Tax Dec 3 [Pantawid Recit]

I. Introduction and General Principles

a. Definition and concept of Taxation

Taxation- inherent power of the state to demand enforced contributions for public purposes; process by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government.

Taxes- the enforced proportional and pecuniary contributions from persons and property levied by the law-making body of the state having jurisdiction over the subject of the burden for the support of the government and all public needs.

1. Theory and basis of Taxation

Life blood theory The lifeblood theory constitutes the theory of taxation, which provides that the existence of government is a necessity; that government cannot continue without means to pay its expenses; and that for these means it has a right to compel its citizens and property within its limits to contribute.

Commissioner of Internal Revenue vs. Algue Inc. 158 SCRA 9

Necessity Theory

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.

Benefits-Protection Theory

This theory bases the power of the State to demand and receive taxes on the reciprocal duties of support and protection. The citizen supports the State by paying the portion from his 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. In return for his contribution, the taxpayer receives the general advantages and protection which the government affords the taxpayer and his property. One is compensation or consideration for the other; protection for support and support for protection.

Jurisdiction over subjects and objects

The power of taxation being legislative, all its incidents are naturally within the control of the legislature. A state is free to select the subject of taxation. They may be persons, whether natural or judicial; property, whether real or personal, tangible or intangible; businesses, transactions, rights or privileges.

2. Principles of a Sound Tax System

a. Fiscal adequacy- sources of revenue should be sufficient to meet the demands of public expenditure.

b. Equality or theoretical justice- tax burden is distributed in proportion to the taxpayer’s ability to pay. Similarly situated taxpayers should pay equal taxes, while those who have more should pay more.

c. Administrative feasibility- tax laws are capable of convenient, just and effective administration or enforcement at a reasonable cost.

By Kaye from De Leon’s Fundamentals of Taxation (2009) and some BAR reviewers

3. Inherent nature power of the state- inherent in sovereignty as an incident or attribute thereof being essential to the existence of every govt. Hence, it can be exercised even if the Consti is entirely silent on the subject.

b. Purpose of Taxation1. Revenue Raising- provide funds to promote the general welfare and protection of its

citizens2. Regulatory- taxation is often employed as a device for regulation by means of which

certain effects or conditions envisioned by governments may be achieved.Tio vs. Videogram Regulatory Board 151 SCRA 208 (1987)Philippine Health Care Providers vs Commissioner of Internal Revenue 554 SCRA 411

c. Power of Taxation compared with other powers

Police Power Eminent Domain TaxationAuthority which exercises power

Only by govt or its political subdivisions

govt or its political subdivisions; public service companies

Only by govt or its political subdivisions

Purpose Use of property is regulated for the purpose of promoting general welfare

Property is taken for public use or benefit

Property is taken for the support of the govt

Persons affected Community or class of individuals

Operates on entity or individual as the owner of a particular property

Community or class of individuals

Effect No transfer of title; there is restraint on the injurious use of property

There is transfer of the right to property

Money contributed becomes public funds

Benefits received No direct and immediate benefit; maintenance of a healthy economic standard of society

Person affected receives the market value of the property taken

Persons affected receives the equivalent of the tax in the form of protection and benefits he receives from the govt

Amount of imposition

Amount imposed should not be more than sufficient to cover the cost of the license and the necessary expenses of police surveillance, examination or regulation

No amount imposed; owner is paid the market value of property taken

Generally no limit

Relationship to the Constitution

Relatively free from constitutional limitations

Subject to certain constitutional limitations; non-impairment of

Subject to certain constitutional limitations; non-impairment of


contracts contracts

d. Limitations on Taxing Power

1. Public Purpose- purpose affecting the inhabitants of the state or taxing district as a community and not merely as individuals; public money can only be spent for public purpose; for the support of the govt; for any of the recognized objects of govt; to promote general welfare of the community.

2. Inherently legislativeMactan Cebu International Airport Authority vs. Marcos 261 SCRA 667Napocor vs. City of Cabanatuan G.R. No. 1491110, April 9, 2003

3. Territorial; Situs of Taxation- literally means place of taxation; the basic rule is that the state where the subject to be taxed has a situs may rightfully levy and collect the tax; and the situs is necessarily in the state which has jurisdiction or ehich exercises dominion over the subject in question. A person may be subject to taxation in several taxing jurisdictions.

a. Persons- Poll tax may be levied upon persons who are inhabitants or residents of the state, whether citizens or not.

b. Real Property- taxable only in the state which it is locatedc. Tangible personal property- taxable where it is physically locatedd. Intangible personal property- generally, domicile of the ownere. Income- exacted from persons who are residents or citizens in the taxing

jurisdiction and even from those who are neither residents nor citizens provided the income is derived from sources within the taxing state

f. Business, occupation, transaction- where the business is done, or the occupation is engaged in, or the transaction took place.

g. Gratuitous transfer of property- state where the transferor is a citizen or resident, or where the property is located.

4. Exemption of government- agencies and instrumentalities of the government are generally exempt from taxation; the govt would be taxing itself to raise money to pay over to itself; immunity is necessary in order that the functions of the govt shall not be unduly impeded; reduce the amount of money to be handled by the govt in its operations. This exemption only applies to govt entities through which the govt immediately and directly exercises its sovereign powers. GOCCs performing proprietary functions are generally subject to tax in the absence of tax exemptions in their charters.

5. Constitutional Limitations of Taxation

1. Article III, Section 20Section 20. No person shall be imprisoned for debt or non-payment of a poll tax.

2. Article VI Section 28 (1)Section 28. (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.

Abakada vs. Ermita 469 SCRA 1Tolentino vs. Secretary Finance 249 SCRA 628

3. Article VI Section 28 (2)(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.

RMO 20-2013 (July 22,2013)St. Paul College vs. CIR (RTC-Makati Civil Case No. 13-1268, 13-1405, December 27, 2013)RMO 34-2014

4. Article VI Section 28 (3)(3) 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.

Lung Center of the Philippines 433 SCRA 119CIR vs. CA 298 SCRA 83CIR vs. St. Lukes Medical Center September 26, 2012

5. Article XIV Section 4 (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.

Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions, subject to the limitations provided by law, including restrictions on dividends and provisions for reinvestment.

6. Article VI, Section 27(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.

7. Article VIII, Section 5 (2)(b)Section 5. The Supreme Court shall have the following powers: (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.

8. Article X, Section 6Section 6. Local government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them.

9. Article VI Section 28 (4)(4) No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress.

10. Article VI, Section 29 (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.

11. Article III, Section 1 (Due Process)Section 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws.

Pepsi Cola Bottling Company vs. Municipality of Tanauan 69 SCRA 460Revenue Regulation No. 18-2013

12. Article III, Section 1 (Equal Protection)John Hay vs. Lim 414 SCRA 356British American Tobacco vs. Camacho 562 SCRA 511

13. Article III, Section 5 (Religious Freedom )Section 5. No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. No religious test shall be required for the exercise of civil or political rights.

14. Article III, Section 10 (Non-impairment of Contracts)Section 10. No law impairing the obligation of contracts shall be passed.

e. Doctrines in Taxation1. Prospectivity of tax laws

General rule: tax laws or amendments thereof are prospective because the nature and amount of tax could not be foreseen and understood by the taxpayer at the time the transaction which the law seeks to tax was completed.

Exception: when a statute operates retroactively as expressly declared or is clearly legislative intent.

Republic vs. Ablaza 108 PHIL 1105

2. Double TaxationStrict sense- taxing twice, by the same taxing authority, within the same jurisdiction, for the same purpose, in the same year or taxing period, on the same property in the territory; unconstitutional

General sense- there is a burden of 2 or more pecuniary impositions; constitutional like when there is a tax imposed by the national govt and a local govt for the exercise of the same occupation

Commissioner of Internal Revenue vs. Solidbank Corporation 416 SCRA 436Compania General De Tabacos vs City of Manila 8 SCRA 367City of Baguio vs. De Leon 25 SCRA 938

3. Direct vs. Indirect Taxes

Direct- Tax which is demanded from the person who also shoulders the burden of the tax; or tax for which the taxpayer is directly or primarily liable or which he cannot shift to another.

Indirect- Tax which is falls upon the ultimate purchaser or consumer; part of the purchase price


Asia International Auctioneers vs. Commissioner of Internal Revenue (G.R. No. 179115, September 26, 2012)

4. Tax Exemption- The grant of an exemption rests upon the theory that such exemption will benefit the body of the people and not upon the idea of lessening the burden of the individual owners of property.

- Mere personal privilege of a grantee; cannot be assigned or transferred without the consent of the legislature

- Generally revocable

Grounds:1. Based on contract; usually contained in the charter of the corporation to which

the exemption is granted.2. Public policy

*equity cannot be a ground

Republic vs. Caguioa 536 SCRA 194

5. Compensation and set-offGENERAL RULE: Taxes cannot be the subject of compensation or set-off. 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 tax cannot await the results of a lawsuit against the government.

Reasons:a) lifeblood theoryb) taxes are not contractual obligation (absence of consent of taxpayer)c) taxpayer and government are not mutualdebtors and creditors of each other

EXCEPTIONS:1) Both claims already became overdue and demandable as well as fully liquidated –there must have already been an act of appropriation by the government (legislative) of funds for payment of the debt.2) Tax overpayment (BIR’s obligation to refund or set-off arises from time tax was paid)3) If the case involves local government taxes

Commissioner of Internal Revenue vs. Gould Pumps Inc. (August 22, 2012)

Solutio IndebitiUnder Article 1145 of the New Civil Code. There is solutio indebiti where: (1) payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who received the payment; and (2) the payment is made through mistake, and not through liberality or some other cause

Filinvest Development Corporation vs. CIR 529 SCRA 605

Tax AmnestyNATURE OF TAX AMNESTY1) general or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law2) partakes of an absolute forgiveness or waiver of the Government of its right to collect 3) to give tax evaders, who wish to relent & are willing to reform a chance to do so

RULES ON TAX AMNESTY1) Tax amnesty(a) like tax exemption, never favored nor presumed(b) construed strictly against the taxpayer (must show complete compliance with the law)


2) Government not estopped from questioning the tax liability even if amnesty tax payments were already receivedReason: Erroneous application and enforcement of the law by public officers do not block subsequent correct application of the statute. The government is never estopped by mistakes or errors of its agents.Basis: Lifeblood Theory3) Defense of Tax amnesty, like insanity, is a personal defense.Reason: Relates to the circumstances of a particular accused and not the character of the acts charged in the information

6. Construction of tax statutesLiberal Construction in favor of Taxpayers- In case of doubt, tax statutes are construed strictly against the govt and liberally in favor of the taxpayer

Manila Railroad vs. Collector of Customs 52 Phil 950 (1929)

Philippine Health Care Providers vs Commissioner of Internal Revenue 554 SCRA 411

Commissioner of Customs vs. Hypermix Feeds G.R. No. 179579, February 1, 2012Meralco vs. Vera 67 SCRA 352

Quezon City vs. ABS-CBN 567 SCRA 495- Stricissimi Juris (of the strictest right or law)

Non-retroactive application (Section 246 of Tax Code)Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall notbe given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers, except in the following cases:(a) Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the BIR;(b) Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or(c) Where the taxpayer acted in bad faith.

PBCOM vs. CIR 302 SCRA 241BIR Ruling No. 370-2011 October 7, 2011

7. Tax Avoidance vs. EvasionCIR vs. Estate of Toda September 14, 2004

Tax Avoidance (Tax Minimization) – tax saving device that is legally permissible

Tax Evasion (Tax Dodging) – connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes; must be willful and intentional.


Tax Dec 3 [Pantawid Recit]

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