2010 taxation review by domondon 1.docx

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2010 Taxation Review by Domondon 1

PRIMUS PRE-BAR REVIEW DIVISION

BAR STAR NOTES

TAXATIONVER. 2010.08.12

copyrighted 2010Prepared by Prof. Abelardo T. Domondon

(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.). Lawyer-CPA-Customs Broker, ManagementConsultant, Professor of Law and Pre-Bar Reviewer)

How to use the BAR STAR NOTES. The BAR STAR NOTES in the form of questions and answers as well astextual discussion werespecially prepared by Prof. Domondon for the exclusive use of Bar Reviewees whoattended the 2010 Wrap-Up Lectures on TAXATION conducted by Primus Information, Center, Inc., and the BarReviewees of various law schools and Review Centers where he was invited to lecture on Taxation. Included in thepresentation are doctrines contained in Supreme Court decisions up to April 2010.

The purpose of the BAR STAR NOTES is to provide the Bar Reviewee with a handy review material whichserves as memory- joggers for the September 12, 2010 Bar Examinations in Taxation. The author tries to second guesswhat would be included in the Bar Exams using statistical analysis. The actual Bar questions may not be formulated inthe same manner as the BAR STAR NOTES. However, the doctrines tested in the Bar would in all probability beincluded in these Notes.

If pressed for time, the author suggests that the reader should focus his attention on the following: Nice to know Should know Must know and masterIt is further suggested that the reader should merely browse those without stars.

The BAR STAR NOTES in TAXATION is the 4th in the series of Bar Star Notes the author has prepared forall the eight Bar subjects. The other Bar Star Notes may be availed of by enrolling in the 2010 Wrap-Up lecturesconducted by PRIMUS INFORMATION CENTER, INC.Please feel free to call Baby, Tel. No. 816-07-68 or 817-84-49;Leon, Mobile No. 0917-793-6169; Atty. Celia, Mobile No. 0917-790-8406, or Venny, Mobile No. 0917-337-6479.

WARNING:

These materials are copyrighted and/or based on the writer s books on Taxation and future revisions. It isprohibited to reproduce any part of these Notes in any form or any means, electronic or mechanical, includingphotocopying without the written permission of the author. These materials are authorized for the use only of PRIMUSReviewees and others who attended the author s lectures on Taxation. Unauthorized users shall not be prosecutedbut SHALL BE SUBJECT TO THE LAW OFKARMASUCH THAT THEY WILL NEVER PASS THE BAR OR WOULDBE UNHAPPY IN LIFEfor stealing the intellectual property of the author.

THE BEST OF LUCK AND ADVANCE CONGRATULATIONS

TAXATION

GENERAL PRINCIPLES OF TAXATION

TAXATION, IN GENERAL

1. State briefly and concisely the nature of taxation. Alternatively, define taxation. SUGGESTED ANSWER: The inherent power of the sovereign exercised through the legislature to impose burdens

upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects ofgovernment.

2. What is the nature of the States power to tax ? Explain briefly.


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SUGGESTED ANSWER: The nature of the state s power to tax is two-fold. It is both an inherent power and alegislative power. It is inherent in nature being an attribute of sovereignty. This is so, because without thetaxes, the state s existence would be imperiled. There is thus, no need for a constitutional grant for the state to exercisethis power. It is a legislative power becauseit involves the promulgation of rules. Taxation is a set of rules, how much is the tax to be paid, who pays the tax, to whomit should be paid, and when the tax should be paid.

3. What is the underlying theory of taxation ? Explain briefly. SUGGESTED ANSWER: Taxes are the lifeblood of the nation. Without revenue raised from taxation, the

government will not survive, resulting in detriment to society. Without taxes, the government would be paralyzed for lackof motive power to activate and operate it. (Commissioner of Internal Revenue v. Algue, Inc. et al., 158 SCRA 8, 16-17) 4. Marshall said that, the power to tax involves the power to destroy. On the other hand,

Holmes stated that the power to tax is not thepower to destroy while the court sits. Reconcile thestatements. In the alternative, what are the implications that flowfrom the above statements ? SUGGESTED ANSWERS:Marshall s view refers to avalid tax while the Holmes view refers to an invalid tax. a. The imposition of a validtax could not be judicially restrained merely because it would prejudice taxpayer s property. b. Anillegal tax could be judicially declared invalid and should not work toprejudice a taxpayer s property.

5. Discuss briefly the basis/bases, or rationale oftaxation. SUGGESTED ANSWER: a. Reciprocal

duties of protection and support between the state and its citizens and residents. Also calledsymbioticrelation between the state and its citizens.b. Jurisdiction by the state over persons and property within its territory. 6. Discuss briefly but comprehensively the objectives or purposes of taxation. SUGGESTED ANSWER: The purposes or objectives of taxation are the

following: a. The primarypurpose: 1) Revenuepurpose. b. The secondarypurposes 1) Sumptuary or regulatorypurpose. 2) Compensatorypurpose. 3) To implement the power of eminent domain.

7. Distinguish a tax from a license fee. SUGGESTED ANSWER: The following are thedistinctions: a. Purpose: Tax imposed for revenue while license fee for regulation. Tax for general publicpurposes while license fee for regulatory purposesonly. b. Basis: Tax imposed under power of taxationwhile license fee under police power. c. Amount: Intaxation, no limit as to amount while license fee limited to cost of the license and the expenses of police surveillance andregulation. d. Time of payment: Taxesnormally paid after commencement of business while license fee before. e. Effect ofpayment: Failure to pay a tax does not make the business illegal while failure to pay license fee makes businessillegal. f. Surrender: Taxes, being the lifeblood of the state, cannot be surrendered except for lawfulconsideration while a license fee may be surrendered with or without consideration. (Cooley on Taxation, pp. 1137-1138; Pacific Commercial Company v. Romualdez, et al.,49 Phil. 924)

8. How may the power to tax be utilized to carry out the social justice program of our government? SUGGESTED ANSWER: The compensatory purpose of taxation is to implement the social justiceprovisions of the constitution through the progressive system of taxation, which would result to equal distribution of wealth,etc.

Progressive income taxes alleviate the margin between rich and poor. (Southern Cross Cement Corporation v.Cement Manufacturers Association of the Philippines, et al.,G. R. No. 158540, August 3, 2005)

In recent years, the increasing social challenges of the times expanded the scope of the state activity, and taxationhas become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protectionof local industries as well as public welfare and similar objectives. (Batangas Power Corporation v. Batangas City, etal., G. R. No. 152675, and companion case, April 28, 2004 citingNational Power Corporation v. City of Cabanatuan,G. R.No. 149110, April 9, 2003)

9. Explain the sumptuary purpose of taxation.SUGGESTED ANSWER: The sumptuary purpose of taxation is to promote the general welfare and to protect the

health, safety or morals of the inhabitants. It is in the joint exercise of the power of taxation and police power whereregulatory taxes are collected.


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Taxation may be made the implement of the state s police power. The motivation behind many taxation measures isthe implementation of police power goals. [Southern Cross Cement Corporation v. Cement Manufacturers Association of thePhilippines, et al.,G. R. No. 158540, August 3, 2005) The reader should note that the August 3, 2005Southern Crosscase isthe decision on the motion for reconsideration of the July 8, 2004Southern Crossdecision.

The so-called sin taxes on alcohol and tobacco manufacturers help dissuade the consumers from excessive intake ofthese potentially harmful products. (Southern Cross Cement Corporation v. Cement Manufacturers Association of thePhilippines, et al.,G. R. No. 158540, August 3, 2005)

10. Taxation distinguished from police power. Taxation is distinguishable from police power as to the meansemployed to implement these public goals. Those doctrines that are unique to taxation arose from peculiar considerationssuch as those especially punitive effects (Southern Cross Cement Corporation v. Cement Manufacturers Association of thePhilippines, et al.,G. R. No. 158540, August 3, 2005) as the power to tax involves the power to destroy and the belief thattaxes are lifeblood of the state. (Ibid.) t axes being the lifeblood of the government, their prompt and certain availability is ofthe essence.

These considerations necessitated the evolution of taxation as a distinct legal concept from police power. (Ibid.)

11. How the power of taxation may be used to implement power of eminent domain. Tax measures arebut enforced contributions exacted on pain of penal sanctions and clearly imposed for public purpose. In most recentyears, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitabledistribution of wealth. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation,G.R. No. 159647, April 16,

2005)Establishments granting the 20% senior citizens discount may claim the discounts granted to senior citizensas taxdeduction based on the net cost of the goods sold or services rendered:Provided , That the cost of the discount shall beallowed as deduction from gross income for the same taxable year that the discount is granted.Provided, further,That thetotal amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross salesreceipts for tax purposes and shall be subject to proper documentation and to the provisions of the National InternalRevenue Code, as amended. [M.E. Holding Corporation v. Court of Appeals, et al.,G.R. No. 160193, March 3, 2008 citingExpanded Senior Citizens Act of 2003, Sec. 4 (a)]

12. What are the three basic principles of a sound tax system? Explain eachbriefly. SUGGESTED ANSWER: The canons of a sound tax system, also known as thecharacteristics or, principles of a sound tax system, are used as a criteria in order to determine whether a tax system isable to meet the purposes or objectives of taxation. They are:

a. Fiscal adequacy.b. Administrative feasibility.c. Theoretical justice.

13. What are the elements or characteristics of a tax ? SUGGESTED ANSWER: a. Enforced contribution.

b. Generally payable in money.c. Proportionate in character.d. Levied on persons, property or exercise of a right or privilege.e. Levied by the state having jurisdiction.f. Levied by the legislature.g. Levied for a public purpose.h. Paid at regular periods or intervals.

14. State the requisites of a valid tax. SUGGESTED ANSWER: a. A valid tax should be within the jurisdiction of the taxingauthority.

b. That the assessment and collection of certain kinds (The same as the inherent limitations of the power oftaxation) should be for a public purpose.

c. The rule of taxation should be uniform.d. That either the person or property of taxes guarantees against injustice to individuals, especially by

way or notice and opportunity for hearing be provided.e. The tax must not impinge on the inherent and Constitutional limitations on the power of

taxation.15. What are the classes or kinds of taxes according to the subject matter or object

? SUGGESTED ANSWER: a. Personal, poll or capitalization imposed on allresidents, whether citizen or not. Example Community Tax.


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b. Property - Imposed on property. Example Real propertytax. c. Excise imposed upon theperformance of an act, the enjoyment of a privilege or the engaging in an occupation. Example income tax, estatetax.

16. What are the kinds of taxes classified as to who bears the burden ? Explain eachbriefly. SUGGESTED ANSWER: Based on the possibility of shifting the incidence of taxation, or as towho shall bear the burden of taxation, taxes may be classified into:

a. Direct taxes. Those that are extracted from the very person who, it is intended or desired, should pay

them (Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company,G. R. No. 140230, December15, 2005); they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in,(Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, supra) which liability cannot beshifted or transferred to another. Example income tax, estate tax, donor s tax, etc.

b. Indirect taxes are those that are demanded in the first instance, from, or are paid by, one person in theexpectation and intention that he can shift the burden to (Commissioner of Internal Revenue v. Philippine Long DistanceTelephone Company, supra) to someone else not as a tax but as part of the purchase price. (Commissioner, of InternalRevenue v. American Express International, Inc. (Philippine Branch),G. R. No. 152609, June 29, 2005 citing variouscases and authorities) Example value added tax (VAT), documentary stamp tax, excise tax, percentage tax, etc.

17. Silkair (Singapore) PTE, Ltd., an international carrier, purchased aviation gas from PetronCorporation, which it uses for its operations. It now claims for refund or tax credit for the excise taxes it paid

claiming that it is exempt from the payment of excise taxes under the provisions of Sec. 135 of the NIRC of 1997which provides that petroleum products are exempt from excise taxes when sold to Exempt entities or agenciescovered by tax treaties, conventions, and other international agreements for their use and consumption: Provided,however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxespetroleum products sold to Philippine carriers, entities or agencies

Silkair further anchors its claim on Article 4(2) of the Air Transport Agreement between the Governmentof the Republic of the Philippines and the Government of the Republic of Singapore (Air Transport Agreementbetween RP and Singapore) which reads: Fuel, lubricants, spare parts, regular equipment and aircraft storesintroduced into, or taken on board aircraft in the territory of one Contracting party by, or on behalf of, a designated airlineof the other Contracting Party and intended solely for use in the operation of the agreed services shall, with the exceptionof charges corresponding to the service performed, be exempt from the same customs duties, inspection fees and otherduties or taxes imposed in the territories of the first Contracting Party , even when these supplies are to be used on theparts of the journey performed over the territory of the Contracting Party in which they are introduced into or taken onboard. The materials referred to above may be requiredto be kept under customs supervision and control.

Silkair likewise argues that it is exempt from indirect taxes because the Air Transport Agreement betweenRP and Singapore grants exemption from the same customs duties, inspection fees and o ther duties or taxesimposed in the territory of the first Contracting Party. It invokes Maceda v. Macaraig, Jr., G.R. No. 88291, May 31,1991, 197 SCRA 771.which upheld the claim for tax credit or refund by the National Power Corporation (NPC) onthe ground that the NPC is exempt even from the payment of indirect taxes.

Is Silkair entitled to the tax refund or credit it seeks ? Reason out your answer.SUGGESTED ANSWER: Silkair is not entitled to tax refund or credit for the following reasons:a. The excise tax on aviation fuel is an indirect tax. The proper party to question, or seek a refund of, an

indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if heshifts the burden thereof to another. (Philippine Geothermal, Inc. v. Commissioner of Internal Revenue, G.R. No. 154028,July 29, 2005, 465 SCRA 308, 317-318) The NIRC provides that the excise tax should be paid by the manufacturer orproducer before removal of domestic products from place of production. Thus, Petron Corporation, not Silkair, is thestatutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the AirTransport Agreement between RP and Singapore.

Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jetfuel is not a tax but part of the price which Silkair had to pay as a purchaser. [Philippine Acetylene Co., Inc. v.Commissioner of Internal Revenue,127 Phil. 461, 470 (1967)]

b. Silkair could not seek refuge underMaceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA771.which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPCis exempt even from the payment of indirect taxes.

In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company , G.R. No. 140230,December 15, 2005, 478 SCRA 61 the Supreme Court clarified the ruling inMaceda v. Macaraig, Jr.,viz: It may be sothat inMaceda vs. Macaraig, J r., the Court held that an exemption from all taxes granted to the National PowerCorporation (NPC) under its charter includes both direct and indirect taxes.

An exemption from all taxes excludes indirect taxes, unless the exempting statute, like NPC s charter, is socouched as to include indirect tax from the exemption. The amendment under Republic Act No. 6395 enumerated thedetails coveredby NPC s exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of


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NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its operation. PresidentialDecree No. 938 [NPC s amended charter] amended the tax exemption by simplifying the same law in general terms. Itsuccinctly exempts NPC from all forms of taxes, duties, fees The use of the phrase all forms of taxes demonstratesthe intention of the law to give NPC all the tax exemptions it has been enjoying before.

The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore cannot, without a clear showing of legislative intent, be construed as includingindirect taxes. Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally infavor of the taxing authority, and if an exemption is found to exist, it must not be enlarged by construction. (Silkair

(Singapore) PTE, Ltd., v. Commissioner of Internal Revenue,G.R. No. 173594, February 6,2008)18. What are the different

kinds of taxes classified as to purpose ? SUGGESTED ANSWER: a. General, fiscal or revenue imposed for thepurpose of raising public funds for the service of the government. b. Special or regulatory imposed primarily for the regulation of useful or non-useful occupation or enterprises and secondarily only for the raisingof public funds.

LIMITATIONS OR RESTRICTIONS ON THE POWER

1. Purpose for the limitations on the power of taxation.

The inherent and constitutional limitations to the power of taxation are safeguards which would prevent abuse in theexercise of this otherwise unlimited and plenary power.The limitations also serve as a standard to measure the validity of a tax law or the act of a taxing authority. A violation

of the limitations serves to invalidate a tax law or act in the exercise of the power to tax.

INHERENT LIMITATIONS

1. What are the inherent limitations on the power of taxation ? SUGGESTED ANSWERS:a. Public purpose. The revenues collected from taxation should be devoted to a public purpose.b. No improper delegation of legislative authority to tax. Only the legislature can exercise the power of taxes

unless the same is delegated to some other governmental body by the constitution or through a law which does not violateany provision of the constitution.

c. Territoriality. The taxing power should be exercised only within territorial boundaries of the taxing authority.d. Recognition of government exemptions; ande. Observance of the principle of comity. Comity is the respect accorded by nations to each other because they

are equals. On the other hand taxation is an act of sovereign. Thus, the power should be imposed upon equals out ofrespect.

Some authorities include no double taxation.

2. What are the principles to consider in the determination of whether tax revenues are devoted for apublic purpose ?

SUGGESTED ANSWER:a. The tax revenues are for a public purpose if utilized for the benefit of the community in general. An

alternative meaning is that tax proceeds should be utilized only to attain the objectives of government.b. Inequalities resulting from the singling out of one particular class for taxation or exemption infringe no

constitutional limitation.REASON: It is inherent in the power to tax that the legislature is free to select the subjects of taxation.BASIS: The lifeblood theory.c. An individual taxpayer need not derive direct benefits from the tax.REASON: The paramount consideration is the welfare of the greater portion of the population.d. A tax may be imposed, not so much for revenue purposes, but under police power for the general

welfare of the community. This would still be for a public purpose.e. Public purpose continually expanding. Areas formerly left to private initiative now lose their

boundaries and may be undertaken by the government if it is to meet the increasing social challenges of the times.f. Tax revenue must not be used for purely private purposes or for the exclusive benefit of private

persons.g. Private persons may be benefited but such benefit should be merely incidental as its main object is the

benefit of the community in general.h. Determined at the time of enactment of tax law and not at the time of implementation.


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i. There is a presumption of public purpose even if the tax law does not specifically provide for itspurpose. (Santos & Co., v. Municipality of Meycauayan, et al ., 94 Phil. 1047)

j. Public use is no longer confined to the traditional notion of use by the public but held synonymous with publicinterest, public benefit, public welfare, and public convenience. (Commissioner of Internal Revenue v. Central Luzon DrugCorporation,G.R. No. 159647, April 16, 2005)

3. A law was enacted imposing a tax on manufacturers of coconut oil, the proceeds of which are to beused exclusively for the protection and promotion of the coconut industry, namely, to improve the working

conditions in coconut mills and to conduct research on the use of coconut oil for motor fuel. Some of themanufacturers of coconut oil challenge the validity of the law, contending that the tax is to be used for a privatepurpose, and therefore, the law violates the rule that public revenues shall not be appropriated for anything but apublic purpose. Decide with reason .

SUGGESTED ANSWER: The levy is for a public purpose. It cannot be denied that the coconut industry is one ofthe major industries supporting the national economy. It is, therefore, the state s concern to make it a strong and securesource not only of the livelihood of the significant segment of the population, but also of export earnings, the sustainedgrowth of which is one of the imperatives of economic growth. (Philippine Coconut Producers Federation, Inc. (Cocofedv. Presidential Commission on Good Government,178 SCRA 236, 252)

4. Requisites for taxpayers, concerned citizens, voters or legislators to have locus standi to sue. a. In general, the case should involve constitutional issues. (David, et al., v. President Gloria Macapagal-

Arroyo, etc., et al.,G. R. No. 171396, May 3, 2006)b. For taxpayers, there must be a showing:1) That tax money is being extracted and spent in violation of specific constitutional protections

against abuses of legislative power. (Flast v. Cohen, 392 U.S. 83)2) That public money is being deflected to any improper purpose (Pascual v. Secretary of

Public Works, 110 Phil. 33) or a claim of illegal disbursement of public funds or that the tax measure isunconstitutional. (David, supra)

3) A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, orthat public money is being deflected to any improper purpose, or that there is a wastage of public funds throughthe enforcement of an invalid or unconstitutional law. ( Abaya v. Ebdane,G. R. No. 167919, February 14,2007;Garcia v. Enriquez, Jr. G.R. No. 112655 December 9, 1993, Minute Resolution )

A taxpayer s suit is properly brought only when there is an exercise of the spending or taxingpower of Congress. ( Automotive Industry Workers Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al.,G.R. No. 157509, January 18, 2005 citingGonzales v. Narvasa,G. R. No. 140835, August 14,2000, 337 SCRA 733, 741)

c. For voters, there must be a showing of obvious interest in the validity of the election law in question.d. For concerned citizens, there must be a showing that the issues raised are of transcendental importance

which must be settled early.e. For legislators, there must be a claim that the official action complained of infringes upon their prerogatives

as legislators. (David, et al., v. President Gloria Macapagal-Arroyo, etc., et al.,G. R. No. 171396, May 3, 2006)

5. Only those directly affected have locus standi to impugn the alleged encroachment by theexecutive department into the legislative domain of Congress.

a. Only those who shall be directly affected by such executive encroachment, such as for exampleemployees who would find themselves subject to disciplinary powers that may be imposed under the questionedExecutive Order as they have a direct and specific interest in raising the substantive issue therein(Automotive IndustryWorkers Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al.,G. R. No. 157509, January 18, 2005) or employees who aregoing to be demoted, transferred or otherwise affected by any personnel action subject o the rule on exhaustion ofadministrative remedies.

b. Moreover, and if at all, only Congress, can claim any injury from the alleged executive encroachment of thelegislative function to amend, modify and/or repeal laws. ( Automotive Industry Workers Alliance (AIWA),etc., et al.,supra, citingGonzales v. Narvasa,G. R. No. 140835, August 14,2000, 337 SCRA 733, 741)

6. Locus standi being merely a matter of procedure, have been waived in certain instances where a partywho is not personally injured may be allowed to bring suit. The following are examples of instances where suits havebeen brought by parties who have not have been personally injured by the operation of a law or any other government actbut by concerned citizens, taxpayers or voters who actually sue in the public interest:

a. Taxpayer s suits to question contracts entered into by the national government or government-owned orcontrolled corporations allegedly in contravention of the law.


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b. A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that publicmoney is being deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of aninvalid or unconstitutional law. ( Abaya v. Ebdane,G. R. No. 167919, February 14, 2007)

7. The VAT law provides that, the President, upon the recommendation of the Secretary of Finance, shall,effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) after any of the followingconditions have been satisfied. (i) value-added tax collection as a percentage of Gross Domestic Product (GDP) ofthe previous year exceeds two and four-fifth percent (2 4/5%) or (ii) national government deficit as a percentage of

GDP of the previous year exceeds one and one- half percent (1 %). Was there an invalid delegation of legislative power ? SUGGESTED ANSWER: No. There is no undue delegation of legislative power but only of the discretion as to the

execution of the law. This is constitutionally permissible.Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who

must do it, and what is the scope of his authority. In the above case the Secretary of Finance becomes merely the agent ofthe legislative department, to determine and declare the even upon which its expressed will takes place. The Presidentcannot set aside the findings of the Secretary of Finance, who is not under the conditions acting as the execute alter ego orsubordinate. . [ Abakada Guro Party List (etc.) v. Ermita, etc., et al.,G. R. No. 168056, September 1, 2005 and companioncases citing various cases]]

8. Instances of proper delegation: When taxing power could be delegated: Exceptions to the rule on non-

delegation: a. Delegation of tariff powers by Congress to the President under the flexible tariff clause, Section 28 (2), ArticleVI of the Constitution.

b. Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution.c. The delegation to the President of the Philippines to enter into executive agreements, and to ratify treaties

which may contain tax exemption provisions subject to the concurrence by the Senate in the ratification made by thePresident.

d. Delegation to the people at large.e. Delegation to administrative bodies [ Abakada Guro Party List (Formerly AASJS), etc., v, Ermita, et al.,G. R.

No.168056, September 1, 2005], which is referred to as subordinate legislation.In this instance, there is a requirement that the law is complete in all aspects so what is delegated is merely the

implementation of the law or there exists sufficiently determinate standards to guide the delegate and prevent a totaltransference of the taxing power.

9. Paradigm shift from exclusive Congressional power to direct grant of taxing power to locallegislative bodies. The power to tax is no longer vested exclusively on Congress; local legislative bodies are now givendirect authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution. (BatangasPower Corporation v. Batangas City, et al.G. R. No. 152675, and companion case, April 28, 2004 citingNational PowerCorporation v. City of Cabanatuan,G. R. No. 149110, April 9, 2003)

Local government legislation, is not regarded as a transfer of general legislative power, but rather as the grant ofauthority to prescribe local regulations, according to immemorial practice, subject, of course, to the interposition of thesuperior in cases of necessity. (People v. Vera, 65 Phil. 56)

10. Taxing power of the local government is limited. The taxing power of local governments is limited inthe sense that Congress can enact legislation granting tax exemptions.

While the system of local government taxation has changed with the onset of the 1987 Constitution, the power oflocal government units to tax is still limited.

While the power to tax by local governments may be exercised by local legislative bodies, no longer merely byvirtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution,the basic doctrine on local taxation remains essentially the same,the power to tax is [still] primarily vested in theCongress. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citingCityGovernment of Quezon City, et al. v. Bayan Telecommunications, Inc.,G.R. No. 162015, March 6, 2006, 484 SCRA 169in turn referring toMactan Cebu International Airport Authority, v. Marcos, G.R. No. 120082, September 11, 1996, 261SCRA 667, 680 )

11. Further amplification by Bernas of the local governments power to tax. What is the effect of Section5 on the fiscal position of municipal corporations? Section 5 does not change the doctrine that municipal corporations donot possess inherent powers of taxation. What it does is to confer municipal corporations a general power to levy taxesand otherwise create sources of revenue. They no longer have to wait for a statutory grant of these powers. The powerof the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose


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limitations on municipal powers.Moreover, these limitations must be consistent with the basic policy of localautonomy. The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved againstmunicipal corporations. Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolvedin favor of municipal corporations. It is understood, however, that taxes imposed by local government must be for a publicpurpose, uniform within a locality, must not be confiscatory, and must be within the jurisdiction of the local unit to pass. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citingCity Government ofQuezon City, et al. v. Bayan Telecommunications, Inc.,G.R. No. 162015, March 6, 2006, 484 SCRA 169)

12. Reconciliation of the local governments authority to tax and the Congressional general taxingpower. Congress has the inherent power to tax, which includes the power to grant tax exemptions. On the other hand,the power of local governments, such as provinces and cities for example Quezon City, to tax is prescribed by Section151 in relation to Section 137 of the LGC which expressly provides that notwithstanding any exemption granted by anylaw or other special law, the City or a province may impose a franchise tax. It must be noted that Section 137 of the LGCdoes not prohibit grant of future exemptions.

The Supreme Court in a series of cases has sustained the power of Congress to grant tax exemptions over andabove the power of the local government s delegated power to tax. (Quezon City, et al., v. ABS-CBN BroadcastingCorporation, G. R. No. 166408, October 6, 2008 citingCity Government of Quezon City, et al. v. BayanTelecommunications, Inc.,G.R. No. 162015, March 6, 2006, 484 SCRA 16)

Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affectthe power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of

the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxingpowers, doubts must be resolved in favor of municipal corporations. [Ibid., referring toPhilippine Long DistanceTelephone Company, Inc. (PLDT) vs. City of Davao]

13. General principles of income taxation in the Philippines or the source rule of income taxation asprovided in the NIRC of 1997.

a. Acitizen of the Philippinesresiding therein is taxable onall income derived from sourceswithin and without thePhilippines;

b. Anonresident citizen is taxable only onincome derived from sourceswithin the Philippines;c. Anindividual citizen of the Philippines who is working and deriving income abroad as anoverseas contract

worker is taxable only onincome from sourceswithin the Philippines: Provided, That aseaman who is a citizen of thePhilippines and who receives compensation for services rendered abroad as a member of the complement of a vesselengaged exclusively in international trade shall be treated as anoverseas contract worker ;

d. Analien individual, whether a resident or not of the Philippines, is taxable only onincome derived fromsources within the Philippines;

e. Adomestic corporation is taxable on allincome derived from sourceswithin and without the Philippines; andf. Aforeign corporation , whether engaged or not in trade or business in the Philippines, is taxable only

on income derived from sourceswithin the Philippines. (Sec. 23, NIRC of 1997, emphasis supplied)

14. Juliane a non-resident alien appointed as a commission agent by a domestic corporation with a salescommission of 10% all sales actually concluded and collected through her efforts. The local company withheld theamount of P107,000 from her sales commission and remitted the same to the BIR.

She filed a claim for refund alleging that her sales commission is not taxable because the same was acompensation for her services rendered in Germany and therefore considered as income from sources outside thePhilippines.

Is her contention correct ? SUGGESTED ANSWER: Yes. The important factor which determines the source of income of personal services is

not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but theplace where the services were actually performed.

Since the activity of securing the sales were in Germany, then the income did not originate from sources from withinthe Philippines. (Commissioner of Internal Revenue v. Baier-Nickel,G. R. No. 153793, August 29, 2006)

15. Ensite, Ltd.. is a Canadian corporation not doing business in the Philippines. It holds 40% of theshares of Philippine Stamping Plant, Inc.,., a Philippine company while the 60% is owned by Fred Corporation, aFilipino-owned Philippine corporation. Ensite Co. also owns 100% of the shares of Susanto Co., an Indonesiancompany which has a duly licensed Philippine branch. Due to worldwide restructuring of the Ensite Ltd.,. group,Ensite Ltd.,. decided to sell all its shares in Philippine Stamping Plant, Inc. and Susanto Co. The negotiations forthe buy-out and the signing of the Agreement of Sale were all done in the Philippines. The Agreement providesthat the purchase price will be paid to Ensite Ltds bank account in the U.S. and that title to the PhilippineStamping Plant, Inc. and Susanto Co. shall be transferred to General Co., in Toronto Canada where stock


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certificates will be delivered. General Co. seeks your advice as to whether or not it will subject the payments ofthe purchase price to withholding tax. Explain your advice. SUGGESTED ANSWER: The paymentsof the purchase price will be subject to withholding tax. Considering that all the activities (sales) occurred within thePhilippines, the income is considered as income from within, subject to Philippine income taxation. Ensite, Ltd. being aforeign corporation is to be taxed on its income derived from sources within thePhilippines.

16.Ensite, Ltd. is a Canadian corporation, which has a dulylicensed Philippine branch engage in trading activities in the Philippines. Ensite, Ltd.. also invested directly in

40% of the shares ofstock of Philippine Stamping Plant, Inc.., a Philippine corporation. These shares are bookedin the Head Office of Ensite, Ltd.. and are not reflected as assets of the Philippine branch. In 2009, PhilippineStamping Plant, Inc.. declared dividends to its stockholders. Before remitting the dividends to Ensite Ltd.,.,Philippine Stamping Plant, Inc. Co. seeks your advice as to whether it will subject the remittance to withholdingtax. There is no need to discuss WT rates, if applicable. Focus your discussion on what is theissue. SUGGESTED ANSWER: Philippine Stamping Plant, Inc.. shouldsubject the remittance to withholding tax.. Since Philippine Stamping Plant. is a Philippine corporation, its shares of stockhave obtained a business situs in the Philippines, hence the dividends are considered as income from within. Ensite. Ltd.,being a foreign corporation, should be subject to tax on its income from within.

17. Philippine Stamping Plant, Inc., a Philippine corporation, has an executive Larry who is a Filipinocitizen. Philippine Stamping Plant, Inc,. has a subsidiary in Malaysia (Kuala Lumpur Manufacturing, Inc.) and willassign Larry for an indefinite period to work full time for Kuala Lumpur Manufacturing, Inc.. Larry will bring his

family to reside in Malaysia and will lease out his residence in the Philippines. The salary of Larry will beshouldered 50% by Philippine Stamping Plant, Inc.. while the other 50% plus housing, cost of living andeducational allowances of Larrys dependents will be shouldered by Kuala Lumpur Manufacturing,Inc.. Philippine Stamping Plant, Inc.. will credit the 50% of Larrys salary to his Philippine bank account. Larrywill sign the contract of employment in the Philippines. He will also be receiving rental income for the lease ofhis Philippine residence. Are these salaries,allowances and rentals subject to Philippine income tax? Explainbriefly. SUGGESTED ANSWER: The salaries and allowances of Larry, being derivedfrom labor or personal services rendered outside of the Philippines is considered as income from without. Since Larry isan OCW, then he is to be taxed only on his income derived from within the Philippines such as the rentals on hisPhilippine residence, and not on his income from without.

18. Obama Airlines, Inc., a foreign airline company which does not maintain any flight to and from thePhilippines sold air tickets in the Philippines, through a general sales agent, relating to the carriage of passengersand cargo between two points, both outside the Philippines.

a. Is Obama, Inc., subject to income taxes on the sale of the tickets ? SUGGESTED ANSWER: Yes.The source of income which is taxable is that activity which produced the

income. The sale of tickets in thePhilippines is the activity that determines whether such income is taxable in thePhilippines.

The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs ofthe source of payments is the Philippines. the flow of wealth proceeded from and occurred, within the Philippine territory,enjoying the protection accorded by the Philippine Government. In consideration of such protection, the flow of wealth shouldshare the burden of supporting the government. [Commissioner of Internal Revenue v. British Overseas Airways Corporation(BOAC),149 SCRA 395 ]

Off-line air carriers having general sales agents in the Philippines are engaged in or doing business in thePhilippines and their income from sales of passage documents here is income from within the Philippines. Thus, the off-line air carrier liable for the 32% (now 30%) tax on its taxable income. [South African Airways v. Commissioner of InternalRevenue, G.R. No. 180356, February 16, 2010 citingCommissioner of Internal Revenue v. British Overseas AirwaysCorporation(British Overseas Airways), No. L-65773-74, April 30, 1987, 149 SCRA 395]

b. Supposing that Obama, Inc., sells tickets outside of the Philippines for passengers it carry from GoldCity, South Africa to the Philippines but returns to South Africa without any cargo or passengers. Would it then besubject to any Philippine tax on such sales ?

SUGGESTED ANSWER: It would not be subject to any tax. It is not subject to any income tax because the activitywhich generated the income (the sale of the tickets) was performed outside of the Philippines.

It is not subject to the carrier s tax based on gross Philippine billings because there were no lifts that originated fromthe Philippines.Gross Philippine Billings refers to the amount of gross revenue derived from carriage of persons, excessbaggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the placeof sale or issue and the place of payment of the ticket or passage document. [NIRC of 1997, Sec. 28(A)(3)(a)]

c. Would your answer be the same if Obama, Inc. sold tickets outside of the Philippines for travelerswho are going to picked up by Obama, Inc., planes from the Diosdado Macapagal Intl. Airport at Clark, Angeles,Pampanga, bound for Nairobi, Kenya ? Reason out your answer.


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SUGGESTED ANSWER: No more.This time Obama, Inc., would be subject to the carrier s tax based on GrossPhilippine Billings. (GPB).

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 orissue and the place of payment of the ticket or passage document. [NIRC of 1997, Sec. 28(A)(3)(a)]

The place of sale is irrelevant; as long as the uplifts of passengers and cargo occur from the Philippines, incomeis included in GPB. (South African Airways v. Commissioner of Internal Revenue,G.R. No. 180356, February 16, 2010)

19. No improper delegation of legislative authority to tax. The power to tax is inherent in the State, suchpower being inherently legislative, based on the principle that taxes are a grant of the people who are taxed, and the grantmust be made by the immediate representatives of the people; and where the people have laid the power, there it mustremain and be exercised. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation,G. R. Nos. 167274-75,July 21, 2008)

CONSTITUTIONAL LIMITATIONS

1. Constitutional limitations on the power of taxation . The general or indirect constitutional limitations aswell as the specific or direct constitutional limitations.

2. The general or indirect constitutional limitations on the power of taxation are:

a. Due process clause;b. Equal protection clause;c. Freedom of the press;d. Religious freedom;e. No taking of private property without just compensation;f. Non-impairment clause;g. Law-making process:1) Bill should embrace only one subject expressed in the title thereof;2) Three (3) readings on three separate days;3) Printed copies in final form distributed three (3) days before passage.

h. Presidential power to grant reprieves, commutations and pardons and remittal of fines and forfeiture afterconviction by final judgment.

3. The specific or direct constitutional limitation. a. No imprisonment for non-payment of a poll tax;b. Taxation shall be uniform and equitable;c. Congress shall evolve a progressive system of taxation;d. All appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives, but the

Senate may propose and concur with amendments;e. 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;f. Delegated power of the President to impose tariff rates, import and export quotas, tonnage and wharfage

dues:1) Delegation by Congress2) through a law3) subject to Congressional limits and restrictions4) within the framework of national development program.

g. Tax exemption of charitable institutions, churches, parsonages and convents appurtenant thereto, mosques,and all lands, buildings and improvements of all kinds actually, directly and exclusively used for religious, charitable oreducational purposes;

h. No tax exemption without the concurrence of majority vote of all members of Congress;i. No use of public money or property for religious purposes except if priest is assigned to the armed forces,

penal institutions, government orphanage or leprosarium; j. Money collected on tax levied for a special purpose to be used only for such purpose, balance if any, to

general funds;k. The Supreme Court's power to review judgments or orders of lower courts in all cases involving the legality of

any tax, impose, assessment or toll or the legality of any penalty imposed in relation to the above;l. Authority of local government units to create their own sources of revenue, to levy taxes, fees and other

charges subject to guidelines and limitations imposed by Congress consistent with the basic policy of local autonomy;m. Automatic release of local government's just share in national taxes;


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n. Tax exemption of all revenues and assets of non-stock, non-profit educational institutions used actually,directly and exclusively for educational purposes;

o. Tax exemption of all revenues and assets of proprietary or cooperative educational institutions subject to limitationsprovided by law including restrictions on dividends and provisions for reinvestment of profits;

p. Tax exemption of grants, endowments, donations or contributions used actually, directly and exclusively foreducational purposes subject to conditions prescribed by law.

5. Equal protection of the law clause is subject to reasonable classification. If the groupings are

characterized by substantial distinctions that make real differences, one class may be treated and regulated differently fromanother. The classification must also be germane to the purpose of the law and must apply to all those belonging to thesame class. (Tiu, et al., v. Court of Appeals, et al.,G.R. No. 127410, January 20, 1999)

6. Requisites for valid classification. All that is required of a valid classification is that it be reasonable,which means that a. the classification should be based on substantial distinctions which make for realdifferences,

b. that it must be germane to the purpose of the law;c. that it must not be limited to existing conditions only; andd. that it must apply equally to each member of the class.The standard is satisfied if the classification or distinction is based on a reasonable foundation or rational basis and

is not palpably arbitrary. [ ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008]

7. Equal protection does not demand absolute equality. It merely requires that all persons shall betreated alike, under like circumstances and conditions, both as to the privileges conferred and liabilities enforced. (Santosv. People, et al,G. R. No. 173176, August 26, 2008)

It is imperative to duly establish that the one invoking equal protection and the person to which she is beingcompared were indeed similarly situated,i.e., that they committed identical acts for which they were charged with theviolation of the same provisions of the NIRC; and that they presented similar arguments and evidence in their defense -yet, they were treated differently.(Santos, supra)

8. Tests to determine validity of classification. The United States Supreme Court has establisheddifferent tests to determine the validity of a classification and compliance with the equal protection clause. Therecognized tests are:

a. The traditional (or rational basis) test.b. The strict scrutiny (or compelling interest) test.c. The intermediate level of scrutiny (or quasi-suspect class) test.9. The traditional (or rational basis) test used in order to determine the validity of classification. The

classification is valid if it is rationally related to a constitutionally permissible state interest.The complainant must prove that the classification is invidous, wholly arbitrary, or capricious, otherwise the

classification is presumed to be valid.(Lindsley v. Natural Carboinic Gas Co.,220 U.S. 61; McGowan v. Maryland,366U.S. 420; United States Railroad Retirement Board v. Fritz,449 U.S. 166 )

10. The strict scrutiny (or compelling interest) test used in order to determine the validity of theclassification. Government regulation that intentionally discriminates against a suspect class such as racial or ethnicminorities, is subject to strict scrutiny and considered to violate the equal protection clause unless found necessary topromote a compelling state interest.

A classification is necessary when it is narrowly drawn so that no alternative, less burdensome means is availableto accomplish the state interest.

Thus, it was held that denial of free public education to the children of illegal aliens imposes an enormous andlasting burden based on a status over which the children have no control is violative of equal protection because there isno showing that such denial furthers a substantial stategoal. (Plyler v. Doe, 457 U.S. 202 )

11. The intermediate level of scrutiny (or quasi-suspect class) test used in order to determine thevalidity of he classification. Classification based on gender or legitimacy are not suspect, butneither are they judgedby the traditional or rational basis test.

Intentional discriminations against members of a quasi-suspect class violate equal protection unless they aresubstantially related to important government objectives.(Craig v. Boren,429 U.S. 190 )

Thus, a state law granting a property tax exemption to widows, but not widowers, has been held valid for it furthersthe state policy of cushioning the financial impact of spousal loss upon the sex for whom that loss usually imposes aheavier burden. (Kahn v. Shevin,416 U.S. 351 )


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12. Equality and uniformity of taxation may mean the same as equal protection . In such a case, the termswould mean that all subjects and objects of taxation which are similarly situated shall be subject to the same burdens andgranted the same privileges without any discrimination whatsoever.

13. It is inherent in the power to tax that the State be free to select the subjects of taxation, and it has beenrepeatedly held that, "inequalities which result from a singling out of one particular class of taxation, or exemption, infringe noconstitutional limitation."(Commissioner of Internal Revenue, et al., v. Santos, et al.,277 SCRA 617)

9. Benjie is a law-abiding citizen who pays his real estate taxes promptly. Due to a series of typhoons

and adverse economic conditions, an ordinance is passed by Soliman City granting a 50% discount for paymentof unpaid real estate taxes for the preceding year and the condonation of all penalties on fines resulting from thelate payment.

Arguing that the ordinance rewards delinquent tax payers and discriminates against prompt ones, Benjiedemands that he be refunded an amount equivalent to one-half of the real property taxes he paid. The municipalattorney rendered an opinion that Benjie cannot be reimbursed because the ordinance did not provide for suchreimbursement. Benjie files suit to declare the ordinance void on the ground that it is a class legislation. Will hissuit prosper ? Explain your answer briefly.

SUGGESTED ANSWER: No. There is no class legislation because there is no violation of the equal protectionsuit. There is a valid classification between those who already paid their taxes and those who have not. Furthermore, thetaxing authority has the prerogative to select the subjects and objects of taxation, including granting a 50% discount inthe payment of unpaid real estate taxes, and the condonation of all penalties on fines resulting from late payment.

10. The rewards law to tax collectors does not violate equal protection. The equal protection clauserecognizes a valid classification, that is, a classification that has a reasonable foundation or rational basis andnot arbitrary. With respect to RA 9335, it s expressed public policy is the optimization of the revenue-generation capabilityand collection of the BIR and the BOC. Since the subject of the law is the revenue- generation capability and collection ofthe BIR and the BOC, the incentives and/or sanctions provided in the law should logically pertain to the said agencies.Moreover, the law concerns only the BIR and the BOC because they have the common distinct primary function ofgenerating revenues for the national government through the collection of taxes, customs duties, fees and charges.

Indubitably, such substantial distinction is germane and intimately related to the purpose of the law. Hence, theclassification and treatment accorded to the BIR and the BOC under RA 9335 fully satisfy the demands of equalprotection. ( ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008)

11. The prosecution of one guilty person while others equally guilty are not prosecuted, however, isnot, by itself, a denial of the equal protection of the laws. Where the official action purports to be in conformity to thestatutory classification, an erroneous or mistaken performance of the statutory duty, although a violation of the statute, isnot without more a denial of the equal protection of the laws.

The unlawful administration by officers of a statute fair on its face, resulting in its unequal application to those whoare entitled to be treated alike, is not a denial of equal protection unless there is shown to be present in it an element ofintentional or purposeful discrimination. This may appear on the face of the action taken with respect to a particular classor person, or it may only be shown by extrinsic evidence showing a discriminatory design over another not to be inferredfrom the action itself.(Santos v. People, et al,G. R. No. 173176, August 26, 2008)

12. Equal protection should not be used to protect commission of crime . While all persons accused ofcrime are to be treated on a basis of equality before the law, it does not follow that they are to be protected in thecommission of crime. It would be unconscionable, for instance, to excuse a defendant guilty of murder because othershave murdered with impunity.

Likewise, if the failure of prosecutors to enforce the criminal laws as to some persons should be converted into adefense for others charged with crime, the result would be that the trial of the district attorney for nonfeasance wouldbecome an issue in the trial of many persons charged with heinous crimes and the enforcement of law would suffer acomplete breakdown. (Santos v. People, et al,G. R. No. 173176, August 26, 2008)

13. Illustration of double taxation in local taxation. there is indeed double taxation if Coca-Cola is subjectedto the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the samesubject matter the privilege of doing business in the City of Manila; (2) for the same purpose to make personsconducting business within the City of Manila contribute to city revenues; (3) by the same taxing authority City ofManila; (4) within the same taxing jurisdiction within the territorial jurisdiction of the City of Manila; (5) for the sametaxing periods per calendar year; and (6) of the same kind or character a local business tax imposed on gross sales orreceipts of the business. (The City of Manila, et al., v. Coca-Cola Bottlers Philippines, Inc.,G. R. No. 181845, August 4,2009)


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14. A lawful tax on a new subject, or an increased tax on an old one, does not interfere with a contract or

impairs its obligation , within the meaning of the constitution. (Tolentino v. Secretary of Finance, et al., and companioncases, 235 SCRA 630)

15. The withdrawal of a tax exemption should not be construed as prohibiting future grants of exemptionfrom all taxes. (Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc.,G. R. No. 143867, August22, 2001)

16. Tax exemptions in franchises are always subject to withdrawal. A legislative franchise is granted withthe express condition that it is subject to amendment, alteration, or repeal. (1987 Constitution, Art. XII, Sec. 11)

It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment, fetter theexercise of the taxing power of the State. For not only are existing laws read into contracts in order to fix obligations asbetween parties, but the reservation of essential attributes of sovereign power is also read into contracts as a basicpostulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of agovernment which retains adequate authority to secure the peace and good order of society. (Smart Communications,Inc. v. The City of Davao, etc., et al ., G. R. No. 155491, September 16, 2008)

NOTES AND COMMENTS:Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc.,G. R.No. 143867, August 22, 2001 made the observation that since Smart s franchise was granted after the effectivity of the LocalGovernment Code that its tax exemption privilege was reinstated. However,Smart Communications, Inc. v. The City of

Davao, etc., et al ., G. R. No. 155491, September 16, 2008 is explicit in its holding that Smart is not entitled to a taxexemption.

17. When withdrawal of a tax exemption impairs the obligation of contracts. The Contract Clause hasnever been thought as a limitation on the exercise of the State s power of taxation save only where a taxexemption hasbeen granted for a valid consideration. (Smart Communications, Inc. v. The City of Davao, etc., et al ., G. R. No. 155491,September 16, 2008) citingTolentino v. Secretary of Finance,G. R. No. 115455, August 25, 1994, 235 SCRA 630,685) The author opines that since practically all franchises granted to telecommunications companies are similarlyworded that the above doctrine finds application to the others)

18. The primary reason for the withdrawal of tax exemption privileges granted to government owned andcontrolled corporations and all other units of government was that such privilege resulted to serious tax base erosion anddistortions in the tax treatment of similarly situated enterprises, hence resulting in the need for these entities to share in therequirements of development, fiscal or otherwise, by paying the taxes and other charges due them. (Philippine Ports Authority v. City of Iloilo,G. R. No. 109791, July 14, 2003)

19. National Power Corporation (NPC) is of the insistence that it is not subject to the payment offranchises taxes imposed by the Province of Isabela because all of its shares are owned by the Republic of thePhilippines. It is thus, an instrumentality of the National Government which is exempt from local taxation. As suchit is not a private corporation engaged in business enjoying franchise

Is such contention meritorious ? SUGGESTED ANSWER: No.Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc ., G. R.

No. 143867, August 22, 2001, upheld the authority of the City of Davao, a local government unit, to impose and collect alocal franchise tax because the Local Government Code has withdrawn all tax exemptions previously enjoyed by all personsand authorized local government units to impose a tax on business enjoying a franchise tax notwithstanding the grant of taxexemption to them.

20. In lieu of all taxes in the franchise of ABS-CBN does not exempt it from local franchise taxes. Itdoes not expressly provide what kind of taxes ABS-CBN is exempted from. It is not clear whether the exemption wouldinclude both local, whether municipal, city or provincial, and national tax.Whether the in lieu of all taxes provision wouldinclude exemption from local tax is not unequivocal.

The right to exemption from local franchise tax must be clearly established and cannot be made out of inference orimplications but must be laid beyond reasonable doubt.Verily, the uncertainty in the in lieu of all taxes provision shouldbe construed against ABS-CBN. ABS-CBN has the burden to prove that it is in fact covered by the exemption so claimedbut has failed to do so. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008)

NOTES AND COMMENTS: This is practically the same holding in an earlier case involving anothertelecommunications companySmart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,September 16, 2008. The author opines that since practically all franchises granted to telecommunications companiesare similarly worded that the above doctrine finds application to the others.)


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21. In lieu of all taxes refers to national internal revenue taxes and not to local taxes. The in lieu of alltaxes clause applies only to national internal revenue taxes and not to local taxes. As appropriately pointed out in theseparate opinion of Justice Antonio T. Carpio in a similar case involving a demand for exemption from local franchisetaxes:

[T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other than income tax, imposed underthe National Internal Revenue Code. The "in lieu of all taxes" clause does not apply to local taxes. The proviso in the firstparagraph of Section 9 of Smart's franchise states that the grantee shall "continue to be liable for income taxes payableunder Title II of the National Internal Revenue Code." Also, the second paragraph of Section 9 speaks of tax returns filed

and taxes paid to the "Commissioner of Internal Revenue or his duly authorized representative in accordance with theNational Internal Revenue Code." Moreover, the same paragraph declares that the tax returns "shall be subject to audit bythe Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes. The clear intent is for the "in lieu ofall taxes" clause to apply only to taxes under the National Internal Revenue Code and not to local taxes. Even withrespect to national internal revenue taxes, the "in lieu of all taxes" clause does not apply to income tax.

If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to local taxes, Congresswould have expressly mentioned the exemption from municipal and provincial taxes. Congress could have used thelanguage in Section 9(b) of Clavecilla's old franchise, as follows:

x x x in lieu of any and all taxes of any kind, nature or description levied, established or collected by any authoritywhatsoever, municipal, provincial or national, from which the grantee is hereby expressly exempted, x x x. (Emphasissupplied).

However, Congress did not expressly exempt Smart from local taxes. Congress used the "in lieu of all taxes"

clause only in reference to national internal revenue taxes. The only interpretation, under the rule on strict construction oftax exemptions, is that the "in lieu of all taxes" clause in Smart's franchise refers only to national and not to localtaxes. [Smart Communications, Inc. v. The City of Davao, etc., et al ., G. R. No. 155491, September 16, 2008citingPhilippine Long Distance Telephone Company, Inc. v. City of Davao, 447 Phil. 571, 594 (2003)]

NOTES AND COMMENTS: The author opines that the above finds application to all telecommunicationscompanies.

22. The in lieu of all taxes clause in the franchise of ABS-CBN has become functus officio with theabolition of the franchise tax on broadcasting companies with yearly gross receipts exceeding Ten MillionPesos. The clause in lieu of all taxes does not pertain to VAT or any other tax. It cannot apply when what is paid is atax other than a franchise tax. Since the franchise tax on the broadcasting companies with yearly gross receiptsexceeding ten million pesos has been abolished, the in lieu of all taxes clause has now become functus officio, renderedinoperative. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008)

NOTES AND COMMENTS: This is practically the same holding in an earlier case involving anothertelecommunications company. Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491,September 16, 2008. The author opines that since practically all franchises granted to telecommunications companiesare similarly worded that the above doctrine finds application to the others.)

23. Double taxation in its generic sense, this means taxing the same subject or object twice during thesame taxable period. In its particular sense, it may mean direct duplicate taxation, which is prohibited under the constitutionbecause it violates the concept of equal protection, uniformity and equitableness of taxation. Indirect duplicate taxation is notanathematized by the above constitutional limitations.

24. Elements of direct duplicate taxation: a. Same1) Subject or object is taxed twice2) by the same taxing authority3) for the same taxing purpose4) during the same taxable period

b. Taxing all of the subjects or objects for the first time without taxing all of them for the second time.If any of the elements are absent then there is indirect duplicate taxation which is not prohibited by the constitution.

NOTES AND COMMENTS:a. Presence of the 2 nd element violates the equal protection clause. If only the 1stelement is present, taxing

the same subject or object twice, by the same taxing authority, etc., there is no violation of the equal protection clausebecause all subjects and objects that are similarly situated are subject to the same burdens and granted the same privilegeswithout any discrimination whatsoever,

The presence of the 2nd element, taxing all of the subjects and objects for the first time, without taxing all for the secondtime, results to discrimination among subjects and objects that are similarly situated, hence violative of the equal protectionclause.


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25. Double taxation a valid defense against the legality of a tax measure if the double taxation is directduplicate taxation , because it would violate the equal protection clause of the constitution.

26. When an item of income is taxed in the Philippines and the same income is taxed in another country,this would be known as international juridical double taxation which is the imposition of comparable taxes in two ormore states on the same taxpayer in respect of the same subject matter and for identical grounds.(Commissioner of InternalRevenue v. S.C. Johnson and Son, Inc., et al.,G.R. No. 127105, June 25, 1999)

27. Methods for avoiding double taxation (indirect duplicate taxation). a. Tax treaties which exempts foreign nationals from local taxation and local nationals from foreign taxationunder the principle of reciprocity.

b. Tax credits where foreign taxes are allowed as deductions from local taxes that are due to be paid.c. Allowing foreign taxes as a deduction from gross income.

28. Tax credit generally refers to an amount that is subtracted directly from one s total tax liability, an allowanceagainst the tax itself, or a deduction from what is owned.

A tax credit reduces the tax due, including whenever applicable the income tax that is determined after applying thecorresponding tax rates to taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation,G. R. No.159647, April 15, 2005)

29. A tax deduction is defined as a subtraction fro income for tax purposes, or an amount that is allowed by lawto reduce income prior to the application of the tax rate to compute the amount of tax which is due. A tax deduction reduces the income that is subject to tax in order to arrive at taxable income. (Commissioner of Internal

Revenue v. Central Luzon Drug Corporation,G. R. No. 159647, April 15, 2005)

30. The petitioners allege that the R-VAT law is constitutional because the Bicameral ConferenceCommitted has exceeded its authority in including provisions which were never included in the versions of both theHouse and Senate such as inserting the stand-by authority to the President to increase the VAT from 10% to 12%;deleting entirely the no pass-on provisions found in both the House and Senate Bills; inserting the provisionimposing a 70% limit on the amount of input tax to be credited against the output tax; and including theamendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition to the value-addedtax. Thus, there was a violation of the constitutional mandate that revenue bills shall originate exclusively from theHouse of Representatives.

Are the contentions of such weight as to constitute grave abuse of discretion which may invalidate the law? Explain briefly.

SUGGESTED ANSWER: No. There was no grave abuse of discretion because all the changes and modificationsmade by the Bicameral Conference Committee were germane to subjects of the provisions referred to it for reconciliation.

The Bicameral Conference Committee merely exercised the judicially recognized long-standing legislative practice ofgiving said conference committee ample latitude for compromising differences between the Senate and theHouse. [ Abakada Guro Party List (etc.) v. Ermita, etc., et al.,G. R. No. 168056, September 1, 2005 and companion cases]

31. The VAT while regressive is NOT violative of the mandate to evolve a progressive system of taxation. Doyou agree ? The mandate to Congress is not to prescribe but to evolve a progressive system of taxation. Otherwise, salestaxes which perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation of theconstitutional provision. Sales taxes are also regressive. . [ Abakada Guro Party List (etc.) v. Ermita, etc., et al.,G. R. No.168056, September 1, 2005 and companion cases citingTolentino v. Secretary of Finance, et al.,G. R. No. 115455, August25, 1994, 235 SCRA 630]

32. All revenues and assets of non-stock, non-profit educational institutions that are actually, directlyand exclusively used for educational purposes shall be exempt from taxation.

33. Revenues and assets of proprietary educational institutions, including those which are cooperativelyowned, may be entitled to exemptions subject to limitations provided by law including restrictions on dividends andprovisions for reinvestments. There is no law at the present which grants exemptions, other the exemptions granted tocooperatives.

OTHER CONCEPTS

1. Distinguish tax from debt. TAX DEBT


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Basis based on law based on contract or judgment

Failure to Pay may result inimprisonment

no imprisonment

Mode ofPayment

generally payable inmoney

payable in money,property or service

Assignability not assignable assignablePayment unless it becomes a

debt is not subject tocompensation or set-off

may be a subject

Interest does not draw interestunless delinquent

draws interest ifstipulated or delayed

Authority imposed by publicauthority

can be imposed byprivate individuals

Prescription Prescriptive periods fortax under NIRC

debt under the CivilCode

WARNING: Do not use the above arrangement in answering Bar questions.

2. Compensation takes place by operation of law, where the local government and the taxpayer are in their

own right reciprocally debtors and creditors of each other, and that the debts are both due and demandable, in consequenceof Articles 1278 and 1279 of the Civil Code.(Domingo v. Garlitos,8 SCRA 443)

3. May there be compensation or set-off between a national tax and a debt ? Reason out youranswer. SUGGESTED ANSWER: As a general rule, there could be no compensation or set-offbetween a tax and a debt for the followingreasons: a. Lifebloodtheory. b. Taxes are not contractual obligations but ariseout of a duty to, and are the positive acts of government, to the making and enforcing of which the personal consent of theindividual taxpayer is not required.(Republic v. Mambulao Lumber Co.,4 SCRA622) c. Taxes cannot be the subject of compensation because the government

and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand,contract or judgment as is allowed to be set-off.Thus, it is correct to say that the offsetting of a taxpayer s tax refund with its alleged tax deficiency is unavailing

under Art. 1279 of the Civil Code. (South African Airways v. Commissioner of Internal Revenue,G.R. No. 180356,February 16, 2010 reiteratingCaltex Philippines, Inc. v. Commission on Audit,which appliedFrancia v. Intermediate Appellate Court )

4. Exceptions: When set-off or compensation allowed for localtaxes. a. Where both claims already become overdue anddemandable as well as fully liquidated. Compensation takes place by operation of law under Art. 1200 in relation to Arts.1279 and 1290 all of the Civil Code. (Domingo v. Garlitos, 8 SCRA443) b. Compensation takes place by operation of law, where the government and the

taxpayer are in their own right reciprocally debtors and creditors of each other, and that the debts are both due anddemandable. This is in consequence of Article 1278 and 1279 of the Civil Code. (Domingo v. Garlitos,8 SCRA443) c. ,The Supreme Court upheld the validity of a set-off betweenthe taxpayer and the government. In both cases, the claims of the taxpayers therein were certain and liquidated. Theclaims were certain since there were no doubts or disputes as to their refundability. In fact, the government admitted thefact of over-payment. (Commissioner of Internal Revenue v. Esso Standard Eastern, Inc., 172 SCRA364) d. In case of a tax overpayment, the BIR sobligation to refund or off-set arises from themoment the tax was paid. REASON:Solutio indebeti. (Commissioner of Internal Revenue v. Esso Standard Eastern,Inc 172 SCRA 364) e. While judgmentshould be rendered in favor of Republic for unpaid taxes, judgment ought at the same time to issue for SampaguitaPictures commanding payment to the latter by the Republic of the value of the backpay certificates which the Republicreceived. (Republic v. Ericta, 172 SCRA 623)

5. Gilbert obtained a judgment for a sum of money against the municipality of Camiling. The judgment has become final although execution has not issued. Upon receiving an assessment for municipalsales taxes from the Municipal Treasurer, Gilbert executed a partial assignment of his judgment sufficient tocover the assessment in favor of the Municipality. May the Municipal Treasurer validly accept the assignment?Why?


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SUGGESTED ANSWER: Yes. The parties in this case are mutually debtors and creditors of each other, andsince both of the claims became overdue, demandable and fully liquidated, compensation takes place by operation oflaw. Such was the holding inDomingo v. Garlitos,8 SCRA 443, a case decided by the Supreme Court whose factualantecedents are similar to theproblem.

6. In case of doubt, tax laws must be construed strictly against the State and liberally infavor of the taxpayer because taxes, as burdens which must be endured by the taxpayer, should not be presumed to gobeyond what the law expressly and clearly declares.(Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of

Appeals, et al.,293 SCRA 92, 99)7. Interpretation in the imposition of taxes, is not the similar doctrine as that applied to taxexemptions. The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless itdoes so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words for thatpurpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiarstrictness to tax laws and the provisions of a taxing act are not to be extended by implication. In answering the question ofwho is subject to tax statutes, it is basic that in case of doubt, such statutes are to be construed most strongly against thegovernment and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposedbeyond what statutes expressly and clearly import. [Commissioner of Internal Revenue v. Fortune TobaccoCorporation,G. R. Nos. 167274-75, July 21, 2008 citingCIR v. Court of Appeals, 338 Phil. 322, 330-331 (1997)] Asburdens, taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax laws. (Ibid.,citingCIR v.Philippine American Accident Insurance Company, Inc.,G.R. No. 141658, March 18, 2005, 453 SCRA 668)

8. Strict interpretation of tax exemption laws. Taxes are what civilized people pay for civilizedsociety. They are the lifeblood of the nation. Thus, statutes granting tax exemptions are construedstricissimi juris againstthe taxpayer and liberally in favor of the taxing authority. A claim of tax exemption must be clearly shown and based onlanguage in law too plain to be mistaken. Otherwise stated, taxation is the rule, exemption is the exception. (Quezon City,et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citingMactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680) The burden of proof rests upon theparty claiming the exemption to prove that it is in fact covered by the exemption so claimed. (Quezon City, supraciting Agpalo, R.E., Statutory Construction, 2003 ed., p. 301)

9. Rationale for strict interpretation of tax exemption laws. The basis for the rule on strict construction tostatutory provisions granting tax exemptions or deductions is to minimize differential treatment and foster impartiality,fairness and equality of treatment among taxpayers. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R.No. 166408, October 6, 2008) He who claims an exemption from his share of common burden must justify his claim thatthe legislature intended to exempt him by unmistakable terms. For exemptions from taxation are not favored in law, norare they presumed. They must be expressed in the clearest and most unambiguous language and not left to mereimplications.It has been held that exemptions are never presumed the burden is on the claimant to establish clearly hisright to exemption and cannot be made out of inference or implications but must be laid beyond reasonable doubt. Inother words, since taxation is the rule and exemption the exception, the intention to make an exemption ought to beexpressed in clear and unambiguous terms. (Quezon City, supraciting Agpalo, R.E., Statutory Construction, 2003 ed., p.302)

10. Why are tax exemptions are strictly construed against the taxpayer and liberally in favor of the State ? SUGGESTED ANSWER: Taxes are necessary for the continued existence of the State.

11. In case of a tax overpayment, where the BIRs obligation to refund or set -off arises from the momentthe tax was paid under the principle of solutio indebeti . (Commissioner of Internal Revenue v. Esso Standard Eastern,Inc,172 SRCA 364)

12. But note Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001which held that in order forthe rule onsolutio indebeti to apply it is an essential condition that the petitioner must first show that its payment of thecustoms duties was in excess of what was required by the law at the time the subject 16 importations of milk and milkproducts were made. Unless shown otherwise, the disputable presumption of regularity of performance of duty lies in favorof the Collector of Customs.

13. Strict interpretation of a tax refund that partakes of the nature of a tax does not apply to tax refundbased on erroneous payment or where there is no law that authorizes collection of the tax. There is parity betweentax refund and tax exemption only when the former is based either on a tax exemption statute or a tax refundstatute. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation,G. R. Nos. 167274-75, July 21, 2008)


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Tax refunds (or tax credits), on the other hand, are not founded principally on legislative grace but on the legalprinciple which underlies all quasi-contracts abhorring a person s unjust enrichment at the expense of another.[Commissioner, supracitingRamie Textiles, Inc. v. Hon. Mathay , Sr., 178 Phil. 482 (1979);Puyat & Sons v. City ofManila, et al., 117 Phil. 985 (1963)]

The dynamic of erroneous payment of tax fits to a tee the prototypic quasi-contract,solutio indebiti,which coversnot only mistake in fact but also mistake in law. (Commissioner, supraciting CIVIL CODE, Arts. 2142, 2154 and 2155)

The Government is not exempt from the application ofsolutio indebiti . (Commissioner, supracitingCommissionerof Internal Revenuev. Firemans Fund Insurance Co., G.R. No. L-30644, 9 March 1987, 148 SCRA 315, 324-325;Ramie

Textiles, Inc. v. Mathay, supra; Gonzales Puyat & Sons v. City of Manila, supra)Indeed, the taxpayer expects fair dealing from the Government, and the latter has the duty to refund without anyunreasonable delay what it has erroneously collected. (Commissioner, supracitingCommissioner of Internal Revenue v.Tokyo Shipping Co., supraat 338) If the State expects its taxpayers to observe fairness and honesty in paying their taxes,it must hold itself against the same standard in refunding excess (or erroneous) payments of such taxes. It should notunjustly enrich itself at the expense of taxpayers. [Commissioner, supraciting AB Leasing and Finance Corporationv. Commissioner of Internal Revenue, 453 Phil. 297 in turn citingBPI-Family Savings Bank, Inc. v. Court of Appeals, 330SCRA 507, 510, 518 (2000)] And so, given its essence, a claim for tax refund necessitates only preponderance ofevidence for its approbation like in any other ordinary civil case. (Commissioner, supra)

14. Tax refunds premised upon a tax exemption strictly construed, Tax exemption is a result oflegislative grace. And he who claims an exemption from the burden of taxation must justify his claim by showing that the

legislature intended to exempt him by words too plain to be mistaken. [Commissioner of Internal Revenue v. FortuneTobacco Corporation,G. R. Nos. 167274-75, July 21, 2008 citingSurigao Consolidated Mining Co. Inc. v. Commissionerof Internal Revenue and Court of Tax Appeals, 119 Phil. 33, 37 (1963)]

The rule is that tax exemptions must be strictly construed such that the exemption will not be held to be conferredunless the terms under which it is granted clearly and distinctly show that such was the intention. [Commissioner,supra citingPhil. Acetylene Co. v. Commission of Internal Revenue, et al., 127 Phil. 461, 472 (1967);Manila ElectricCompany v. Vera, G.R. No. L-29987, 22 October 1975, 67 SCRA 351, 357-358;Surigao Consolidated Mining Co. Inc. v.Commissioner of Internal Revenue, supra]

A claim for tax refund may be based on statutes granting tax exemption or tax refund. In such case, the rule ofstrict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, alegislative grace, which cannot be allowed unless granted in the most explicit and categorical language. The taxpayermust show that the legislature intended to exempt him from the tax by words too plain to be mistaken. [Commissioner,supra with a note to see Surigao Consolidated Mining Co. Inc. v. CIR , supra at 732-733;Philex Mining Corp.v. Commissioner of Internal Revenue, 365 Phil. 572, 579 (1999);Davao Gulf Lumber Corp. v. Commissioner of InternalRevenue, 354 Phil. 891-892 (1998);. Commissioner of Internal Revenue v. Tokyo Shipping Co., Ltd ., 314 Phil. 220, 228(1995)]

15. Effect of a BIR reversal of a previous ruling interpreting a law as exempting a taxpayer. A reversal of aBIR ruling favorable to a taxpayer would not necessarily create a perpetual exemption in his favor, for after all thegovernment is never estopped from collecting taxes because of mistakes or errors on the part of its agents.(LincolnPhilippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al.,293 SCRA 92, 99)

16. A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penaltieson persons otherwise guilty of evasion or violation of a revenue or a tax law.

It partakes of an absolute waiver by the gove

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