Taxation 1 – Prelims Reviewer - It is the power to destroy

- It must not be exercised with hostility or

Present BIR Commissioner: Caesar Dulay discrimination with no reasonable basis
Present Finance Secretary: Carlos Dominguez III Taxes are not political in nature and as such are continued
WHAT IS TAXATION? in force during the period of enemy occupation. These laws
are the laws of the occupied territory not the occupying
To define it is to enumerate three elements: enemy.

1. It is an enforced proportional contribution from - Tax laws were still effective during the Japanese
persons and properties occupation
2. Imposed by the State, in its sovereign capacity
3. Levied for the support of the government. To distinguish these doctrines:

- THE LIFEBLOOD DOCTRINE states that taxes

are the lifeblood o the state, without which the
CONCEPT OF TAXATION: Tax is a pecuniary burden government will not operate
unto - THE NECESSITY THEORY states that the
government cannot continue to operate without
SCOPE OF TAXATION taxes to pay for expenses – hence, it may compel
The subject of taxation (and therefore its scope) is its citizens to pay.
PLENARY: - THE BENEFITS RECEIVED PRINCIPLE
states that taxes are what we pay for a civilized
- The State is free to select the subjects of taxation society.
- Inequalities which would result from a singling out - THE SYMBIOTIC RELATIONSHIP
of one class for taxation or exemption infringe no DOCTRINE states that taxpayers and the
constitutional limitation government have reciprocal obligations: the
- The power to determine what is taxable is also the taxpayer pays taxes and the government provides
power to determine what is tax exempt protection and benefits.

NATURE OF TAXATION ATTRIBUTES OF A SOUND TAXATION SYSTEM

(FAT)
1. The Power of Taxation is inherent to the State = it
exists apart from the Constitution. 1. FISCAL ADEQUACY
2. Legislative in character - The sources of revenue should be adequate to meet
the government expenditures and their variations
2. ADMINISTRATIVE FEASIBILITY
TAXATION DISTINGUISHED FROM OTHER - The system should be capable of being effectively
INHERENT POWERS administered and enforced with the least
inconvenience to the taxpayer
- TAXATION WHEN primary purpose is revenue - Regardless of the burden, tax laws are valid unless
gathered from persons, properties, and privileges, shown to violate a law or the Constitution
without limit 3. THEORETICAL JUSTICE
- POLICE POWER WHEN primary purpose is - The tax system should be fair to the average
regulation of a right to exercise a privilege, limited taxpayer and based upon the ability to pay.
to what is necessary or reasonable
- EMINENT DOMAIN WHEN just compensation is
involved such as granting senior citizens discounts
Inherent Limitations of Taxation (LPGIT)
and reimbursing the drug stores (CIR v. Central
Luzon Drug). 1. Must be exacted for a PUBLIC PURPOSE
- Money raised in taxation cannot be spent for the
advantage of private individuals
THEORIES AND BASES FOR TAXATION 2. Inherently LEGISLATIVE in nature
- Purely legislative and cannot be delegated; except
LIFEBLOOD THEORY: Taxes are the lifeblood of the to local governments, the president, and
state, through which the government and its agencies administrative authorities
continue to operate and with which the State effects its 3. GOVERNMENT entities, agencies, and
functions for the welfare of its constituents. instrumentalities are generally exempt from
taxation
- Injunction does not lie against the collection of
- GOCCs are not exempt however
Taxes
4. INTERNATIONAL COMITY
- The state is not estopped from collecting taxes by
- Tax treaties are entered to minimize the harshness
the mistakes or errors of its agents.
of international double taxation
REGARDLESS, the power of taxation must still be - Tax treaties > administrative issuance
exercised reasonably and in accordance with the law and 5. Limited to the State’s TERRITORIAL
prescribed procedure JURISDICTION
 - Except when privity of relationship exists between - SPECIAL ASSESSMENT WHEN primary
the State and the taxpayer purpose is to contribute to cost of public
improvement, imposed on land, limited to time and
Constitutional Limitations on the Power of Taxation: locality of benefits obtained
1. Due Process - It is different from a tax. An example is the
2. Equal Protection of Laws special levy in the Local Government Code. Its
3. Religious Freedom purpose is to recover that cost of improvement or
4. Non-impairment of contracts infrastructure introduced by the LGU such that
5. Prohibition against Imprisonment for Non- only real property owners who were benefited by
payment of Poll Tax that improvement are subject to tax. When the
6. Uniformity and Equality of Taxation and government has already recovered the cost, the
Progressive System of Taxation collection stops. Collection is limited, unlike in
7. Delegated Authority to the President to Impose tax, where it will continue unless Congress will
Tariff Rates repeal.
8. Prohibition against Taxation of Real Property of - SPECIAL LEVY WHEN imposed on the land. If
Charitable Institutions, Churches, Parsonages, or you have an area not accessible to commercial
Convents, Mosques, and non-profit Cemeteries activity because there are no roads or bridges, the
9. Prohibition against Taxation of Non-Stock, Non- local government will build roads or bridges to
Profit Educational Institutions have an access to that remote area. It is
10. Majority vote of Congress for Tax Exemptions exceptional both as to time and locality.
11. Prohibition on Use of Tax Levied for Special - TOLL FEES WHEN primary purpose is to
Purpose reimburse costs and expenses incurred in the
12. Tax Bills should originate exclusively in the House construction of toll ways and to assure reasonable
of Representatives marign of income, imposed on private persons
13. President’s Veto Power on Appropriation, based on their ownership. (Fees paid to toll way
Revenue, and Tariff Bills operators are for the use of toll ways, not taxes.
14. Judicial Power to Review Legality of Tax These are exactions which are the earnings of toll
15. LGUs are granted power to create own sources of way operators, not the state)
revenues - LICENSE TAX V. LICENSE FEE – former is for
revenue (taxation), latter is for regulation (police
power)
SITUS OF TAXATION

- literally means place of taxation. The general rule

is that the taxing power cannot go beyond the
territorial limits of the taxing authority. Basically,
the state where the subject to be taxed has a situs
KINDS AND CLASSIFICATIONS OF TAX
may rightfully levy and collect the tax.
I. AS TO SUBJECT MATTER OR OBJECT
1. Personal, poll or capitation tax
STAGES OR ASPECTS OF TAXATION - Tax of a fixed amount imposed on persons residing
within a specified territory, whether citizens or not,
1. LEVY: the enactment of a law by Congress without regard to their property or the occupation
imposing a tax or business in which they may be engaged, i.e.
2. ASSESSMENT AND COLLECTION: the act of community tax.
administration and implementation of the tax law 2. Property tax
by the executive department through the - Tax imposed on property, real or personal, in
administrative agencies proportion to its value or in accordance with some
3. PAYMENT: the act of compliance by the other reasonable method of apportionment.
taxpayer including whatever remedies are available 3. Excise tax
to him under the law - A charge impose upon the performance of an act,
the enjoyment of privilege, or the engaging in an
occupation.
REQUISITES OF A VALID TAX
II. AS TO PURPOSE
1. Public purpose, should be for a 1. General/fiscal revenue tax
2. Uniform, must be
- imposed for the purpose of raising public funds for
3. Jurisdiction, person or property taxed is within that
the service of the government.
of the taxing authority
2. A special or regulatory tax
4. Due Process is observed
- imposed primarily for the regulation of useful or
5. Compliant with the inherent and Constitutional
non-useful occupation or enterprises and
limitations on the power of taxation
secondarily only for the purpose of raising public
funds.

TAX DISTINGUISHED FROM OTHER EXACTIONS III. AS TO WHO BEARS THE BURDEN
Impact and Incidence of Taxation - The basic sources of tax law in the Philippine's are
the nation's constitution, the National Internal
- IMPACT OF TAXATION is the point where the
Revenue Code, administrative issuance, and local
tax is originally imposed or the one on whom the laws.
tax is formally assessed.
- INCIDENCE OF TAXATION is the point on
whom the tax burden finally rests.
CONSTRUCTION OF TAX LAWS
It is important to note the impact and incidence of taxation
because these determine the proper party to claim a tax - A tax cannot be imposed unless it is supported in
refund or whether the indirect taxes can be passed on to an clear and express language of a statute. It is the
exempt buyer. burden of the State to first prove that the taxpayer
is covered by a tax statute.
Based on the possibility of shifting the Incidence of - State is estopped from collecting the difference
Taxation, taxes can be classified into two categories: between the deficiency tax assessment and the
amount already paid by the taxpayer pursuant to a
1. Direct taxes
tax amnesty.
- Those that are exacted from the very person who
- A tax-exempt buyer is not exempted from the
should pay them
payment of indirect taxes because he is not the one
- Direct liability
statutorily liable for the payment of the tax in the
2. Indirect taxes
first place. The proper party is the statutory
- Liability for the payment of tax falls on one person
taxpayer (the vendor). Except when he is
but the burden thereof can be shifted or passed on
specifically exempted from payment of indirect
to another person
taxes.
IV. AS TO THE SCOPE OF THE TAX PROSPECTIVITY OF TAX LAWS
1. National tax
- A national tax is imposed by the national - Tax laws must be applied prospectively, except by
government. express provision of the law
2. Local tax - Accordingly, exemption statutes are not retroactive
- A local tax is imposed by the municipal NON-RETROACTIVITY OF RULINGS
corporations or LGUs.
- Rulings, circulars, rules, and regulations
V. AS TO THE DETERMINATION OF promulgated by the CIR do not have retroactive
AMOUNT application if they would prejudice the taxpayers
1. Specific tax - This rule does not apply if the rulings were
- A specific tax is a tax of a fixed amount imposed nullified by a court, not the CIR (then the ruling
by the head or number or by some other standard retroacts).
of weight or measurement. It requires no
assessment other than the listing or classification
of the objects to be taxed. DOUBLE TAXATION
2. Ad valorem tax
- a fixed proportion of the value of the property with Two kinds:
respect to which the tax is assessed. It requires the
1. Direct
intervention of assessors or appraisers to estimate
- Prohibited: a person is taxed twice on
the value of such property before due from each
(1) the same property or subject matter,
taxpayer can be determined.
(2) for the same purpose,
(3) by the same authority,
VI. AS TO GRADUATION OR RATE
(4) within the same jurisdiction,
1. Proportional tax
(5) during the same tax period.
- Tax based on a fixed percentage of the amount of
2. Indirect
the property receipts or other basis to be taxed.
- Not prohibited: there are two or more pecuniary
Example: real estate tax.
impositions on a subject matter
2. Progressive or graduated tax
- Tax the rate of which increases as the tax base or
bracket increases.
3. Digressive tax rate: FORMS OF ESCAPE FROM TAXATION
- Progressive rate stops at a certain point.
TAX AVOIDANCE
Progression halts at a stage.
4. Regressive tax - Legal; involves saving on taxes using legal means
- Tax the rate of which decreases as the tax base or
bracket increases. There is no such tax in the TAX EVASION
Philippines. - Illegal
- Connotes three factors:
1. The end to be achieved
SOURCES OF TAXATION 2. Bad faith
 3. Unlawful action - Deals with Double-Taxation, found in US-RP Tax
- Intent to defraud need not be shown for a Treaty, Article 13:
conviction of tax evasion.
(1) Royalties derived by a resident of one of the
- Only thing that needs to be proven is that the
Contracting States from sources within the other
taxpayer was aware of his obligation to file the tax
Contracting State may be taxed by both Contracting States.
return, but he nevertheless voluntarily, knowingly,
and intentionally filed the required returns. (2) However, the tax imposed by that other Contracting
State shall not exceed:
TAX EXCLUSIONS
(b) (iii) The lowest rate of Philippine tax that may be
- Items formerly taxable are now classified as non-
imposed on royalties of the same kind paid under similar
taxable
circumstances to a resident of a third State.
SHIFTING OF TAX BURDEN
The applicable tax in international indirect double taxation
- See INDIRECT TAXES above. is the lowest rate based on Philippine laws.

WILLFUL BLINDNESS DOCTRINE: taxpayers cannot

raise the defense that the errors on their tax returns are not
TAXPAYER’S SUIT
their responsibility or that it is the fault of the accountants
they hired. - Requisites:
1. The disbursement of public funds by a
political subdivision or instrumentality
TAX EXEMPTION or EXEMPTION FROM violates a law or commits an irregularity
TAXATION 2. Petitioner is affected by the act

- The immunity or freedom from a charge or burden Distinguished from a Citizen Suit:
to which others are subjected. It is a waiver of the
In a taxpayer's suit, one can sue where there is an assertion
government’s right to collect what would have
that (1) public funds are illegally disbursed or deflected to
been otherwise collectible.
an illegal purpose, or that there is a (2) wastage of public
- Any claim for tax exemption is strictly construed
funds through the enforcement of an invalid or
against the taxpayer. unconstitutional law.
- Tax refunds and tax exclusions are tax exemptions.
On the other hand, in a citizen's suit, the person
complaining must allege that he has been or is about to be
denied some right or privilege to which he is lawfully
DOCTRINE OF EQUITABLE RECOUPMENT,
entitled or that he is about to be subjected to some burdens
COMPENSATION & SET-OFF OF TAXES
or penalties by reason of the statute or act complained of
- This doctrine allows the government to collect a (GR No. 183591, October 14, 2008).
tax or a taxpayer to collect a refund of tax after the
running of the statute of limitations for such cases
where the statute of limitations creates an DOCTRINE OF TRANSCENDENTAL
inequitable result. IMPORTANCE
- There can be no off-setting of taxes against the
claims that the taxpayer may have against the Transcendental importance is a judicial construct which has
government at least two variants. The first variant states that courts may
- Taxes are not in the nature of contracts between decide a case even though the person who instituted it has
the party and the government. Taxes grow out of a no standing if the issues raised are of transcendental
duty to the government. Taxes are positive acts of importance as held in Araneta v. Dinglasan.
the government; the personal consent of individual
The second variant states that if the issues raised are of
taxpayers is not required for the making and
transcendental importance, courts may recognize a person’s
enforcement of taxes.
standing. Thus, in Kilusang Mayo Uno v. Garcia, the Court
held that: [a]ssuming arguendo that petitioner is not
possessed of the standing to sue, this court is ready to brush
COMPROMISE AND TAX AMNESTY aside this barren procedural infirmity and recognize the
legal standing of the petitioner in view of the
- Tax amnesty is a limited-time opportunity for a
transcendental importance of the issues raised.
specified group of taxpayers to pay a defined
amount, in exchange for forgiveness of a tax 1st variant - they can hear a case even if no locus standi if
liability (including interest and penalties) relating issues are TI
to a previous tax period or periods and without fear
of criminal prosecution. 2nd variant - they can grant a person locus standi if issues
are TI

MOST FAVOURED NATION CLAUSE

ORGANIZATION AND FUNCTIONS OF THE BIR

POWERS OF THE BIR (executive)

 1. To assess and collect all taxes, fees, and charges
2. To enforce all forfeitures, penalties, and fines in
connection therewith
3. Recommend needful riles and regulations to the
Secretary of Finance for the effective
implementation of the NIRC and special laws
4. Police Power – to administer or give effect to the
power conferred upon it by law

CORROLLARY POWERS OF THE BIR

1. Summon persons on certain cases pending

investigation
2. Inquire into bank deposits
3. Examine books of accounts of the taxpayer and
other documents
4. Obtain information
5. Take testimony of persons
6. Administer oaths
7. Arrest persons who have violated the tax code with
a warrant of arrest
8. Take inventory

POWERS OF THE CIR (quasi-judicial)

1. Interpret the NIRC and other tax laws subject to

review by the Secretary of Finance
2. Decide disputed assessments, refunds of internal
revenue taxes, fees, penalties, and other matters
arising from the NIRC subject to review by the
CTA

POWERS OF THE SECRETARY OF FINANCE

- Affirm, revise, modify, or set aside rulings and

issuances of the BIR/CIR.
- Does not have power over disputes under the
NIRC (exclusive appellate jurisdiction with CTA).
All rulings issued before 1 January 1998 are no longer
binding as these were on a case-to-case basis. (only
binding on the parties and to the subject specific
transaction)