TAXATION REVIEW

ATTY. JIMMY I. PERU, MBM, MICB, CPA

PERU LAW & ACCOUNTING OFFICE

TAXATION LAW (RA 8424, as amended by RA 10963; RA 11534

A. Definition, Characteristics, and Purpose
B. Distinguished from Police Power and Eminent Domain
C. Inherent and Constitutional Limitations
D. Requisites of a Valid Tax (1987 Const., Art. VI, Sec. 28)
E. Distinguished from Other Forms of Exactions
F. Doctrines in Taxation
1. Lifeblood Theory
2. Construction and Interpretation of Tax Laws, Rules and Regulations
3. Prospectivity of Tax Laws
4. Imprescriptibility of Taxes
5. Double Taxation
6. Tax Avoidance v. Tax Evasion
7. Prohibition on Compensation and Set-Off
8. Compromise and Tax Amnesty
Taxation
• It is the power by which the sovereign raises revenue to defray the expenses of
government. (REG)
• It is described as a destructive power that interferes with the people's personal and
property rights and takes from them a portion of their property for the government's support.
(Paseo Realty & Development Corporation v. CA, GR 119286, October 13, 2004)
Taxes
• Latin “taxare” which means to censure, charge or compute; to estimate or value; to assess
• Enforced proportional contribution

Nature of the power of taxation

1. Inherent Attribute of Sovereignty

Inherent Power of the State

• No law or legislation for the exercise of the power to tax by the national government.
• The power to tax depends on the existence of the state, the moment the state exists,
AUTOMATICALLY, the power to tax also exists.

Inherent Power to LGU?

• No. The taxing power of LGUs is a DELEGATED Power.
• Delegated by Congress through law in case of Autonomous Regions (AR)
• Autonomous Regions – source of power, conferred by Congress through law. (RA 11054
BARM)
Art. X, Sec. 20#2 of the Constitution is a non-self-executing provision
• Delegated by the Constitution in case of LGUs other than AR
• Cities, provinces and municipalities – source of power, Constitution, Art. X, Sec. 5
Art. X, Sec. 5 of the Constitution is self-executing thus the power is granted by the
Constitution

2. Legislative in Character

• The power to tax includes the authority to:

a. Determine the nature, object, extent, coverage, apportionment of the tax, situs and
methods. (MAS CONE)
b. Grant tax exemptions and condonations
c. Provide Tax remedies

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 • Genel Rule: Not delegated to Executive and Judicial Department
• XPNs:
a. To LGU – exercised by local legislative bodies, matters of local concern
b. To President – when allowed by the Constitution, tariff rates, import/export quotas,
tonnage and wharfage dues, and other duties

3. Subject to Constitutional and Inherent Limitations

ASPECTS OF TAXATION

1. Levy – refers to the enactment of a law by Congress, imposing tax.

• Act No. 2833 – First Income Tax Law, 1920, US Insular Government
• Commonwealth Act No. 466 – NIRC 1939, Manuel L. Quezon
• PD 1158 – NIRC 1977, Ferdinand E. Marcos
• PD 1994 – NIRC 1986, Ferdinand E. Marcos
• RA 8424 – NIRC 1997, Fidel V. Ramos
• RA 10963 – TRAIN LAW 2018, Rodrigo R. Duterte
• RA 11534 - CREATE LAW 2021, Rodrigo R. Duterte
2. Assessment and collection – refers to the act of administration and implementation of the tax
law by the executive department through the administrative agencies
3. Filing/Payment – refers to the act of compliance by the taxpayer.

IS THE POWER TO TAX THE POWER TO DESTROY?

• McCulloch v. Maryland (17 US 316, 1819)
• Justice John Marshall – Chief Justice of SCOTUS
• “The power to tax involves the power to destroy”
• The power of taxation is the strongest of all the powers of government
• The power to tax includes the power to regulate even to the extent of prohibition or
destruction.
• Includes the power to determine who to tax, what to tax and how much tax is to be imposed

JUDICIAL REVIEW OF TAXATION

• Panhandle Oil Co. v. Mississippi ex Rel. Knox (277 US 218, 1928)
• Justice Oliver Wendell Holmes
• “The power to tax is not the power to destroy while the Supreme Court sits”
• While taxation involves the power to destroy, it is by no means unlimited.
• If tax laws are so great an abuse is manifested as to destroy natural and fundamental rights
which no free government could consistently violate, it is the duty of the judiciary to hold
such act unconstitutional.

EXTENT OF TAXING POWER

1. Comprehensive –
• It covers persons, businesses, activities, professions, rights and privileges
2. Unlimited –
• The power to impose taxes is one so unlimited in force
• And so searching in extent
3. Plenary –
• As it is complete
• Under NIRC, the BIR may avail of certain remedies to ensure the collection of taxes
4. Supreme –
• Taxation, although referred to as the strongest of all the powers of the government,
cannot be interpreted to mean that it is superior to the other inherent powers of the
government.
• It is supreme insofar as the selection of the subject of taxation is concerned.

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PRINCIPLES OF SOUND TAX SYSTEM

Principle Description If violated

1. Fiscal Adequacy The sources of revenue should be Tax law is unsound but still
sufficient to meet the demands of valid and not unconstitutional
public expenditures. (Chavez v.
Ongpin, GR 76778, June 6, 1990)
2. Administrative The tax law should be capable of Tax law is unsound but still
Feasibility convenient, just and effective valid and not unconstitutional
administration, as well as easy
compliance by the TP.
3. Theoretical Justice The tax burden should be Tax law is unsound, invalid
or Equality proportionate to the taxpayer’s and unconstitutional
ability to pay. (Sec. 28(1), Art. VI,
Constitution)

PURPOSES OF TAXATION

1. Revenue
• To raise revenue
• To promote the general welfare and protection of its citizens
2. Regulatory (Sumptuary purpose of taxation)
• To provide means for the rehabilitation and stabilization of a threatened industry
which is affected with public interest so as to be within the police power of the state
3. Promotion of general welfare
• Taxation may be used as an implement of the police power to promote the general
welfare of the people
• Senior Citizen discount (20%) can be claimed then as “tax credit” but later as
“tax deduction”. The 20% discount as well as the tax deduction scheme is a valid
exercise of the police power. (Manila Memorial park, Inc. v. DSWD, 711 SCRA 302,
2013)
4. Reduction of social inequality
• Progressive system prevents the undue concentration of wealth in the hands of a few
individuals
• Those who are able to pay shoulder the bigger portion of the tax burden
5. Encourage economic growth by granting incentives
• Power to tax
• Power to exempt
• But no power to condone taxes
6. Protectionism
• Protect local industries from foreign competition

INHERENT LIMITATIONS (PINET)

Restrictions to the power to tax are attached to its nature. Violation of any or all of the inherent
limitations constitutes TAKING without due process of law (and/or infringement of the general
principles of international law which form part of the law of the land.

1. Public Purpose
• Who determines “Public Purpose”? Legislative prerogative
• Purpose when deemed “public”: it is the purpose that determines the public character of
the tax law, not the number of persons benefited.
• Time when public purpose is determined. Public purpose must exist at the time of the
enactment of the law levying the tax or appropriating the funds
• It is robbery if for private purpose
• To promote public welfare
2. International Comity
• Basis: Constitution Art. II Sec 2: “….adopts generally accepted principles of int’l law….”
• One Principle: Sovereign Equality Among States
• Origin: Par in parem non habet imperium

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 • Application: Tax imposing RPT upon foreign embassy…not valid
3. Non-delegation of the power
• The power of the legislature is itself a delegated power conveyed to it by the people
• Delegata potestas non potest delegari
• Rule: The power to tax is exclusively vested in the legislative body
• Exceptions: 1) President – tariffs 2) LGU
4. Exemption of Government (Sec. 2 (10) Admin Code 1987)
• Matter of Public Policy
• No constitutional grant is necessary
• Generally exempt from taxation even in the absence of an express provision of law

May the government tax itself?

Taxing Levying from Taxable Remarks

Authority
LGU National Gov’t NO Sec. 133, LGC – the power to tax shall not
extend to taxes, fees, charges of any kind on
the nat’l gov’t and instrumentalities EXCEPT
income from public utility under their
jurisdiction
National LGU YES Sec 27©, NIRC, provides NG can levy tax
Gov’t upon, GOCCs, agencies and instrumentalities
although income received by the gov’t from
any public utility or the exercise of any
essential gov’t functions is exempt (Sec 32B7b,
NIRC)

Basco v. PAGCOR (197 SCRA 52)

The City of Manila being a mere municipal corporation, has no inherent power to tax.
LGUs have no power to tax instrumentalities of the NG. PAGCOR being an instrumentality of
the NG, is therefore exempt from local taxes, otherwise, its operation might be burdened,
impeded or subjected to control by a mere LGU.

Government Instrumentality
This term includes regulatory agencies, chartered institutions and government-owned or
controlled corporations.

Instrumentality refers to any agency of the National Government (NEVEA)

• Not integrated within the department framework

• Enjoying operational autonomy
• Vested within special functions or jurisdiction by law
• Endowed with some if not all corporate powers,
• Administering special funds

5. Territoriality or Situs of Taxation

• Situs means situation, location or place
• Situs of taxation is literally the place or authority that has the right to impose and collect
taxes
• Territoriality principle is the result of the concept that taxes are paid for the protection
and services provided by the taxing authority which could not be provided outside the
territorial limits of the taxing estate.
• Tax laws may operate outside of the territorial jurisdiction provided the same is imposed
on its citizens who, in view of their attachment, still derive protection from the state.

CONSTITUTIONAL LIMITATIONS
(REVENUE LESS DAN PTN)

1 Religious Clause Involves Three things

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 Section 5, Art III 1. Freedom to choose religion
2. Freedom to exercise one’s religion
3. Prohibition upon the NG to establish a national religion

Which one limits the power to tax?

No. 3 – this requires a special appropriation of money from the national
treasury

• License Fee – suppresses religious freedom

• Sales Tax – on the sale of religious materials by a religious org., no
constitutional proscription, almost always paid by the buyer
• Exempt from Income Tax. Exception to exemption, income from
any activity conducted for profit regardless of disposition is subject
to tax
2 Equal protection GR: TP of the same footing are treated alike, both as to privileges
clause conferred and liabilities imposed.
Section 1, Art III XPN: Substantial distinction
3 Veto power Veto any particular item or items in the appropriation, revenue and
Section 27(2), Art tariff (ART) bill
XI
4 Exempt – RPT Requirements
Section 28(3), Art 1. ADE – Actually, Directly and Exclusively used for
VI 2. RCE – Religious, Charitable and Educational purposes

“Dominant Use” or “Principal Use” cannot be substituted for the words

“Used Exclusively”

Exclusively used does not mean total or absolute use. Incidentally

used, the exemption applies.

Test is ACTUAL use. Use takes precedence over ownership. A property

owned by a criminal but actually used by RCE is exempt from
tax.

The use of profits does not determine exemption, rather it is the use of
the property that determines exemption. (Phil. Lung Center v. Quezon
City)
5 Non-impairment It upholds the people’s right and freedom to contract as well as the
clause (NIC) sanctity of contracts.
Section 10, Art III
Applies to taxation but not to police power and eminent domain.

Is a Tax Exemption Revocable? It depends:

• No. For contractual tax exemptions, those agreed to by the

taxing authority in contracts. (Ex. Government bonds)

• Yes. For tax exemptions granted under franchises. Franchise

takes the nature of grant. No franchise shall be granted except
under the condition that such privilege shall be subject to
amendment, alteration or repeal by Congress

Obligation to pay taxes – imposed by law, NIC does not apply.

TP enters into a compromise agreement – the obligation to pay tax is

now based on contract, NIC applies
6 Uniformity, Uniformity – persons and things belonging to the same class shall be
Equitability and taxed at the same rate.
Progressivity
Section 28(1), Art Uniformity in the Political Unit.
VI

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 Equitability – taxes should be apportioned among the people according
to their capacity to pay.

Taxation is progressive when its rate goes up depending on the

resources of the person affected.

Is tax law adopting a regressive system of taxation valid? Yes.

Regressive tax. A tax is applied uniformly regardless of income.

VAT is regressive. No prohibition.

7 Exemption – Granting Tax Exemption: Majority of all the members of Congress voting
absolute majority separately (absolute majority) NOT majority of the quorum (simple
Section 28(4), Art majority)
VI
Withdrawal Tax Exemption: relative majority or plurality

Tax amnesty, condonation and refund – nature of tax exemption

8 LGU Section 5. Each local government unit shall have the power to
Section 5 & 6, Art create its own sources of revenues and to levy taxes, fees and charges
X subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees, and
charges shall accrue exclusively to the local governments.
9 Exempt – NSNP All revenues and assets of NSNP educational institutions used ADE for
Educ Ins educational purposes shall be exempt from taxes and duties.
Section 4(3), Art
XIV Exemption from RPT, Income Tax

Sec 30 NIRC Donations to EI are exempted from donor’s tax

Passive Income, VAT on importations, Rental Income paid by a

concessionaire of the school’s canteen, exempt, ADE
10 Special Fund All money collected on any tax levied for a special purpose shall be
Section 29(3), Art treated as a special fund and paid out for such purpose only. If the
VI purpose for which a special fund was created has been fulfilled or
abandoned, the balance, if any, shall be transferred to the general funds
of the Government.
11 Supreme Court Section 5. The Supreme Court shall have the following powers:
Section 5(2), Art Review, revise, reverse, modify, or affirm on appeal or certiorari, as the
VII law or the Rules of Court may provide, final judgments and orders of
lower courts in:

All cases involving the legality of any tax, impost, assessment, or toll, or
any penalty imposed in relation thereto.

Decisions of the BIR are appealable to the CTA division.

CTA division may be appealed to the CTA en banc (RA 9282)
CTA en banc elevated to SC only on a question of law.

12 Due Process Guarantees the protection of personal and property rights. Hence,
Section 1, Art III enforced contributions from the people cannot be made without a law
authorizing the same.

Due process is violated where the tax imposed is

• for private purpose
• imposed on property outside the state
• arbitrary or oppressive methods are used in assessing and
collecting taxes
• violates inherent limitations

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 Case: CREBA v. Romulo, GR 160756, March 9, 2010
• MCIT is not violative of due process

13 Appropriations, It is not the law but the revenue bill which is required by the
revenue and tariffs Constitution to originate exclusively in the HOR.
(ART) bill
Section 24, Art VI Initiative for filing the bill must come from the HOR.

14 No public money Rule: Inviolable principle of separation of the church and the state.
Section 29(2), Art
VI Exception: assigned in leprosarium, orphanage, penal institution, armed
forces (LOPA)

15 Press freedom Section 4. No law shall be passed abridging the freedom of speech, of
Section 4, Art III expression, or of the press, or the right of the people peaceably to
assemble and petition the government for redress of grievances.

The press is not immune from all taxes.

• Sales tax to cable television services alone while exempting the
print media does not violate the Constitution
• Owners of newspapers are not immune from any of the ordinary
forms of taxation for support of the government
16 Tariff Power The Congress may, by law, authorize the President to fix within specified
Section 28(2), Art limits, and subject to such limitations and restrictions as it may impose,
III tariff rates, import and export quotas, tonnage and wharfage dues, and
other duties or imposts within the framework of the national
development program of the Government.
17 Non-imprisonment Fixed amount on individuals – citizens or not
for non payment of
poll tax Tax imposed on persons without any qualifications
Section 20, Art III
Persons may be allowed to pay even if they are not qualified as to age
or property ownership

Non-payment of poll tax may be penalized by fines because it is only

imprisonment which is prohibited by the Constitution.

Why is it a limitation to the power to tax?

Congress is prohibited from passing a law penalizing with imprisonment
a person who does not pay poll tax.

Requisites of a Valid Tax (1987 Const., Art. VI, Sec. 28)

1. The person or property taxed should be within the jurisdiction of the taxing authority
2. The assessment and collection of certain kinds of taxes guarantee against injustice to
individuals, especially by providing notice and opportunity for hearing
3. It should be for public purpose
4. The rule of taxation shall be uniform and equitable
5. The tax must not impinge on the inherent and constitutional limitations on the power of
taxation.

Lifeblood Theory
• The existence of government is a necessity
• It cannot exist nor endure without the “means” to pay its expenses
• For those “means”, the government has the right to compel all its citizens and property within
its limits to contribute in the form of taxes.
• Taxation is the indispensable and inevitable price for civilized society; without taxes the
government would be paralyzed.

Implementation of Lifeblood Theory (WERPA)

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 1. Waiver of the statute limitations
• The government is not estopped from collecting taxes by the mistakes or errors of its
agents (Phil. Guaranty Co., Inc. v. CIR, 13 SCRA 775)
2. Exemption
• Disfavored
• Statutes that allow exemptions are construed strictly against the grantee and liberally
in favor of the government (Davao Gulf Lumber Corp. v. CIR, 293 SCRA 77)
3. Refunds
• Claims for refund or tax credit should be exercised within the time fixed by law. (PBC
v. CIR, 302 SCRA 250)
• Strictly construed against the TP
4. Payment under protest
• An injunction against the assessment and collection of taxes is generally withheld by
the laws imposing such taxes.
• SEC. 218. Injunction not Available to Restrain Collection of Tax. – No court shall have
the authority to grant an injunction to restrain the collection of any national internal
revenue tax, fee or charge imposed by this Code.
• Exception of Sec. 218: when the decision of the Commissioner is pending appeal
before the CTA, the said court may enjoin the collection of taxes if such collection will
jeopardize the interest of the government and/or the taxpayer.
5. Approval of probate court
• The approval of the court, sitting in probate or as a settlement tribunal over the
deceased’s estate, is not a mandatory requirement in the collection of estate
taxes (Ferdinand R. Marcos II v. CA, et al., 273 SCRA 47)

Construction and Interpretation of Tax Laws, Rules and Regulations

Statutes levying taxes are construed against the government

• In case of doubt, tax statutes are to be construed most strongly against the government
• Burdens are not to be imposed nor presumed to be imposed beyond what the statutes
expressly and clearly import.

Construction of statute by predecessors is not binding on the successors

• The power to pass upon the validity of BIR Regulations is vested exclusively in our courts.
• The Secretary of Finance is vested with the authority to revoke, repeal, or abrogate the acts
or previous rulings of his predecessor in office because the construction of a statute by those
administering it is not binding on their successors. (Hilado v. Collector, 100 Phil. 288, 1956)

Retroactive application
• GR: Taxing statutes must be applied prospectively
• XPN: Express provision of the law

When the Supreme Court decides a case, it did not pass a new law, but merely interprets a pre-
existing one
• The interpretation of the SC became part of the law from the moment it became effective.
• It is elementary that the interpretation of a law by the Court constitutes part of that law from
the date it was originally passed, since the Court’s construction merely establishes the
contemporaneous legislative intent that the interpreted law carried into effect (Accenture v.
CIR, GR 190102, July 11, 2012)

Prospectivity of Tax Laws

• Tax laws are civil in nature.

• The GR under the Civil Code that laws shall have prospective application applies to tax laws.
• Retroactive application of revenue laws may be allowed if it will not amount to denial of due
process.

Imprescriptibility of Taxes

• GR: Taxes are imprescriptible as they are the lifeblood of the government.

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 • Xpns: Tax statutes may provide for statute limitations
1. NIRC –
➢ 3 years from last day prescribed by law– period to assess tax for a return filed on
or before due date
➢ 3 years from date of actual filing– period to assess tax for a return filed after due
date
➢ 10 years discovery of omission, fraud or falsity – period to assess tax for no
return filed or the return filed is false or fraudulent
➢ 5 years following the assessment – period to collect by distraint, levy or
proceeding in court

2. LGC –
➢ 5 years from the date they became due – period to assess local taxes, fees or
charges
➢ 10 years from the discovery of fraud or intent to evade payment – period to
assess local taxes, fees or charges
➢ 5 years from date of assessment – period to collect either by administrative or
judicial action

Double Taxation

Taxing the same subject twice when it should be taxed only once. Also known as duplicate taxation.

There is no constitutional prohibition against double taxation in the Philippines. It is something not
favored but permissible. (Pepsi Cola Bottling Co. v. City of Butuan, 1968)

Elements (PAYS)
1. Same Purpose
2. Same Taxing Authority
3. Same Subject Matter
4. Same Taxable Year

Kinds:
1. Direct duplicate taxation/obnoxious
• Objectionable or prohibited
• Reason: constitutes a violation of substantive due process.
• Requisites: (JAPSKY)
1. Same Jurisdiction
2. Same Taxing Authority
3. Same Purpose
4. Same Subject Matter
5. Same Kind/Character
6. Same Taxable Year

2. Indirect double taxation

• Not legally objectionable
• The absence of one or more of the requisites (JAPSKY) of obnoxious DT makes the
DT indirect.

Reliefs from DT
1. Tax deductions – ex. Vanishing deductions
2. Tax credits
3. Exemptions
4. Treaties with other states
5. Principle of reciprocity

Tax Avoidance v. Tax Evasion

Tax Avoidance (Tax Loophole)

• Tax saving device within the means sanctioned by law.
• This method should be used by the TP in good faith and at arm’s length

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Tax Evasion (Tax Dodging)
• Scheme used outside of those lawful means and when availed of, it usually subjects the TP to
further or additional civil or criminal liabilities.
• Integration of 3 factors
1. The end to be achieved
2. An accompanying state of mind which is described as being “evil”, in “bad faith”, “willful”,
or “deliberate” and not accidental
3. A course of action or failure of action which is unlawful

Prohibition on Compensation and Set-Off

Set-off
• Presupposes mutual obligations between the parties.
• “Mutual” means that the cause of action must arise from the same source.
• They are mutual creditors and debtors of each other.
• In taxation, the concept of set-off arises where a TP is liable to pay tax but the government,
for one reason or another, is indebted to the said taxpayer.
• Republic v. Mambulao Lumber Co.
➢ Mambulao is liable to forest charges
➢ The lumber company claimed that since the government did not use the reforestation
charges it paid for reforestation of the denuded land covered by its license, the
amount paid should be reimbursed to them or at least compensated or applied to
their liability to pay forest charges.
➢ The court ruled that the reforestation charges paid is in the nature of taxes.
➢ Compensation not applicable as parties are not mutually creditors and debtors of
each other.
• Francia v. IAC (GR L-67649, 6/28/1988)
➢ TP obligation, Real Estate Taxes
➢ Pasay City obligation, payment of expropriated property
➢ Court ruled, off-setting is not allowed

Compromise and Tax Amnesty

• Tax amnesty is an opportunity afforded to a TP to rectify errors or omissions in past tax years
or returns relieving delinquent tax debt and criminal prosecution.
• Partakes an absolute forgiveness
• Generally waives the fines and penalties associated with the evasion but not the principal
amount of taxes that are due.
• Tax amnesty: immunity from criminal and civil liability
• Tax exemption: immunity from civil liability only

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