0069CONSOLIDATED SYLLABUS IN TAXATION

A. General Principles of Taxation

a. Concept1Underlying Basis2 and Purpose
1. Taxation, Taxes Defined
2. Attributes or Characteristics of Taxes

1) Cebu Portland Cement v. CTA, L-29059, 15 Dec 1987, 156 SCRA 535 (Lifeblood of the Government)
If the payment of taxes could be postponed by simply questioning their validity, the machinery of the
state would grind to a halt and all government functions would be paralyzed.
2) Mun. of Makati v. CA, et al, L-89898, 01 Oct 1990, 190 SCRA 206 (Exempt from execution)
In this jurisdiction, well-settled is the rule that public funds are not subject to levy and execution,
unless otherwise provided for by statute. Municipal revenues derived from taxes, licenses and market
fees, and which are intended primarily and exclusively for the purpose of financing the governmental
activities and functions of the municipality, are exempt from execution.

3) CIR v. Algue, Inc. et al, L-28896, 17 Feb 1988, 158 SCRA 9 (Lifeblood Theory; Rationale is Symbiotic
Relationship; timeliness of assessment / collection; effect of warrant of distraint & levy;
deductibility of promotional expense) 3 It is said that taxes are what we pay for civilization society.
Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it.
Hence, despite the natural reluctance to surrender part of one’s hard earned income to the taxing
authorities, every person who is able to must contribute his share in the running of the government.
The government for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values. This symbiotic
relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power. But even as we concede the inevitability and
indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably
and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and
the courts will then come to his succor. For all the awesome power of the tax collector, he may still be
stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.
4) BPI Family Savings Bank v. CA et al, 330 SCRA 507, 12 Apr 2000 (Mutual Observance of fairness &
honesty; claim for refund due to losses, how to prove entitlement) 4 While tax refunds are in the
nature of the exceptions and are to the construct strictissimi juris against the claimant, under the facts of
this case, petitioner has established its claim. Substantial justice equity, and fair play are on the side of
petitioner. Technicalities and legalisms, however, exalted, should not be misused by the government to
keep money not belonging to it and thereby enrich would be better by allowing to appeal.
b. Principles of a Sound Tax System
1. Fiscal Adequacy
2. Theoretical Justice
3. Administrative Feasibility

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What is the concept of taxation? It can be viewed in two ways, namelya) as a power to
tax and (b) as the act or process by which taxing power is exercised.
2
What is the theory or underlying basis of taxation? It is a necessity without which no
government could exist; revenues collected are intended to finance government and its
activities. It can reach what traditionally are within police power measures to attain:
i. Social justice
ii. Equitable distribution of wealth
iii. Economic progress
iv. Protection of local industries, public welfare and the like
3
The substantive issue here is the deductibility of P75,000 promotional fees paid by Algue
to certain individuals who were also its stockholders and who rendered services so that
Algue would earn commission fees. The procedural issue whether or not Allgue seasonably
filed its appeal to the CTA from receipt of Warrant of Distraint and Levy. Due to a special
circumstance, this case presents an excepted to the rule that a Warrant of Distraint and Levy
is “proof of the finality of the assessment” and “renders hopeless a request for
reconsideration,” being “tantamount to an outright denial thereof and makes the said request
deemed rejected.”
4
This is a claim for tax refund due to losses, which was denied by the CTA allegedly for
failure to present the Annual Income Tax Return of the following year, which would show
whether the overpaid taxes had not been credited in that year’s tax liability.

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 4. Will the non-observance of these principles invalidate the tax law? No, unless other inherent
and constitutional limitations are infringed.

c. Scope of Taxation
1. No attribute of sovereignty is more pervading, unlimited, plenary,
comprehensive and supreme
2. Wide spectrum of the power to tax reaches every trade or occupation,
every object of industry, use or enjoyment, every species of possession
3. Imposes burden, if not followed could result to seizure and penalty
4. Pervasive affecting constantly and consistently all relations of life
5. It also involves the power to destroy per Justice Marshall [but Justice
Holmes said no while the US SC sits]

5) CIR v Tokyo Shipping Co, 244 SCRA 332, 26 May 1995 [Claim for Refund of tax on GPB from charter of
vessel; claim for refund construed strictississimi juris finding of fact by CTA that vessel left without sugar
laden; 15 years lapsed without refund though at one point lawyer of BIR said it was approved; kill the
goose that lay the golden eggs]

d. Limitation of Taxation
1. Inherent Limitations
a. Public Purpose

6) Gomez v. Palomar, 25 SCRA, 25 827

For it is now a settled principle of law that "consideration of practical administrative convenience and
cost in the administration of tax laws afford adequate ground for imposing a tax on a well recognized and
defined class.

This is altogether a different proposition, since explained by the court "that while the principle that there
must be a reasonable relationship between classification made by the legislation and its purpose is
undoubtedly true in some contexts, it has no application to a measure whose sole purpose is to raise
revenue, so long as the classification imposed is based upon some standard capable of reasonable
comprehension, be that standard based upon ability to produce revenue or some other legitimate
distinction, equal protection of the law has been afforded."

The subject tax is levied with a regulatory purpose, to provide means for the rehabilitation and
stabilization of the threatened sugar industry. In other words, the act is primarily a valid exercise of police
power.

7) Tio v. VRB, 98 Phil. 148

The power to impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely
venture to declare that it is subject to any restrictions whatever, except such as those rest in the discretion
of the authority which exercises it. In imposing a tax, the legislature acts upon its constituents. This is, in
general, a sufficient security against erroneous and oppressive taxation.

The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose
the tax was to favor one industry over another.

a. Legislative in Nature
b. Territorial

8) Commissioner v. BOAC, 149 SCRA 395

For the source of income to be considered coming from the Philippines, it is sufficient that the income is
derived from the activity coming from the Philippines. The tax code provides that for revenue to be
taxable, it must constitute income from Philippine sources. In this case, the sale of tickets is the source of
income. The situs of the source of payments is the Philippines.

a. International Comity

9) CIR v Mitsubishi Metal Corp, 181 SCRA 214, 22 Jan 1990 [Exemption of Japanese govt owned bank
does not extend to Jap corp, who in turn lent the loan to a local company; exemption construed
strictississimi]

e. Exemption of Government from tax

2. Constitutional Limitations
Directly affecting taxation
a. Non-imprisonment for non-payment of poll tax
b. Rule of taxation should be uniform and equitable; progressive system of taxation to
evolve; authorized President to fix limits by Congress

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 c. Bills to originate from the House of Representatives

10) Tolentino vs. Secretary of Finance, 235 SCRA 630

The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for regulation.
Its imposition on the press is unconstitutional because it lays a prior restraint on the exercise of its right.
Hence, although its application to others, such those selling goods, is valid, its application to the press or
to religious groups, such as the Jehovah’s Witnesses, in connection with the latter’s sale of religious books
and pamphlets, is unconstitutional. As the U.S. Supreme Court put it, “it is one thing to impose a tax on
income or property of a preacher. It is quite another thing to exact a tax on him for delivering a sermon.”

The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege, much less
a constitutional right. It is imposed on the sale, barter, lease or exchange of goods or properties or the sale
or exchange of services and the lease of properties purely for revenue purposes. To subject the press to its
payment is not to burden the exercise of its right any more than to make the press pay income tax or
subject it to general regulation is not to violate its freedom under the Constitution.

d. Exempt charitable and religious institution from property tax

11) Abra Valley College, Inc. v. Aquino, 162 SCRA 106

Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, expressly grants exemption
from realty taxes for cemeteries, churches and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious, charitable or educational purposes. ﾝ
Reasonable emphasis has always been made that the exemption extends to facilities which are incidental
to and reasonably necessary for the accomplishment of the main purposes. The use of the school building
or lot for commercial purposes is neither contemplated by law, nor by jurisprudence. In the case at bar,
the lease of the first floor of the building to the Northern Marketing Corporation cannot by any stretch of
the imagination be considered incidental to the purpose of education. The test of exemption from taxation
is the use of the property for purposes mentioned in the Constitution.

12) Rev. .Lladoc v. CIR, 14 Phil. 292

The Constitution only made mention of property tax and not of excise tax as stated in Section 22, par 3.
The assessment of the CIR did not rest upon general ownership; it was an excise upon the use made of the
properties, upon the exercise of the privilege of receiving the properties. A gift tax is not a property tax,
but an excise tax imposed on the transfer of property by way of gift inter vivos, the imposition of which on
property used exclusively for religious purposes, does not constitute an impairment of the Constitution.

13) Bishop of Nueva Segovia v. Prov. Board of Ilocos Norte, 51 Phil. 352
The exemption from payment of land tax of a convent refers to the home of the party who resides over the
church and who has to take care of himself in order to discharge his duties. It is therefore include not only
the land actually occupied by the church, but also the adjacent ground destined for the ordinary and
incidental uses of the occupant. Except in large cities where density of the population and the
development of commerce require the use of larger tracts of land for buildings, a vegetable garden
belongs to a house and in the present case, its use is limited to the necessities of the priest, which comes
under exemption.

e. Exempting law must be passed by majority of all members of Congress

f. Special purpose tax should be used for said purpose and excess to revert to general
fund
g. Veto power of the President
h. Review power of the SC
i. Grant of power to local government
j. Exemption of non-stock, non-profit educational institution, etc from taxes

Indirectly affecting taxation

a. Due Process Clause
b. Equal Protection Clause
c. Police Power and Eminent Domain higher, can override constitutional rights, subject to
limitations

Distinguish Taxation from Police Power and Eminent Domain

Taxation is subordinate to:

1) Due Process
1) Separation of Church and State
1) Non-impairment clause of contracts
1) Free exercise and enjoyment of religious profession

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14) Phil Bank of Communications v. CIR, et al, 302 SCRA 241, 28 Jan 1999 [Summary collection does not
infringe due process) Basic is the principle that "taxes are the lifeblood of the nation." The primary
purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common
weal. Due process of law under the Constitution does not require judicial proceedings in tax cases. This
must necessarily be so because it is upon taxation that the government chiefly relies to obtain the means
to carry on its operations and it is of utmost importance that the modes adopted to enforce the collection
of taxes levied should be summary and interfered with as little as possible. From the same perspective,
claims for refund or tax credit should be exercised within the time fixed by law because the BIR being an
administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by
incidental matters

15) Sison v. Ancheta, GR 59431, 25 Jul 1984 [Uniformity, Equal Protection and Due Process Clauses not
violated when BP 135 adopted gross income taxation) [when the tax “operates with the same force
and effect in every place where the subject may be found”. It was held to comply with uniformity
requirement; “Equality and uniformity in taxation means that all taxable articles or kinds of property of
the same class shall be taxed at the same rate.]

On equal protection - it suffices that the laws operate equally and uniformly on all persons under similar
circumstances, both in the privileges conferred and the liabilities imposed.

On the matter that the rule of taxation shall be uniform and equitable - this requirement is met when the
tax operates with the same force and effect in every place where the subject may be found." Also, :the rule
of uniformity does not call for perfect uniformity or perfect equality, because this is hardly unattainable."
When the problem of classification became of issue, the Court said: "Equality and uniformity in taxation
means that all taxable articles or kinds of property of the same class shall be taxed the same rate. The
taxing power has the authority to make reasonable and natural classifications for purposes of taxation..."
As provided by this Court, where "the differentation" complained of "conforms to the practical dictates of
justice and equity" it "is not discriminatory within the meaning of this clause and is therefore uniform."

16) Reyes v. Almanzor, 196 SCRA 322 (Arbitrary valuation violated Due Process
The taxing power has the authority to make a reasonable and natural classification for purposes of
taxation but the government's act must not be prompted by a spirit of hostility, or at the very least
discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly
on all persons under similar circumstances or that all persons must be treated in the same manner, the
conditions not being different both in the privileges conferred and the liabilities imposed.

17) Nitafan et al v. CIR, GR 78780, 23 Jul 1987 (Salaries of justices & Judges are not exempt from income
tax) This payment of income tax does not fall within the constitutional protection against decrease of their
salaries during their continuance in office. Further, the deletion of the grant of exemption from payment of
income tax to members of the Judiciary was a way of ensuring the equality of the three branches of
government.

Based on jurisprudence, it was concluded that the true intent of the framers was to make the salaries of
members of the Judiciary taxable, as is applicable to all income earners.

The course of deliberations, debates, and amendments on the draft proposal of Section 10, Article VIII
further clarified the issue:

Commissioner Cirilo Rigos’s proposal, that the term “diminished” be changed to “decreased” and that the
word “nor subjected to income tax” be deleted, was accepted.

Commissioner Joaquin G. Bernas announced
understanding that the salaries of justices
understanding that there will be a provision
General Provisions of the 1973 Constitution,
exempt from payment of income tax.
that by putting a period after “decreased”, it is with the
are subject to tax. He cited that this is based on the
in the Constitution similar to Section 6 of Article XV, the
which states that no salary of any public officer shall be

Due to these issues, Fr. Bernas stated that the ruling in Perfecto vs Meer and Dencia vs David were not
applicable anymore.

18) Carlos Superdrug Corp. v. DSWD, 526 SCRA 130, 140, 143, 145
Police power is not capable of an exact definition, but has been purposely veiled in general terms to
underscore its comprehensiveness to meet all exigencies and provide enough room for an efficient and
flexible response to conditions and circumstances, thus assuring the greatest benefits. Accordingly, it has
been described as the most essential, insistent and the least limitable of powers, extending as it does to all
the great public needs.

It is [t]he power vested in the legislature by the constitution to make, ordain, and establish all manner of
wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not repugnant
to the constitution, as they shall judge to be for the good and welfare of the commonwealth, and of the
subjects of the same.

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 For this reason, when the conditions so demand as determined by the legislature, property rights must
bow to the primacy of police power because property rights, though sheltered by due process, must yield
to general welfare. Police power as an attribute to promote the common good would be diluted
considerably if on the mere plea of petitioners that they will suffer loss of earnings and capital, the
questioned provision is invalidated. Moreover, in the absence of evidence demonstrating the alleged
confiscatory effect of the provision in question, there is no basis for its nullification in view of the
presumption of validity which every law has in its favor.

19) Reyes v. Almanzor, 196 SCRA 322

Taxes are lifeblood of government, however, such collection should be made in accordance with the law
and therefore necessary to reconcile conflicting interests of the authorities so that the real purpose of
taxation, promotion of the welfare of common good can be achieved

20) Cagayan Electric Power and Light and Co., Inc. vs. Commissioner, GR No. 60126
Congress could impair the company’s legislative franchise by making it liable for income tax. The
Constitution provides that a franchise is subject to amendment, alteration or repeal by the Congress when
the public interest so requires. However, it cannot be denied that the said 1969 assessment appears to be
highly controversial. It had reason not to pay income tax because of the tax exemption its franchise. For
this reason, it should be liable only for tax proper and should not be held liable for surcharge and interest.

21) Gomez v. Palomar, 25 SCRA 827

It is settled that the legislature has the inherent power to select the subjects of taxation and to grant
exemptions. This power has aptly been described as "of wide range and flexibility." Indeed, it is said that in
the field of taxation, more than in other areas, the legislature possesses the greatest freedom in
classification. The reason for this is that traditionally, classification has been a device for fitting tax
programs to local needs and usages in order to achieve an equitable distribution of the tax burden.

The classification of mail users is based on the ability to pay, the enjoyment of a privilege and on
administrative convenience. Tax exemptions have never been thought of as raising revenues under the
equal protection clause.

22. Ormoc Sugar Co., Inc. v. Treasurer of Ormoc City, 22 SCRA 603
Even though petitioner, at the time of the enactment of the ordinance, was the only sugar central in
Ormoc, the classification should have been in terms applicable to future conditions as well. The taxing
ordinance should not be singular and exclusive as to exclude any subsequently established sugar central,
of the same class as petitioner, for the coverage of the tax.

Though, petitioner can be refunded, they are not entitled to interest because the taxes were not arbitrarily
collected as the ordinance provided a sufficient basis to preclude arbitrariness, the same being then
presumed constitutional until declared otherwise.

22) Tolentino v. Secretary of Finance, 235 SCRA 630

Facts: The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as well
as on the sale or exchange of services. RA 7716 seeks to widen the tax base of the existing VAT system and
enhance its administration by amending the National Internal Revenue Code. There are various suits
challenging the constitutionality of RA 7716 on various grounds. One contention is that RA 7716 did not
originate exclusively in the House of Representatives as required by Art. VI, Sec. 24 of the Constitution,
because it is in fact the result of the consolidation of 2 distinct bills, H. No. 11197 and S. No. 1630. There is
also a contention that S. No. 1630 did not pass 3 readings as required by the Constitution.

Issue: Whether or not RA 7716 violates Art. VI, Secs. 24 and 26(2) ofthe Constitution

Held: The argument that RA 7716 did not originate exclusively in the House of Representatives as
required by Art. VI, Sec. 24 of the Constitution will not bear analysis. To begin with, it is not the law but the
revenue bill which is required by the Constitution to originate exclusively in the House of Representatives.
To insist that a revenue statute and not only the bill which initiated the legislative process culminating in
the enactment of the law must substantially be the same as the House bill would be to deny the Senate’s
power not only to concur with amendments but also to propose amendments. Indeed, what the
Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills authorizing an
increase of the public debt, private bills and bills of local application must come from the House of
Representatives on the theory that, elected as they are from the districts, the members of the House can
be expected to be more sensitive to the local needs and problems. Nor does the Constitution prohibit the
filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the House, so long as
action by the Senate as a body is withheld pending receipt of the House bill.

The next argument of the petitioners was that S. No. 1630 did not pass 3 readings on separate days as
required by the Constitution because the second and third readings were done on the same day. But this
was because the President had certified S. No. 1630 as urgent. The presidential certification dispensed
with the requirement not only of printing but also that of reading the bill on separate days. That upon the
certification of a billby the President the requirement of 3 readings on separate days and of printing and
distribution can be dispensed with is supported by the weightof legislative practice.

23) PAL v. Sec of Finance, GR 115852, 25 Aug 1994 (Withdrawal of PAL’s exemption from VAT without
being mentioned in title not violative of bill embracing one subject)

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24) Tolentino v Sec of Finance & CIR, GR 11545, 64 SCAD 352, 235 SCRA 630 (Does VAT law violate the
“progressivity rule of taxation” given that VAT is regressive?; equality & uniformity rule?)
FACTS: The present case involves motions seeking reconsideration of the Court’s decision dismissing the
petitions for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded
Value-Added Tax Law. The motions, of which there are 10 in all, have been filed by the several petitioners.

The Philippine Press Institute, Inc. (PPI) contends that by removing the exemption of the press from the
VAT while maintaining those granted to others, the law discriminates against the press. At any rate, it is
averred, “even nondiscriminatory taxation of constitutionally guaranteed freedom is unconstitutional”,
citing in support of the case of Murdock v. Pennsylvania. Chamber of Real Estate and Builders
Associations, Invc., (CREBA), on the other hand, asserts that R.A. No. 7716 (1) impairs the obligations of
contracts, (2) classifies transactions as covered or exempt without reasonable basis and (3) violates the
rule that taxes should be uniform and equitable and that Congress shall “evolve a progressive system of
taxation”.

Further, the Cooperative Union of the Philippines (CUP), argues that legislature was to adopt a definite
policy of granting tax exemption to cooperatives that the present Constitution embodies provisions on
cooperatives. To subject cooperatives to the VAT would, therefore, be to infringe a constitutional policy.

ISSUE: Whether or not, based on the aforementioned grounds of the petitioners, the Expanded Value-
Added Tax Law should be declared unconstitutional.

RULING:
No. With respect to the first contention, it would suffice to say that since the law granted the press a
privilege, the law could take back the privilege anytime without offense to the Constitution. The reason is
simple: by granting exemptions, the State does not forever waive the exercise of its sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to which
other businesses have long ago been subject. The PPI asserts that it does not really matter that the law
does not discriminate against the press because “even nondiscriminatory taxation on constitutionally
guaranteed freedom is unconstitutional.” The Court was speaking in that case (Murdock v. Pennsylvania)
of a license tax, which, unlike an ordinary tax, is mainly for regulation. Its imposition on the press is
unconstitutional because it lays a prior restraint on the exercise of its right. The VAT is, however, different.
It is not a license tax. It is not a tax on the exercise of a privilege, much less a constitutional right. It is
imposed on the sale, barter, lease or exchange of goods or properties or the sale or exchange of services
and the lease of properties purely for revenue purposes. To subject the press to its payment is not to
burden the exercise of its right any more than to make the press pay income tax or subject it to general
regulation is not to violate its freedom under the Constitution.

Anent the first contention of CREBA, it has been held in an early case that even though such taxation may
affect particular contracts, as it may increase the debt of one person and lessen the security of another, or
may impose additional burdens upon one class and release the burdens of another, still the tax must be
paid unless prohibited by the Constitution, nor can it be said that it impairs the obligation of any existing
contract in its true legal sense. It is next pointed out that while Section 4 of R.A. No. 7716 exempts such
transactions as the sale of agricultural products, food items, petroleum, and medical and veterinary
services, it grants no exemption on the sale of real property which is equally essential. The sale of food
items, petroleum, medical and veterinary services, etc., which are essential goods and services was
already exempt under Section 103, pars. (b) (d) (1) of the NIRC before the enactment of R.A. No. 7716.
Petitioner is in error in claiming that R.A. No. 7716 granted exemption to these transactions while
subjecting those of petitioner to the payment of the VAT. Finally, it is contended that R.A. No. 7716 also
violates Art. VI, Section 28(1) which provides that “The rule of taxation shall be uniform and equitable.
The Congress shall evolve a progressive system of taxation”. Nevertheless, equality and uniformity of
taxation mean that all taxable articles or kinds of property of the same class be taxed at the same rate. The
taxing power has the authority to make reasonable and natural classifications for purposes of taxation. To
satisfy this requirement it is enough that the statute or ordinance applies equally to all persons, firms, and
corporations placed in similar situation. Furthermore, the Constitution does not really prohibit the
imposition of indirect taxes which, like the VAT, are regressive. What it simply provides is that Congress
shall “evolve a progressive system of taxation.” The constitutional provision has been interpreted to mean
simply that “direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be
minimized.” The mandate to Congress is not to prescribe, but to evolve, a progressive tax system.

25) ABAKADA Guro v. Exec Secretary, 469 SCRA 1, etc 1 Sep 2005 & 18 Oct 2005
Facts: Petitioners ABAKADA GURO Party List challenged the constitutionality of R.A. No. 9337 particularly
Sections 4, 5 and 6, amending Sections 106, 107 and 108, respectively, of the National Internal Revenue
Code (NIRC). These questioned provisions contain a uniform proviso authorizing the President, upon
recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after
any of the following conditions have been satisfied, to wit:

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 following conditions has been
satisfied:

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 (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the 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 ½%).

Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its
exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine
Constitution. They further argue that VAT is a tax levied on the sale or exchange of goods and services and
cannot be included within the purview of tariffs under the exemption delegation since this refers to
customs duties, tolls or tribute payable upon merchandise to the government and usually imposed on
imported/exported goods. They also said that the President has powers to cause, influence or create the
conditions provided by law to bring about the conditions precedent. Moreover, they allege that no guiding
standards are made by law as to how the Secretary of Finance will make the recommendation. They claim,
nonetheless, that any recommendation of the Secretary of Finance can easily be brushed aside by the
President since the former is a mere alter ego of the latter, such that, ultimately, it is the President who
decides whether to impose the increased tax rate or not.

Issues: Whether or not R.A. No. 9337 has violated the provisions in Article VI, Section 24, and Article VI,
Section 26 (2) of the Constitution.

Whether or not there was an undue delegation of legislative power in violation of Article VI Sec 28 Par 1
and 2 of the Constitution.

Whether or not there was a violation of the due process and equal protection under Article III Sec. 1 of the
Constitution

Rulings: R.A. No. 9337 has not violated the provisions. The revenue bill exclusively originated in the House
of Representatives, the Senate was acting within its constitutional power to introduce amendments to the
House bill when it included provisions in Senate Bill No. 1950 amending corporate income taxes,
percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain
any prohibition or limitation on the extent of the amendments that may be introduced by the Senate to the
House revenue bill.

There is no undue delegation of legislative power but only of the discretion as to the execution of a 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 our
complex economy that is frequently the only way in which the legislative process can go forward.

Supreme Court held no decision on this matter. The power of the State to make reasonable and natural
classifications for the purposes of taxation has long been established. Whether it relates to the subject of
taxation, the kind of property, the rates to be levied, or the amounts to be raised, the methods of
assessment, valuation and collection, the State’s power is entitled to presumption of validity. As a rule, the
judiciary will not interfere with such power absent a clear showing of unreasonableness, discrimination,
or arbitrariness.

e. Aspects of Taxation
Levy

26) CIR v. Botelbo Shipping Corp, 20 SCRA 487

27) Tan v. Del Rosario, Jr.5 237 SCRA 324(1994) (Legislative discretion to determine nature (kind) ,
subject (purpose), extent (rate), coverage (subject), land situs (place), SNITS is valid;

FACTS: The consolidated cases questions the constitutionality of RA 7496 or the Simplified Net Income
Taxation Scheme. Petitioners claim to be taxpayers adversely affected by the continued implementation of
the amendatory legislation. Petitioners also assailed Section 6 of Revenue Regulations No. 2-93: that
public respondents have exceeded their rule-making authority in applying SNIT to general professional
partnerships. The Solicitor General agrees with the public respondents.

ISSUE: Whether RA 7496 and RR Nos. 2-93 are unconstitutional.

RULING: No. RA 7496 does not impose tax on single proprietorships and professionals differently from
the manner it imposes the tax on corporations and partnerships. Such system of income taxation has long
been the prevailing rule even prior to RA 7496. Uniformity of taxation merely requires that all subjects or
objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities.

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Tan v. Del Rosario, 237 SCRA 324 (1994) – This is a challenge to the validity of Simplified
Net Income Taxation applied to general professional partnerships; uniformity of taxation
merely requires that all subjects or objects of taxation similarly are to be treated alike both in
privileges and liabilities.

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 Also, the Court clarifies that a general professional partnership is not itself an income taxpayer. The
income tax is imposed not on the professional partnership, which is tax exempt, but on the partners
themselves in their individual capacity computed on their distributive shares of partnership profits as
provided in Section 23 of the Tax Code.

There is no distinction in income tax liability between a person who practices his profession alone or
individually and one who does it through partnership with others in the exercise of a common profession.
Under the present income tax system all individuals deriving income from any source whatsoever are
treated in almost invariably the same manner and under a common set of rules.

The phrase "income taxpayers" is an all embracing term used in the Tax Code, and it practically covers all
persons who derive taxable income. Partnerships no matter how created or organized, are subject to
income tax which, for purposes of the above categorization, are by law assimilated to be within the
context of, and so legally contemplated as, corporations.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as
now so modified by Republic Act No. 7496 on basically the extent of allowable deductions applicable to all
individual income taxpayers on their non-compensation income. There is no evident intention of the law,
either before or after the amendatory legislation, to place in an unequal footing or in significant variance
the income tax treatment of professionals who practice their respective professions individually and of
those who do it through a general professional partnership.

Assessment & Collection

Payment

f. Classification of Taxes
According to subject matter (Capitation Tax, Property Tax, Excise Tax)
According to burden or incidence (Direct or indirect)

28) Maceda v. Macaraeg 223 SCRA 217

Facts: On November 3, 1986, Commonwealth Act No. 120 created the NPC as a public corporation to
undertake the development of hydraulic power and the production of power from other sources. On June
4, 1949, Republic Act No. 358 granted NPC tax and duty exemption privileges - exempt from all taxes,
duties, fees, imposts, charges and restrictions of the Republic of the Philippines, its provinces, cities and
municipalities.

On January 22, 1974, Presidential Decree No. 380 amended it - the exemption of NPC from such taxes,
duties, fees, imposts and other charges imposed "directly or indirectly," on all petroleum products used by
NPC in its operation. On June 11, 1984, Presidential Decree No. 1931 withdrew all tax exemption
privileges granted in favor of government-owned or controlled corporations including their subsidiaries.
However, said law empowered the President and/or the then Minister of Finance, upon recommendation
of the FIRB to restore, partially or totally, the exemption withdrawn, or otherwise revise the scope and
coverage of any applicable tax and duty. On January 7, 1986, the FIRB issued resolution No. 1-86
indefinitely restoring the NPC tax and duty exemption privileges effective July 1, 1985.

However, effective March 10, 1987, Executive Order No. 93 once again withdrew all tax and duty
incentives granted to government and private entities which had been restored under Presidential Decree
Nos. 1931 and 1955 but it gave the authority to FIRB to restore, revise the scope and prescribe the date of
effectivity of such tax and/or duty exemptions. On June 24, 1987 the FIRB issued Resolution No. 17-87
restoring NPC's tax and duty exemption privileges effective March 10, 1987.

Issues:
1. Whether petitioner have the standing to challenge the questioned orders and resolution.
2. Whether or not the respondent NPC has ceased to enjoy indirect tax and duty exemption with the
enactment of P.D. No. 938 on May 27, 1976 which amended P.D. No. 380, issued on January 11, 1974.

Ruling:

First issue:
Petitioner, as a taxpayer, may file the instant petition following the ruling in Lozada when it involves illegal
expenditure of public money. The petition questions the legality of the tax refund to NPC by way of tax
credit certificates and the use of said assigned tax credits by respondent oil companies to pay for their tax
and duty liabilities to the BIR and Bureau of Customs.

Difference between Direct tax and an Indirect Tax:

A direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in.
Examples are the custom duties and ad valorem taxes paid by the oil companies to the Bureau of Customs
for their importation of crude oil, and the specific and ad valorem taxes they pay to the Bureau of Internal
Revenue after converting the crude oil into petroleum products.

On the other hand, "indirect taxes are taxes primarily paid by persons who can shift the burden upon
someone else ." For example, the excise and ad valorem taxes that oil companies pay to the Bureau of

8
 Internal Revenue upon removal of petroleum products from its refinery can be shifted to its buyer, like the
NPC, by adding them to the "cash" and/or "selling price."

Second Issue:
It is noted that in the earlier law, R.A. No. 358 the exemption was worded in general terms, as to cover "all
taxes, duties, fees, imposts, charges, etc. . . ." However, the amendment under Republic Act No. 6395
enumerated the details covered by the exemption. Subsequently, P.D. No. 380, made even more specific the
details of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum
products used in its operation. Presidential Decree No. 938 amended the tax exemption by simplifying the
same law in general terms. It succinctly exempts NPC from "all forms of taxes, duties, fees, imposts, as well
as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or
administrative proceedings."

The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC all the tax
exemptions it has been enjoying before. The rationale for this exemption is that being non-profit the NPC
"shall devote all its returns from its capital investment as well as excess revenues from its operation, for
expansion. Petitioner cannot invoke the rule on strictissimi juris with respect to the interpretation of
statutes granting tax exemptions to NPC.

Moreover, it is a recognized principle that the rule on strict interpretation does not apply in the case of
exemptions in favor of a government political subdivision or instrumentality.

29) ABAKADA Guro v. Exec Secretary, GR 168056 1 Sep 2005 & 18 Oct 2005
Facts:
ABAKADA GURO Party List, et al., filed a petition for prohibition o questioning the constitutionality of
Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National
Internal Revenue Code (NIRC).
Section 4 imposes a 10% VAT on sale of goods and properties;
Section 5 imposes a 10% VAT on importation of goods; and
Section 6 imposes a 10% VAT on sale of services and use or lease of properties;

These provisions contain a provision which authorizing the President, upon recommendation of the
Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after specified conditions
have been satisfied.

Issues:
Whether or not there is a violation of Article VI, Section 24 of the Constitution.

Whether or not there is undue delegation of legislative power in violation of Article VI Sec 28(2) of the
Constitution.

Whether or not there is a violation of the due process and equal protection of the Constitution.

Ruling:
No, the revenue bill exclusively originated in the House of Representatives, the Senate was acting within
its constitutional power to introduce amendments to the House bill when it included provisions in Senate
Bill No. 1950 amending corporate income taxes, percentage, and excise and franchise taxes.

No, there is no undue delegation of legislative power but only of the discretion as to the execution of a 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 our
complex economy that is frequently the only way in which the legislative process can go forward. In this
case, it is not a delegation of legislative power but a delegation of ascertainment of facts upon which
enforcement and administration of the increased rate under the law is contingent.

No, the power of the State to make reasonable and natural classifications for the purposes of taxation has
long been established. Whether it relates to the subject of taxation, the kind of property, the rates to be
levied, or the amounts to be raised, the methods of assessment, valuation and collection, the State’s power
is entitled to presumption of validity. As a rule, the judiciary will not interfere with such power absent a
clear showing of unreasonableness, discrimination, or arbitrariness.

According to determination of amount (Ad Valorem, Specific)

30) Tan v Mun of Pagbilao GR 14264, 30 Apr 1963 7 SCRA 887

9
 According to purpose (General, Special)

31) PAL v. Romeo Edu, GR 41383, 15 Aug 1998 164 SCRA 320 (exempt from taxes)
FACTS: The Philippine Airlines (PAL) is a corporation engaged in the air transportation business under a
legislative franchise, Act No. 42739. Under its franchise, PAL is exempt from the payment of taxes. Sometime in
1971, however, Land Transportation Commissioner Romeo F. Elevate (Elevate) issued a regulation pursuant to
Section 8, Republic Act 4136, otherwise known as the Land and Transportation and Traffic Code, requiring all
tax exempt entities, among them PAL to pay motor vehicle registration fees.

Despite PAL's protestations, Elevate refused to register PAL's motor vehicles unless the amounts imposed under
Republic Act 4136 were paid. PAL thus paid, under protest, registration fees of its motor vehicles. After paying
under protest, PAL through counsel, wrote a letter dated May 19,1971, to Land Transportation Commissioner
Romeo Edu (Edu) demanding a refund of the amounts paid. Edu denied the request for refund. Hence, PAL filed
a complaint against Edu and National Treasurer Ubaldo Carbonell (Carbonell).

The trial court dismissed PAL's complaint. PAL appealed to the Court of Appeals which in turn certified the case
to the Supreme Court.

ISSUE: Whether or not motor vehicle registration fees are considered as taxes.

RULING: Yes. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax. Such is the case of motor vehicle registration fees. The
motor vehicle registration fees are actually taxes intended for additional revenues of the government even if
one fifth or less of the amount collected is set aside for the operating expenses of the agency administering the
program.

32) ESSO Std Eastern v CIR GR 28508-9, 7 Jul 1989 175 SCRA 149 (Margin Fee a license – police power,
not taxing)
FACTS: Esso deducted from its gross income, as part of its ordinary and necessary business expenses,
margin fees it had paid to the Central Bank on its profit remittances to its New York Office. The CIR
disallowed the claimed deduction. ESSO appealed to the CTA but was denied. Hence, this petition.

ISSUE: Whether the margin fees were deductible from gross income either as a
(1) tax or
(2) ordinary and necessary business expense

RULING: (1) No, it is not a tax. A tax is levied to provide revenue for government operations, while the
proceeds of the margin fee are applied to strengthen our country’s international reserves. Thus the
margin fee was imposed by the State in the exercise of its police power ant not the power of taxation.

(2) No. ESSO has not shown that the remittance to the head office of part of its profits was made in
furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses are
necessary and appropriate in the absence of a showing that they are illegal or ultra vires. This is error. The
public respondent is correct when it asserts that the paramount rule is that claims for deductions are a
matter of legislative grace and do not turn on mere equitable considerations... The taxpayer in every
instance has the burden of justifying the allowance of any deduction claimed.

33) Lozano v. Energy Regulatory Board, GR 95119-21, 18 Dec 1990 192 SCRA 363 (OPSF not a tax)

According to authority imposing the tax (National, Local)

34) Meralco Securities v. Central Board of Assessments Appeals, GR L-46245, 31 May 1982 114 SCRA
260 (Real Property under Real Property Tax Code, a national tax; This is no longer true under the
Local Government Code)

Facts: Pursuant to a pipeline concession issued under the Petroleum Act of 1949, Republic Act No. 387,
Meralco Securities installed from Batangas to Manila a pipeline system consisting of cylindrical steel pipes
joined together and buried not less than one meter below the surface along the shoulder of the public
highway. The pipes are embedded in the soil and are firmly and solidly welded together so as to preclude
breakage or damage thereto and prevent leakage or seepage of the oil. The valves are welded to the pipes
so as to make the pipeline system one single piece of property from end to end.

10
 In order to repair, replace, remove or transfer segments of the pipeline, the pipes have to be cold-cut by
means of a rotary hard-metal pipe-cutter after digging or excavating them out of the ground where they
are buried. In points where the pipeline traversed rivers or creeks, the pipes were laid beneath the bed
thereof. Hence, the pipes are permanently attached to the land.

Pursuant to the Assessment Law, Commonwealth Act No. 470, the provincial assessor of Laguna treated
the pipeline as real property and issued tax declarations, containing the assessed values of portions of the
pipeline.

Meralco appealed the assessments to the defendants, but the latter ruled that pipeline is subject to realty
tax. The defendants argued that the pipeline is subject to realty tax because they are contemplated in
Assessment Law and Real Property Tax Code; that they do not fall within the category of property exempt
from realty tax under those laws; that Articles 415 & 416 of the Civil Code, defining real and personal
property have no applications to this case because these pipes are constructions adhered to soil and
things attached to the land in a fixed manner, and that Meralco Securities is not exempt from realty tax
under petroleum law.

Meralco insists that its pipeline is not subject to realty tax because it is not real property within the
meaning of Art. 415.

Issue: Whether the aforementioned pipelines are subject to realty tax.

Held: Yes, the pipelines are subject to realty tax.

Section 2 of the Assessment Law provides that the realty tax is due “on real property, including land,
buildings, machinery, and other improvements.” This provision is reproduced with some modification in
Section 38, Real Property Tax Code, which provides that “there shall be levied, assessed, and collected xxx
annual ad valorem tax on real property such as land, buildings, machinery, and other improvements
affixed or attached to real property xxx.”

It is incontestable that the pipeline of Meralco Securities does not fall within any of the classes of exempt
real property enumerated in section 3 of the Assessment Law and section 40 of the Real Property Tax
Code.

Pipeline means a line of pipe connected to pumps, valves and control devices for conveying liquids, gases
or finely divided solids. It is a line of pipe running upon or in the earth, carrying with it the right to the use
of the soil in which it is placed.

Article 415[l] and [3] provides that real property may consist of constructions of all kinds adhered to the
soil and everything attached to an immovable in a fixed manner, in such a way that it cannot be separated
therefrom without breaking the material or deterioration of the object.

The pipeline system in question is indubitably a construction adhering to the soil. It is attached to the land
in such a way that it cannot be separated therefrom without dismantling the steel pipes which were
welded to form the pipeline.

WHEREFORE, the questioned decision and resolution are affirmed. The petition is dismissed. No costs.

According to graduation (tax base / tax rate) – (Progressive, regressive, etc)

g. Distinguished from other exactions

License

35) Procter & Gamble v. Mun of Jagna, 94 SCRA 894, (nature and amount of license)
FACTS: The CFI of Manila upheld the validity of Ordinance No. 4, Series of 1957, which imposed “storage
fees on all exportable copra deposited in the bodega of the Municipality of Jagna.” Plaintiff-appellant is
engaged in the manufacture of soap, edible oil, margarine and other similar products, and for this
purpose, maintains a bodega in Jagna where it stores copra purchased in the Municipality. It further
claims that Ordinance No. 4 is ultra-vires and void for being beyond the power of the Municipality to enact
and that it be allowed to refund to it the amount of Php42,265.13 it paid in protest. Moreover, it claims
that subject Ordinance is inapplicable to it as it is not engaged in the business or trade of storing copra for
others for compensation or profit.

ISSUE: Whether the Municipality of Jagna was authorised to impose and collect the storage fee provided
for in the challenged Ordinance.

RULING: YES. The validity of the ordinance must be upheld pursuant to the broad authority conferred
upon municipalities by CA No. 472, Section 1. Under the foregoing provision, a municipality is authorised
to impose (1) a license for regulation of useful occupation; (2) a license for restriction or regulation of
non-useful occupation or enterprises; and (3) license for revenue.

The storage fee imposed under the question Ordinance is actually a municipal license tax or fee on
persons, firms and corporations, like plaintiff, exercising the privilege of storing copra in a bodega within
the Municipality's territorial jurisdiction. For it has been held that a warehouse used for keeping or

11
 storing copra is an establishment likely to endanger the public safety or likely to give rise to conflagration
because the oil content of the copra when ignited is difficult to put under control by water and the use of
chemicals is necessary to put out the fire, the same is under Section 2238 of the Administrative Code.

Plaintiff's averment that the Ordinance, even if presumed valid, is inapplicable to it because it is not
engaged in the business or occupation of buying or selling of copra but is only storing copra in connection
with its main business of manufacturing soap and other similar products, and that to be compelled to pay
the storage fees would amount to double taxation, does not inspire assent. The question of whether
appellant is engaged in that business or not is irrelevant because the storage fee, as previously mentioned,
is an imposition on the privilege of storing copra in a bodega within defendant municipality by persons,
firms or corporations. Section 1 of the Ordinance in question does not state that said persons, firms or
corporations should be engaged in the business or occupation of buying or selling copra. Moreover, by
plaintiff's own admission that it is a consolidated corporation with its trading company, it will be hard to
segregate the copra it uses for trading from that it utilizes for manufacturing.

Thus, it can be said that plaintiff's payment of storage fees imposed by the Ordinance in question does not
amount to double taxation. For double taxation to exist, the same property must be taxed twice, when it
should be taxed but once. Double taxation has also been defined as taxing the same person twice by the
same jurisdiction for the same thing. Surely, a tax on plaintiff's products is different from a tax on the
privilege of storing copra in a bodega situated within the territorial boundary of defendant municipality.

36) Golden Ribbon Lumber v City of Butuan, 12 SCRA 611 (non payment is illegal)
FACTS: Golden Ribbon Lumber Co., Inc., a duly organized domestic corporation, operated a lumber mill
and lumber yard in Butuan City. Pursuant to Ordinance No. 5, as amended by Ordinance Nos. 9, 10, 47, and
49 of the said city, it paid the taxes provided therein. Claiming that said ordinance, as amended, was void,
it later brought the present action to have it so declared; to recover the amount paid, and to have
appellants permanently enjoined from enforcing said ordinance as amended.

ISSUE: Whether or not Ordinance No. 5 falls within the Charter of the City of Butuan.

HELD: No. The tax imposed is and was really intended to be on lumber sold and not a tax on, or, license fee
for the privilege of operating a lumber mill and/or a lumber yard. It violates RA 2264 as municipal
corporations are prohibited from imposing charges of taxes of such nature.

Appellants’ claim that the questioned tax is one on business or a privilege tax for the operation of a
lumber mill or a lumber yard is without merit. The character or nature of a tax is determined by its
operation, practical results and incidents. Neither the original ordinance in question nor the amendatory
ones provide that payment thereof is a condition precedent to the enjoyment of such privilege or that its
non-payment would result in the cancellation of any previous license granted.

Lastly, the rule is well-settled that municipal corporations are clothed with no power of taxation; that its
charter or a statute must clearly show an intent to confer that power or the municipal corporation cannot
assume and exercise it, and that any such power granted must be construed strictly, any doubt or
ambiguity arising out from the terms of the grant to be resolved against the municipality.

Toll

37) City of Ozamis v Lumapas, 65 SCRA 33

Special Assessments (Now, Special Levy under the Local Government Coe)

38) Apostolic Prefect v Treasurer of Baguio, 71 PHIL 547

FACTS In 1937, an ordinance (Ord. 137) was passed in the City of Baguio. The said ordinance sought to
assess properties of property owners within the defined city limits.
APMP, on the other hand, is a religious corporation duly established under Philippine laws. Pursuant to
the ordinance, it contributed a total amount of P1,019.37. It filed the said contribution in protest.
APMP later averred that it should be exempt from the said special contribution since as a religious
institution, it has a constitutionally guaranteed right not to be taxed including its properties.

ISSUE: Whether or not APMP is exempt from taxes

HELD:The test of exemption from taxation is the use of the property for purposes mentioned in the
Constitution. Based on Justice Cooley’s words: "While the word 'tax' in its broad meaning, includes both
general taxes and special assessments, and in a general sense a tax is an assessment, and an assessment is
a tax, yet there is a recognized distinction between them in that assessment is confined to local
impositions upon property for the payment of the cost of public improvements in its immediate vicinity
and levied with reference to special benefits to the property assessed.

The differences between a special assessment and a tax are that (1) a special assessment can be levied
only on land; (2) a special assessment cannot (at least in most states) be made a personal liability of the
person assessed; (3) a special assessment is based wholly on benefits; and (4) a special assessment is
exceptional both as to time and locality. The imposition of a charge on all property, real and personal, in a
prescribed area, is a tax and not an assessment, although the purpose is to make a local improvement on a
street or highway. A charge imposed only on property owners benefited is a special assessment rather

12
 than a tax notwithstanding the statute calls it a tax." In the case at bar, the Prefect cannot claim exemption
because the assessment is not taxation per se but rather a system for the benefits of the inhabitants of the
city.

Debt or an ordinary obligation

39) Victoria Millling v Phil Ports Authority, GR 73705 27 Aug 1987, 153 SCRA 317 (share of govt from
earnings of arrastre and stevedoring from contractual compensation not tax)
FACTS: This is a petition for review on certiorari of the July 27, 1984 Decision of the Office of the
Presidential Assistant For Legal Affairs dismissing the appeal from the adverse ruling of the Philippine
Ports Authority on the sole ground that the same was filed beyond the reglementary period.

On April 28, 1981, the Iloilo Port Manager of respondent Philippine Ports Authority (PPA for short) wrote
petitioner Victorias Milling Co., requiring it to have its tugboats and barges undergo harbor formalities
and pay entrance/clearance fees as well as berthing fees effective May 1, 1981. PPA, likewise, requiring
petitioner to secure a permit for cargo handling operations at its Da-an Banua wharf and remit 10% of its
gross income for said operations as the government's share.

Victorias Milling Co. maintained that it is except from paying PPA any fee or charge because: 1. The wharf
and its facilities are built and installed on it’s own land; 2. Repairs and maintenance are solely paid by it; 3.
Maintenance and dredging of the channel are done by the Company personnel; 4. At not time has the
government paid any centavo for such activities.

ISSUE: WON the Victorias Milling Co. claim of exception for PPA fees is meritorious.

HELD: No, the petitioners claim that there is no basis for the PPA to assess and impose the dues and
charge is devoid of merit. As correctly stated by the Solicitor General, the fees and charges PPA collects are
not for the use of the wharf that petitioner owns but for the privilege of navigating in public waters, of
entering and leaving public harbours and berthing on public streams or waters.

As to the requirement to remit 10% of the handling charges, Section 6B-(ix) of the Presidential Decree No.
857 authorized the PPA "To levy dues, rates, or charges for the use of the premises, works, appliances,
facilities, or for services provided by or belonging to the Authority, or any organization concerned with
port operations." This 10% government share of earnings of arrastre and stevedoring operators is in the
nature of contractual compensation to which a person desiring to operate arrastre service must agree as a
condition to the grant of the permit to operate.

40) CIR v Prieto 109 PHIL 592

FACTS: Respondent Vda. de Prieto conveyed by way of gifts a real property to her children. The
Commissioner of Internal Revenue appraised the property donated at P1,231,268.00, and assessed the
total sum of P117,706.50 as donor's gift tax, interest and compromises due thereon. Of the total sum of
P117,706.50 paid by respondent on April 29, 1954, the sum of P55,978.65 represents the total interest on
account of deliquency. Said sum was claimed as deduction, among others, by respondent in her 1954
income tax return. Petitioner disallowed the claim and as a consequence of such disallowance assessed
respondent for 1954 deficiency income tax due on the aforesaid P55,978.65, including interest 1957,
surcharge and compromise for the late payment.

ISSUE: Whether or not interest paid for the late payment of tax is deductible from gross income.

HELD: YES. For interest to be deductible, it must be shown that: (1) there be an indebtedness, (2) there
should be interest upon it, and (3) what is claimed as an interest deduction should have been paid or
accrued within the year. In this case, the last two requirements are undisputed. The only question is if
interest on account of late payments of taxes be considered as indebtedness. Indebtedness has been
defined as an unconditional and legally enforceable obligation for the payment of money. Within the
meaning of that definition, it is apparent that a tax may be considered indebtedness. Although taxes
already due have not, strictly speaking, the same concept as debts, they are, however, obligations that may
be considered as such. Where statute imposes a personal liability for a tax, the tax becomes, at least in a
board sense, a debt. It follows that the interest paid by herein respondent for the late payment of her
donor's tax is deductible from her gross income.

In conclusion, interest payment for delinquent taxes is not deductible as tax but the taxpayer is not
precluded thereby from claiming said payment as deduction on account of interest.

h. Interpretation and Construction of Tax Statutes

How are tax laws interpreted or construed?
a. Rules of Statutory Construction are applied, legislative intent is primordial
b. In case of doubt, construed in favor of taxpayer
c. But for exemptions, construed against taxpayer
i. Except when it applies to government
ii. Special class of subjects under special conditions
iii. When the law says so

13
41) CIR v CA, Central Vegetable Mfg Co & CTA, GR 107135, 23 Feb 1999

42) Luzon Stevedoring v CTA, GR 30232, 29 Jul 1988, 163 SCRA 647
FACTS: Petitioner-appellant Luzon Stevadoring Corporation (LSC), in 1961 and 1962, for the repair and
maintenance of its tugboats, imported various engine parts and other equipment for which it paid, under
protest, the assessed compensating tax. Unable to secure a tax refund from the CIR, on January 2, 1964, it
filed a Petition for Review with the CTA, praying among others, that it be granted the refund of the amount
of P33,442.13.

Petitioner contends that tugboats are embraced and included in the term cargo vessel under the tax
exemption provisions of Section 190 of the Revenue Code, as amended by Republic Act. No. 3176. He
argues that in legal contemplation, the tugboat and a barge loaded with cargoes with the former towing
the latter for loading and unloading of a vessel in part, constitute a single vessel. Accordingly, it concludes
that the engines, spare parts and equipment imported by it and used in the repair and maintenance of its
tugboats are exempt from compensating tax.

The CTA, however, in a Decision dated October 21, 1969 denied the various claims for tax refund. Its
Motion for Reconsideration was also denied.

ISSUES:

Whether or not petitioner’s tugboats can be interpreted to be included in the term “cargo vessels” for
purposes of the tax exemption provided for in Section 190 of the National Internal Revenue Code, as
amended by Republic Act No. 3176.

HELD: Petition without merit. Section 190 of NIRC provides that the tax imposed in this section shall not
apply to articles to be used by the importer himself in the manufacture or preparation of articles subject
to specific tax or those for consignment abroad and are to form part thereof or to articles to be used by the
importer himself as passenger and/or cargo vessel, whether coastwise or oceangoing, including engines
and spare parts of said vessel.

This Court has laid down the rule that “as the power of taxation is a high prerogative of sovereignty, the
relinquishment is never presumed and any reduction or dimunition thereof with respect to its mode or its
rate, must be strictly construed, and the same must be coached in clear and unmistakable terms in order
that it may be applied. More specifically stated, the general rule is that any claim for exemption from the
tax statute should be strictly construed against the taxpayer.

As correctly analyzed by the Court of Tax Appeals, in order that the importations in question may be
declared exempt from the compensating tax, it is indispensable that the requirements of the amendatory
law be complied with, namely: (1) the engines and spare parts must be used by the importer himself as a
passenger and/or cargo, vessel; and (2) the said passenger and/or cargo vessel must be used in coastwise
or oceangoing navigation.

As pointed out by the CTA, the amendatory provisions of RA 3176 limit tax exemption from the
compensating tax to imported items to be used by the importer himself as operator of passenger and/or
cargo vessel.

As quoted in the decision of the Court of Tax Appeals, a tugboat is defined as follows:

A tugboat is a strongly built, powerful steam or power vessel, used for towing and, now, also used for
attendance on vessel. (Webster New International Dictionary, 2nd Ed.)

A tugboat is a diesel or steam power vessel designed primarily for moving large ships to and from piers
for towing barges and lighters in harbors, rivers and canals. (Encyclopedia International Grolier, Vol. 18, p.
256).

A tug is a steam vessel built for towing, synonymous with tugboat. (Bouvier’s Law Dictionary.).

Under the foregoing definitions, petitioner’s tugboats clearly do not fall under the categories of passenger
and/or cargo vessels. Thus, it is a cardinal principle of statutory construction that where a provision of
law speaks categorically, the need for interpretation is obviated, no plausible pretense being entertained
to justify non-compliance. All that has to be done is to apply it in every case that falls within its terms
(Allied Brokerage Corp. v. Commissioner of Customs, L-27641, 40 SCRA 555 [1971]; Quijano, etc. v. DBP, L-
26419, 35 SCRA 270 [1970]).

And, even if construction and interpretation of the law is insisted upon, following another fundamental
rule that statutes are to be construed in the light of purposes to be achieved and the evils sought to be

14
 remedied (People v. Purisima etc., et al., L-42050-66, 86 SCRA 544 [1978], it will be noted that the
legislature in amending Section 190 of the Tax Code by Republic Act 3176, as appearing in the records,
intended to provide incentives and inducements to bolster the shipping industry and not the business of
stevedoring, as manifested in the sponsorship speech of Senator Gil Puyat.
43) CIR v. Gotamco & Sons, GR 31092, 27 Feb 1987, 148 SCRA 36
Facts: The World Health Organization (WHO), an international organization, entered into a Host
Agreement with the Republic of the Philippines on July 22, 1951. In the agreement, WHO’S assets, income
and other properties shall be exempt from all direct and indirect taxes. WHO decided to construct a
building to house its own offices, as well as the other United Nations offices stationed in Manila. In inviting
bids for the construction of the building, WHO informed the bidders that the building to be constructed
belonged to an international organization with diplomatic status and thus exempt from the payment of all
fees, licenses, and taxes, and that therefore their bids “must take this into account and should not include
items for such taxes, licenses and other payments to Government agencies.” The construction contract was
awarded to respondent John Gotamco & Sons, Inc. on February 10, 1958.

On June 3, 1958, the Commissioner of Internal Revenue stated that “as the 3% contractor’s tax is not a
direct nor an indirect tax on the WHO, but a tax that is primarily due from the contractor, the same is not
covered by . . . the Host Agreement.”

On January 2, 1960, the WHO issued a certification that the bid of Gotamco should be exempted from any
taxes in connection with the construction of the WHO office building because taxes or fees in connection
with the construction of the building is an indirect tax to WHO.

On January 17, 1961, the Commissioner of Internal Revenue sent a letter of demand to Gotamco
demanding payment of P 16,970.40, representing the 3% contractor’s tax plus surcharges on the gross
receipts it received from the WHO in the construction of the latter’s building.

Respondent Gotamco appealed the Commissioner’s decision to the Court of Tax Appeals, which after trial
rendered a decision, in favor of Gotamco and reversed the Commissioner’s decision.

Issues: Whether or not the 3% contractor’s tax assessed on Gotamco is an “indirect tax”.
Whether respondent John Gotamco & Sons, Inc. should pay the 3% contractor’s tax under Section 191 of
the National Internal Revenue Code on the gross receipts it realized from the construction of the World
Health Organization office building in Manila.

RULING: The Petitioner’s position is that the contractor’s tax “is in the nature of an excise tax which is a
charge imposed upon the performance of an act, the enjoyment of a privilege or the engaging in an
occupation. . . It is a tax due primarily and directly on the contractor, not on the owner of the building.
Since this tax has no bearing upon the WHO, it cannot be deemed an indirect taxation upon it.”

The Court agreed with the Court of Tax Appeals in rejecting this contention of the petitioner. The CA
stated: The contractor’s tax is of course payable by the contractor but in the last analysis it is the owner of
the building that shoulders the burden of the tax because the same is shifted by the contractor to the
owner as a matter of self-preservation. Thus, it is an indirect tax. And it is an indirect tax on the WHO
because, although it is payable by the petitioner, the latter can shift its burden on the WHO. In the last
analysis it is the WHO that will pay the tax indirectly through the contractor and it certainly cannot be said
that ‘this tax has no bearing upon the World Health Organization.

The Host Agreement, in specifically exempting the WHO from “indirect taxes,” contemplates taxes which,
although not imposed upon or paid by the Organization directly, form part of the price paid or to be paid
by it. The 3% contractor’s tax would be within this category and should be viewed as a form of an
“indirect tax” On the Organization, as the payment thereof or its inclusion in the bid price would have
meant an increase in the construction cost of the building.

44) CIR v. CA, CTA and Ateneo de Manila, GR 115349, 18 Apr 1997, 271 SCRA 605

FACTS: Private respondent, Ateneo de Manila University, is a non-stock, non-profit educational institution with
auxiliary units and branches all over the country. The Institute of Philippine Culture (IPC) is an auxiliary unit
with no legal personality separate and distinct from private respondent. The IPC is a Philippine unit engaged in
social science studies of Philippine society and culture. Occasionally, it accepts sponsorships for its research
activities from international organizations, private foundations and government agencies.

On 8 July 1983, private respondent received from CIR a demand letter dated 3 June 1983, assessing private
respondent the sum of P174,043.97 for alleged deficiency contractor’s tax, and an assessment dated 27 June
1983 in the sum of P1,141,837 for alleged deficiency income tax, both for the fiscal year ended 31 March 1978.
Denying said tax liabilities, private respondent sent petitioner a letter-protest and subsequently filed with the
latter a memorandum contesting the validity of the assessments.

After some time petitioner issued a final decision dated 3 August 1988 reducing the assessment for deficiency
contractor’s tax from P193,475.55 to P46,516.41, exclusive of surcharge and interest.

The lower courts ruled in favor of respondent. Hence this petition.

15
Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila University
"falls within the definition" of an independent contractor and "is not one of those mentioned as excepted";
hence, it is properly a subject of the three percent contractor's tax levied by the foregoing provision of law.
Petitioner states that the "term 'independent contractor' is not specifically defined so as to delimit the scope
thereof, so much so that any person who . . . renders physical and mental service for a fee, is now indubitably
considered an independent contractor liable to 3% contractor's tax."

ISSUE: Whether or not private respondent falls under the purview of independent contractor pursuant to
Section 205 of the Tax Code and is subject to a 3% contractors tax.

HELD: The petition is unmeritorious.

The term "independent contractors" include persons (juridical or natural) not enumerated above (but not
including individuals subject to the occupation tax under Section 12 of the Local Tax Code) whose activity
consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of
the service calls for the exercise or use of the physical or mental faculties of such contractors or their
employees.
Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without first
applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical
and impractical to determine who are exempted without first determining who are covered by the aforesaid
provision. The Commissioner should have determined first if private respondent was covered by Section 205,
applying the rule of strict interpretation of laws imposing taxes and other burdens on the populace, before
asking Ateneo to prove its exemption therefrom.

Interpretation of Tax Laws. The doctrine in the interpretation of tax laws is that “(a) statute will not be
construed as imposing a tax unless it does so clearly, expressly, and unambiguously. . . . (A) tax cannot be
imposed without clear and express words for that purpose. Accordingly, the general rule of requiring
adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a
taxing act are not to be extended by implication.” In case of doubt, such statutes are to be construed most
strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed
nor presumed to be imposed beyond what statutes expressly and clearly import.

Ateneo’s Institute of Philippine Culture never sold its services for a fee to anyone or was ever engaged in a
business apart from and independently of the academic purposes of the university. Funds received by the
Ateneo de Manila University are technically not a fee. They may however fall as gifts or donations which are
“tax-exempt” as shown by private respondent’s compliance with the requirement of Section 123 of the National
Internal Revenue Code providing for the exemption of such gifts to an educational institution.
Transaction of IPC not a contract of sale nor a contract for a piece of work. The transactions of Ateneo’s
Institute of Philippine Culture cannot be deemed either as a contract of sale or a contract for a piece of work. By
the contract of sale, one of the contracting parties obligates himself to transfer the ownership of and to deliver
a determinate thing, and the other to pay therefor a price certain in money or its equivalent. In the case of a
contract for a piece of work, “the contractor binds himself to execute a piece of work for the employer, in
consideration of a certain price or compensation. . . . If the contractor agrees to produce the work from
materials furnished by him, he shall deliver the thing produced to the employer and transfer dominion over the
thing. . . .” In the case at bench, it is clear from the evidence on record that there was no sale either of objects or
services because, as adverted to earlier, there was no transfer of ownership over the research data obtained or
the results of research projects undertaken by the Institute of Philippine Culture.

How are the rules applied? Apply first the doctrine that imposition is a burden thus construed
strictly vs. govt, then if applicable, the burden shifts to taxpayer to prove he is exempt.

i. Classifications of Exemptions
Express

i. Section 30 of NIRC
ii. Section 105 of Tariffs and Customs Code
iii. Special Laws, like the Omnibus Investment Code

Implied or by Omission

i. Government is impliedly not subject to tax but it can tax itself

ii. Equity
iii. Contractual

45) Prov of Mizamis Oriental v. Cagayan Electric, GR 45355, 12 Jan 1990, 181 SCRA 38
Facts: Cagayan Electric Power and light Co, Inc. (CEPALCO) was granted a franchise in 1961 under RA
3247 to install, operate and maintain an electric light, heat and power system in Cagayan de Oro and its
suburbs. In 1973, the Local Tax Code (PD 231) was promulgated, where Section 9 thereof providing for a
franchise tax. Pursuant thereto, the province of Misamis Oriental enacted Provincial Revenue Ordinance
19, whose Section 12 also provides for a franchise tax. The Provincial Treasurer demanded payment of
the provincial franchise tax from CEPALCO. CEPALCO paid under protest.

Issue: Whether CEPALCO is exempt from the provincial franchise tax.

16
 Held: Local Tax Regulation 3-75 issued by the Secretary of Finance in 1976 made it clear that the franchise
tax provided in the Local Tax Code may only be imposed on companies with franchise that do not contain
the exempting clause, i.e. “in-lieu-of-all-taxes-proviso.” CEPALCO’s franchise i.e. RA 3247, 3571 and 6020
(Section 3 thereof), uniformly provides that “in consideration of the franchise and rights hereby granted,
the grantee shall pay a franchise tax equal to 3% of the gross earnings for electric current sold under the
franchise, of which 2% goes to the national Treasury and 1% goes into the treasury of the municipalities
of Tagoloan, Opol, Villanueva, Jasaan, and Cagayan de Oro, as the case may be: Provided, that the said
franchise tax of 3% of the gross earnings shall be in lieu of all taxes and assessments of whatever
authority upon privileges, earnings, income, franchise and poles, wires, transformers, and insulators of
the grantee from which taxes and assessments the grantee is hereby expressly exempted.

j. Instances Exemptions construed liberally

The law says so
Special classes of persons under special circumstances

46) CIR v. CA, ROH Auto Products Phils & CTA, GR 108358, 20 Jan 1995, 240 SCRA 368
Facts: Cagayan Electric Power and light Co, Inc. (CEPALCO) was granted a franchise in 1961 under RA
3247 to install, operate and maintain an electric light, heat and power system in Cagayan de Oro and its
suburbs. In 1973, the Local Tax Code (PD 231) was promulgated, where Section 9 thereof providing for a
franchise tax. Pursuant thereto, the province of Misamis Oriental enacted Provincial Revenue Ordinance
19, whose Section 12 also provides for a franchise tax. The Provincial Treasurer demanded payment of
the provincial franchise tax from CEPALCO. CEPALCO paid under protest.

Issue: Whether CEPALCO is exempt from the provincial franchise tax.

Held: Local Tax Regulation 3-75 issued by the Secretary of Finance in 1976 made it clear that the franchise
tax provided in the Local Tax Code may only be imposed on companies with franchise that do not contain
the exempting clause, i.e. “in-lieu-of-all-taxes-proviso.” CEPALCO’s franchise i.e. RA 3247, 3571 and 6020
(Section 3 thereof), uniformly provides that “in consideration of the franchise and rights hereby granted,
the grantee shall pay a franchise tax equal to 3% of the gross earnings for electric current sold under the
franchise, of which 2% goes to the national Treasury and 1% goes into the treasury of the municipalities
of Tagoloan, Opol, Villanueva, Jasaan, and Cagayan de Oro, as the case may be: Provided, that the said
franchise tax of 3% of the gross earnings shall be in lieu of all taxes and assessments of whatever
authority upon privileges, earnings, income, franchise and poles, wires, transformers, and insulators of
the grantee from which taxes and assessments the grantee is hereby expressly exempted.

In favor of the government, etc

47) Maceda v. Macaraeg, 197 SCRA 77

Exemptions granted to traditional exemptees, such as religious / charitable

k. Certain Doctrines in Taxation

Prospectivity of tax laws

How may tax laws be applied? General rule, prospective, but the law can provide that it has retro
effect and it is still valid, except if too harsh and oppressive as to violate due process clause of the
constitution.

48) Hydro Resources v CA, GR L-80276 21 Dec 1990, 192 SCRA 604 [ad valorem tax imposed by law
passed after transfer of ownership not applicable; contract of sale subject to suspensive condition; LC
issued prior to law is not subject to ad valorem; no retro effect unless stated by law]

49) Central Azucarera de Don Pedro v. CTA, 20 SCRA 344 [interest on deficiency tax was imposed by a law
passed after the deficiency was incurred is not a retroactive application]

May tax laws be given retroactive effect? Yes, Lorenzo v. Posadas 64 Phil 353; Smietanka v First
Trust Savings Bank, 257 US 602; Law on Federal Taxation, Vo; 1 p.154

Is the government bound by the errors of its agents? While the government is not bound by the
error of its agent in issuing a ruling, in the interest of justice and fair play, reversal of ruling may not
be given retro effect

50) CIR v. Benguet Corp, 463 SCRA 28 (2005)

51) CIR v. Burmeisters & Wain Scandinavian, GR 153205 Jan 2007
Non-prescriptive

52) CIR v. Ayala Securities Corp, GR L-29485, 21 Nov 1980 – tax on undue accumulation of income does
not prescribe because the law imposing does not provide for the fixed period within which to file a tax
return; the SC reconsidered its earlier decision dated April 8, 1976; see Sec 29, NIRC

May taxes prescribe? No, but the law can provide for its prescription, such as NIRC, Customs and
LGC

17
 Double Taxation
What is double taxation? Is it valid or constitutional?

Direct Duplicate Taxation – same taxing authority, same year, same taxes but applying to some of
the properties
Indirect Duplicate Taxation – when otherwise

53) Pepsi Cola v. Tanauan, 69 SCRA 460 [mun ordinance impose .01 per gallon per RA is not undue
delegation; no double taxation; not specific tax]

54) CIR v. SC Johnson & Sons, 309 SCRA 87 (1999), [Most favored nation clause; double taxation; claim for
refund in the nature of exemption; construction of RP-US tax Treaty – tax rate on royalty US v Germany,
international juridical double taxation defined]

Measures to avoid double taxation

i. Treaty
ii. Reciprocity
iii. Tax Credit

Means of escaping taxation – tax avoidance / tax evasion

55) CIR v. Rufino, GR L-33665-68, 27 Feb 1987, 148 SCRA 42, [tax exempt merger of two corporations]
56) Delpher Trades Corp v IAC, 157 SCRA 349 [tax exempt transfer of property to a corporation resulting
to control]
57) CIR v. Benigno Toda, 438 SCRA 290 (2004) – meaning of fraud; tax avoidance / evasion

Is equitable recoupment allowed though prescription has set in?

58) Collector v. UST, 104 PHIL 1062 – (rejected this common law doctrine)

Set off of taxes

59) Philex Mining v. CIR,L-125704, 28 Aug 1998 (General rule: no offsetting) [Refundable VAT v. Excise
tax);
60) CIR v ESSO Standard, 172 SCRA 369 18 Apr 1989, 172 SCRA 623 [ Offset of Percentage Tax and
amusement taxes v. matured back pay certificates]; Domingo v. Garlitos, 8 SCRA 443 [1963]
(exception: allowed)[Estate and Inheritance Taxes v specificallu appropriated fund for the
payment of obligation to the estate]

Taxpayer suit may be filed

When disbursement of public funds involved

BUT NOT to enjoin COMELEC to call election

Funds were not raised through taxation
Maceda v. Macaraeg, 197 SCRA 771 [Exemption of NPC from taxes]

Are compromises allowed? Yes by the BIR under NIRC and by Customs under TCCP. NO similar
provisions under the LGC, thus Civil Code applies suppletorily

Are tax laws political in nature? No, it applies to territory and not by reason of occupying forces.

l. DEFINITIONS OF DIFFERENT TAXES UNDER THE NIRC

Capital Gains Tax is a tax imposed on the gains presumed to have been realized by the seller from the
sale, exchange or other disposition of capital assets located in the Philippines, including pacto de retro
sales and other forms of conditional sale.

Documentary Stamp Tax is a tax on documents, instruments, loan agreements and papers evidencing
the acceptance, assignment, sale or transfer of an obligation, rights or property incident thereto.

Donor’s Tax is a tax on a donation or gift, and is imposed on the gratuitous transfer of property between
two or more persons who are living at the time of the transfer.

Estate Tax is a tax on the right of the deceased person to transmit his / her estate to his / her lawful heirs
and beneficiaries at the time of death and on certain transfers which are made by law as equivalent to
testamentary disposition.

Income Tax is a tax on all yearly profits arising from property, profession, trades or offices or as a tax on a
person’s income, emoluments, profits and the like.

18
 Percentage Tax is a business tax imposed on persons or entities who sell or lease goods , properties or
services in the ordinary course of trade or business whose gross annual sales or receipts do not exceed
P1.5million and are not VAT-registered.

Value-Added Tax is a business tax imposed and collected from the seller in the course of trade or
business on every sale of properties (real or personal) lese of goods or properties (real or personal) or
vendors of services. It is an indirect tax, thus it can be passed on to the buyer.

Withholding Tax on Compensation is the tax withheld from individuals receiving purely compensation
income.

Expanded Withholding Tax is a kind of withholding tax which is prescribed only for certain payors and
is creditable against the income tax due of the payee for the taxable quarter / year.

Final Withholding Tax is a kind of withholding tax which is prescribed only for certain payors and is not
creditable against the income tax due of the payee for the taxable year. Income tax withheld constitutes
the full and final payment of the Income Tax due from the payee on the said income.

Withholding Tax on Government Money Payments is the tax withheld by government offices and
instrumentalities, including government owned or controlled corporations and local government units,
before making any payments to private individuals, corporations, partnerships and / or associations.

B. THE NATIONAL INTERNAL REVENUE CODE

a. Taxes imposed under the NIRC (Sec 21, NIRC)

b. Bureau of Internal Revenue (Sec 2 to 20, NIRC)

Powers and duties of the Bureau of Internal Revenue

Exclusive and original power of the CIR to interpret tax laws, subject to review by the Secretary of
Finance
Assess and Collect

61) CIR v. Pascor Realty & Dev Corp, 309 SCRA 402 (1999), Meaning of Assessment; is assessment
prejudicial to filing a tax evasion case?

62) Marcos II v. CA, 270 SCRA 47(1997) Burden of Proof on taxpayer to prove erroneous assessment;
inapplicability of the statute on non-claims under the Rules of Court to taxes

63) Meralco Securities Corp v. Savellano, 117 SCRA 804 (BIR cannot be compelled by Mandamus to issue
assessment)

Enforce forfeitures, penalties & fines, execute decision of CTA & ordinary courts

64) Republic v CTA 366 SCRA 489(2001); Aznar v CIR 58 SCRA 519(1974); CIR v. Benigno Toda 438
SCRA 290 (2004) (meaning of fraud)

Effect police powers

Obtain information, etc

65) Sy Po v CTA, GR No. 81446, 18 Aug 1988 (best evidence to support assessment); CIR v. Hantex Trading
GR L-136975, 31 Mar 2005; Aurelio P. Reyes v. Coll of Internal Revenue, CTA No. 42, 26 Jul 1956 and
William Li Yao v. Coll, CTA No. 30, 30 Jul 1956 G.R. No. L-11875 December 28, 1963 (use of net
worth method)

66) Bache & Co. v. Ruiz, 37 SCRA 823 (requirement for a search warrant)

3. BIR Rules and Regulations

67) CIR v. CA, ROH Auto Products Phil Inc and CTA, GR No. 108358, 20 Jan 1995, 240 SCRA 368 (Nature
of administrative rules and regulations)

68) CIR v. CA, CTA and Fortune Tobacco Corp, GR No. 119761, 29 Aug 1996, 261 SCRA 236 (Extent of BIR
Interpretative rule)

69) CIR v. Burroughs Ltd, GR No. 66653, 19 Jun 1986, 142 SCRA 324 (Effect of revocation of ruling)

70) PBC v. CIR, GR No. 112024, 29 Jan 1999 (wrong interpretation will not prejudice the government)

71) ABS-CBN v. CTA & CIR, GR No. 52306, 12 Oct 1981 (circulars or rulings, prospective)

19
 72) CIR v. Benguet Corporation, 463 SCRA 28 (2005) – Non-retroactivity of ruling; while government is not
bound by the error of its agents issuing ruling, in the interest of justice and fair play, it may be not given
retroactive effect (same holding in Sy Po v. CTA, GR No. 81446, 18 Aug 1988;

73) CIR v. Burmeisters & Wain Scandinavian, GR No. 153205, Jan 2007 – Non-retroactivity of BIR ruling;
0% VAT on export of services

C. INCOME TAXATION (Secs 22 to 83, NIRC)

1. Definition of Terms (Sec 22, NIRC)

2. General Principles (Sec 23, NIRC and cross refer to Sec 42)
3. RR 8-2018 – implementing the Income Tax provisions of TRAIN law

74) CIR v. BOAC 149 SCRA 395 – Source of income of airlines – sale of airline tickets of an offline carrier
considered income derived from Phil by majority SC; source rule discussed; minority considered airline
tickets as contract of carriage or service, thus situs is where rendered; characterization becomes moot
given the new provision on 2 ½ % Phil Gross Billings regardless of where sold or paid provided cargo or
passenger originates from Phil. [Read RA 10378, 29 Mar 2013, amending Sec 28(A)(3)(b), NIRC]

75) NDC v CIR, 151 SCRA 472 (1987) – Source of interest income – Exemption strictly construed; Sec 37
(now Sec 42) – income from sources within the Philippines applied; also exclusions from gross income.

4. Meaning of Income

76) Fisher v. Trinidad GR No. 17518, 30 Oct 1922, 43 Phil 973 – Income defined; stock dividends
construed

77) Madrigal v. Rafferty GR No. 12287, 07 Aug 1918, 38 Phil 14 – Functions of income tax – The aim has
been to mitigate the evils arising from the inequalities of wealth by a progressive scheme of taxation,
which places the burden on those best able to pay; income distinguished from capital. Income as
contrasted with capital or property is to be the test. The essential difference between capital and income
is that capital is a fund; income is a flow. Capital is wealth, while income is the service of wealth. “The fact
is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income is the
fruit.” Madrigal spouses reported income from conjugal partnership separately resulting to lower tax due.
SC said under the law at the time they should report jointly. The partnership is not a business
partnership; right of spouses inchoate. [Under current income tax law, spouses report their income jointly
but income tax liability is computed separately.]

78) CONWI v. CTA, GR No. 48532, 31 Aug 1992, 213 SCRA 83 – Income may be defined as an amount of
money coming to a person or corporation within a specified time, whether as payment for services,
interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income
can also be thought of as a flow of the fruits of one’s labor. The issue here is which exchange rate to use on
$-denominated salaries of P&G employees earned abroad. RR issued by Sec of Finance required
application of floating rate is applicable in this case but not the CB Circular. Thus, refund claim is denied.

79) Javier v. CA 199 SCRA 824 – received by mistake in income

80) Limpan Investment Corp v. CIR, 17 SCRA 703 (1966) – constructive receipt of rent income deposited in
court in 1957 withdrawn in 1958

81) Fernandez v. CIR 29 SCRA 553 – Book error not income - liability to an insurance company overstated,
thus when corrected the net worth went up. This is not taxable.

82) Rutkin v. US, 343 US 130 – claim of right doctrine – illegally acquired (extortion) is income

83) Eisener v. Macomber, 252 US 189; CIR v. CA 301 SCRA 52 – Severance test theory – separation from
capital of something which is of exchangeable value, refers to taxability of stock dividends

84) Helvering v. Horst. 311 US 112, Control test – power to procure the payment of income and enjoy the
benefit thereof determines who is subject to tax on coupon bond donated to his son.

85) BIR Ruling 029 – 1998 – Economic benefit principle – exception to the rule that no income is earned
when there is merely an increase in the value of the property

86) CIR v. Lednicky, 11 SCRA 603 – Partnership Theory – the right to tax income emanates from
partnership in the production of income by providing protection, resources, incentives and climate to
produce income. [Was income tax paid to foreign government by resident alien deductible though income
exclusively came from the Philippines? No.]

87) CIR v. Isabela Cultural Corp GR No. 17223, 12 Feb 2007 – All Events Test applied in recognizing
income or liability under accrual method of accounting. Expenses incurred in prior year cannot be
claimed as expense in another. For a taxpayer using the accrual method, the determinative question is,

20
 when do the facts present themselves in such a manner that the taxpayer must recognize income or
expense? The accrual of income and expense is permitted when the all-events test has been met. This
test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable
accurate determination of such income or liability.

5. INCOME TAXPAYERS [KINDS]

Individuals (Sec 24 to 26, NIRC)

Citizens Aliens
Residents Residents
Non-residents Non-residents
Engaged in business
Not engaged

Corporate Taxpayers (Sec 27 to 30, NIRC)

Kinds of Corporation
Domestic (Sec 27)
Foreign (Sec 28)
Resident – engaged in business
Non-resident

Others whose activities or ventures considered as corporation for income tax

purposes

Estate under judicial settlement – must be under judicial administration; entitled to deduction for
single individual; allowed to deduct distribution to heirs.

Trusts – irrevocable both as to corpus and as to income

6. TAX BASE AND TAX RATES FOR INDIVIDUALS

Resident citizens
All sources – compensation, business and other income, (except passive income & capital
gains – subject to final taxes)

Readings / Questions:
88) Tan v. Del Rosario 237 SCRA 324 (1994) Global Taxation

RR No. 2-98, as amended by RR 8-98, 12-98, 3-99, 8-2000, 10-2000, 6-2001, 12-2001, 3-2002 and
14-2003 on withholding taxes

RR 3-98, as amended – Fringe Benefits Tax

89) Coll v. Henderson 1 SCRA 649 – Convenience of employer rule

Overtime / Transportation Allowance & Duty Allowance on night / graveyard shift / outstation or out of
town allowance for carrying on the business of employer are not subject to FBT being for the convenience
of employer. Moreover, when they are pre-computed on daily basis and paid while on assignment, they
likewise not subject to income tax and WT. [DA 013-2008, 16 Jan 2008]

What is compensation income?

What are fringe benefits? (See Sec 33, NIRC)
What is meant by ordinary income? (Sec 22, NIRC)
How is compensation of directors of corporation taxed? Effect if directors are not employees of the
corporations? If not employed, taxed like a business income. [RMC 34-2008, 15 Apr 2008 – fees
paid to directors of a corporation who are not employees of said corporation is considered as
seller of services, hence also subject to VAT.
How is taxable income computed? (Sec 31, NIRC)
Gross compensation, less personal and additional exemptions and premiums on health and
hospitalization (subject to conditions)
Business and other income taxed at net taxable income (net income = GI less deductions under Sec 34,
NIRC)
Above items subject to 5, 10, 15, 20, 25, 30 to 32% graduated tax rates (10k, 30K, 70K, 140K, 250K, 500K)
Passive Income
Royalties – 20% (except books, literary, musical at 10%)
Prizes exceeding 10K – 20% (except Lotto, PCSO); 10K or less subject to ordinary rates
Other winning – 20%
Interest (peso) – 20%
Interest (foreign) – 7.5%
Interest (5 years) – exempt
Interest Pre-term, < 3 years – 20%; <4 years – 12%; <5 years – 5%

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 Dividends from domestic corp and taxable partnership, 10%
Stock dividend, CIR v CA, 301 SCRA 152
Recipient other than shareholder, Bachrach v. Siefert, 87 Phil 483
Treasury Stock, CIR v. Manning 65 SCRA 14
Dividends from foreign corp – subject to regular income tax
Dealings in properties classified as capital assets
Capital gains from sale of real property located in Phil – 6% or 5% to 32% (option when sold to
government)
RR 13-99 – Exemption of residence from CGT
Other capital gains – 5% to 32%
Sale of stocks of Domestic Corp
Listed and thru Stock Exchange – exempt from income tax but subject to ½ of 1% (non-
deductible from gross income) See Sec 127
Not listed or if listed, not thru stock exchange – 5%, 10% (100k, >100k)
See Rev Reg No. 2-82, 29 Mar 1982 – taxation of sales of shares of stocks classified as capital
assets
See RR 7-2003 – capital assets vs ordinary assets
Cash reward to informers – 10%, max of 1M (see Sec 282, NIRC)

Non-resident Citizen
From within Phil – same rules as to resident citizen
Without Phil – exempt

Resident Alien
Same rules as to resident citizen, but only on income earned from within Phil

Non-resident Alien
Engaged in business (183 days) – same as resident alien with respect to compensation, business,
other income and passive income, but not entitled to additional exemption, except: dividends from
domestic corp – 20% (Sec 25(A)(2)

Not engaged – 25% on gross income (but entitled to preferred rates for sale of shares of stocks and
real property)
Dividends from domestic corp – 25%
Royalties, prizes & winnings – 25%
Employed by OBU, RHQ/ ROHQ, MNC, petroleum service contractors / subcon (same treatment
to Filipino of same rank & job – 15% based on gross income of non-residents, whether
individual or corp from transactions with depositary banks under expanded foreign currency
deposit system – exempt from income tax, Sec 27 (D)(3))

Estates and Trusts (Sec 60 to 66, NIRC)

CATEGORIES OF INCOME OF INDIVIDUAL TAXPAYERS

Compensation
Fringe Benefits
Income from Trade / Business
Exercise of Profession
Passive Income
Other Dealings in Property

COMPUTATION OF INCOME TAX DUE OF INDIVIDUAL WHO EARNS BUSINESS, COMPENSATION AND OTHER INCOME
Gross Sales / Receipts
Less: Sales Returns & Discounts
Net Sales
Less: Cost of Sales / Service
Gross Income from business or exercise of profession
Compensation income (purely compensation income is not entitled to business deductions)
Other Income (other than those subject to final tax)
Total Gross Income
Less: Itemized Deductions or optional standard deduction
Personal and additional exemptions
Taxable Income
Tax Due (Tax table 5% to 32%)
Creditable W/Tax
Tax still due / refund

TYPE OF GROSS INCOME OF INDIVIDUALS SUBJECT TO 5% TO 32% TAX

Compensation
Trade / Business
Exercise of Profession
Prizes / Winnings – P 10K or less
Capital gains on real property sold to government – 6% or 5% to 32%

22
 Other capital gains from dealings in property [except those subject to 6% final tax on land and 5% or 10% final
tax on shares of stocks and ½ of 1% transaction tax on shares of stocks traded and sold through the stock
exchanges; see below
Capital gains other than from real property and shares of stocks are still subject to the rules on long term and
short term investments, i.e. 1 year or less and over 1 year holding period; loss carry over and deduction rules of
capital loss v. capital gains and ordinary income only.

INCOME OF INDIVIDUALS SUBJECT TO FINAL TAX

Passive Income
Prizes / winnings >P10K, except from PCSO, etc
Dividends
Royalties
Interest
Capital Gains from sale or exchange of shares of stock (outside of stock exchanges);
Capital gains from sale of real property (held as capital asset)
Compensation from ROHQ/RHQ, OBU, etc
Informer’s reward

GENERAL PROFESSIONAL PARTNERSHIP (Sec 26)

Exempt from income tax as a corporation but its partners are taxable on their share whether distributed or not
90) Its exclusion is a classification clause not an exemption thus construed in favour of taxpayer, CIR v.
Ledesma, 31 SCRA 95, 30 Jan 1970
91) Sison v. Ancheta and Tan v. Del Rosario, supra

TAX BASE AND TAX RATES APPLICABLE TO CORP (Sec 27 -30, NIRC)
Meaning of Corp or partnership
Sharing not taxable – Pascual v. CIR, 166 SCRA 560 (1988)
Co-ownership is not taxable, Ona v. CIR, 45 SCRA 74; Obillos v. CIR, 139 SCRA 436 (1985); cited Ona,
Evangelista cases
Afisco Insurance v. CIR, GR No. L-112675, 25 Jan 1999; taxed as a corporation the pool of insurance
companies.
Joint Emergency Operations – Coll v. Batangas, 54 OG 6724
Power of Attorney for operation of mining claims deemed partnership – Philex Mining v. CIR, GR No. 148187,
16 Apr 2008

Kinds of Corporation
Domestic (Sec 27)
Profit-oriented (32%); effective July 1, 2005 – 35%; effective January 1, 2009 – 30% per RA 9337
Proprietary educational and non-profit hospital – 10% of taxable income, except passive income;
contrast with a tax exempt non-stock and non-profit educational institution; See Art. XIV, Sec 3(3)
of the Constitution; Central Mindanao State Universtiy v. Dept of Agrarian Reform 215 SCRA
86 (1992); and Abra Valley College, Inc. v. Aquino, 162 SCRA 106 (1988)
Government Corps – SSS, GSIS, PHIC, PCSO & PAGCOR (Pagcor now taxable under RA 9337)

Foreign (Sec 28)

Resident – engaged in business
Non-resident
Others whose activities or ventures considered as corporation for income tax purposes

TAXATION OF DIFFERENT TYPES OF INCOME OF DOMESTIC CORP – SUBJECT TO TAX ON INCOME EARNED FROM
ALL SOURCES (WITHIN & WITHOUT THE PHILS); see NV Reederif Amsterdam v. CIR GR No. 46029, 23 June 1988
On taxable income (other than passive income) – 34%, 33% or 32% starting 2000, 35%; effective
January 1, 2009 – 30% per RA 9337

On Passive Income
Royalty – 20%
Interest / Yield from bank deposits, deposit substitutes, Trust Fund and similar arrangement –
20% [CIR v. Solidbank, GR No. 148191, 25 Nov 2003 – GRT v. FWT – no double taxation;
accrued v. constructive]
Interest Income (expanded foreign currency) – 7.5%
Interest Income of depositary banks from deposits in foreign currency & loans to residents –
10%
Interest income from non-residents, whether individual or corp – exempt
Interest (5 years or more maturity) – exempt; if pre terminated <3- 20%, <4 – 12%, <5 – 5%
Interest passed on by parent company to its subsidiaries on reimbursement basis is not taxable
to parent company. The real lender is the banks. [CTA Case No. 7086, 10 Jan 2008]
Dividends from domestic corp and taxable partnership – exempt from regular income tax [See
Sec 73, NIRC]
Dividends from foreign corp subject to regular income tax

Capital gains from sale of real property located in the Phil – 6%

Where sale of land was made between PEZA-registered enterprises subject to 5% preferential
tax “ in lieu of all other taxes”, the same is not subject to 6% CGT, VAT or DST [ DA 025-
2008, 22 Jan 2008]

23
 Sale of real property held for investment by a holding company and not engaged in real estate
business is subject to 6% CGT & DST but exempt from VAT [DA 011-2008, 15 Jan 2008]
Buyers of real property who are not engaged in trade or business are required to withhold the
creditable tax from the purchase price. If seller already remitted the tax, there is no more
obligation to pay the tax or the penalty, [DA 02-2008, 08 Jan 2008]
Sale of stocks of domestic corp
Listed and thru stock exchange – exempt from income tax, but subject to business tax at ½
of 1% of gross (Sec 127)
IPO of a taxpayer granted with legislative air transport franchise is not subject to IPO
tax because of ipso facto provision in its franchise that levels the playing field with
competition. The competition franchise provides that it shall pay 2% franchise tax
or basic corp income tax whichever is lower, ‘in lieu of other taxes’. The issuance of
shares of stocks is likewise not subject to DST. [DA 05-2008, 9 Jan 2008]
Not listed or if listed, not trade thru stock exchange – 5%, 10% (100K, >100k)
See RR 7-2003 Capital assets v. Ordinary Assets

2% MCIT BASED ON GROSS INCOME (see Rev Reg 9-98, 25 Aug 1998)
Beginning immediately on the 4th taxable year from start of operations; compare tax based on 30% and 2% of
Gross income whichever is higher. Carry Forward of Excess MCIT vs regular tax for 3 immediately
succeeding years
Relief due to prolonged labor disputes, force majeure, and other legit buss reverses
Gross Income means Gross Sales less sale returns, discounts & allowances & Cost of Goods Sold (CGS).
CGS include all expenses to produce the goods to bring them to their present location & use. For trading
or merchandising, CIF & duties; for manufacturing, cost of goods manufactured and sold, cost of
producing finished goods; for seller of services, Gross Receipts less sales returns, discounts, allowances &
cost of services, facilities, salaries, benefits, equipment, rent, supplies; for banks, include interest expense.
92) CREBA Inc v. Exec Secretary, et al – GR NO. 160756, 09 March 2010 (Validity of imposition of MCIT
and other related issues)

15% OF GROSS INCOME IS AN OPTION TO CORPORATION

Tax effort ratio = 20% of GNP
Income tax collected = 40% total revenues
VAT = 4% of GNP
Consolidated Public Sector Financial Position = 0.9% of GNP

RESIDENT FOREIGN CORPORATION

30% effective January 1, 2009 – same as domestic corp, except that taxable income should come from Phil
sources
International Carrier – 2 ½ of Gross Phil Billings (GPB)
Air Carrier – continuous and uninterrupted flight originating from Phil regardless of place of issue and
payment, exchange with other airlines; but in transhipment, only the leg from Phil
Shipping – originating from Phil up to final destination; regardless of sale or payment of document
93) CIR v. Tokyo Shipping Co. GR No. L-68252, 25 May 1995 [Claim for refund of tax on GPB from charter
or vessel; claim fro refund construed stricticissimi juris finding of fact by CTA that vessel left without
sugar laden; 15 years lapsed without refund though at one point lawyer of BIR said it was approved; kill
the goose that lay the golden eggs]
10% - Offshore banking units – income from foreign transactions with local and resident banks, including from
foreign loans with residents
15% - Branch profits remittances based on total profits applied or earmarked for remittance without deduction
of tax component paid via withholding system
Except activities registered with PEZA
94) Items of income = rent, dividends, salaries, remuneration, capital gains, royalty, etc if not effectively
connected with the conduct of its trade or business in the Phils [see CIR v. Marubeni, 177 SCRA 500]
10% - RHQ, AHQ, ROHQ – Sec 22 DD & EE, NIRC, for definitions
20% - on interests & royalties
7.5% - on interest income from expanded foreign currency denominated units in a depositary bank
10% - on interest from depositary bank
5% to 10% - capital gains on sale of shares of stocks
Inter-corporate dividends from domestic corp - exempt

NON-RESIDENT FOREIGN CORPORATION

30% effective January 1, 2009 based on gross income
25% on cinema film owner, lessor or distributor
4 ½ % on rentals to owners or lessor of chartered vessels to Phil residents
7 ½ % rentals of aircraft, machineries & other equipment
20% on foreign loans contracted on or after Aug 1, 1988
capital gains on sale of shares of stocks -5% to 10% or ½ of 1% if sold through stock exchange
Royalty – subject to tax treaty
95) Most favored nation clause CIR v. SC Johnson & Sons 309 SCRA 87 (1999)
15% on dividends from domestic corp provided a tax credit = to 33% if granted to non-resident corp for tax
deemed paid
96) CIR v. Procter & Gamble, 204 SCRA 378, GR No. 66838, 02 Dec 1991 , Persons liable to tax v. persons
subject to tax; rate of tax at 15% v. 35%

24
10% IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) See Rev Reg No. 2-2001, 12 Feb 2001 implementing Sec
29 of NIRC)
Applies to domestic corporations; Exemptions
Publicly held corp
Banks & Non-bank Financial Institution
Insurance Companies
General Professional Partnerships
Non-taxable Joint Venture
PEZA, CDA entities
Prima facie evidence of purpose to avoid payment of tax, if personal holding or investment company
Evidence determinative if permitted to accumulate beyond the reasonable needs of the purpose to avoid tax
upon shareholders unless contrary is proved
Dividend must be declared and paid within 1 year from close of tax year, otherwise tax shall be paid within 15
days thereafter
How computed: Taxable Income during the year + Exempt, exclusions, final tax, NOLCO less dividends &
income tax paid, and reasonable needs x 10%
Reasonable needs include anticipated needs:
100% of paid up capital
Definite expansion with board resolution
Loan Agreements
LWC requirements, meet competition, anticipated losses or reverses, hazards and emergencies
Legal Prohibition
Subsidiaries of foreign corp earmarked for investments
Investments if unrelated business, bonds and long term securities are not deemed reasonable
97) Bardahl Formula and Immediacy Test (Cyanamid Phils Inc v. CA 332 SCRA 639, 2000)
IAET is only imposed once on specific earnings but still subject to dividends tax to individuals

EXEMPT CORPORATIONS (Sec 30, NIRC)

Labor, agricultural & horticultural not principally for profit
Non-stock, non-profit mutual and coop banks for mutual purpose & without profit
Beneficiary society, order, association, frat benefits of members
Exclusive cemetery for members
Non-stock religious, charitable, scientific, cultural no income inures to its members or any specific person. (Art
VI, Sec 28(3), Constitution) grants exemption to religious, non-profit cemeteries, charitable, educational
covers property tax)
NGOs engaged in micro financing are subject to income tax regardless of disposition because these are not
the registered activities that are exempt [RR 14-2007, 11 Dec 2007]
Business league, chamber or trade association
Civic league, org
Non-stock, non-profit educational institutions [Art XIV, Sec 4(3) of Constitution) are exempt from duties and
taxes, all revenues and assets; substantial evidence to prove that it fails under classification and that
income is used actually, directly and exclusively for educational purposes. (See Rev Memorandum
Circular No. 76-2003, 14 Nov 2003)
Government Educational Institutions
Farmers or other mutual typhoon or fire insurance co., mutual ditch, irrigation or coop telegraph, only fees,
assessments are for meeting expenses
Farmers fruit growers association for marketing products
Notwithstanding the foregoing, income of whatever kind or nature from properties or activities conducted for
profit regardless of disposition shall be subject to tax
Interest Income of religious org subject to tax regardless of disposition; bank deposits are personal
property (BIR Ruling 512, 21 Oct 1998, Ruling No 58, 05 Apr 1991 ); Rental income is taxable
regardless of disposition (CIR v. CA 298 SCRA 83, 14 Oct 1998)
Gain from sale of land & bldg of religious org used for same purpose is an isolated transaction, thus
exempt from income tax; its rents, dividends, interest, profits from businesses are taxable. ( Manila Polo
Club, CTA No. 293, 31 August 1959; BIR Rulings No. 569, 29 Nov 1988; No. 115, 2 Apr 1992)
Application of Sec 30 (H) – YMCA, CIR v. CA 298 SCRA 83 – YMCA’s income is not exempt from income
tax. It is not an educational institution referred to in the constitution.

MEANING OF TAXABLE INCOME (Sec 31) – ITEMS OF GROSS INCOME LESS DEDUCTIONS AND PERSONAL
EXEMPTIONS, IF ANY, AUTHORIZED BY NIRC OR SPECIAL LAWS

Sec 32 (A) Definitions of Gross Income, includes compensation for services, conduct of trade or business or
profit, gains from dealings in property, interest, rents, royalties, dividends, annuities, prizes, winnings,
pensions, partners’ distributive share in general professional partnership

Sec 32 (B) EXCLUSIONS FROM GROSS INCOME – Excluded and exempts from taxation
Life insurance proceeds payable to heirs or beneficiaries, but if held by insurer to pay interest, the interest
is taxable; Question: If beneficiary is the taxpayer itself, are the proceeds taxable or not? Justice
dimaampao says yes.
Return of premiums or cash surrender value under diff types of life insurance
Gifts, bequests, devices of property, but income from such property & gifts, etc or income from any
property, in case of transfer of divided interests, are taxable
Compensation for injuries or sickness, plus damages whether by suit or agreement

25
 Exempt by treaty
Retirement, pensions, gratuities, etc. under RA 7641 and from reasonable private benefit plan (50 / 10 /
once; non-diversion of corpus & profits)
Amount received as consequence of separation due to sickness / death, other physical disability, or causes
beyond control
98) PLDT v CIR GR No. 157264, 31 Jan 2008 – separation pay due to redundancy. Proof of receipt by
employees of the pay and the remittance of the withholding tax to the BIR are material to the claim for
refund of erroneously paid withholding tax on separation pay. Also, it must be shown that employees
declared the income and the tax paid to the BIR through withholding. “Section 10. Claims for tax credit or
refund. – Claims for tax credit or refund of income tax deducted and withheld on income payments shall
be given due course only when it is shown on the return that the income payment received was declared
as part of the gross income and the fact of withholding is established by a copy of the statement duly
issued by the payer to the payee (BIR Form NO. 1743.1) showing the amount paid and the amount of tax
withheld thereon.”

CTA Circular 1-95 states in part:

1. The party who desires to introduce as evidence such voluminous

documents must, after motion and approval by the Court, present (a) a Summary containing,
among others, a chronological listing of the numbers, dates and amounts covered by the
invoices or receipts and the amounts of tax paid; and (b) a Certification of an independent
Certified Public Accountant attesting to the correctness of the contents of the summary after
making an examination, evaluation and audit of the voluminous receipts and invoices xxx

2. The method of individual presentation of each and every receipt, invoice

or account for making, identification and comparison with the originals thereof need not be
done before the Court or Clerk of Court anymore after the introduction of the summary and
CPA certification. It is enough that the receipts, invoices, vouchers or other documents
covering the said accounts or payment to be introduced in evidence must be pre-marked
by the party concerned and submitted to the Court in order to be made accessible to the
adverse party who desires to check and verify the correctness of the summary and CPA
certification. Likewise, the originals of the voluminous receipts, invoices and accounts must be
ready for verification and comparison in case of doubt on the authenticity thereof is raised
during the hearing or resolution of the formal offer of evidence. (Emphasis and underscoring
supplied)

Motion for New Trial & Liberal application of the CTA rules of court discussed. Petition denied.
[See new Rules of Court for CTA issued in 2005]

Social security, retirement, gratuities, pensions received by Filipinos or aliens who reside permanently in
the Philippines from foreign government, other institution, public or private
Received by any person residing in Phil from US Veterans Admin
SSS, GSIS benefits and gratuities
Income by foreign government, their financing institutions & international finance institution
Income from public utility and essential functions of Phil government and political subdivisions
Prizes & awards as recognitions for religious, charitable, scientific, educational, art, literary, civic if
selection is without action on his part to enter the contest or proceedings and does not require
substantial future service
Prizes and awards to athletes from local and international competition recognized by local sports
association [cross reference to Other Percentage Tax, Title V, NIRC]
13th Month pay & other benefits under this paragraph, not more P30K such as government employees
under RA 6686, benefits not covered by PD 851 as amended by MO No. 28, 13 Aug 1986, productivity
incentives and Christmas bonus. Ceiling increased to P82K under RA 9504
SSS, GSIS, Medicare, Pag-ibig, Union Dues by individuals
Gains from sale of bonds, debentures, certificate of indebtedness with maturity of >5 years
Gains from redemption of mutual funds company shares defined in Sec 22 (BB)

ALLOWABLE DEDUCTIONS

Itemized Deductions (Sec 34, NIRC)

10% Optional Standard Deductions (OSD) (Sec 34 (L), Amended pursuant to RA 9504, 07 Jul
2008, now 40%, includes corporation
Allowed only to citizens and resident aliens engaged in business or profession
No need to support expenses
Election irrevocable for the year
Unless indicated, itemized is deemed elected
Premiums on medical & hospitalization (Sec 34 M)
Personal Exemptions (Sec 35)
Personal and additional exemptions

Not allowed to claim deductions

Individuals receiving compensation income (except premiums on medical / hospitalization
subject to limitations and personal and additional exemptions)
Non-resident aliens not engaged in trade or business

26
 Aliens (also Filipinos similarly situated) employed in ROHQ, AHQ, OBU, Petroleum contractors
Non-resident Foreign Corporations
Income subject to Final Tax

Itemized Deductions (Sec 34)

There must be a law allowing them (Atlas Consolidated Mining v. CIR 102 SCRA 246)
Requisites: Ordinary, necessary, reasonable, not against law, etc
Ordinary and necessary means reasonable
It appeared sale of property was effected by a broker hence bonus to company officer
disallowed (Aguinaldo v. CIR, 112 SCRA 136, 1982)
Fees paid to broker to induce investors are reasonable and deductible (On the substantive
issue, SC allowed the deduction as reasonable citing Rev Reg No. 2. It is worth noting
at this point that most of the payees were not in the regular employ of Algue, nor
were they its controlling stockholders. The Solicitor General is correct when he says
that the burden is on the taxpayer to prove the validity of claimed deduction. In the
present case, however, we find that the onus has been discharged satisfactorily. The
private respondent has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing investors and
prominent businessmen to venture in an experimental enterprise and involve
themselves in a new business requiring millions of pesos. This was no mean feat and
should be, as it was, sufficiently recompensed [see Algue case, supra]
Must be connected with business, except:
Contributions / donations
Premium on health / hospitalization
These are allowed to corporations, individuals, partnerships
Must be incurred during the year, [CIR v. Isabela Cultural Corp, GR No. 172231, 12 Feb
2007] – All events test applied in determining whether expenses booked on accrual
basis should be claimed as deductible expense]
Must be substantiated (ESSO v. CIR 175 SCRA 149 (1989)], see Cohan Rule – there is
showing that expenses were incurred but cannot be ascertained due to absence of
documentary evidence (RMC 23-2000)
RR No. 6-2018 - requirements for deductibility of certain expenses,
RR No. 11-2018 and 14-2018- relative to withholding of Income Tax

Subject to withholding tax, where applicable

FEBTC V. CA, CTA & BIR, 477 SCRA 49 (Dec 2005) – To sufficiently support claims
for tax refund of excess creditable withholding tax, BIR Form 1743 must be
submitted, Confirmation Receipts and ITRs are not sufficient. Having failed to
do so, the claims were correctly denied. Under withholding tax system, it is the
payor who withholds the tax and not the payee. The OR/CR did not indicate the
nature and amount of the payment. “The findings of fact of the CTA, a special
court exercising particular expertise on the subject of tax, are generally
regarded as final, binding and conclusive upon this Court, especially if these are
substantially similar to the findings of the CA which is normally the arbiter of
questions of fact. The findings shall not be reviewed nor disturbed on appeal,
unless a party can show that these are not supported by evidence or when the
judgment is premised on a misapprehension of facts, or when the lower courts
failed to notice certain relevant facts which if considered would only justify a
different conclusion.

Income payments to registered enterprises availing of the Income Tax Holiday

are not subject to Creditable Withholding Tax [DA 030-2008 23 Jan 2008]

99) Barcelon, Roxas Securities v. CIR, GR No. 157064 07 Aug 2006 – Assessed for deficiency income tax for
failure to withhold tax, assessment barred by prescription.

Specific Deductions
Salaries, bonuses, emoluments, allowances, incentives, Fringe Benefits
Rental (without equity, operating lease)
Advertising expenses are period costs deductible in the year incurred or paid. However, they
may be considered capital expenditures if so substantial in promoting a single brand ( CIR
v. General Foods, 401 SCRA 545)
Entertainment, amusement, recreation, subject to ceiling
Travel Expense
Excess over 1st class not deductible, subject to FBT
Excess over fixed allowance $150 / 100 not deductible, taxable to employee or to FBT
Home leave not taxable to employee
Family expenses taxable to employee to be deductible to employer
Meals & Housing
Generally taxable to employee, except when for the convenience of the employer or form
part of Fringe Benefits of the employee
Cash Advance / Reimbursement system

27
Entertainment, amusement or recreation (EAR) facilities
Directly related to business
Directly in furtherance of business
Not contrary to law, etc
Ceiling, ½ % or1% of Net sales or net revenues
Substantiation in the name of taxpayer & subject to w/tax, where applicable
Only one athletic club per officer
Guests other than company officers, etc
Exclusions from EAR
Treated as compensation or Fringe Benefit
Charitable or fund raising events
Bona fide business meetings of directors, etc
Business league or professional organization meet
Promotion, Ad and marketing
Shifting to other accounts to hide –prohibited
Separate item in ITR or note to FS

Interest – Use, forbearance or detention of money [see Rev Reg 13-2000, 20 Nov 2000 –
Requisites]
There is debt, and interest is agreed in writing
Paid or incurred in connection with business during the year
Legally due
Not between related parties
Not incurred for petroleum operations
Not capitalized
Limitations on interest – interest is reduced by 41% (42% effective 01 Jul 2005);
39% and 38% of interest income subject to final w/tax
Interest of business taxes not subject to limit
Although cash basis, interest paid in advance deductible only in the year debt is paid in
full or correspondingly to amortized principal

Taxes
Connected with trade or business, except
Income Tax – Local [ Not an item of operating expenses because it does not help
generate revenue, nor does it redound to benefit of customers, thus not to be
considered in fixing rates of public utility (Republic v. Meralco, GR No.
141369, 14 Nov 2002)
Income tax paid to foreign government (tax credit / deduction)
CIR v. Lednicky 11 SCRA 604 – Partnership Theory – the right to tax income
emanates from partnership in the production of income by providing
protection, resources, incentives and climate to produce income. [Was income
tax paid to foreign government by resident alien deductible though income
exclusively came from the Phils? No.]
Gift & Estate Tax
Special Assessment or special levy under the Local Govt Code [Real Property
Taxation]
If allowed, as deductible and subsequently refunded, Tax Benefit rule applies
Limitations on tax credit
CIR v. Central Luzon Drug Corp (Mercury) 456 SCRA 414 (2005) – 20% Senior
Citizens discount is a tax credit deductible from tax liability

Losses
Fires, shipwreck, theft other casualties
Connected with trade or business
Not compensated by insurance or otherwise
Not claimed in the estate tax return
Declared within 30 to 90 days with BIR
NOLCO – Sec 34(D)(3) (see Rev Reg 14-2001, 27 Aug 2001)
Losses from wash sales of stock & securities (Sec 38)
What are wash sales and how are they treated for income tax purposes?
Capital losses (Sec 39)

Bad Debts (See Rev Reg No. 5-99, 10 Mar 1999, as amended by Rev Reg No. 25-2002, 19 Nov
2002 amending Sec. 3 of RR No. 5-99)
Charged off during the year (see PRC v. CIR 256 SCRA 667)
Connected with business
Not related parties
Effort to collect failed
Legal debt
Power of attorney for operation of mining claims deemed partnership; write off of bad
debts not warranted; it was investment, thus not debt; alleged debtor has not filed
for bankruptcy; assumed guaranteed obligations were not yet due – Philex Mining v.
CIR GR No. 148187, 16 Apr 2008
Tax Benefit Rule applies

28
 Depreciation
Definition – Gradual diminution in the useful service value of tangible property used in
business (Basilan Estates Inc v. CIR, 21 SCRA 17, 1967
Methods of depreciation [straight line, sum of years digits, etc]

Depletion
Definition – Exhaustion of natural resources like mines, oil and gas wells as a result of
production or severance from such mines or wells.

Charitable & Other Contributions

Requisites [ See RR 13-98 and Sec 13 (C) of RR 2-2003]; What are the requirements for
the deductibility of donations for income tax purposes? (Mariposa Properties Inc v.
CIR, CTA Case No. 6402, 13 Feb 2007) In deciding on the BIR’s disallowance of
deduction for donations made to a private foundation, the CTA required the donor to
prove compliance of both the donor and the donee with the requirements for
deductibility of donations. Hence, for failure of the donor to present proof that the
foundation’s income tax return and audited financial statements, as well as the
annual information report of the foundation were submitted to BIR as required in
the regulations, the deduction for donations was disallowed. Deductible in full and
subject to limitations
Donations by PEZA registered entity to Province of Batangas for national priority project
of NEDA is exempt from donor’s tax, deductible in full and not subject to DST [DA
026-2008, 22 Jan 2008]

Research and Development

Requisites for deductibility
Limitations on deductions

Pension Trust Contributions

Nature and requisites
Limitation on deduction
Excess retirement plan assets reverted back to the employer company is subject to
income tax [DA 020-2008, 17 Jan 2008]

Personal Exemptions (Sec 35)

Personal and Additional exemptions
Status & amounts –
RA 9504 dated July 6, 2008 eliminated the status of an individual taxpayer.
Basic personal exemption of individual taxpayer is P50,000 each
(both spouses are entitled provided they are both earning income)
Qualified dependents at P25,000 each, maximum of 4
See Carmelino Pansacola v. CIR, GR No. 15999, 16 Nov 2006 –
effectivity of increased personal exemptions
Change in status
Marriage
Birth / Death
Of age
Gainfully employed
See Silverio v. Republic of the Phils, GR No. 174689 22 Oct 2007

Items not deductible (Sec 36)

Personal and living expenses
Capital Expenditures
Premium on insurance where beneficiary is the payor –taxpayer
Losses between related parties

Special provisions re: income and deductions of insurance companies (Sec 37)
Losses from Wash Sales of Stock or securities (Sec 38)
Capital gains and losses (Sec 39) [See Rev Reg No. 7-2003, 27 Dec 2003]

INCOME TAX TREATMENT ON THE SALE OR EXCHANGE OF PROPERTY (SEC 40)

General rule on recognition of gain or loss in a sale or exchange of property

Exceptions
Factors relevant to determination of gain or loss
How is gain or loss computed?
What is the basis to be used?
When are gains recognized, but not losses?
What are the two types of merger or consolidation under Sec 40?
What are the tax implications of merger, consolidation & acquisition of 80% of the assets?

29
 What are the requisites for taxable and tax free transfer of property resulting to majority ownership of the
corporation?
When stocks or securities are subsequently sold, how are gains or losses computed?
Guidelines on Monitoring of Tax – Free exchange of property for shares [Rev Reg No. 18-2001]
Implementing guidelines of Sec 40 [RMO 32-2001 & RMO 17-2002]
Tax consequences of tax-free exchange of property for shares of stock of controlled corporation per Sec 40
(C)(2) [See Rev Memorandum Ruling No. 1-2001, 29 Nov 2001]
Tax consequences of De Pacto Merger re Sec 40 (C)(2) and (6)(B) [See Rev Memo Ruling No. 1-2002]
Determination of substituted basis of property transferred and shares received [See Rev Memo Ruling
No. 2-2002];
CIR v. Rufino, GR No. L-33665-68, 27 Feb 1987, 148 SCRA 42 – [ tax exempt merger of two
corporations]
Delpher Trades Corp v. IAC, 157 SCRA 349,- [tax exempt transfer of property to a corporation resulting
to control]
CIR v. Benigno Toda, 438 SCRA 290 (2004) – meaning of fraud; tax avoidance / evasion
See De Leon’s NIRC Annotated Vol 1, 2003 ed discussions of Sec 40.
How are inventories treated? (Sec 41)
Income from sources within the Philippines (Sec 42)
CIR v. BOAC 149 SCRA 395 – Source of income of airlines – [ sale of airline tickets of an offline carrier
considered income from Phil by majority of SC; source rule discussed; minority considered airline
tickets as contract of carriage or service, thus situs is where rendered; characterization becomes
moot given the new tax provision on 2 ½ % Phil Gross Billings regardless of where sold or paid
provided cargo or passenger originates from Phil]
NDC v. CIR, 151 SCRA 472 (1987) – Source of interest income – [Exemption strictly construed; Sec 37
(now Sec 42) – Income from sources within the Philippines applied; also exclusions from gross
income.

Accounting periods and accounting methods (Sec 43 to 50)

How are installment and deferred payment sales treated for income tax purposes?
Accounting Methods (Sec 43)
What accounting methods are acceptable to BIR
What are accounting periods and their relevance
How are leases treated for income tax, VAT and withholding purposes?
Two types of leases: (1) Full payout lease – it’s treated as capital lease – subject to VAT the full amount of
lease and to 2% WT if payor is top 10,000 taxpayer; also subject to depreciation on the part of the
lessee-buyer and (2) FMV or residual lease – treated as operating lease, the monthly rentals are
subject to VAT and WT. See BIR Ruling No. 9-2007 and Rev Reg 19-86
Ericsson v. Pasig City 538 SCRA 99, 22 Nov 2007- Accrual accounting of income; financial reporting
system; gross receipts v. gross income; double taxation explained; question of law v. of facts; Rules
41, 45 and 56; local taxation.

Returns and Payments for individuals and corporations [Sec 51 to 59]

What returns should be filed
Who are required to file the returns
When, where and how are returns filed and the tax paid
Effects if returns are not file don time or not at all
What happens in case of excess creditable withholding for corporation?
Philam Asset Management Inc v. CIR 477 SCRA 761, 14 Dec 2005 – Under Sec 76 of the NIRC, a taxable
corporation with excess quarterly income tax payments may apply for either a tax refund or a tax
credit, but not both. The choice of one precludes the other. Failure to indicate a choice, however, will
not bar a valid request for a refund, should this option be chosen later on. [ 1997 and 1998 ITR].
Issues are: “Whether or not the failure of the petitioner to indicate in its annual income tax return
the option to refund its creditable withholding tax is fatal to its claim for refund”; [NO] and “Whether
or not the presentation in evidence of the petitioner’s annual income tax return for the succeeding
calendar year is a legal requisite in a claim for refund of unapplied creditable withholding tax” [NO]
But if it is clear that an option was made although the box is not filled up, that choice shall prevail.
[Narrated history of recent NIRC amendments]
CIR v. Meralco, 535 SCRA 399, 10 Oct 2007 – Filing of ITR with excess payment applied for credit and
refund; proof required. Note the amendments to the law applied in this case under 1986 NIRC v.
1997 NIRC provisions

Estates and Trusts (Secs 60 to 66, NIRC)

The taxes imposed on individuals apply to income of estates and of any property held in trust, including:

Income accumulated in trust for unborn or unascertained persons with contingent interest or for future
distribution according to the terms of the will or trust
Income to be distributed currently by fiduciary to beneficiaries, and income collected by guardian to be
held or distributed per court order
Income received by estates of deceased person during period of admin or settlement proceedings
Trust holding employee retirement plan is not taxable subject to conditions under Sec 60(B). Any amount
received by said employee or distribute in excess of his contribution is taxable to him. But under Sec

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 32 (B)(6)(a) if the conditions for its exclusion are present, the excess may also be exempt from
income tax.

Estate – refers to the mass of property [assets and liabilities] left by a decedent
Taxable as a separate taxpayer like an individual if under judicial testate or intestate proceedings,
otherwise, income from said property is taxable to the heirs; it follows the status of the decedent
Trust – property held by one person for the benefit of another
Taxable -
Trust – if income is to be accumulated or if the trustee has discretion to accumulate or
distribute to beneficiaries
Beneficiary – if he / she received income from the trust during the taxable year pursuant to the
trust agreement
Grantor – if revocable or held for grantor’s benefit or to his designate
Control test – power to procure the payment of income and enjoy the benefit thereof
determines who is subject to tax on coupon bond donated to his son. Helvering v.
Horst. 31 US 112
Deductions – same as Estate
Estates and Trusts entitled to deductions
Personal exemption – P 20,000 (sec 62)
Distribution to heir during the year; If no distribution, subsequent distribution of said income
no longer taxable to heirs
Distribution to guardian for the benefit of infant
Administered in foreign country is taxable in the Philippines in the hands of the trust but no
longer taxable in the hands of the beneficiary when distributed to him. These
distributions are not allowed as deductions from the taxable return of the trust.
Read BIR Ruling 003-05 – taxation of trusts under common trust funds.

Other Income Tax Requirements (Secs 67 to 73)

How are dividends taxed? (Sec 73)

Quarterly corporate income tax, Annual declaration and quarterly payments of income tax (Secs 74 to 77)
State Land Investment Corp v. CIR, GR No. 171956, 18 Jan 2008 – Excess creditable tax may be refunded or
credited at the option of the taxpayer under former Sec 69, now Sec 76. Under then Sec 69, excess taxes
may be credited in the following year only, after then need to be claimed for refund within two (2) years
from payment which SIC did. MR filed with CTA included 1999 & 2000 ITRs showing losses, thus 1997
excess tax credit could not have been applied in 1999, Doctrines: SC is not trier of facts but if lower court
mis-appreciated facts or failed to notice facts that could change conclusion, then it can review facts.
Solutio indebiti applied against government. Refund granted. Note: counting of 2 years starts from the
filing of final return.

Withholding on Wages (Secs 78 to 83)

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