Tiu Outline - Tax 1

TAXATION LAW REVIEWUniversity of San Carlos – College of Law

Part 1 - General Principles

A. Basic Concepts and Considerations

1. Meaning of Taxation - the process or means by which the sovereign, through its law making body, raises income to defray the necessary expenses of government.

- the inherent power of the state to demand enforced contribution for public purpose/s.

2. Meaning of Tax(es) - 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.

3. Essential Characteristics and Attributes of Taxes

a) it is an enforced contribution- not dependent on the will of the person taxed, not a contact but a positive act of the government

b) it is proportionate in character- taxes must be based on the ability to pay in accordance with the constitutional mandate to Congress to evolve a progressive system of taxation.

c) it is generally payable in money- unless qualified by law, the term “tax/es” is usually understood to be a pecuniary burden

d) it is levied on persons/property

e) it is levied by the state which has jurisdiction over the person/property- the object to be taxed must be subject to the jurisdiction of the taxing state.

f) it is levied by the law-making body of the state- the power to tax is a legislative power which under the Constitution only Congress can exercise through enactment of tax statutes.

g) it is levied for public purpose/s- revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private persons.

-eStReLLa g. MeNcHaVeZ- based on Atty. Emery Joy Tiu’s Outline

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4. Importance of Taxes - the power of taxations 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.

5. Nature of the Power of Taxationa) inherent prerogative of the sovereignty

- it exists apart from constitutions and without being expressly conferred by the people.

b) legislative in character- the power to tax is peculiarly and exclusively legislative and cannot be exercised by the executive or judicial branch of government.

c) subject to constitutional and inherent limitations- individual equities or inequalities, however, are not considered in the exercise of the power.

B. Theory and Basis of Taxation

1. Necessity Theorya) involves the power to destroyb) does not involve the power to destroy as long as the SC

sits**According to the SC, taxation is a power emanating from

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 designed 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.

2. Benefits Received or Compensation TheorySymbiotic Relationship - In return of his contribution,

the taxpayer receives the general advantages and protection which the government affords the taxpayer and property.

**According to this theory, the State demands and receives taxes from the subjects of taxation within its jurisdiction so that it may be enabled to carry its mandate into effect and perform the functions of government, and the citizen pays from his property the portion demanded in order that he may, be means thereof, be secured in the enjoyment of the benefits of organized society.


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C. Purpose and Objectives of Taxation

1. Revenue - Basically, the purpose of taxation is to provide funds or property with which the State promotes the general welfare and protection of its citizens.

2. Non-Revenuea) regulation

- taxation also has a regulatory purpose as in the case of taxes levied on excises or privileges like those imposed on tobacco and alcoholic products, or amusement places like night clubs, cabarets, cockpits, etc.

b) promotion of general welfare- as an implement of police power in order to

promote the general welfare of the peoplec) reduction of social inequality

- reduce inequalities in wealth and incomes- possible through progressive system of taxation where the object is to prevent the undue concentration of wealth in the hands of a few individuals

d) encourage economic growth- through granting tax exemptions or the creation of conditions conducive to their growth

e) protectionism- taxes sometimes provide protection to local industries like protective tariffs and custom duties

D. Scope of the Legislative Taxing Power

1. Determination of Purpose(s)- as long is it is for a public purpose

2. Determination of the Subjects and Objects of Taxation- refers to the coverage and nature of the tax

3. Determination of the Amount and Rate of Tax- the legislature may levy a tax of any amount or rate as it sees fit. If the taxes are oppressive or unjust, the only remedy is the ballot box and the election of new representatives.- the power of taxation carries with it the power to destroy.

4. Determination of the Kind of Tax to be Collected-

5. Determination of Apportionment of the Tax-


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6. Determination of the Manner and Mode of Enforcement and Collection

- refers to the administration of the tax or the implementation of tax laws.

7. Determination of the Situs of Taxation-

E. Aspects of Taxation

1. Levy (Imposition of the tax) - enactment of tax laws or statutes, includes the determination of the persons, property or excises to be taxed, the sum or sums to be raised, the due date thereof and the time and manner of levying and collecting taxes.

2. Administration (Tax Administration) - collection of tax levied

F. Basic Principles of a Sound Tax System

1. Fiscal Adequacy - that the sources of revenue, which are the receipts therefrom, taken as a whole, should be sufficient to meet the demands of public expenditure.

2. Theoretical Justice or Equality - that the tax burden should be in proportion to the taxpayer’s ability to pay.

- a sound tax system must take into consideration the taxpayer’s ability to pay (Ability to Pay Theory). Our laws mandate that taxes must be reasonable, fair, just and conscionable. The Constitution provides that taxation must be uniform and equitable and that the State must evolve a progressive system of taxation.

3. Administrative Feasibility - that tax laws should be capable of convenient, just and effective administration.

4. Economic Efficiency -

G. Classification of Taxes

1. As to Subject Matter or Objecta) personal, poll or capitation

- tax of a fixed amount impose upon persons residing within a specified territory, residing within a specified territory, whether citizens or not, without regard to their property, occupation or business in which they may be engaged.

Example: Community Tax


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b) property- tax imposed on property, whether real or

personal, in proportion either to its value or some other reasonable rule of apportionment.

Example: Real Property Taxc) excise or privilege

- charge imposed upon the performance of an act, the enjoyment of a privilege or engaging in an occupation, profession, or business tax.

Example: Donor’s Tax

2. As to who bears the burden:a) direct

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

Example: Income Taxb) indirect

- tax wherein the incidence or liability for the payment falls on one person but the burden can be shifted or passed on to another.

Example: VAT

3. As to purpose:a) general, fiscal or revenue

- tax imposed for the general purposes of the Government, to raise revenue for governmental needs.

Example: Income Taxb) Special or Regulatory

- tax imposed for a special purpose, to achieve some social or economic ends, irrespective of whether revenue is actually raised or not.

Example: Custom Duties

4. As to determination of amount:a) specific

- tax of a fixed amount imposed by the head or number or by some standard or weight or measurement; it requires no valuation other than a listing or classification of the objects to be taxed.

Example:b) ad valorem (value)

- tax of a fixed portion of the value of the property with respect to which the tax is assessed; it requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined.


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5. As to taxing authority:a) national - levied by the National Governmentb) local - levied by the local government

6. As to rate:a) progressive or graduated

- tax rate which increases as the tax base or bracket decreases.

b) regressive- tax rate which decreases as the tax base

increasesc) proportional

- based on a fixed percentage of the amount of the property, receipts, or other basis to be taxed.

H. Limitations on the Power of Taxation

1. Inherent Limitations - these proceed from the very nature of the taxing power itself.

a) public purpose- purpose affecting the inhabitants of the

state or taxing district as a community and not merely as individuals and is designed to support the services of government for some of the recognized objects of the country.

b) non-delegation of the legislative power to taxGEN. RULE: The power of taxation being purely

legislative, Congress cannot delegate the power to others. This limitation arises from the doctrine of separation of powers among the three branches of our government.

EXCEPTIONS:a. delegation to the president

- the Constitution expressly allows Congress to authorize the President to fix within specified limits and subject to such limitations and restrictions as it may impose, tariff rates, import or export quotas, tonnage and wharfage dues and other duties or imposts.b. delegation to local governments

- each local government unit shall have the power to create is own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges


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shall accrue exclusively to the local government.c. delegation to administrative agencies

- also known as the power of subordinate legislation. The delegation must comply with the completeness test and existence of sufficiently determinate standards test. Should only be for tax administration or implementation.

c) exemption from taxation of government entities- property of the national government as well

as those of the local government units are NOT subject to tax, otherwise, it will result in the absurd situation of the government “taking money from one pocket and putting it in another”.

d) international comity- the property or income of a foreign state or

government may not be the subject of taxation by another.

Reasons:a. in par parem non habet imperium.

As between equals, there is no sovereign.

b. The rule of international law that a foreign government may not be sued without its consent so that it is useless to impose a tax which could not be collected.

c. The concept that when a foreign sovereign enters the territorial jurisdiction of another, it does not subject itself to the jurisdiction of the other.

e) territorial jurisdictionGEN. RULE: A state may not tax property

lying outside its borders or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege derived from the laws of another state and therein exercised or enjoyed. Tax laws do not operate beyond the jurisdictional limits of a country.

EXCEPTION: privity of relationship

2. Constitutional Limitationsa) due process of law

Any deprivation is with due process if it is done:a. Under the authority of a law that is valid

or of the Constitution itself the tax statute is within the Constitutional authority of Congress to pass, and that it must be reasonable, fair, and just. This is Substantive Due Process which limits the government’s law and rule making powers.


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b. After compliance with fair and reasonable methods of procedure prescribed by law, with notice or hearing or at least an opportunity to be heard whenever necessary. This is Procedural Due Process which limits the actions of judicial and quasi-judicial bodies.

- In addition:a. Due process in taxation requires:

1. Tax must be for public purpose2. Imposed within territorial jurisdiction3. No arbitrariness or oppression in

a. assessmentb. collection

b. Due process in taxation does not require:1. Determination through judicial

inquiry ofa. property subject to taxb. amount of tax to be

imposed2. Notice and hearing as to

a. amount of taxb. manner of apportionment

b) equal protection of the lawsEqual protection does not require equal rates of

taxation or different classes of property, nor prohibit unequal taxation so long as the inequality is not based upon arbitrary classification; it merely requires that all persons subjected to such legislation shall be treated alike, under like circumstances and conditions both in the privileges conferred and in the liabilities imposed.

c) rule of uniformity and equity in taxationUniformity - all taxable articles or

properties of the same class shall be taxed at the same rate. Different articles or other subjects may be taxed at different rates provided that the rate is uniform on the same class everywhere.

Equity - requires that such apportionment be more or less just in the light of the taxpayer’s ability to shoulder the tax burden, usually measured in terms of wealth, and if warranted, on the basis of the benefits he receives from the government. Taxation may be uniform, but inequitable where the amount is excessive or unreasonable.

d) no imprisonment for non-payment of a poll taxA poll tax is imposed on persons without any

qualification. An example is the community tax under Sec. 162 of the LGC which provides that a person or corporation who does not own any real property, does


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not receive any income, or even a minor may be permitted to pay basic community tax and be issued a community tax certificate.

One cannot be imprisoned for non-payment of poll tax because payment thereof is NOT mandatory. Payment is merely permissive; it cannot be imposed compulsorily upon taxpayers.

While a person may not be imprisoned for non-payment of poll tax, he may be imprisoned for non-payment of other kinds of taxes where the law so expressly provides.

e) non-impairment of the obligation of contracts- The obligation of a contract is impaired

when its terms or conditions are changed by law or by a party without the consent of the other, thereby weakening the position or rights of the latter.

Rationale: When the state grants an exemption on the basis of a contract, consideration is presumed to be paid to the State, and the public is supposed to receive the whole equivalent therefore.

Rules:a. When the exemption is bilaterally agreed

upon between the government and the taxpayer- it cannot be withdrawn without violating

the non-impairment clauseb. When it is unilaterally granted by law and

the same is withdrawn by virtue of another law- no violation

c. When the exemption is granted under a franchise.

- may be revoked because under the Constitution, a franchise is “subject to amendment, alteration, or repeal.”

f) non-infringement of religious freedom- A municipal license tax on the sale of bibles

and religious articles by a non-stock, non-profit missionary organization at minimal profit constitutes curtailment of religious freedom and worship which is guaranteed by the Constitution.

Income of such organizations from any activity conducted for profit or from any of their property, real or personal, regardless of the disposition made of such income, is taxable.

g) no appropriation for religious purposes-

h) exemption of religious, charitable and educational entities, non-profit cemeteries, and churches from property taxation

- exemption from real estate taxTest of Exemption: It is the use of the property


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and not ownership.Nature of Use: The properties must be

actually, directly and exclusively used for the purposes mentioned.

Scope of Exemption: The exemption is not limited to property actually indispensable for religious, charitable or educational purpose. It extends to facilities which are incidental to or reasonably necessary for the accomplishment of said purposes.

i) exemption of non-stock, non-profit educational institutions from taxation(note: Congress is authorized to grant similar exemptions

to proprietary educational institutions subject to limitations provided by law.)

- The exemption covers income, property, and donor’s taxes and custom duties.

GEN. RULE: To be exempt, the revenue and assets must be used actually, directly and exclusively for educational purposes.

j) concurrence by a majority of all the members of Congress for the passage of a law granting tax exemption

Reason: The requirement is obviously intended to prevent indiscriminate grant of tax exemptions.

The phrase “a majority of all the members of the Congress” means at least ½ plus 1 of all the members voting separately.

In granting tax exemptions, an absolute majority of the members of Congress is required, while in cases of withdrawal of such tax exemption, a relative majority is sufficient.

Tax amnesties, condonations and refunds are in the nature of tax exemptions, such being the case, a law granting them requires the vote of an absolute majority.

A constitutional grant of exemption may be self-executing or may require an act of Congress for its operation. Where a Constitutional provision granting an exemption is self-executing, the legislature can neither add nor detract from it. It may, however, prescribe a procedure to determine whether a claimant is entitled to the Constitutional exemption.

k) power of the President to veto any particular item or items in a revenue or tariff bill

- see Art. VI, Sec. 27[2], 1987 Constitutionl) non-impairment of the jurisdiction of the SC in tax cases

- see Art. VIII, Sec. 2 & 5, 1987 Constitution


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I. Power of Judicial Review

1. courts can determine public purpose, constitutionality or legality of a tax

- As long as the legislature, in imposing a tax, does not violate applicable constitutional limitations or restrictions, it is not within the province of the courts to inquire into the wisdom or policy of the exaction, the motives behind it, the amount to be raised or the persons, property or other privileges to be taxed.

2. courts cannot inquire into the wisdom of a taxing act/legislation- The court’s power in taxation is limited only

to the application and interpretation of the law.

J. Situs of Taxation

1. Meaning of Situs of Taxation- is the place or authority that has the right to

impose and collect taxes. The state where the subject to be taxed has a situs may rightfully levy and collect the tax. The situs is necessarily in the state which has jurisdiction or which exercises dominion over the subject in question.

2. Situs of Subjects on Taxationa. persons - poll, capitation, or community taxes

are based upon the residence of the taxpayer, regardless of the source of income or location of the property of the taxpayer.

b. propertyi. real property - real estate is subject to taxation in the state in which it is located whether the owner is a resident or non-resident and is taxable only there.

This is the principle of lex rei sitei.Reasons:

a) The taxing authority has control because of the stationary and fixed character of the property.

b) The place where the real property is situated gives protection to the real property, hence the property or its owner should support the government of that place.

ii. tangible personal property - the modern rule is that it is taxable in the state where it has actual situs; where it is physically located although the owner resides in another jurisdiction.

Reason: The place where the tangible personal property is found gives it protection.

iii. intangible personal property


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GEN. RULE: The situs is at the domicile of the owner. This is in accordance with the principle of mobilla sequuntur personam, or movable follow the person.

EXCEPTIONS:a) when the property has acquired a

business situs in another jurisdiction.b) when the law provides for the situs of the

subject.

3. Multiplicity of SitusEffect - due to the variance in the concept of ‘domicile’, for tax purposes, and considering the multiple distinct relationships that may arise with respect to intangible personalty and the use to which the protection of the laws of jurisdiction other than the domicile of the owner thereto, the same income or intangible may be subject to taxation in several taxing jurisdictions.Remedies - a) provide for exemptions or allowance of

deduction or tax credit for foreign taxesb) enter into treaties with other states

K. Double Taxation

1. Meaning of Double Taxation- means taxing the same property twice when it should

only be taxed once.a) strict sense

Direct Duplicate Taxation / Obnoxious- double taxation in the objectionable or

prohibited sense. This violates the equal protection clause of the Constitution, hence prohibited.

Elements:a. The same property or subject matter is

taxed twice when it should be taxed only once;b. Both taxes are levied for the same

purpose;c. Imposed by the same taxing authority;d. Within the same jurisdiction;e. During the same taxing period;f. Covering the same kind of character of

tax.b) broad sense

Indirect Duplicate Taxation- is permissible double taxation. This is

allowed if the taxes are of different nature or character imposed by different taxing authorities. Generally, it extends to all cases in which there is a burden of two or more pecuniary impositions. The absence of one or more of the above-mentioned elements makes the double taxation indirect.


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2. Instances of Double TaxationThey include:

a) a tax on a mortgage as personal property when the mortgaged property is also taxed at its full value as real estate

b) a tax upon a corporation for its property and upon its shareholders for their shares

c) a tax upon a corporation for its capital stock as a whole and upon the shareholders for their shares

3. Constitutionality of Double Taxation- Double taxation in its narrow sense is undoubtedly

unconstitutional but that in the broader sense is not necessarily so.a) general rule

- our Constitution does not prohibit double taxation, hence, it may not be invoked as a defense against the validity of a tax law.

b) exceptioni. doubts as to whether double taxation has

been imposed should be resolved in favour of the taxpayer. The reason is obviously to avoid injustice or unfairness.

ii. where double taxation occurs, the taxpayer may seek relief under the uniformity rule or the equal protection guarantee.

L. Three (3) Main Powers of the Government

1. Concept of Police Power2. Concept of Eminent Domain3. Taxation distinguished from Police Power4. Taxation distinguished from Eminent Domain5. Distinctions6. Similarities

TAXATION POLICE POWER EMINENT DOMAIN1. As to Purpose

To raise revenue To promote public purpose through regulations

To facilitate the State’s need of property for public use

2. As to amount of ExactionNo limit Limited to the cost of

regulation, issuance of the license or surveillance

No exaction; but private property is taken by the State for public purpose

3. As to Benefits ReceivedNo special or direct benefit is received by the taxpayer; merely general benefit of

No direct benefit is received; a healthy economic standard of society is attained

A direct benefit results in the form of just compensation to the property owner


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protection4. As to Non-Impairment of Contracts

Contracts may not be impaired

Contracts may be impaired

Contracts may be impaired

5. As to Transfer of Property RightsTaxes paid become part of public funds

No transfer but only restraint in its exercise

Transfer is effected in favour of the State

6. As to ScopeAll persons, property and excises

All persons, property, rights and privileges

Only upon a particular property

M. Taxes Distinguished from Other Impositions

1. Toll Fee

TAX TOLLEnforced proportional contributions from persons and property

A sum of money for the use of something, a consideration which is paid for the use of a property which is of a public nature; e.g. road, bridge

A demand of sovereignty A demand of proprietorshipNo limit as to the amount of tax Amount of toll depends upon the cost

of construction or maintenance of the public improvement used

Imposed only by the State May be imposed by :(1) Government(2) Private Individuals or entities

2. Penalty

TAX PENALTYEnforced proportional contributions from persons and property

Sanction imposed as a punishment for violation of a law or acts deemed injurious; violation of tax laws may give rise to imposition of penalty

Intended to raise revenue Designed to regulate conductMay be imposed only by the government

May be imposed by :(1) Government(2) Private Individuals or entities


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3. Special Assessment

TAX SPECIAL ASSESSMENTImposed on persons, property and excises

Levied only on land

Personal liability attaches on the person assessed in case of non-payment

Cannot be made a personal liability of the person assessed

Not based on any special or direct benefit

Based wholly on benefit

Levied and paid annually Exceptional both as to time and locality

Exemption granted by Art. VI, Sec. 28 [3], 1987 Constitution is applicable

Exemption does not apply. N.B. If property is exempt from Real Property Tax, it is also exempt from Special Assessment

4. License or Permit Fee

TAX LICENSE FEEBased on the power of taxation Emanates from police powerThe purpose is to generate revenue The purpose is regulatoryAmount is unlimited Amount is limited to the cost of

(1) issuing the license, and(2) inspection and surveillance

Normally paid after the start of a business

Normally paid before commencement of business

Taxes, being the lifeblood of the State, cannot be surrendered except for lawful consideration

License fee may be with or without consideration

Non-payment does NOT make the business illegal but maybe a ground for criminal prosecution

Non-payment makes the business illegal

5. Debt

TAX DEBTAn obligation imposed by law Created by contractDue to the government in its sovereign capacity

May be due to the government but in its corporate capacity

Payable in money Payable in money, property or services

Does not draw interest except in case of delinquency

Draws interest if stipulated or delayed

Not assignable AssignableNot subject to compensation or set-off Subject to compensation or set-offNon-payment is punished by imprisonment except in poll tax

No imprisonment in case of non-payment


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Imposed only by public authority Can be imposed by private individual

6. Subsidy

TAX SUBSIDYIt is a pecuniary aid directly granted by the government to an individual or private commercial enterprise deemed beneficial to the public;It is not a tax, although a tax may have to be imposed to pay it.

7. Revenue

TAX REVENUEIt refers to the amount imposed. A broad term that includes not only

taxes but income from other sources as well. It refers to the amount collected.

8.. Internal Revenue

TAX INTERNAL REVENUETaxes other than duties on imports or exports in the nature of excise taxes such as taxes on tobacco, liquor, etc.

9. Customs Duties

TAX CUSTOM DUTIESA broader term to include not only customs duties but other taxes as well.

Duties charged upon commodities on their being imported into or exported from a country. They are regulatory imposts on goods.

10. Tariff

TAX TARIFFAll embracing term to include various kinds of enforced contributions upon persons for the attainment of public purposes

A kind of tax imposed on articles which are traded internationally


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11. Compulsory Labor

TAX COMPULSORY LABOR

N. Forms of Escape from Taxation

1. Six (6) Basic Formsa) Shiftingb) Evasionc) Exemptiond) Capitalizatione) Avoidancef) Transformation

2. Meaning of the following terms:a) shifting, in general

- the transfer of the burden of a tax by the original payer of the one on whom the tax was assessed (impact of taxation or statutory taxpayer) or imposed to another or someone else (incidence of taxation).

**Direct tax cannot be shifted - a tax cannot be shifted when it is purely personal or when it has no relation to any business dealings of the taxpayer.

i. impact of taxation- point on which tax is originally imposed or the one on whom the tax is formally assessed.

ii. incidence of taxation- point on which the tax burden finally rests or settles down.

iii. relations among impact, shifting, and incidence**Kinds of Shifting:

1. forward shifting - when burden of tax is transferred from a factor of production through the factors of distribution until is finally settles on the ultimate purchaser or consumer.

2. backward shifting - when burden is transferred from consumer through factors of distribution to the factors of production.

3. onward shifting - when the tax is shifted 2 or more times either forward or backward


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b) capitalization- the reduction in the price of the taxed object

equal to the capitalized value of future taxes which the purchaser expects to be called upon to pay.

c) transformation- the manufacturer or producer upon whom

the tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavours to recoup himself by improving his process of production, thereby turning out his units at a lower cost.

d) tax evasion- a term that connotes fraud though the use

of pretenses and forbidden devices to lessen or defeat taxes.

- a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.

e) tax avoidance- the exploitation by the taxpayer of legally

permissible alternative tax rates or methods of assessing taxable property or income, in order to avoid or reduce tax liability.

Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length.

f) exemption- is the grant of immunity 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.

3. Distinction between Tax Evasion and Tax Avoidance

TAX AVOIDANCE TAX EVASIONAs to Validity

Legal and not subject to criminal penalty.

Illegal and subject to criminal penalty.

As to EffectMinimization of taxes. Almost always results in absence of

tax payments.


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4. Factors in Tax Evasion and the Evidence to Prove Tax Evasion

*Factors in Tax Evasiona. 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.

b. An accompanying state of mind which is described as being evil, in bad faith, wilful, or deliberate and NOT coincidental.

c. A course of action which is unlawful.*Evidence to Prove Tax Evasion

a. Failure to declare for taxation purposes true and actual income derived from business for 2 consecutive years.

b. Substantial under declaration of income in the tax returns of the taxpayer for 4 consecutive years, coupled with intentional overstatement of deductions.

O. Exemption from Taxation

1. Meaning of Exemption from Taxation- the grant of immunity 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.

2. Nature of Tax Exemptiona) personal privilege

- an exemption from taxation is a mere personal privilege of the grantee

b) generally revocable- it is generally revocable by the government unless the exemption is founded on a contract which is protected from impairment.

c) waiver on the part of the government- it implies a waiver on the part of the government of its right to collect what otherwise would be due to it and prejudicial thereto.

d) not necessarily discriminatory-

3. Nature of the Power to Grant Tax Exemption- Like the inherent power to tax, the power to exempt is an attribute of sovereignty to the power to prescribe who or what property shall be taxed implies the power to prescribe who or what property shall not be taxed.

**Municipal corporations have no inherent power to tax. But the moment the power to impose tax is granted, they also


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have the power to grant exemption unless forbidden by the Constitution or law.

4. Rationale of Tax Exemption- The power of the legislature to exempt form taxation, although of wide scope, is not unlimited.

a) Aside from the limitations provided by the Constitution, there must underlie its exercise some principle of public policy that can support a presumption that the public interest will be subserved by the exemption allowed.

b) It may not be amiss to add that no tax exemption – like any other legal exemption/exception – is given without any reason therefore. In much the same way as other statutory commands, its avowed purpose is some public benefit or interest, which the law making body considers sufficient to offset the monetary loss entailed in the grant of the exemption.

5. Grounds for Tax Exemptiona) contract

- tax exemption may be based on contract in which case the public represented by the government is supposed to receive a full equivalent therefore.

b) public policy- it may be based on some ground of public policy, such as, for example to encourage new and necessary industries, or to foster charitable and other benevolent institutions.

c) reciprocity- it may be created in a treaty on grounds of reciprocity, or to lessen the rigors of international double or multiple taxation.

6. Kinds of Tax Exemptiona) as to manner of creation

i. Express or Affirmative Exemption- expressly granted by organic or statute law

ii. Implied or Exemption by Omission- when particular persons, property or excises are deemed exempt as they fall outside the scope of the taxing provision itself.

b) as to scope or extenti. Total - absolute immunityii. Partial - one where a collection of a part of the tax

is dispensed withc) as to object

i. Personal - granted directly in favour of certain persons.

ii. Impersonal- granted directly in favour of certain class or property.


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7. Examples of Tax Exemption(see De Leon’s Fundamentals of Taxation)

a) as provided for in the Constitutionb) as provided for in the Tax Codec) as provided for under Special Laws

8. Construction of Tax Exemption StatutesGEN. RULE: Exemptions are not favored and are construed strictissimi juris (by the most strict right or law) against the taxpayer.EXCEPTIONS:i. when the statute granting exemption provides for liberal construction thereof.ii. in case of special taxes relating to special cases and affecting only special classes of persons.iii. if exceptions refer to public property.iv. in cases of exemptions granted to religious, charitable and educational institutions or their property.v. in cases of exemption in favour of the government, its political subdivisions or instrumentalities.

9. Meaning of Tax Amnesty- a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of tax evasion or violation of a revenue or tax law.

**It partakes of an absolute forgiveness or waiver by the government of its right to collect that is due it and to give tax evaders who wish to relent a chance to start with a clean slate.- a general pardon to taxpayers without having to go through the tedious process of a tax case.

**To avail of a tax amnesty granted by the Government, and to be immune from suit of its delinquencies, the taxpayer must have voluntarily disclosed his previously untaxed income and must have paid the corresponding tax on such previously untaxed income.

P. Nature, Construction, Application of Tax Laws

1. Nature of Internal Revenue Lawa. not political in character

- They are deemed to be the laws of the occupied territory and not of the occupying enemy.

b. civil in nature, not subject to ex post facto law prohibitionsc. not penal in character


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- The purpose of tax laws in imposing penalties for delinquencies is to compel the timely payment of taxes or to punish evasion or neglect of duty in respect thereof.

2. Construction of Tax Lawsa) legislative intention must be considered

- tax statutes are to receive a reasonable construction with a view to carrying out their purpose and intent.

b) where there is doubt- tax statutes are construed most strongly against the Government and liberally in favour of the citizen because burdens are not imposed beyond what the statutes expressly and clear import.

c) where language is plain- the rule of strict construction as against the government is not applicable where the language of the tax statute is plain and there is no doubt as to the legislative intent. In such a case, the words employed are to be given their ordinary meaning.- It is a well-settled rule in taxation that a statute will not be construed as imposing a tax unless it does so clearly, expressly and unambiguously.

3. Application of Tax Lawsa) generally prospective

- the general rule is that tax laws are prospective in operation. The reason is that the nature and amount of the tax could not be foreseen and understood by the taxpayer at the time the transaction which the law seeks to tax was completed.

b) exception- while it is not favored, a statute may nevertheless operate retroactively provided it is expressly declared or is clearly the legislative intent.**But a tax law should not be given retroactive application when it would be harsh and oppressive, for in such a case, the constitutional limitation of due process would be violated.

4. Mandatory and Directory Provisions of Tax LawMandatory - those provisions intended for the

security of the citizens or which are designed to insure equality of taxation or certainty as to the nature and amount of each person’s tax.

Directory - those provisions designed merely for the information or direction of officers or to secure methodical and systematic modes of proceedings.

**The distinction is important because the omission to follow mandatory provisions renders invalid the act or


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proceeding to which it relates while the omission to follow directory provisions does not involve such consequence.

5. Existing Tax LawsThe following are among the existing tax laws:a) National

i. The National Internal Revenue Code of 1997,as amended

ii. The Tariff and Customs Code of 1978,as amended

iii. other special lawsb) Local

i. The Local Government Codeii. The respective tax ordinances of provinces, cities,

municipalities, and barangays subject to the limitations provided in the Local Government Code

c) Other important lawsi. RA 1093ii. RA 1125 - act creating the Court of Tax Appealsiii. RA 2211

6. Authority of the Secretary of Finance to promulgate Rules and Regulations- Under Section 244 of the Tax Code, it is provided that the Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue, shall promulgate all needful rules and regulations for the effective enforcement of the provisions and of the Code. The administrative power to provide regulations is likewise authorized by Sections 79-B and 551 of the Revised Administrative Code.

The most formal pronouncements of the Dept. of Finance in this respect are known as “Revenue Regulations”.

The power to recommend the promulgation of internal revenue rules and regulations by the Secretary of Finance is given only to the Commissioner. He is not allowed by law to delegate such power to any of his subordinates.

7. Nature and Power to Make Regulations- The power to make regulations is not the power to legislate in the true sense, and under the guise of regulation, legislation may not be enacted.

The statute which is being administered may not be altered or added to by the exercise of a power to make regulations thereunder. Such regulations cannot increase or decrease the requirements of the law, nor embrace matters not covered or intended to be covered by the statute.


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8. Necessity and Function of Regulation- Regulations are deemed necessary to the proper enforcement and execution of laws. They are intended to clarify or explain the law and carry into effect its general provisions by providing the details of administration and procedure.

9. Requisites for Validity and Effectivity of RegulationsThe requisites are:

a) must not be contrary to law and the Constitution; andb) must be published in the Official Gazette

**It is provided, however, in the Administrative Code of 1987 that: “Every agency of the government shall file with the Univ. of the Philippines Law Center three (3) certified copies of every rule adopted by it x x x” and that “in addition to other rule-making requirements provided by law not inconsistent with this Book, each rule adopted shall become effective fifteen (15) days from the date of filing as above-provided unless a different danger to public health, safety and welfare, the existence of which must be expressed in a statement accompanying the rule.”

In other words, the revenue rules and regulations promulgated by the Secretary of Finance may take effect even before publication in the Official Gazette.

10. Force and Effect of Regulations- Such regulations once established and found to be in consonance with the general purposes and objects of the law have the force and effect of law, and so they must be applied and enforced.

11. Administrative Rulings and OpinionsRulings - are the less general interpretation of tax laws at the administrative level, which are issued by tax officials in the performance of their assessment functions. They are usually rendered by the Commissioner of Internal Revenue on request of taxpayers to clarify certain provisions of a tax law. These rulings may be revoked by the Secretary of Finance if the latter finds them not in accordance with law.Opinions - rulings in the form of “opinions” on tax questions are also given by the Secretary of Justice who is the chief legal officer of the government. These take on the character of substantive rules and are generally binding and effective if not otherwise contrary to law and the Constitution.

12. Administrative Interpretation and the Courts- It is a principle widely accepted that the contemporaneous construction placed upon the statute by the executive officers whose duty is to enforce it is entitled to great respect by the courts. This is especially true if the administrative interpretation has been observed for a long time without objection.


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13. Power of the Secretary of Finance to Revoke the Rulings of his Predecessor- The power to interpret the provisions of the Tax Code and other tax laws is under the exclusive and original jurisdiction of the Commission of Internal Revenue subject to review by the Secretary of Finance.

The Secretary of Finance has the power to revoke, repeal or abrogate the acts or previous rulings of his predecessors in office. The reason for this is that the construction of the statute by those administering it is not binding on their successors if thereafter the latter becomes satisfied that a different construction should be given.

14. Non-Retroactivity of Repeal of Regulations or Rulings

GEN. RULE: Any revocation, modification, or reversal of any of the rules and regulations or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue cannot be given retroactive application when such revocation, modification, or reversal will be prejudicial to the taxpayer.

EXCEPTIONS:a) where the taxpayer deliberately misstates or omits

material facts from his return or in any document required of him by the BIR;

b) where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; and

c) where the taxpayer acted in bad faith.

15. Decisions of the Supreme Court and the Court of Tax Appeals- In tax cases, as in other case, the Supreme Court is the tribunal of last resort or final appeal. The importance of this statement lies in the fact that the decisions of the SC applying or interpreting existing tax laws are binding on all subordinate courts and have the force and effect of law. They constitute evidence of what the law means.

The same is also true with respect to the decisions of the Court of Tax Appeals. However, by the nature of its jurisdiction, the decisions of this court are still appealable to the SC by a petition for review on certiorari.

Q. Sources of Tax Laws

1. Legislations/Statutes- including Presidential Decrees and Executive Orders on

taxation and tax ordinances


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2. Administrative Rules and Regulations, Rulings or Opinions of Tax Officials

- particularly the Commissioner of Internal Revenue, including opinions of the Secretary of Justice

3. Judicial Decisions- they interpret the tax laws.

4. Tax Treaties or Agreements- same force and effect as statutes


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Tiu Outline - Tax 1

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Transcript of Tiu Outline - Tax 1