tax, shall be reckoned, as the end of the month comprising the 12 month
period of the fiscal year.
 The term “reasonable needs of the business” includes the reasonably anticipated needs of the
business.
CASES:
Commissioner of Internal Revenue vs. Antonio Tuason, Inc. 173 SCRA 397
 Accumulation of Surplus; Surtax; Touchstone of liability is the purpose behind the accumulation of
the income and not the consequences of accumulation. Thus, if the failure to pay dividends were for
the purpose of using the undistributed earnings and profits for the reasonable needs of the business,
that purpose would not fall within the interdiction of the statute.” It is plain to see that the
company’s failure to distribute dividends to its stockhold ers in 1975-1978 was for reasons other
than the reasonable needs of the business, thereby falling within the interdiction of Section 25 of the
Tax Code of 1977.
Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue 127 SCRA 483
 Prerequisite for imposition of 25% surtax on improperly accumulated corporate profits.—A

prerequisite to the imposition of the tax has been that the corporation be formed or availed of for
the purpose of avoiding the income tax (or surtax) on its shareholders, or on the shareholders of any
other corporation by permitting the earnings and profits of the corporation to accumulate instead of
dividing them among or distributing them to the shareholders. If the earnings and profits were
distributed, the shareholders would be required to pay an income tax thereon whereas, if the
distribution were not made to them, they would incur no tax in respect to the undistributed earnings
and profits of the corporation. The touchstone of liability is the purpose behind the accumulation of
the income and not the consequences of the accumulation. Thus, if the failure to pay dividends is
due to some other cause, such as the use of undistributed earnings and profits for the reasonable
needs of the business, such purpose does not fall within the interdiction of the statute.
 To avoid surtax on profits taxpayer must prove purchase of bonds within reasonable needs of its
business.—To avoid the twenty-five percent (25%) surtax, petitioner has to prove that the purchase
of the U.S.A. Treasury Bonds in 1951 with a face value of $175,000.00 was an investment within the
reasonable needs of the Corporation.
 To determine the “reasonable needs” of the business in order to justify an accumulation of earnings,
the Courts of the United States have invented the so-called “Immediacy Test” which construed the
words “reasonable needs of the business” to mean the immediate needs of the business, and it was
generally held that if the corporation did not prove an immediate need for the accumulation of the
earnings and profits, the accumulation was not for the reasonable needs of the business, and the
penalty tax would apply. American cases likewise hold that investment of the earnings and profits of
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the corporation in stock or securities of an unrelated business usually indicates an accumulation

beyond the reasonable needs of the business.
Cyanamid Philippines, Inc. vs. Court of Appeals 322 SCRA 639
 Accumulated Earnings Tax; Corporation Law; The tax on improper accumulation of surplus is
essentially a penalty tax designed to compel corporations to distribute earnings so that the said
earnings by shareholders could, in turn, be taxed.—The provision discouraged tax avoidance through
corporate surplus accumulation. When corporations do not declare dividends, income taxes are not
paid on the undeclared dividends received by the shareholders. The tax on improper accumulation of
surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the
said earnings by shareholders could, in turn, be taxed.
 In order to determine whether profits are accumulated for the reasonable needs of the business to
avoid the surtax upon shareholders, it must be shown that the controlling intention of the taxpayer
is manifested at the time of accumulation, not intentions declared subsequently, which are mere
afterthoughts.
2. Resident foreign corporations doing trade or business in the Philippines – are taxed on
their taxable net income only from sources within the country at 35% and 30% beginning at
January 1, 2009.
 Resident foreign corporation shall be granted the same option to be taxed at 15%
gross income under the same conditions provided for domestic corporation.
 A minimum income tax of 2% of gross income shall likewise be applicable to
resident foreign corporation in the same way domestic corporations are subjected.
 Where a foreign corporation enters into a transaction in the Philippines directly and
independently of its branch office in the country, the taxpayer on the income tax
due on said transaction, would be the foreign corporation itself and subject to the
tax similarly imposed on non-resident foreign corporations.
CASES:
Commissioner of Internal Revenue vs. British Overseas Airways Corporation 149 SCRA 395
 lt is our considered opinion that BOAC is a resident foreign corporation, There is no specific criterion
as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged
in the light of its peculiar environmental circumstances. The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the performance of acts or works or
the exercise of some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization. "In order that a foreign
corporation may be regarded as doing business within a State, there must be continuity of conduct
and intention to establish a continuous business, such as the appointment of a local agent, and not
one of a temporary character.'
 An international airline, like BOAC, which has appointed a ticket sales agent in the Philippines and
which allocates fares received to various airlines on the basis of their participation in the services
rendered. although BOAC does not operate any airplane in the Philippines, is a resident foreign
corporation subject to tax on income received from Philippine sources.
 The source of an income is the property, activity or service that produced the income. For the source
of income to be considered as coming from the Philippines, it is sufficient that the income is derived
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from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity
that produces the income. The tickets exchanged hands here and payments for fares were also made
here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth
proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the
Philippine government. In consideration of such protection, the flow of wealth should share the
burden of supporting the government.
 BOAC, however, would impress upon this Court that income derived from transportation is income
for services, with the result that the place where the services are rendered determines the source;
and since BOAC's service of transportation is performed outside the Philippines, the income derived
is from sources without the Philippines and, therefore, not taxable under our income tax laws. The
Tax Court upholds that stand in the joint Decision under review. The absence of flight operations to
and from the Philippines is not determinative of the source of income or the situs of income
taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The
test of taxability is the "source"; and the source of an income is that activity x x x which produced the
income. Unquestionably, the passage documentations in these cases were sold in the Philippines and
the revenue therefrom was derived from a business activity regularly pursued within the Philippines.
And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from
foreign cities," it cannot alter the fact that income from the sale of tickets was derived from the
Philippines. The word "source" conveys one essential idea that of origin, and the origin of the income
herein is the Philippines.
South African Airways vs. Commissioner of Internal Revenue 612 SCRA 665
 Air Transportation; Gross Philippine Billings (GPB); As long as the uplifts of passengers and cargo
occur to or from the Philippines, income is included in Gross Philippine Billings (GPB).
 Prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in the world, provided that
the passage documents were sold in the Philippines. Legislature departed from such concept in the
1997 NIRC where GPB is now defined under Sec. 28(A)(3)(a): “Gross Philippine Billings” refers to the
amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of
sale or issue and the place of payment of the ticket or passage document. Now, it is the place of sale
that is irrelevant; as long as the uplifts of passengers and cargo occur to or from the Philippines,
income is included in GPB.
 Off-line air carriers having general sales agents in the Philippines are engaged in or doing business in
the Philippines and that their income from sales of passage documents here is income from within
the Philippines.
Marubeni Corporation vs. Commissioner of Internal Revenue 177 SCRA 500
 Marubeni Corporation is a resident foreign corporation; Reason.—Under the Tax Code, a resident
foreign corporation is one that is “engaged in trade or business” within the Philippines. Petitioner
contends that precisely because it is engaged in business in the Philippines through its Philippine
branch that it must be considered as a resident foreign corporation. Petitioner reasons that since the
Philippine branch and the Tokyo head office are one and the same entity, whoever made the
investment in AG&P, Manila does not matter at all. A single corporate entity cannot be both a
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resident and a non-resident corporation depending on the nature of the particular transaction
involved. Accordingly, whether the dividends are paid directly to the head office or coursed through
its local branch is of no moment for after all, the head office and the office branch constitute but one
corporate entity, the Marubeni Corporation, which, under both Philippine tax and corporate laws, is
a resident foreign corporation because it is transacting business in the Philippines.
 while public respondents correctly concluded that the dividends in dispute were neither subject to
the 15% profit remittance tax nor to the 10% intercorporate dividend tax, the recipient being a non-
resident stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner
because the taxes thus withheld totaled the 25% rate imposed by the Philippine-Japan Tax
Convention pursuant to Article 10 (2) (b).
 To simply add the two taxes to arrive at the 25% tax rate is to disregard a basic rule in taxation that
each tax has a different tax basis. While the tax on dividends is directly levied on the dividends
received, “the tax base upon which the 15% branch profit remittance tax is imposed is the profit
actually remitted abroad.”
 Petitioner being a non-resident foreign corporation with respect to the transaction in question, as a
general rule is taxed 35% of its gross income from all sources within the Philippines.
a. International Carriers
 International carriers doing business in the Philippines shall pay a tax of two and a half percent (2
½%) on their Gross Philippine Billings.
o For international Air Carrier: GROSS PHILIPPINE BILLINGS – refers to the amount of gross
revenue derived from carriage of persons, excess baggage, cargo and mail originating from
the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or
issue and the place of payment of the ticket or passage document.
 E.G. tickets revalidated, exchanged and/or indorsed to another international airline
form part of the GPB of the passenger boards a plane in a port or point in the
Philippines.
o For International Shipping: GROSS PHILIPPINE BILLINGS – means gross revenue whether for
passenger, cargo or mail originating from the Philippines up to the final destination,
regardless of the place of sale or payment of the passage or freight documents.
b. Offshore Banking Units
 Income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP), from
foreign currency transactions with non-residents, other offshore banking units, local commercial
banks, including branches of foreign banks that may be authorized by the BSP to transact business
with offshore banking units, SHALL BE EXEMPT FROM ALL TAXES except net income from such
transaction as many may be specified by the Secretary of Finance upon recommendation of the
Monetary Board which shall be subject in regular income tax payable by banks.
 Income derived from foreign currency loans granted to residents other than offshore banking units
on local commercial banks and local branches of foreign banks authorized by the BSP to transact
business with offshore banking units, SHALL BE SUBJECT TO A FINAL INCOME TAX OF 10%.
 Any income of non-residents, whether individual or corporation from transaction units and offshore
banking units shall be exempt from income tax.
c. Income derived under the Expanded Currency Deposit System

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 Income derived by a depository bank under the expanded foreign currency deposit system from
foreign currency transactions with local commercial banks including branches of foreign banks that
may be authorized by the BSP to transact business with foreign currency deposit system units and
other depository banks under the expanded foreign currency deposit system, including interest
income from foreign currency loans, granted by such depository banks under said expanded foreign
currency deposit system to residents, SHALL BE SUBJECT TO A FINAL TAX AT THE RATE OF 10%.
 Any income of non-residents from transactions with depository banks under the expanded system
are exempt from income tax.
d. Regional or Area Headquarters and Regional Operating Headquarters of Multi-national Corporations
 Regional or Area Headquarters are EXEMPT FROM INCOME TAX while Regional Operating
Headquarters ARE SUBJECT TO 10% TAX OF THEIR TAXABLE INCOME.
o REGIONAL OR AREA HEADQUARTERS – refers to a branch established in the Philippines by
multinational companies and which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communications and coordinating center for their
affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets.
o REGIONAL OPERATING HEADQUARTERS – refers to a branch established in the Philippines by
multinational companies which are engaged in any of the following services:
 General administration and planning
 Business planning and coordination
 Sourcing and procurement of raw materials and components
 Corporate finance advisory services
 Marketing control and sales promotion
 Training and personnel management
 Logistic services
 Research and development services and product development
 Technical support and maintenance data processing and communication
 Business development
FINAL TAXES ON RESIDENT FOREIGN CORPORATION
 the income tax treatment on:

o bank deposits and substitute arrangements
o royalties
o sale of shares of stocks in domestic corporation
o intercorporate dividends; and
o income derived under the Expanded Foreign Currency Deposit System
apply to resident foreign corporations.
 Interest income and royalty are subject to 20% final tax.

 Dividends received from domestic corporations are exempt from income tax
 Interest income derived from a depository bank under the expanded foreign currency deposit system
shall be subject to 7 ½ tax rate
REMITTANCE TAX
 Profits, including interests, dividends, rents, royalties, remuneration for technical services or other
gains, profits, income, which are effectively connected with the conduct of its trade or business in
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the Philippines and remitted abroad by a local branch office of a foreign corporation in the conduct
of its trade or business in the Philippines shall be subject in the absence of a contrary treaty
covenant, to 15% remittance tax computed on the amount actually remitted.
CASES:
Marubeni Corporation vs. Commissioner of Internal Revenue 177 SCRA 500
 Petitioner having made independent investment attributable only to the head office, cannot now
claim the increments as ordinary consequence of its trade or business in the Philippines.
 while public respondents correctly concluded that the dividends in dispute were neither subject to
the 15% profit remittance tax nor to the 10% intercorporate dividend tax, the recipient being a non-
resident stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner
because the taxes thus withheld totaled the 25% rate imposed by the Philippine-Japan Tax
Convention pursuant to Article 10 (2) (b).
Bank of America NT & SA vs. Court of Appeals 234 SCRA 302
 In the 15% remittance tax, the law specifies its own tax base to be on the “profit remitted abroad.”
There is absolutely nothing equivocal or uncertain about the language of the provision. The tax is
imposed on the amount sent abroad, and the law (then in force) calls for nothing further. The
taxpayer is a single entity, and it should be understand-able if, such as in this case, it is the local
branch of the corporation, using its own local funds, which remits the tax to the Philippine
Government.
 The remittance tax was conceived in an attempt to equalize the income tax burden on foreign
corporations maintaining, on the one hand, local branch offices and organizing, on the other hand,
subsidiary domestic corporations where at least a majority of all the latter’s shares of stock are
owned by such foreign corporations. Prior to the amendatory provisions of the Revenue Code, local
branches were made to pay only the usual corporate income tax of 25%-35% on net income (now a
uniform 35%) applicable to resident foreign corporations (foreign corporations doing business in the
Philippines).
 While Philippine subsidiaries of foreign corporations were subject to the same rate of 25%-35% (now
also a uniform 35%) on their net income, dividend payments, however, were additionally subjected
to a 15% (withholding) tax (reduced conditionally from 35%). In order to avert what would otherwise
appear to be an unequal tax treatment on such subsidiaries vis-a-vis local branch offices, a 20%, later
reduced to 15%, profit remittance tax was imposed on local branches on their remittances of profits
abroad. But this is where the tax pari-passu ends between domestic branches and subsidiaries of
foreign corporations.
NON-RESIDENT FOREIGN CORPORATIONS
 Foreign corporations not engaged in trade or business in the Philippines are taxed on their gross
income derived from sources within the Philippines, subject to treaty covenants, at a rate of 35%
and beginning January 1, 2009 at the rate of 30%. Except:
1. Reinsurance premiums, which are exempt.
2. Interest on foreign loans contracted on or after Aug. 1, 1986 which is subject to 20%.
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3. Dividends from domestic corporations are subject to 15%, provided, that 20% difference and
15% differences starting Jan. 1, 2009 is allowed as a tax credit by the country where the
recipient corporation is domiciled.
4. Non-resident cinematographic film owners, lessors, or distributors, which are subject to 25%
gross income.
5. Non-resident vessel owners, or lessors of vessels chartered by Philippine nationals which are
subject to 4.5% of lease rentals and charter fees from lease or charters as approved by
Maritime Industry Authority.
6. Multinational corporations with regional operating headquarters in the Philippines which
are subject to 10% tax on their taxable income.
7. Non-resident owners or lessors of aircraft, machineries, and other equipment, are subject to
7 1/2 % of gross rentals or fees.
CASES:
Commissioner of lnternal Revenue vs. Procter & Gamble PMC 160 SCRA 560 & 204 SCRA 377
 Tax on non-resident foreign corporations; Tax credit.—The ordinary thirty-five percent (35%) tax rate
applicable to dividend remittances to non-resident corporate stockholders of a Philippine
corporation, goes down to fifteen percent (15%) if the country of domicile of the foreign stockholder
corporation “shall allow” such foreign corporation a tax credit for “taxes deemed paid in the
Philippines,” applicable against the tax payable to the domiciliary country by the foreign stockholder
corporation.
 In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable
if the USA “shall allow” to P&G-USA a tax credit for “taxes deemed paid in the Philippines” applicable
against the US taxes of P&G-USA. The NIRC specifies that such tax credit for “taxes deemed paid in
the Philippines” must, as a minimum, reach an amount equivalent to twenty (20) percentage points
which represents the difference between the regular thirty-five percent (35%) dividend tax rate and
the preferred fifteen percent (15%) dividend tax rate.
 It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a
“deemed paid” tax credit for the dividend tax (20 percentage points) waived by the Philippines in
making applicable the preferred dividend tax rate of fifteen percent (15%).
 In other words, our NIRC does not require that the US tax law deem the parent-corporation to have
paid the twenty (20) percentage points of dividend tax waived by the Philippines. The NIRC only
requires that the US “shall allow” P&G-USA a “deemed paid” tax credit in an amount equivalent to
the twenty (20) percentage points waived by the Philippines.
Comm’r. of Internal Revenue vs. Wander Philippines, Inc. 160 SCRA 573
 Fact the Switzerland did not impose any tax on the dividends received by Glaro from the Philippines
should be considered as a full satisfaction of the given condition.—While it may be true that claims
for refund are construed strictly against the claimant, nevertheless, the fact that Switzerland did not
impose any tax or the dividends received by Glaro from the Philippines should be considered as a full
satisfaction of the given condition. For, as aptly stated by respondent Court, to deny private
respondent the privilege to withhold only 15% tax provided for under Presidential Decree No. 369,
amending Section 24 (b) (1) of the Tax Code, would run counter to the very spirit and intent of said
law and definitely will adversely affect foreign corporations’ interest here and discourage them from
investing capital in our country.
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86
FINAL TAX ON NON-RESIDENT FOREIGN CORPORATION
 Final tax of 5% for net capital gross not over P100,000 and 10% of any amount in excess of P100,000.
 These corporations are not entitled to claim the special treatment (20% final tax) on interest income
or bank deposits, instead, the 35% tax is imposed.
SPECIAL RULES ON FOREIGN CURRENCY TRANSACTIONS
 Income derived by offshore banking units authorized by the BSP from foreign currency transactions
with:
(a) Non-residents
(b) Other offshore banking units
(c) Local commercial banks
(d) Branches of foreign banks
duly authorized by the BSP to transact business with offshore banking units shall be exempt from all
taxes.
 Income derived by depository banks under the Expanded Foreign Currency Deposit System from
foreign currency transactions with:
(a) Non-residents
(b) Offshore banking units in the Philippines
(c) Local Commercial Banks
(d) Branches of foreign banks
(e) Other depository banks
under the Expanded Foreign Currency Deposit System are exempt from all taxes.
 Interest from foreign currency loans granted to residents shall be subject to 10% final tax.
 Income of non-residents whether individual or corporation from transactions with said offshore
banking units are tax-exempt.
 Interest income derived by a domestic or a resident foreign corporation from a depository bank
under the expanded currency deposit system shall be subject to a final tax of 7.5%.
EXEMPT CORPORATIONS
The following organizations shall not be taxed under this Title in respect to income received by them as such:
A. Labor, agricultural or horticultural organization not organized principally for profit;

B. Mutual savings bank not having a capital stock represented by shares, and cooperative bank without
capital stock organized and operated for mutual purposes and without profit;
C. A beneficiary society, order or association, operating fort he exclusive benefit of the members such
as a fraternal organization operating under the lodge system, or mutual aid association or a nonstock
corporation organized by employees providing for the payment of life, sickness, accident, or other
benefits exclusively to the members of such society, order, or association, or nonstock corporation or
their dependents;
D. Cemetery company owned and operated exclusively for the benefit of its members;
E. Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income
or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific
person;
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F. Business league chamber of commerce, or board of trade, not organized for profit and no part of the
net income of which inures to the benefit of any private stock-holder, or individual;
G. Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;
H. A nonstock and nonprofit educational institution;
I. Government educational institution;
J. Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company,
mutual or cooperative telephone company, or like organization of a purely local character, the
income of which consists solely of assessments, dues, and fees collected from members for the sole
purpose of meeting its expenses; and
K. Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose
of marketing the products of its members and turning back to them the proceeds of sales, less the
necessary selling expenses on the basis of the quantity of produce finished by them;
CASES:
Herrera vs. Quezon City Board of Assessment Appeals 3 SCRA 186
 The admission of pay patients does not detract from the charitable character of a hospital, if all of its
funds are devoted “exclusively to the maintenance of the institution” as a “public charity”. In other
words, “where rendering charity is its primary object, and the funds derived from payments made by
patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that a
profit has been made will not deprive the hospital of its benevolent character.
 The fact, therefore, that in the case at bar, St. Catherine’s Hospital, which is a charitable institution,
admits pay-patients, does not bar it from claiming that it is devoted exclusively to benevolent
purposes, it being admitted that the income derived from pay patients is devoted to the
improvement of the charity wards, which represent almost two-thirds (2/3) of the bed capacity of
the hospital, aside from “out-charity patients” who come only for consultation.
 The exemption in favor of property used exclusively for charitable or educational purposes is “not
limited to property actually indispensable” therefor, but extends to facilities which are “incidental to
and reasonably necessary for” the accomplishment of said purposes, such as, in the case of hospitals,
“a school for training nurses, a nurses’ home, property used to provide housing facilities for interns,
resident doctors, superintendents, and other members of the hospital staff, and re creational
facilities for student nurses, interns and residents”, such as “athletic fields”, including “a farm used
for the inmates of the institution”
 The fact that a garage located in the hospital was being used in the operation of the school of
midwifery because the students enrolled therein were entitled to transportation and that the
hospital directress who received no compensation, and her family, resided in the building, were
incidental to the operation of the hospital, and, accordingly, did not affect the charitable character of
the hospital and the educational nature of the school.
American Bible Society vs. City of Manila 101 Phil. 386
 In the case at bar, plaintiff is engaged in the distribution and sales of bibles and religious articles. The
City Treasurer of Manila informed the plaintiff that it was conducting the business of general
merchandise without providing itself with the necessary Mayor's permit and municipal license, in
violation of Ordinance No. 3000, as amended, and Ordinance No. 2529, as amended, and required
plaintiff to secure the corresponding permit and license. Plaintiff protested against this requirement
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and claimed that it never made any profit from the sale of its bibles. Held: It is true the price asked
for the religious articles was in some instances a little bit higher than the actual cost of the same, but
this cannot mean that plaintiff was engaged in the business or occupation of selling said
"merchandise" for profit. For this reasons, the provisions of City Ordinance No. 2529, as amended,
which requires the payment of license fee for conducting the business of general merchandise,
cannot be applied to plaintiff society, for in doing so, it would impair its free exercise and enjoyment
of its religious profession and worship, as well as its rights of dissemination of religious beliefs. Upon
the other hand, City Ordinance No. 3000, as amended, which requires the obtention of the Mayor's
permit before any person can engage in any of the businesses, trades or occupations enumerated
therein, does not impose any charge upon the enjoyment of a right granted by the Constitution, nor
tax the exercise of religious practices. Hence, it cannot be considered unconstitutional, even if
applied to plaintiff Society.
Commissioner of Internal Revenue vs. Court of Appeals 298 SCRA 83
 In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very wording
of the last paragraph of then Section 27 of the NIRC which mandates that the income of exempt
organizations (such as the YMCA) from any of their properties, real or personal, be subject to the tax
imposed by the same Code. Because the last paragraph of said section unequivocally subjects to tax
the rent income of the YMCA from its real property, the Court is duty-bound to abide strictly by its
literal meaning and to refrain from resorting to any convoluted attempt at construction.
 Private respondent also invokes Article XIV, Section 4, par. 3 of the Charter, claiming that the YMCA
“is a non-stock, non-profit educational institution whose revenues and assets are used actually,
directly and exclusively for educational purposes so it is exempt from taxes on its properties and
income.” We reiterate that private respondent is exempt from the payment of property tax, but not
income tax on the rentals from its property. The bare allegation alone that it is a non-stock, non-
profit educational institution is insufficient to justify its exemption from the payment of income tax.
TAX RATES AND TAX BASE ON ESTATES AND TRUSTS
1. Estates under judicial settlement are subject to income tax in the same manner as individuals.
o Its own status is dependent on the status of the decedent immediately prior to his death.
o Thus, where the decedent was a resident citizen then the income taxability of his estate
would that applicable to resident citizens, except that:
 The entitlement to personal exemption is limited.
 The distribution to the heirs during the taxable year of estate income is deductible
from the taxable income of the estate which distributed share, instead, would then
form part of the recipient heirs’ respective incomes.
o Where no such distribution to the heirs is made during the taxable year that the income is
earned, which is then the subject to income tax payment by the estate, the subsequent
distribution thereof, after tax, is no longer taxable on the part of its recipients.
Estates not under judicial settlement are subject to income tax generally as mere co-ownerships.
 The tax treatment on income of co-ownership is similar to exempt partnerships, hence, the
tax liability on income of the co-ownership is levied directly on the co-owners.
2. Irrevocable Trust is taxed exactly in the same way as estates under judicial settlement and its status
as an individual is that of the trustor. Hence, it is entitled to the minimum personal exemption and
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89
distribution of trust income during the taxable year to the beneficiaries is deductible from the trust’s
taxable income.
D. MEANING OF TAXABLE INCOME
 Taxable income – the pertinent items of gross income specified in this Code, less the deductions
and/or personal and additional exemption, if any, authorized for such types of income by the Code
or other special laws
 Income - all such gains, profits or income derived from any source whatever, such as for services,
whether constituting a demandable debt or not or from or for the use of capital.
 Capital is fund, while Income is flow; Capital is wealth, while Income is the service of wealth
 Taxable income does not include items received which do not add to the taxpayers net worth or
redounded to the benefit such as amounts merely deposited or entrusted to him
Gross Income – all income from whatever sources derived, including but not limited to
1. Compensation for services in whatever form paid. E.g. salaries, fees, wages, commissions
and other similar items
2. Gross income derived from the conduct of trade or business or the exercise of a profession
3. Gains derived from the conduct of trade or business or the exercise of a profession
4. Gains derived from dealings in property
5. Interest
6. Rents
7. Royalties
8. Dividends
9. Annuities
10. Prizes and winnings
11. Pensions
12. Partner’s distributive share from the net income of the general professional partnership
Taxable income may be grouped into 3 categories:
a) Passive investment income subject to final tax

b) Compensation income
c) Non-compensation income
a) Income that is subject to final tax in no longer includible in the taxpayer’s taxable income
Individual taxpayers’ tax are computed:
 Tax on compensation income – computed on the basis of gross income. Personal and additional
exemptions are likewise creditable against compensation income
 Non-compensation income – subject to tax upon net income
Corporate income taxpayers
b) Unlike individual taxpayers, the income tax treatment on compensation and non-compensation
income is basically the same, and both incomes are subject to a tax on the basis of net income since
the gross tax scheme is limited to compensation arising from personal not corporate services.
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90
CASES:
Commissioner of Internal Revenue vs. Tours Specialists, Inc. 183 SCRA 402
 The significance of P.D. 31 is clearly established in determining whether or not hotel room charges of
foreign tourists in local hotels are subject to the 3% contractor’s tax. As the respondent court aptly
stated: “x x x If the hotel room charges entrusted to petitioner will be subjected to 3% contractor’s
tax as what respondent would want to do in this case, that would in effect do indirectly what P.D. 31
would not like hotel room charges of foreign tourists to be subjected to hotel room tax. Although,
respondent may claim that the 3% contractor’s tax is imposed upon a different incidence, i.e. the
gross receipts of petitioner tourist agency which he asserts includes the hotel room charges
entrusted to it, the effect would be to impose a tax, and though different, it nonetheless imposes a
tax actually on room charges. One way or the other, it would not have the effect of promoting
tourism in the Philippines as that would increase the costs or expenses by the addition of a hotel
room tax in the overall expenses of said tourists.”
Commissioner of Internal Revenue vs. British Overseas Airways Corporation 149 SCRA 395
 BOAC, during the periods covered by the subject assessments, maintained a general sales agent in
the Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing
tickets; (2) breaking down the whole trip into series of trips—each trip in the series corresponding to
a different airline company; (3) receiving the fare from the whole trip; and (4) consequently
allocating to the various airline companies on the basis of their participation in the services rendered
through the mode of interline settlement as prescribed by Article VI of the Resolution No. 850 of the
IATA Agreement." Those activities were in exercise of the functions which are normally incident to,
and are in progressive pursuit of the purpose and object of its organization as an international air
carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business,
the generation of sales being the paramount objective. There should be no doubt then that BOAC
was "engaged in" business in the Philippines through a local agent during the period covered by the
assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within the Philippines.
Commissioner of Internal Revenue vs. Air India 157 SCRA 648
 Revenue derived by private Respondent from the sales of airplane tickets through its agent PAL here
in the Philippines, considered taxable income pursuant to P.D. 1355 amending Sec. 24 (b) (2) of Tax
Code.—On the basis of the doctrine announced in British Overseas Airways Corporation, the revenue
derived by the private respondent Air India from the sales of airplane tickets through its agent
Philippine Air Lines, Inc., here in the Philippines, must be considered taxable income. As correctly
assessed by the petitioner, such income is subject to a 2.5% tax pursuant to Presidential Decree No.
1355, amending Section 24 (b) (2) of the Tax Code. The total Philippine billings of the private
respondent for the taxable year in question amounts to P2,968,156.00 2.5% of this amount or
P74,203.90 constitutes the income tax due from the private respondent.
I. Income subject to final tax
c) Income that are subject to final tax are excluded from any further income tax
a) Royalties (except on books, literary works, musical compositions final tax is 10%), Prizes (except
prizes amounting to P10,000 or less which shall form part of ordinary taxable income) other
Notes in TAXATION 1
91
winnings (except PCSO and Lotto) from sources within the Philippines in the case of citizens, resident
aliens, and non-resident aliens engaged in trade or business on the Philippines shall be subject to
20% final tax.
I. Non-resident alien not engaged in trade or business in the Philippines, the amount received
by them from sources in the Philippines shall form part of their gross income subject to flat
25% income tax
II. Corporations are not subject to final tax with respect to incomes mentioned, instead, form
part of their respective tax bases. Subject to allowable deductions, the applicable tax rate is
imposed. (except royalties – 20% final tax applies to domestic and resident foreign
corporation)
III. Preferential rate of 10% on royalties applies to US firms
b) Interest from Philippine currency bank deposits and yield from deposit substitute and from trust
fund or similar arrangement
I. Citizens, resident aliens and non-resident aliens engaged in trade of business as well as
domestic and resident foreign corporation – final tax of 20% on interest on savings deposit
and on time deposit or yields from substitute deposit or similar arrangement
II. Non-resident alien not engaged in trade or business in the Philippines – shall form part of
their gross income subject to flat 25% income tax
III. Non-resident foreign corporation not engaged in trade or business in the Philippines –
subject to a tax rate of 34% on their gross income from all sources within the Philippines and
which will slide down to 33% and 32% for the years 1999 and 2000, respectively. Interest
form part of their taxable gross income.
IV. Interest earned from deposits maintained with a bank under the expanded foreign currency
deposit system is subject to a final income tax rate of 7.5% of such interest income
c) Dividends from domestic corporations and shares of individual partners in the net profits of
taxable partnerships
I. Citizens and resident aliens – final tax of 6% in 1998, 10% in 2000 and thereafter
II. Non-resident aliens engaged in trade or business in the Philippines – 20% final tax
III. Non-resident aliens not engaged in the Philippines – declare as part of their gross income
subject to 25% their dividends from domestic corporations and shares in partnership profit
IV. Domestic corporation – exempted from income tax
V. Resident foreign corporation doing business in the Philippines – exempted from
intercorporate dividend tax but subject to 15% remittance tax
VI. Non-resident foreign corporation not doing business in the Philippines – subject to 15%
provided that 20% difference between the usual corporate income tax rate for 1997, 19% in
1998, 18% in 1999 and 17% thereafter is allowed as a tax credit by the country where the
recipient corporation is domiciled
VII. Stock dividends are generally not taxable unless:
a) The shares are later redeemed for a consideration by the corporation or otherwise
conveyed by the stockholders to the extent of consideration
b) The recipient is not a stockholder
c) Change in stockholders equity results by virtue of the stock dividend issuance
o Distribution of treasury shares shall be taxable, since the stocks are not sourced from
unissued share
Notes in TAXATION 1
92
o Distribution of stock dividends do not constitute income to its recipients, not subject to
income tax
o X: redemption or cancellation of stock dividends, depending on the “time of manner” it was
made is essentially equivalent to distribution of taxable dividends making the proceeds
thereof taxable income
d) Capital gains on certain sales or exchange of real property by individuals

I. Citizen and resident alien –final tax of 6% on gross selling price of fair market value
whichever is higher
II. Sale of real property by individual to government or GOCC – taxpayer has the option
whether to report it as ordinary income and pay the tax based in the graduated tax rates or
6% or final tax
III. X: principal residence by a natural person, the proceeds of which are fully used in acquiring
or constructing a new principal residence within 18 months from date of sale shall be
exempt from capital gains tax
a) There was a written notice to the commission to avail of such exemption
b) Historical cost or adjusted basis of the real property sold shall be carried over to the
principal residence built or acquired
c) Tax exemption will be availed only once every 10 years
e) Fringe benefits
I. Final tax of 34% shall be imposed on the grossed-up monetary value of fringe benefit,
reduced to 32% on 1 January 2000 and thereafter.
II. Grossed-up monetary value is determined by dividing the actual monetary value of the
fringe benefit by 68% effective 1 January 2000 and thereafter
III. Fringe benefit – any good, service or other benefit furnished or granted in cash or in kind by
an employer to an individual employee except rank and file
a) Housing
b) Expense account
c) Vehicle
d) Household personnel
e) Interest on loan at less than market rate (difference of market rate and actual rate
granted)
f) Membership fees, dues and other expenses borne by the employer for the
employee in social or athletic club
g) Expenses for foreign travel
h) Holiday and vacation expenses
i) Educational assistance to the employee or his dependent
j) Life or health insurance or non-life insurance in excess of what the law allow
IV. The following fringe benefits are not taxable
a) Fringe benefits which are authorized and exempted from tax under special law
b) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans
c) Benefits given to the rank and file employees
d) De minimis benefits
Notes in TAXATION 1
93
CASES:
Bachrach vs. Seifert and Elianoff 87 Phil. 483
 Under the Massachusetts rule, a stock dividend is considered part of the capital and belongs to the
remainderman; while under the Pennsylvania rule, all earnings of a corporation, when declared as
dividends in whatever form, made during the lifetime of the usufructuary, belong to the latter.
 Under section 16 of our Corporation Law, no corporation may make or declare any dividend except
from the surplus profits arising from its business. Any dividend, therefore, whether cash or stock,
represents surplus profits. Article 471 of the Civil Code provides that the usufructuary shall be
entitled to receive all the natural, industrial, and civil fruits of the property in usufruct. The stock
dividend in question in this case is a civil fruit of the original investment. The shares of stock issued in
payment of said dividend may be sold independently of the original shares, just as the offspring of a
domestic animal may be sold independently of its mother.
Commissioner of Internal Revenue vs. Court of Appeals, 301 SCRA 152
 Requisites for Application of Exempting Clause of Section 83(b) of the 1939 Tax Code.—For the
exempting clause of Section 83(b) to apply, it is indispensable that: (a) there is redemption or
cancellation; (b) the transaction involves stock dividends; and (c) the “time and manner” of the
transaction makes it “essentially equivalent to a distribution of taxable dividends.” Of these, the
most important is the third.
 Although redemption and cancellation are generally considered capital transactions, as such, they
are not subject to tax. However, it does not necessarily mean that a shareholder may not realize a
taxable gain from such transactions. Simply put, depending on the circumstances, the proceeds of
redemption of stock dividends are essentially distribution of cash dividends, which when paid
becomes the absolute property of the stockholder. Thereafter, the latter becomes the exclusive
owner thereof and can exercise the freedom of choice. Having realized gain from that redemption,
the income earner cannot escape income tax.
II. Compensation Income

 Refers to all income payments, in money or in kind, arising from personal services under and
employer-employee relationship
o It must arise from personal services under and EE relationship
o It is in the nature of income to the recipient employees
 Considered part of taxable income. However the allowable deductions are only premiums paid
for health and hospitalization insurance
 EE relationship not essential if it is specifically deemed by law as compensation income such as
director’s fee
 Income from professional partnership is treated as non-compensation income
 Reimbursement from travel expenses incurred in the ordinary course of business should not be
treated as income on the part of the employee
 Compensation made by husband to the wife not subject to income tax – treated as single entity
 Employer Convenience Rule – if the amount paid directly to the lessor, landlord or house lady by
the employer and paid for the convenience of the latter, the excess of what the recipient
employee would not have ordinarily incurred for his own subsistence is not taxable income but a
business expense of the employer
Notes in TAXATION 1
94
 Equivalent of cash doctrine – that would subject to tax any economic benefit to the employee
whatever may have been the mode by which it is effected
 Resident Citizen – compensation income is taxed on gross
 Non-resident citizen, non-resident alien and non-resident aliens engaged in trade or business
in the Philippines – on compensation derived from sources within the Philippines
 NRA not engaged in the Philippines – flat rate of 25% on their total gross income
 Corporate income taxpayers – not subject to gross compensation income tax scheme
CASES:
Collector of Internal Revenue. vs. Henderson 1 SCRA 649
 "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation
for personal service of whatever kind and in whatever form paid, or from professions, vocations,
trades, businesses, commerce, sales, or dealings in property, whether real or personal, growing out
of the ownership or use of or interest in such property; also from interest, rents, dividend, securities,
or the transactions of any business carried on for gain or profit, or gains, profits, and income derived
from any source whatever.
 The findings of the Tax Court as to the allowances given by the employer to the husband and wife,
being supported by substantial evidence, were- affirmed.
 Same;—The claim of the taxpayer that a certain amount was f&r "manager's residential expenses"
and should not form part of the ratable value subject to income tax, being supported by substantial
evidence, was sustained.
III. Non-compensation income

 Any other income that is not derived from personal services or not related to an employer-employee
relationship and is generally subject to tax on net income
 Computed on the taxable net income which is gross income less deductions allowed or the
applicable personal and additional exemptions
 Term includes gains, profits and income of whatever form derived from any source, whether legal or
illegal, such as those derived from the exercise of professions and vocations or from trade, business,
commerce, sales or from dealings in property or growing out of the ownership or use of property or
any interest therein, as well as from interest, rent, dividends, securities or the transaction of any
business carried on for gain or profit.
CASE:
Commissioner of Internal Revenue vs. Manning 66 SCRA 14
 Taxations; Meaning and scope of treasury shares.—Although authorities may differ on the exact legal
and accounting status of so-called “treasury shares,” they are more or less in agreement that
treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by
purchase, donation, forfeiture or other means.
 Treasury shares are therefore issued shares, but being in the treasury they do not have the status of
outstanding shares. Consequently, although a treasury share, not having been retired by the
corporation re-acquiring it, may be reissued or sold again, such share, as long as it is held by the
corporation as a treasury share, participates neither in dividends, because dividends cannot be
declared by the corporation to itself, nor in the meetings of the corporation as voting stock, for
otherwise equal distribution of voting powers among stockholders will be effectively lost and the
directors will be able to perpetuate their control of the corporation, though it still represents a paid-
for interest in the property of the corporation. The foregoing essential features of a treasury stock
are lacking in the questioned shares.
Notes in TAXATION 1
95
 Thus, (a) under paragraph 4(c) of the trust agreement, the trustees were authorized to vote all stock
standing in their names x x x; (b) under paragraph 4(d) “Any and all dividends paid on said shares
after the death of the OWNER shall be subject to the provisions of this Agreement;” (c) under
paragraph 5(b) the amount of retained earnings to be declared as dividends was made subject to the
approval of the trustees of the 24,700 shares; x x x. The manifest intention of the parties to the trust
agreement was, in sum and substance, to treat the 24,700 shares of Reese as absolutely outstanding
shares of Reese’s estate until they were fully paid.
IV. Exclusions from Gross Income.

The following items shall not be included in gross income and shall be exempt from taxation under
this title:
(1)Life Insurance - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the
death of the insured, whether in a single sum or otherwise, but if such amounts are held by the
insurer under an agreement to pay interest thereon, the interest payments shall be included in gross
income.
(2) Amount Received by Insured as Return of Premium - The amount received by the insured, as a
return of premiums paid by him under life insurance, endowment, or annuity contracts, either during
the term or at the maturity of the term mentioned in the contract or upon surrender of the contract.
(3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or
descent: Provided, however, That income from such property, as well as gift, bequest, devise or
descent of income from any property, in cases of transfers of divided interest, shall be included in
gross income.
(4) Compensation for Injuries or Sickness - amounts received, through Accident or Health Insurance
or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the
amounts of any damages received, whether by suit or agreement, on account of such injuries or
sickness.
(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty
obligation binding upon the Government of the Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc. -
(a) Retirement benefits received under Republic Act No. 7641 and those received by officials
and employees of private firms, whether individual or corporate, in accordance with a
reasonable private benefit plan maintained by the employer: Provided, That the retiring
official or employee has been in the service of the same employer for at least ten (10) years
and is not less than fifty (50) years of age at the time of his retirement: Provided, further,
That the benefits granted under this subparagraph shall be availed of by an official or
employee only once.
For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension,
gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of
some or all of his officials or employees, wherein contributions are made by such employer
for the officials or employees, or both, for the purpose of distributing to such officials and
employees the earnings and principal of the fund thus accumulated, and wherein its is
provided in said plan that at no time shall any part of the corpus or income of the fund be
used for, or be diverted to, any purpose other than for the exclusive benefit of the said
officials and employees.
(b) Any amount received by an official or employee or by his heirs from the employer as a
consequence of separation of such official or employee from the service of the employer
Notes in TAXATION 1
96
because of death sickness or other physical disability or for any cause beyond the control of
the said official or employee.
(c) The provisions of any existing law to the contrary notwithstanding, social security
benefits, retirement gratuities, pensions and other similar benefits received by resident or
nonresident citizens of the Philippines or aliens who come to reside permanently in the
Philippines from foreign government agencies and other institutions, private or public.
(d) Payments of benefits due or to become due to any person residing in the Philippines
under the laws of the United States administered by the United States Veterans
Administration.
(e) Benefits received from or enjoyed under the Social Security System in accordance with
the provisions of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement
gratuity received by government officials and employees.
(7) Miscellaneous Items. –
(a) Income Derived by Foreign Government - Income derived from investments in the
Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits
in banks in the Philippines by
i. foreign governments,
ii. financing institutions owned, controlled, or enjoying refinancing from foreign
governments, and
iii. International or regional financial institutions established by foreign governments.
(b) Income Derived by the Government or its Political Subdivisions. - Income derived from any
public utility or from the exercise of any essential governmental function accruing to the
Government of the Philippines or to any political subdivision thereof.
(c) Prizes and Awards - Prizes and awards made primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic achievement but only if: (i) The recipient was
selected without any action on his part to enter the contest or proceeding; and (ii) The
recipient is not required to render substantial future services as a condition to receiving the
prize or award.
(d) Prizes and Awards in Sports Competition. - All prizes and awards granted to athletes in local
and international sports competitions and tournaments whether held in the Philippines or
abroad and sanctioned by their national sports associations.
(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of
public and private entities: Provided, however, That the total exclusion under this
subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: (i)
Benefits received by officials and employees of the national and local government pursuant
to Republic Act No. 6686; (ii) Benefits received by employees pursuant to Presidential
Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; (iii)
Benefits received by officials and employees not covered by Presidential decree No. 851, as
amended by Memorandum Order No. 28, dated August 13, 1986; and (iv) Other benefits
such as productivity incentives and Christmas bonus: Provided,further, That the ceiling of
Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by
the Secretary of Finance, upon recommendation of the Commissioner, after considering
among others, the effect on the same of the inflation rate at the end of the taxable year.
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig
contributions, and union dues of individuals.
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains
realized from the same or exchange or retirement of bonds, debentures or other certificate
of indebtedness with a maturity of more than five (5) years.
Notes in TAXATION 1
97
(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon
redemption of shares of stock in a mutual fund company as defined in Section 22 (BB) of this
Code.
CASES:
El Oriente, Fabrica de Tabacos, Inc., vs. Posadas 56 Phil. 147
 The proceeds of insurance taken by a corporation on the life of an important official to indemnify it
against loss in case of his death, are not taxable as income under the Philippine Income Tax Law. The
indefiniteness of the local law is emphasized.
Pirovano vs. Commissioner of Internal Revenue 14 SCRA 832

 Gift tax; Donation out of gratitude for past services taxable.—A donation made by a corporation to
the heirs of a deceased officer out of gratitude for his past services is subject to the donees’ gift tax.
 No deduction for value of past services.—A donation made out of gratitude for past services is not
subject to deduction for the value of said services which do not constitute a recoverable debt.
 Gratitude not consideration under tax code.—Gratitude has no economic value and is not
“consideration” in the sense that the word is used under Section 311 of the Tax Code.

 Employees’ trusts.—In so far as employees’ trusts are concerned, the foregoing provision should be
taken in relation to then Section 56(b) (now 53[b]) of the Tax Code, as amended by Rep. Act No.
1983, supra, which took effect on 22 June 1957. This provision specifically exempted employees’
trusts from income tax and is repeated hereunder for emphasis: “Sec. 56. Imposition of Tax.—(a)
Application of tax.—The taxes imposed by this Title upon individuals shall apply to the income of
estates or of any kind of property held in trust. xxx xxx “(b) Exception.—The tax imposed by this Title
shall not apply to employee’s trust which forms part of a pension, stock bonus or profitsharing plan
of an employer for the benefit of some or all of his employees x x x” The tax-exemption privilege of
employees’ trusts, as distinguished from any other kind of property held in trust, springs from the
foregoing provision. It is unambiguous. Manifest therefrom is that the tax law has singled out
employees’ trusts for tax exemption.

 Withholding tax; Terminal leave pay; Terminal leave pay received by a government official or
employee is not subject to withholding tax.—The Court has already ruled that the terminal leave pay
received by a government official or employee is not subject to withholding (income) tax. In the
recent case of Jesus N. Borromeo vs. The Hon. Civil Service Commission, et al., G.R. No. 96032, 31
July 1991, the Court explained the rationale behind the employee’s entitlement to an exemption
from withholding (income) tax on his terminal leave pay as follows: “x x x commutation of leave
credits, more commonly known as terminal leave, is applied for by an officer or employee who
retires, resigns or is separated from the service through no fault of his own. (Manual on Leave
Administration Course for Effectiveness published by the Civil Service Commission, pages 16-17). In
the exercise of sound personnel policy, the Government encourages unused leaves to be
accumulated. The Government recognizes that for most public servants, retirement pay is always
less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look
forward to is thus avoided. Terminal leave payments are given not only at the same time but also for
the same policy considerations governing retirement benefits.”
Notes in TAXATION 1
98
V. ALLOWABLE DEDUCTION
 GR: all cases, income tax is imposed on the net taxable income
 X: a). when final tax is imposed; b) gross compensation income tax system applies
 Computed as follows:
o all income minus exclusion equals gross income;
o gross income less allowable deduction equals net income (taxable net income for
corporation)
o net income less personal and additional exemptions equals taxable net income
o taxable net income times income tax rates equals tax dues
o income tax less creditable withholding tax and/or tax credit equals income tax payable
 tax deductions are computed before the tax is computed; tax credit after the tax has been
computed
 Allowable deduction are limited to those that are related to or connected with the taxpayers trade
or business
 X: charitable contribution; premiums on health and hospitalization insurance and certain degree of
losses
 Non-resident aliens engaged in trade or business in the Philippines and Resident foreign corporation
can only claim deductions that are paid or incurred in carrying on such trade or business conducted
within the Philippines
o Ratio: their income tax are subject only to income derived in the Philippine Source
 Deductions are not allowed in: a) gross compensation income; b) income subject to final tax
 X: a) premiums in health and hospital insurance; b). personal and additional expenses
The allowable and itemized deductions include:

A. Expenses in connection with the taxpayer’s trade, business or profession
Requisites:
1) Ordinary (normal and usual) Necessary (useful and reasonable)
 Ordinary – salaries, compensation for personal service rendered
 Necessary – entertainment, amusement, representation expenses
2) Deductible expenses must be incurred and paid during the taxable year
3) Must be directly connected with taxpayers, trade, business or profession
4) Tax required to be withheld on the expense paid or payable is shown to have been remitted
to the BIR
5) Must be reasonable and substantiated by adequate proof
6) Must not be against moral, public policy and public order
 Passive investments are not deductible
 Extraordinary – acquisition if items used in trade or business, the useful life of which
exceeds one year; architect’s fee etc. Expenditures shall be capitalized for which
depreciation allowance may then be claimed.
 Promotional expenses – considered ordinary and necessary but expenses to
promote the sales of additional capital stock or the cost or fees for obtaining stock
subscription are still capital expenses
 Unreasonable expenditures are not deductible
Notes in TAXATION 1
99
 Bonuses granted for successful sale of land effected through a broker and when no
services were actually rendered are not deductible
 Dues and fees paid to any special, athletic or sporting club shall be allowed only of
the taxpayer establishes that the facility is used primarily for the furtherance of and
that the item is directly related to the conduct of business
 Premiums paid on life insurance of an officer, employee, or business associate
where the taxpayer is directly or indirectly the beneficiary is not deductible
 Traveling expenses – inclusive of board and lodging while away from home
(business place) in pursuit of trade or business
 Rentals or other payments required for the continued use of premium of property
for the purpose of trade or business and to which property the taxpayer has not
taken or is not taking title or in which he has no equity
 Private educational institution may elect either: a) to deduct expenditure
otherwise considered as capital or b) to deduct allowance for depreciation
 All deductions must be substantiated with sufficient evidence of official receipt or
other adequate records
CASES:
Commissioner of Internal Revenue vs. Central Luzon Drug Corporation 456 SCRA 414
 Tax Credits and Tax Deductions; Senior Citizens’ Law (R.A. No. 7432); The tax credit allowed under
R.A. 7432 to establishments as a result of granting senior citizens 20% discount on their purchase of
medicines from private establishments may be claimed by such establishments even though they are
operating at a loss.— Section 4(a) of RA 7432 grants to senior citizens the privilege of obtaining a 20
percent discount on their purchase of medicine from any private establishment in the country. The
latter may then claim the cost of the discount as a tax credit. But can such credit be claimed, even
though an establishment operates at a loss? We answer in the affirmative.
 A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due,
including—whenever applicable—the income tax that is determined after applying the
corresponding tax rates to taxable income. A tax deduction, on the other, reduces the income that is
subject to tax in order to arrive at taxable income. To think of the former as the latter is to avoid, if
not entirely confuse, the issue. A tax credit is used only after the tax has been computed; a tax
deduction, before.
B. Interest on Indebtedness
Requisites:
1) There is an indebtedness
2) It must be that of the taxpayer
3) In connection with the taxpayer’s profession, trade or business
4) Liability to pay interest on the debt
5) The interest must have been paid or incurred within the year
6) Must be legally due and stipulated in writing (art 1956 CC)
7) Must not be expressly disallowed by law to be deducted from taxpayer’s gross income
8) Must be within the limit set by law
9) Interest payment must not be made between related parties
Notes in TAXATION 1
100
 Prieto Case – interest on donors tax is deductible and applicable to interest paid on the
estate and inheritance taxes. Interest in taxes should be considered as interests of
indebtedness
 Individual taxpayer who pays interest in advance, through discount can only deduct the said
interest in the year when the principal is paid or if the indebtedness is payable in periodic
amortizations paid in said year
 Should the taxpayer elect to deduct the interest payments against its gross income, he
cannot at the same time capitalized the interest payments
 Taxpayer is not entitled to both the deduction from gross income and adjusted basis for
determining gain or loss and the allowable depreciation charge
CASES:
Kuenzle & Streiff, Inc., vs. the Collector of Internal Revenue 106 Phil. 355
 Bonuses to employees made in good faith and as additional compensation for the services actually
rendered by the employees are deductible, provided such payments, when added to the stipulated
salaries, do not exceed a reasonable compensation for the services rendered
 The term indebtedness is restricted to its usual import which "is the amount which one has
contracted to pay for the use of borrowed money."
Commissioner of Internal Revenue vs. Palanca 18 SCRA 496

 Interest paid on delinquent gift, estate and inheritance tax is deductible.—In Commissioner of
Internal Revenue vs. Prieto, L-13912, September 30, 1960, it was held that, while the distinction
between "taxes" and "debts" was recognized in this jurisdiction, the variance in their legal concept
does not extend to the interests paid on them, at least insofar as Section 30(b)(1) of the Tax Code is
concerned. The rule in the Prieto case, that the interest on the donor's tax is deductible, is applicable
to interest paid on the estate and inheritance taxes. The rationale of this Court's previous
determination, that interests on taxes should be considered as interests of indebtedness within the
meaning of Section 30(b) (1) of the Tax Code, applies to the said taxes.
 Although taxes already due are not the same as debts, they are, however, obligations that may be
considered as such.
 Where the claim for refund was filed with the Tax Court even before it had been denied by the
Bureau of Internal Revenue, then the thirty-day period for prescription under Section 11 of Republic
Act No. 1125 did not even commence to run. Where the tax account was paid by installment, then
the computation of the two-year prescriptive period under Section 306 of the Tax Code, should be
from the date of the last installment.
C. Taxes in connection with taxpayer’s business, trade or profession except:

1) Income taxes
2) Estate and donor’s taxes
3) Taxes assessed against local benefits of kind tending to increase the value of the property
assessed
4) Foreign income taxes unless taxpayer does not make use of the tax credit privilege
 Resident alien subjected to an income tax by his country where he derives no income, will
not be entitled to tax credit
 Taxes earlier claimed as deduction when refunded or credited shall be included as part of
gross income in the year of receipt to the extent of the income tax benefit of said deduction
Notes in TAXATION 1
101
 To be deductible, taxes must be imposed by law and payable by the taxpayer. VAT is passed
on to customer hence not deductible
CASES:
Commissioner of Internal Revenue vs. American Rubber Co. 18 SCRA 842
 Processing does not destroy exemption from sales tax of latex as an agricultural product.—The
exemption from sales tax established in section 188 (b) of the Internal Revenue Code in favor of sales
of agricultural products, whether in their original form or not, made by the producer or owner of the
land where produced, is not taken away merely because the produce undergoes processing at the
hand of said producer or owner for the purpose of working his product into a more convenient and
valuable. Form suited to meet. The demand of an expanded market. The exemption may extend to
large scale agricultural production employing preservative processes to prolong the marketability of
the produce. Where the preservatives and the compacting of the rubber coagulum do not add
anything that was not originally in the liquid latex, they do not alter the agricultural nature of the
latex, and, hence, there is no reason why they should wrest away the protective mantle of the tax
exemption.
 The definition of a "manufacturer" in section 194 (n) of the Internal Revenue Code is not applicable
to the exemption of agricultural products, "whether in their original form or not." The use of this last
phrase in the statute clearly indicates that the agricultural product may be altered in texture or form
without being divested of the exemption. The exception would be sales of agricultural products
while Republic Act No. 1612 was in effect, because under this Act the freedom f. rom sales tax
became restricted to agricultural products "in their original form" only.
D. Losses
1) Must be actual
2) The loss must be sustained in a closed completed transaction
 Expenses for demolition are added to capitalization of a new building if one is
constructed; otherwise treated as deductible expenses
3) The loss must not be compensated by insurance or otherwise
4) The loss must be liquidated and charged off during the taxable year
 No partial writing-off of a loss, deduction must be in full or not at all
5) The loss must have been incurred in the business, trade, or profession of the taxpayer
 Must make declaration of loss to BIR within the time prescribed but not less than 30
days and not more than 90 days
Rules:
 Net operating loss for any taxable year, which refers to the excess of allowable deduction
over gross income, can be carried over as deduction for the next three consecutive taxable
years immediately following the year of such loss
 Capital losses may not be deducted from ordinary gains; such capital losses may only be
deducted from capital gains unless a final tax on the capital transaction is imposed
 Losses from wagering transaction shall be allowed only to the extent of the gains from such
transactions
 Losses on account of the shrinkage in value of securities of shares of stock are not
deductible until after the loss would have been actually sustained by the disposition of
securities
 Voluntary advantage by a corporation made without an expectation of repayment do not
warrant deduction from losses upon non-payment
Notes in TAXATION 1
102
 Shares of stocks becoming worthless in the hands of an investor are capital assets, capital
losses are allowed to be deducted only to the extent of capital gains
CASES:
Fernandez Hermanos, Inc, vs. Commissioner of Internal Revenue 29 SCRA 552
 Disallowances of losses; Where worthless securities were allowed as losses.—There is adequate basis
for writing off as worthless securities the stock of a lumber company which had ceased operations,
even if it still had its sawmill and equipment of some value. Assuming that the company would later
somehow realize some proceeds from its sawmill and equipment and such proceeds would later be
distributed to its stockholders, the amount so received by the taxpayer would then properly be
reportable as income of the taxpayer on the year it is received. In the meantime, it may properly be
claimed as loss in its tax return pursuant to Section 30(d) 4(b) or Section 30(e) (3) of the National
Internal Revenue Code.
 Disallowances of losses and bad debts; No partial disallowance or deductions allowed.—Neither
under Section 30(d) (2) of our Tax Code providing for deduction by corporations of losses actually
sustained and charged off during the taxable year nor under Section 30(e) (1) thereof providing for
deduction of bad debts actually ascertained to be worthless and charged off within the taxable year,
can there be a partial writing off of a loss or bad debt. For such losses or bad debts must be
ascertained to be so and written off during the taxable year, are therefore deductible in full or not at
all, in the absence of any express provision in the Tax Code authorizing partial deductions.
E. Bad Debts
Requisites:
a) There must be a valid and subsisting debt
b) The obligation is connected with the taxpayer’s trade or business, and it is not between
related parties
 Uncollected income are not deductible as bad debts unless it has earlier been
reported as income as when the taxpayer is on accrual basis
c) There is an actual ascertainment that the debt is worthless (e.g. bankruptcy, insolvency,
prescribed debts)
 A mere failure to collect, without proof of incapacity or inability to pay does not
constitute bad debts
d) The debt is charged-off within the taxable year
 Partial writing-off of a bad debt is not allowed; it must be in full or not at all
 Tax benefit rule – the recovery of the amounts deducted in previous years from
gross income become taxable income unless the extent thereof, the deduction did
not result in any tax benefit to the taxpayer
CASES:
Philex Mining Corporation vs. Commissioner of Internal Revenue 551 SCRA 428
 Bad Debt Deductions; Deductions for income tax purposes partake of the nature of tax exemptions
and are strictly construed against the taxpayer, who must prove by convincing evidence that he is
entitled to the deduction claimed.—The lower courts did not err in treating petitioner’s advances as
investments in a partnership known as the Sto. Nino mine. The advances were not “debts” of Baguio
Gold to petitioner inasmuch as the latter was under no unconditional obligation to return the same
to the former under the “Power of Attorney.” As for the amounts that petitioner paid as guarantor
to Baguio Gold’s creditors, we find no reason to depart from the tax court’s factual finding that
Baguio Gold’s debts were not yet due and demandable at the time that petitioner paid the same.
Notes in TAXATION 1
103
Verily, petitioner pre-paid Baguio Gold’s outstanding loans to its bank creditors and this conclusion is
supported by the evidence on record. In sum, petitioner cannot claim the advances as a bad debt
deduction from its gross income. Deductions for income tax purposes partake of the nature of tax
exemptions and are strictly construed against the taxpayer, who must prove by convincing evidence
that he is entitled to the deduction claimed. In this case, petitioner failed to substantiate its assertion
that the advances were subsisting debts of Baguio Gold that could be deducted from its gross
income. Consequently, it could not claim the advances as a valid bad debt deduction.
Philippine Refining Company vs. Court of Appeals 256 SCRA 667

 Taxation;”Bad Debts”; Conditions before debts could be considered as ”worthless.”—This
pronouncement of respondent Court of Appeals relied on the ruling of this Court in Collector vs.
Goodrich International Rubber Co., which established the rule in determining the “worthlessness of a
debt.” In said case, we held that for debts to be considered as “worthless,” and thereby qualify as
“bad debts” making them deductible, the taxpayer should show that: (1) there is a valid and
subsisting debt; (2) the debt must be actually ascertained to be worthless and uncollectible during
the taxable year; (3) the debt must be charged off during the taxable year; and (4) the debt must
arise from the business or trade of the taxpayer. Additionally, before a debt can be considered
worthless, the taxpayer must also show that it is indeed uncollectible even in the future.
F. Depreciation
 Gradual diminution in the service or useful value of tangible property being used in trade or
business, or out of its not being used, resulting from ordinary wear and tear or normal
obsolescence. Or amortization of the value of intangible assets, the use of which in trade or
business is definitely limited in duration (e.g. copyright, patents but not goodwill may be
allowed depreciation allowance for obsolescence)
 If expenses qualify as capital expenditures (e.g. researches or experiments) but the useful
life is undetermined, the taxpayer has the option to consider the same as expenses or
capitalize the amount
 In case of property held by one person for life with remainder to another (usufruct or fidei
commissary) the deduction shall be allowed to the life tenant and shall be computed as if
the life tenant were the absolute owner of the property
 In case of property held in trust, the allowable deduction shall be apportioned between or
among the beneficiaries and the trustee
 If trust were irrevocable, the trust itself can avail of the depreciation allowance
 Income tax law does not authorize the depreciation of an asset beyond its acquisition cost
because deductions from gross income are privileges not a matter of right
CASE:
Basilan Estates, Inc. vs. Commissioner of Internal Revenue 21 SCRA 17
 Depreciation is the gradual diminution in the useful value of tangible property resulting from wear
and tear and normal obsolescence. The term is also applied to amortization of the value of intangible
assets, the use of which in the trade or business is definitely limited in duration.
 Depreciation commences with the acquisition of the property and its owner is not bound to see his
property gradually waste, without making provision out of earnings for its replacement. It is entitled
to see that from earnings the value of the property invested is kept -unimpaired, so that at the end
of any given term of years, the original investment remains as it was in the beginning. It is not only
the right of a company to make such a provision, but it is its duty to its bond and stockholders, and,
in the case of a public service corporation, at least, its plain duty to the public. Accordingly, the law
Notes in TAXATION 1
104
permits the taxpayer to recover gradually his capital investment in wasting assets free from tax.
Precisely, Section 30(f) (1) of the Tax Code allows a deduction from gross income for depreciation
but limits the recovery to the capital invested in the asset being depreciated.
 Basis of depreciation.—The income tax law does not authorize the depreciation of an asset beyond
its acquisition cost. Hence, a deduction over and above cost cannot be claimed and allowed. The
reason is that deductions from gross income are privileges, not matters of right. They are not created
by implication but upon clear expression in the law. Moreover, the recovery, free of income tax, of
an amount more than the invested capital in an asset will transgress the underlying purpose of a
depreciation allowance. For then what the taxpayer would recover will be, not only the acquisition
cost, but also some profit. Recovery in due time through depreciation of investment made is the
philosophy behind depreciation allowance; the idea of profit on the investment made has never
been the underlying reason for the allowance of a deduction for depreciation.
Esso Standard Eastern, Inc. vs. Comm'r. of Internal Revenue 175 SCRA 149
 Deductions; Expenses, elements of.—We come, then, to the statutory test of deductibility where it is
axiomatic that to be deductible as a business expense, three conditions are imposed, namely: (1) the
expense must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and
(3) it must be paid or incurred in carrying on a trade or business. In addition, not only must the
taxpayer meet the business test, he must substantially prove by evidence or records the deductions
claimed under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer
that an item of expense is ordinary and necessary does not justify its deduction.
G. Depletion
 A reasonable allowance for depletion or amortization is allowed for oil and gas wells and
mines
 If depletion allowance is equaled the invested capital, no further allowance is permitted
CASE:
Fernandez Hermanos, Inc, vs. Commissioner of Internal Revenue 29 SCRA 552

 Depletion of oil and gas wells and mines; Capital investment as a -method of depletion.—The "capital
investment" method is not a method of depletion, but the Tax Code provision, prior to its
amendment by Section 1 of Republic Act No. 3698, which took effect on June 18, 1960, expressly
provided that "when the allowances shall equal the capital invested x x x no further allowances shall
be made"; in other words, the "capital investment" was but the limitation of the amount of
depletion that could be claimed. The outright deduction by the taxpayer of 1/5 of the cost of the
mines, as if it were a "straight line" rate of depreciation is not authorized by the Tax Code.
Marcelo Steel Corporation vs. Collector of Internal Revenue 109 Phil. 921
 The purpose or aim of Republic Act No. 35 is to encourage the establishment or exploitation of new
and necessary industries to promote the economic growth of the country. It is a form of subsidy
granted by the Government to courageous entrepreneurs staking their capital in an unknown
venture.
 An entrepreneur engaging in a new and necessary industry faces uncertainty and assumes a risk
bigger than one engaging in a venture already known and developed. Like a settler in an unexplored
land who is just blazing a trail in a virgin forest, he needs all the encouragement and assistance from
the Government. He needs capital to buy his implements, to pay his laborers and to sustain him and
his family. Comparable to the farmer who has just planted the seeds of fruit bearing trees in his
Notes in TAXATION 1
105
orchard, he does not expect an immediate return on his investment. Usually loss is incurred rather
than profit made. It is for these reasons that the law grants him tax exemption to lighten onerous
financial burdens and reduce losses.
 However these may be, Republic Act No. 35 has confined the privilege of tax exemption only to new
and necessary industries. It did not intend to grant the tax exemption benefit to an entrepreneur
engaged at the same time in a taxable or non-exempt industry and a new and necessary industry, by
allowing him to deduct his gain or profits derived from the operation of the first from the losses
incurred in the operation of the second. Unlike a new and necessary industry, a taxable or non-
exempt industry is already a going' concern, deriving profits from its operation, and deserving no
subsidy from the Government. It is but fair that it be required to give the Government a share in its
profits in the form of taxes.
H. Charitable and other contribution

 Contributions or gifts actually paid or made within the taxable year to, or for the use of, the
government or its agencies or political subdivision for exclusively public purpose; or
corporation or association exclusively organized and operated for religious, charitable,
scientific, athletic, cultural or educational purposes, or for the rehabilitation of veterans or
to social welfare institutions, no part of the income inures to the benefit of a private
stockholder or individual are deductible to the amount not exceeding:
o Individuals – 10% of net income computed without the benefit of deduction
o Corporation – 5% of net income computed without the benefit of deduction
 Donation of government or its agencies or political subdivision or fully owned corporation
exclusively for undertaking priority activities in education, health, youth and sport
development, science and culture and in economic development that accord with the
national priority plan to be determined by NEDA are deductible in full and are not included
in computing the maximum amount above fixed
CASE:
Roxas vs. Court of Tax Appeals 23 SCRA 276
 Contribution to the chapel at a private university ground owned by an educational institution that
gives dividends to its stockholders is not deductible from the gross income of the taxpayer for the
reason that the net income of said university inures to the benefit of its stockholders.
J. Research and Development

 paid or incurred by the taxpayer during the taxable year, in connection with his trade or
business or profession as ordinary and necessary expenses which are not chargeable as
capital account
K. Premium payments on health and or hospitalization insurance

 An individual taxpayer can claim as deduction said premium for an amount not exceeding
P2,400 per family during the taxable year, provided the gross family income does not exceed
P250,000 for the taxable year.
 Only the spouse claiming the additional exemption for dependents shall be entitled to this
deduction
Special Rules:
 Individual (Non-resident aliens excluded) may elect standard deduction of not exceeding
40% of the gross receipt or gross sales
Notes in TAXATION 1
106
 domestic and resident foreign corporation may elect standard deduction of not exceeding
40% of the gross income
 where a tax is required to be deducted and withheld from any amount paid or payable and
which amount is otherwise deductible, the same shall be disallowed if the tax thereon
required to be withheld has not been paid to the BIR
 Secretary of finance is empowered to prescribe by regulation, upon recommendation of the
CIR and after public hearing, limitation or ceiling for any of the itemized deductions
Items Not Deductible (in computing net income)
a) Personal, living or family expenses
b) Any amount paid out for new buildings or for permanent improvements, or betterments
made to increase the value of any property or estate
 X: intangible drilling and development costs incurred in petroleum operations
c) Any amount expended in restoring property or in making good the exhaustion thereof for
which an allowance is or has been made
d) Premium paid on any life insurance policy covering the life of any officer or employee, or of
any person financially interested in any trade or business carried on by taxpayer, individual
or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy
PERSONAL AND ADDITIONAL EXEMPTIONS
 PERSONAL EXEMPTIONS – these are arbitrary amounts allowed for personal, living or family
expenses of the taxpayers. They are available only to individual taxpayers and not to juridical
persons.
 They are deducted from the gross compensation income and or business and/or profession income
of the taxpayer.
EXCLUSIONS vs. EXEMPTIONS
a. Exclusions may be availed of by all kinds of taxpayers in general, whereas, personal exemptions are
available only to individual taxpayers.
b. Exclusions are simple not included in the computation of gross income, whereas, personal exemption
is subtracted from gross income to know the net taxable income of the individual taxpayer.
TWO KINDS OF EXEMPTIONS:
1. Basic personal exemption – pertains to the taxpayer himself and is based on his status.
2. Additional exemptions for his qualified independent children.
MAXIMUM EXEMPTIONS ALLOWED UNDER RA 8424:
 Each married man or woman – P32,000 or P64,000 if both husband and wife are deriving income but
they should compute their income tax separately.
 P25,000 for head of the family
 P20,000 – single persons or a married person judicially decreed as legally separated from his or her
souse with no qualified dependents.
 WHO ARE ENTITLED TO PERSONAL EXEMPTIONS?

1. Resident citizens
Notes in TAXATION 1
107
2. Non-resident citizens including OCW and Seamen

3. Resident aliens
4. Non-resident aliens engaged in trade or business subject to the Principle of Reciprocity.
5. Estate under judicial settlement and irrevocable trust.
 ADDITIONAL EXEMPTIONS – a taxpayer is entitled to additional exemption from his gross income of
P25,000 per child maximum of 4, whether legitimate or illegitimate, who is not more than 21 years
of age, unmarried and unemployed, wholly dependent upon him for chief support and living with
such person.
 WHO MAY CLAIM ADDITIONAL EXEMPTIONS FOR DEPENDENTS?

1. Married individual whether his qualified dependents are legitimate, illegitimate, or legally
adopted.
2. Head of the family
3. Legally separated spouses
4. Single individual with qualified dependent child or children
 AMOUNT OF ADDITIONAL EXEMPTION

 Now P25,000 per child, maximum of 4 children.
 In case of married individuals, the additional exemption may be claimed only by one of the
spouses
 As a rule, the husband is the proper claimant.
Exceptions:
1. If husband waives his right in favor of the wife
2. If the husband is unemployed
3. If the husband is abroad.
 In the case of legally separated spouses, the additional exemption may be claimed only by
the spouse who has custody of the child/children.
CASE:
Madrigal and Paterno vs. Rafferty and Concepcion. 38 Phil. 414
 M and P were legally married prior to January 1, 1914. The marriage was contracted under the
provisions concerning conjugal partnerships. The claim is submitted that the income shown on the
form presented for 1914 was in fact the income of the conjugal partnership existing between M and
P, and that in computing and assessing the additional income tax, the income declared by M should
be divided into two equal parts, one-half to be considered the income of M and the other half the
income of P. Held: That P, the wife of M, has an inchoate right in the property of her husband M
during the life of the conjugal partnership, but that P has no absolute right to one-half of the income
of the conjugal partnership.
 The higher schedules of the additional tax provided by the Income Tax Law directed at the incomes
of the wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing with
the conjugal partnership. The aims and purposes of the Income Tax Law must be given effect.
 The Income Tax Law does not look on the spouses as individual partners in an ordinary partnership.
Notes in TAXATION 1
108
INCOME TAX TREATMENT ON THE SALE OR EXCHANGE OF PROPERTY
Helvering v. Hammel 311 U.S. 504 (1941)
 A loss sustained by an individual taxpayer upon the foreclosure sale of an interest in real estate
which he had acquired for profit held, in computing taxable income under the Revenue Act of 1934,
deductible only to the limited extent allowed by §§ 23(j) and 117(d) for losses from "sales" or
exchanges of capital assets, and not in full under § 23(e)(2).
 In this case, the foreclosure sale, and not the decree of foreclosure, was the definitive event which
established the loss within the meaning and for the purpose of the Revenue Act.
 The view that the loss in this case may not be treated as a loss from a sale because, by the state law,
the vendor in a land contract may declare a forfeiture upon default cannot be sustained, since it
does not appear from the record that the contract in this case contained a forfeiture clause, nor that
there was in fact a forfeiture apart from the foreclosure sale.
 Ordinary Assets, defined- property or assets held by the taxpayer used or connected with his trade,
business or profession.
 Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade
or business.
 Capital Assets- property held by the taxpayer (whether or not connected with his trade or business),
but does not include stock in trade of the taxpayer or other property of a kind which would properly
be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property
held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business or
property used in the trade or business, of a character which is subject to the allowance for
depreciation provided in Subsection (F) of section 34; or property used in the trade or business of the
taxpayer.
o Note: the manner to which our tax code approaches the subject matter rules out any easier
explanation to the term "capital assets", for it defines the phrase by exclusion rather than by
inclusion.
 Capital Transaction - this refers to the sale, barter, exchange or other disposition of capital assets.
 Capital gain defined- the gain from sale, exchange or other disposition of capital assets.
o 6% capital gains tax on selling price or zonal value whichever is higher plus 1.5% thereof for
documentary stamps tax.
o Nota bene: even if the property was sold at loss, the CGT is still due because of the
presumption of income or gain whenever capital assets are sold or disposed.
 Tax rate if shares of domestic corporation are traded through the exchanges- 1/2 of 1% of the gross
selling price. (Even if there is a loss, the seller is still liable because the rate is based on selling price
and not on actual gain realized)
 Tax Rate if property sold are shares of domestic corporation not listed or traded in the exchanges
or they are listed but not sold through the exchanges-5% on the first Php 100,000 net capital gain
and 10% in excess of the Php 100,000.
 Capital loss defined- the loss from the sale, exchange or other disposition of capital assets.
Notes in TAXATION 1
109
 Net capital gain defined- the excess of the gains from sales or exchanges of capital assets over the
losses from such sales or exchanges.
 Net capital loss defined- the excess of the losses from the sales or exchanges of capital assets over
the gains from such sales or exchanges.
 Net capital loss carry-over principle (NCLCO)- net capital loss sustained in a taxable year in an
amount not in excess of the net income(before exemptions) for such year maybe deducted as a
short-term capital loss (100%) from the net capital gains of the next or succeeding taxable year but
not beyond such period.
 Holding period - the length of time the asset was held by the taxpayer. It covers the period from the
date of acquisition to the date of sale or exchange.
 Loss limitation rule- the capital loss that is deductible from the capital gain should not be more than
the net ordinary income for the same year.
 Ordinary gain- the gain realized from the sale, exchange other disposition of ordinary asset. This
shall include gains derived from the performance of services, whether personal or professional, and
those accruing from business.
 Ordinary loss- the loss incurred from the sale or exchange or other disposition of ordinary asset. It
may also mean the excess of deductions over the gross income of the taxpayer during a taxable
period or the net operating loss of the taxpayer.
KINDS of ASSETS
1) Ordinary asset
2) Capital asset
a. short-term- capital assets held for 12months or less by an individual taxpayer.
b. long-term- capital assets held for more than 12 months by an individual taxpayer.
 NOTA Bene: importance of knowing whether assets are capital or ordinary

 -gains or losses from capital assets are given preferential treatment which does not apply to the sale
of ordinary assets.
The following are Gain or Income NOT subject to the graduated or normal income tax:
1) gains from interest, royalties, prizes and other winnings
2) gains from sale of shares of stocks NOT traded in the exchanges
3) capital gains from sale of real properties
DISTINCTIONS between SALE of Capital Assets(CA) and Ordinary Assets(OA)

1) with respect to seller of Real Property
a. if the individual seller is engaged in real estate business-OA
b. if the individual seller is not engaged in real estate business but in other kind of business- if
assets is used in business it is OA otherwise it is CA.
c. if the individual is not engaged in any business but owns a real property- CA
d. if the selling corporation is engaged in real estate business- OA
e. if the selling corporation is not engaged in real estate business-CA
Notes in TAXATION 1
110
2) with respect to the nature of tge assets sold

a) if the real property sold forms part of the stock in trade primarily for sale in the course of
business of the seller-OA
b) if it does not form part of the stock in trade or business but the asset is used in business-OA
c) if it does not form part of the stock in trade or business and is not used in business- CA
3) With respect to the tax base and Tax rate

a) if property sold is CA- 6% of the Fair Market Value(FMV) of property or Selling Price
whichever is higher
b) if property sold is OA-gain if any is subject to 32% normal income tax or to MCIT as the case
maybe. If loss is sustained, it will be considered as allowable deduction.
4) with respect to person liable

a) the seller of the real property if it is a capital asset
b) the income tax payor if it is an ordinary asset.
5) with respect to the person responsible for filing of the tax return
a) Sale of Capital Asset (CA)- Seller
b) Sale of Ordinary Asset (OA)- buyer/income tax payor
6) with respect to the cost or adjusted basis of real property sold

a) If the property sold is CA, the cost or adjusted basis is immaterial. The Tax based is the FMV
of the property or the selling price whichever is higher at tax rate of 6%.
b) If asset sold is OA, the cost or adjusted basis of the property must be supported with
documentary evidence in order to be deducted from the Gross Selling Price.
7) With respect to the date of filing of return and payment of Tax

a. if asset sold is CA- within 30 days from date of sale and the DST within 10 days of the
following month of sale.
b. if asset is OA- April 15, the regular date of filing an income tax return and payment of tax.
8) place to file and pay the tax due

a. if Asset is CA- Revenue District Office(RDO) having jurisdiction over the location of the
location of the property
b. if the asset is OA, RDO that has jurisdiction over the principal place of business of the seller.
 Nota Bene: The Rate of expanded witholding tax on ordinary assets by a real property dealer is
subject to the graduated rates from 1.5% to 5%, depending on the amount of the gross selling price,
whereas, the sale of real property by a non-dealer of real property is at 6%, regardless of the Gross
Selling Price.
 Sale of Real Property (CA) by an individual seller on installment- where the initial payment does not
exceed 25% of the selling price, the seller may elect to report the capital gain and pay the capital
gain tax by Installments.
 If the property sold is subject to a mortgage which is assumed by the buyer and the mortgage
exceeds the basis of the property to the seller, the excess is part of the initial seller.
Notes in TAXATION 1
111
 All Real Properties of a real estate LESSOR whether land and/or improvements which are for lease, is
an OA.
IMPORTANT RULES on the recognition of capital gains or losses of an individual taxpayer and of a
corporate taxpayer.
A) The real properties acquired by banks through foreclosure sales= OA. But banks
are not considered real estate dealers for purposes of the application of
withholding tax.
B) the foreclosure sale by financial institutions(bank, finance and insurance

company)= the financial institutions are considered as the statutory seller
representing the owner-mortgagor of the property and becomes liable for the
CGT based on the BID price in the auction sale which is due within 30days from
the date of the issuance of the sheriff's certificate of sale. Thereafter it may get
reimbursement from the debtor-mortgagor upon the exercise of his right of
redemption or from the party who won in the public sale.
C) if taxpayer is engaged in real estate business, all real property acquired by him is
considered OA.
D) if taxpayer is a real estate developer- all properties acquired by him, whether

developed or undeveloped at the time of the acquisition including those for lease
(land, bldg, and other improvements) is considered as OA.
E) if taxpayer is a real estate lessor- all properties whether land, bldg or land and
bldg and other improvements shall be considered OA.
F) if taxpayer is NOT engaged in real estate business- all his real properties used in
business, being used or have been previously used in his business shall be
considered as OA.
 Nota Bene:
- A depreciable asset does not lose its character as an OA, even if it becomes fully
depreciated, or (2) there is failure to take depreciation during the period of
ownership.
- Real properties used by an EXEMPT CORPORATION in its exempt operations
(Sec.30. RE: corporations exempt from income tax) are not considered used for
business purposes= such properties are still considered CA.
G) Property bought for future use in business is OA even if the purpose was
subsequently changed.
H) Vacant industrial lot of a corporation (not owned by a dealer of real property)

that is not used in the business of the manufacturer when sold is considered a CA.
Whereas, a warehouse used to store raw materials and finished goods is
considered an OA. The Gain, if any, when sold will be added to its operating and
other taxable income to arrive at its gross sale. After deducting the allowable
deductions, the taxable income is subject to the normal income tax.
Notes in TAXATION 1
112
I) condominium unit, single detached real property, townhouse not used in business
owned by individuals in business even if bought by money from business= CA.
J) if taxpayer is changing business from real estate to non-real estate business=no

re-classification of real property held by him from OA to CA.
K) If taxpayer (engaged in real estate business or not) has abandoned the use of OA
or has idle real properties, said properties shall continue to be treated as OA.
There shall be automatic conversion into CA upon showing of proof of unused for
more than (2) years prior to consummation of taxable transaction involving said
properties.
L) Properties transferred through succession, donation, barter or exchange or

declaration of property dividends: (1) those that are transferred to heirs/donees
not engaged in business and who will not use the same in business = CA, (2) real
property received by stockholders as dividends who are not engaged in real
estate business are CA even if the corporation that declared it is engaged in real
estate business, (3) real properties received in exchange are OA if transferor is
engaged in real estate business but the transferee is NOT, whereas, if the
transferor is NOT engaged in business but will use the same in business it is still
OA.
M) In DACION EN PAGO the debtor offers another thing to the creditor who accepts it
as equivalent of payment of an outstanding debt. The transaction partakes the
nature of sale, as if: the creditor bought the thing or property of the debtor,
payment of which is charged against the debtor's debt. Hence, it is subject to CGT.
N) mere cancellation of shares of stock by a corporation, previously received by it is

not subject to CGT. Likewise, the receipt of liquidated damages for failure to
complete a transaction is not a sale or disposition that can be covered by the CGT.
O) Real properties transferred through involuntary or forced transfers have no effect

in the classification of the property.
P) In condemnation proceedings, the sale occurs at the time of taking of the

property and NOT when the proceeds of the judgment are received.
 The tax rate of 6% is the same when a corporation sells its capital assets. However, the
tax is only imposed on the gain presumed to have been realized on the sale; exchange
or disposition of land and/or bldg which are not used in the business of the corporation.
ALTERNATIVE TAXATION is NOT available to a corporate taxpayer.
 Even if real property is owned by a resident citizen or a non-resident citizen no real

property tax shall be imposed.
 If the property is a capital asset, when sold shall NOT be subject to the CGT but to the
normal income tax.(equally applies to both individuals and corporate taxpayer.)
TAXATION in case of EXCHANGES of PROPERTY

 -the gain or loss arising from the acquisition and subsequent disposition of property is realized only
when as the result of a transaction between the owner and another person the property is
Notes in TAXATION 1
113
converted into other property (a) that is essentially different from the property disposed of and (b)
that said property has a FMV.
TRANSACTIONS where both GAIN or LOSSES are not recognized
a) Exchange of property where the property received is not essentially different from the property
disposed of.
b) Transfer of property by a person in exchange for stock of a corporation as a result of which said person,
alone or together with others not exceeding four (4) persons, gains control of said corporation.
c) Exchanges of property solely in kind if in pursuance of a plan of merger or consolidation.
TRANSFER of ORDINARY ASSET for insufficient consideration (Sec. 100)

 As a rule the transfer of property for less than an adequate and full consideration in money or
money's worth is deemed gift subject to donor's tax. THIS IS NOT ABSOLUTE, in the case of CIR vs
BF goodrich Philippines, it was held that there was no donor's tax because the purpose of the sale
at less than the FMV was to minimize the loss.
TRANSACTION where only GAIN is recognized but NOT the loss

A) transactions between members of a family and related taxpayer
B) exchanges of property not solely in kind if in pursuance of a plan of merger or consolidation
C) illegal transactions
Kinds of Capital Transactions subject to final Tax and NOT to the scheduler income tax
A) tax on sale, barter or exchange of shares of stocks listed and traded through the local exchanges
-based on gross selling price or gross value in money (1/2 of 1%)
B) Tax on shares of stocks sold or exchanged through initial public offering based on Gross selling
price or gross value in money in accordance with the proportion of shares of stocks sold, bartered,
exchanged or otherwise disposed to the total outstanding shares of stocks after the listing in the
local stock exchange
-up to 25%(4%)
-over 25% but not over 33 1/3% (2%)
-over 33 1/3 % (1%)
C) capital gains from the shares of stocks not traded in the stock exchange
-Net gain not more than Php 100,000 (5%)
-on any amt in excess of Php 100,000 (10%)
D) Capital Gains from the sale of Real Property

-Gross selling price or current FMV
Whichever is higher (6%)
Nota Bene: the tax on (a) and (b) are final percentage taxes while (c) and (d) are final income taxes.
Transactions resulting to capital gains and losses although no sale of a capital asset had taken place:
A) worthless shares of stock-if shares of stock considered as capital assets become worthless
during the taxable year, the loss shall be considered a loss from the sale or exchange on the
last day of such taxable year.
Notes in TAXATION 1
114
B) worthless bonds- if bonds, debentures, or other evidence of indebtedness of any corporation

including those that were issued by government that considered as CA which are ascertained
to be worthless and charged off within the taxable year, the loss shall be considered as a loss
from the sale or exchange, on the last day of such taxable year, of CA.
C) Retirement of bonds- The amounts received by the holder upon the retirement of bonds,
debentures, notes or certificates or other evidence of indebtedness issued by any corporation
and those by the government or its political subd with interest coupons or in registered form,
shall be considered as amounts received in exchange thereof.
D) failure to exercise privilege or option to buy or sell property- the gains or losses attributable
to the failure to exercise privileges or options to buy or sell property shall be considered as
capital gains or losses.
E) Liquidating Dividend- upon dissolution of a corporation, all assets distributed in complete
liquidation , the gain or loss sustained by the stockholders, whether individual or juridical is a
capital gain or losses.
F) Liquidation of Partnership- when a partner retires or the partnership is dissolved, he realizes a
gain or loss by considering the amt he receives for his interest less his (a) investment and (b)
shares in undistributed partnership net income.
G) Re-adjustment of interest in a general professional co-partnership.
H) Short sales of property- Gains or losses from such sales shall be considered as (short-term)
gains or losses from sales or exchanges of capital assets.
 SHORT SALE- this is a transaction where the seller sells security that he does not own and
therefore cannot himself supply the securities for delivery, in expectation of the decline in their
profit.
 Note; a short sale is consummated only until the "DELIVERY" of the property covered by the short
sale is done.
CRITERIA for determining Situs of Income
Sec 42 of the tax code sets the rules in determining where the income is to be deemed derived from, viz.:
1.) Income from sources Within the Philippines
A.) Interest- interest derived from sources within the Philippines, and interest on bonds,
notes, or other interest-bearing obligations of residents, corporate or otherwise.
B.) Dividends- the amount received as dividends
1.) from domestic corporation;or
2.) from foreign corporation unless less than 50% of the gross income of such
foreign corporation for the three-year period ending with the close of its
taxable year preceding the declaration of such dividends was derived from
sources within the Philippines, but only in the amount which bears the same
ratio to such dividends as the gross income of the corporation for such period
derived from sources within the Philippines bears to its gross income from all
sources.
C.) Service-compensation for labor or personal services performed in the Philippines
D.) Rentals and Royalties- Rentals and royalties from property located in the Philippines
or from any interest in such properties, including rentals and royalties for---
1. The use of, or the right or privilege to use in the Philippines, any
copyright, patent, design or model,plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right;
Notes in TAXATION 1
115
2. The use of or the right to use in the Philippines, any industrial,

commercial, or scientific equipment;
3. The supply of scientific, technical, industrial or commercial
knowledge or information;
4. Supply of any assistance that is ancillary and subsidiary to, and is
furnished as a means of enabling the application or enjoyment of, any
property or right as is mentioned in paragraph (a), any such
equipment as mentioned in paragraph (b) or any such knowledge or
information as is mentioned in paragraph (c);
5. The supply of services by a non-resident person or his employee in
connection with the use of property or rights belonging to, or the
installation or operation of any brand, machinery or other apparatus
purchased from such non-resident person;
6. Technical advice or assistance or services rendered in connection
with technical management or administration of any scientific,
industrial or commercial undertaking, venue, project or scheme; and
7. The use of or the right to use---
A. Motion picture films;
B. films or video tapes for use in connection with television;
and
C. Tapes for use in connection with radio broadcasting.
E.) Sale of real property- Gains, profits, and income from the sale of real property
located in the Philippines; and
F.) sale of personal property- gains, profits and income from the sale of real property
located in the Philippines.
2.) Income from sources WITHOUT the Philippines

The following items of gross income shall be treated as income from sources without the
Philippines:
A.) interest other than that derived from sources within the Philippines
B.) dividends other than those derived from sources within the Philippines
C.) compensation for labor or personal service performed without the Philippines
D.) rentals or royalties from property located without the Philippines or any interest in
such property.
E.) gains, profits, and income from the sale of real or personal property located without
the Philippines.
3.) Income from sources PARTLY WITHIN and PARTLY WITHOUT the Philippines
ACCOUNTING METHODS
 General Rule: the liability of taxpayers for income tax is determined on the basis of a fixed period
consisting normally of a taxable year, calendar year or fiscal year, covering 12-month period and it
shall be computed in accordance with the method of accounting as are in the judgment of the
taxpayer best suits his purpose.
 Exception: taxable income shall be computed in such a manner as in the opinion of the CIR clearly
reflects the income:
 Where the taxpayer has not employed any method of accounting
Notes in TAXATION 1
116
 where the method and accounting employed by the taxpayer does not really reflect
his income
 Essential Requirements in keeping accounting records

 classification of capital and income expenditures.
 when the cost of capital assets is being recovered.
 inventories
Principal Accounting Methods recognized by law

1.) Cash Basis and Accrual Basis Methods
 Cash basis- considers as income that which is actually or constructively received and as deduction
that which is actually paid. The term "constructive receipt" closely refers to availability of the income
to the tax payer but by his own and exclusive choosing, he prefers not to actually received the
income.
 Accrual Basis- treats as part of taxable income that which is already earned although not yet actually
or constructively received and as possible deductions those which, although not paid or disbursed,
have already been incurred by the taxpayer.
 Nota Bene: Generally, the cash basis method is used by taxpayers who do not keep books and
records, and the accrual basis method by taxpayers who are required to keep inventories.
2.) Installment basis method

-the code allows the installment basis of reporting income in the following cases:
A) sale by dealer of personal property on installments;
B) casual sale of personal property on installment where the selling price exceeds P1,000 and the initial
payment do not exceed 25% of the selling price;
C) sale of realty where the initial payments do not exceed 25% of the selling price.
D) sale by individuals of real property, considered as capital asset, if initial payments do jot exceed 25%
of the selling price.
Other Accounting Methods

A.) net worth or inventory method which proceeds upon the general theory that money and
other assets in excess of liabilities of a taxpayer not accounted for by his income tax return
leads to the inference that part of his income has not been reported or stated.
 Requisites:
o Determination of the opening net worth that should be established with certainty
o Determination of ending net worth at the close of the taxable year
o Comparison between the opening and ending net worth to ascertain the increase
o Adjustments, using the formula in order to arrive at the taxable income by
deducting non taxable receipts from and adding non deductible expenditures to,
the increase in net worth
 Formula: DNW(difference in net worth) plus NDE(non deductible expenditures) minus
NTR(non taxable receipts) equals TNI(taxable net income)
o Finding taxable net worth by comparing the reported income and the
reconstructed income.
Notes in TAXATION 1
117
B.) Excess cash expenditure method which proceeds upon the premise that if the taxpayer
spends more money than what his returns show was available to him as income, then he
must have either made an understatement of income or overstatement of deductions.
C.) Percentage or comparison Method which proceeds by the Commissioner's comparing the
results of business operations of a tax payer with those of others who are similarly situated
and operating under similar conditions.
 Nota Bene: Sec 6 and Sec 43 of the tax code provide for the legal basis of the application of the
methods by the BIR.
Estates and Trust
 Estate- is created by operation of law, when an individual dies, leaving properties to his compulsory
or other heirs.
 Nota Bene: taxable estates and trusts are taxed in the same manner as an individual. It is entitled to
a personal exemption equivalent to a single individual of Php 20,000 (RA 8424) and now Php 50,000
under RA 9504.
 Estate- refers to the mass of all the property, rights and obligations of a person that are not
extinguished upon his death including those that have accrued thereto since the opening of the
succession.
2 kinds of Estate
1. Estate under judicial settlement
2. Estate not under Judicial settlement
 Nota bene: if the estate is under judicial administration, the income of the estate shall be taxable to
the fiduciary(executor or administrator) and the trustee shall file the return for the estate and he is
responsible to pay the income tax thereon,
 If the estate is distributed to the heirs during the taxable year such income is deductible from the
taxable income of the estate and the heirs shall be taxed individually based on their distributive
share.
 Where no part of the estate income earned during the year is distributed to the heirs and such
income is subject to income tax payment by the estate, the subsequent distribution thereof to the
heirs is no longer taxable on the part of the beneficiaries.
 if the estate is NOT under judicial administration, the income of the estate shall be taxable to the
heirs and beneficiaries of the estate; each heir and beneficiary shall include in his return his
distributive share of the net income of the estate.
Composition of the Gross Income of the Estate:
 All income received by the estate of a deceased person during the period of administration or
settlement of the Estate.
 Nota bene: during the period of administration the ESTATE has only ONE beneficiary and that is the
ESTATE.
 if the estate is under judicial administration, the administrator shall file the return and pay the tax on
the net income of the estate. If the estate is not under judicial administration, the heirs shall include
in their returns their distributive shares of the net income of the estate.
Notes in TAXATION 1
118
 no taxable income is realized from the movement of property to the executor on the death of the
decedent, even if the property has appreciated in value since the decedent acquired it.
 No income shall be realized from the delivery in kind of a property to a legatee or devisee
 "prior" to the settlement of estate, if the executor sells the property of a decedent estate for more
than the appraised value placed upon it 'at the time of death' the excess is income taxable to the
estate.
Additional Special DEDUCTIONS available to trust and estates
1. The amount of the income of the trust and estates for the taxable year which is to be distributed
currently by the fiduciary to the beneficiaries;
2. The amount of income collected by a guardian of an infant which is to be held or distributed as the
court may direct,
3. The amount of income received by estates during the period of administration or settlement,
properly paid or credited during the taxable year to any legatee or heir and,
4. The amount of income of the trusts, which in the discretion of the fiduciary may be either distributed
to the beneficiary or accumulated, properly paid or credited during the taxable year to the
beneficiary.
 TRUST- refers to any arrangement created by will or an agreement under which title to the property,
rights of property, real or personal, is passed to another for conservation or investment with the
income therefrom and ultimately the corpus(principal) to be distributed in accordance with the
direction of the grantor as expressed in the governing will or agreement.
 Nota bene: a trust is generally treated as a separate taxpayer although it id not a legal entity.
 Cestui que trust- the person for whose benefit a trust is created or who is to enjoy the income or the
avails of it.
Essential elements of trust

1. Designated beneficiary and trustee
2. Fund sufficiently identified to enable title to pass to the trustee
3. Actual delivery of fund to trustee with intention of passing title thereto
Trust can be created:

1. Expressly- by the intention of the trustor or the parties
2. Impliedly- by operation of law
Parties to a trust
1. Trustor/grantor- the person who establishes the trust
2. Trustee/grantee- the person in whom confidence is reposed as regards the property for the benefit
of another
3. Beneficiary- the person for whose benefit the trust has been created
Kinds of Trust
1. Ordinary Trust- the income or corpus of the trust do not revert to the grantor. The trust income is
accumulated and held for distribution to the beneficiaries.
2. Revocable trust- kind of trust which the power to revest in the grantor any title to any part of the
corpus of the trust is vested in the grantor himself or in any person not having any substantial
adverse interest in the trust corpus or in its income.
Notes in TAXATION 1
119
3. Irrevocable trust- irrevocable both as to corpus and as to income. Taxed exactly like an estate under
judicial settlement
4. Employee's trust
Taxable estates or trust

1. Estates of deceased person under administration or settlement
2. Trust where income is accumulated for the benefit of an unborn or un ascertained person with
contingent interest
3. Trust where the income is accumulated or held for future distribution by the fiduciary under the
terms of a will or trust
4. Trust where the income may either be accumulated or distributed at the discretion of the fiduciary
5. Trust where the income is collected by a guardian of an infant to be held or distributed as the court
may direct.
Exception of a taxable trust is an employee's trust.
Employees trust requisites:

1. It must form part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of
some or all of his employees.
2. Contributions are made to the trust by such employer or employee or both
3. Contributions are made for the purpose of distributing to such employees the earnings and
principal of the fund accumulated by the trust in accordance with such plan
4. Under the trust instrument,it is impossible, at any time prior to the satisfaction of all liabilities with
respect to employees under the trust, for any part of the corpus or income to be used for or
diverted to purposes other than for the exclusive benefit of the employees.
Nota bene: any amount actually distributed to any employee or distributee shall be taxable to him in the year
in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee.

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Taxation 1 REVIEWER (Lambda Notes)

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Lambda Rho Beta and Lambda Rho Sigma

ARELLANO UNIVERSITY SCHOOL OF LAW

Part 1 – General Principles of Taxation

A. Concept, Underlying Basis, and Purpose

2. Theory and Basis of Taxation

 To protect local industries

4. Nature and Extent of Power to Tax

5. Essential Characteristics of Tax

6. Elements of a Valid Tax

e) It must be proportionate in character;

8. Elements of the Tax System

9. Principles of a Sound Tax System

10. Definition of Taxation, Eminent Domain, and Police Power

11. Similarities between Taxation, Eminent Domain, and Police Power

12. Differences between Taxation, Eminent Domain, and Police Power

Power of Taxation Power of Police Power Power of Eminent

As to persons affected Community of class Community of class Operates on the owner

As to the authority that government government Government or private

As to necessity of No delegation is There must be due There must be due

inherent exercise it party may exercise it

As to benefits Presumption of receipt No direct and immediate The person affected

As to limitation The exercise in Limited to public interest Limited to public

As to amount of No limit Sufficient to cover cost of No imposition, the

As to importance Most important of the Most superior of the

CIR vs Pineda 21 SCRA 105

CIR vs Algue 158 SCRA 9

Municipality of Makati vs CA 190 SCRA 206

Sison vs Ancheta 130 SCRA 654

B. Principles of a Sound Tax System

Sec 28, Art. VI, Philippine Constitution

C. Scope and Limitation of Taxation

a. Taxation is territorial in character.

Pascual vs Secretary of Public Works 110 Phil 331

Lutz vs Araneta 98 Phil 148

City of Baguio vs De la Rosa 97 Phil 994

Gomez vs Palomar 25 SCRA 827

Tio vs Videogram Regulatory Board 151 SCRA 208

2. Taxation is Inherently Legislative

NPC vs Province of Albay 186 SCRA 198

Lozano vs Energy Regulatory Board 192 SCRA 363

Petron vs Pililla 198 SCRA 82

Maceda vs ERB 199 SCRA 454

Victorias Milling vs Philippine Ports Authority 153 SCRA 317

Cuunjieng vs Patstine 42 Phil 818

Cervantes vs Auditor General 91 Phil 359

Maceda vs Macaraig 197 SCRA 771

Meralco vs Yatco 69 Phil 89

CIR vs Marubeni Corp G.R. No. 137377

4. Taxation is Subject to International Comity

Pepsi Cola vs Municipality of Tanauan 69 SCRA 460

II. Constitutional Limitations

a. Provisions Directly Affecting Taxation

 Sec 20, Article III, Philippine Constitution

No person shall be imprisoned for debt or non-payment of a poll tax.

 Sec 28, par 1, Article VI, Philippine Constitution

Juan Luna Subdivision vs Sarmiento 91 Phil 371

City of Baguio vs De Leon 25 SCRA 938

CIR vs Lingayen Gulf Electric 164 SCRA 27

Pepsi Cola vs City of Butuan 24 SCRA 789

Eastern Theatrical Company vs Alfonso 83 Phil 852

Basco vs PAGCOR 197 SCRA 52

Assoiation of Custom Brokers vs. Municipality of Manila et al., 93 Phil 107

Shell Company vs Vano 94 Phil 389

 Even if an installation manager is a salaried employee, still his employment is an occupation,