TAXATION 1

FROM THE LECTURES OF ATTY. DONALVO 2018

June 21 (Part 1) Maghatag na lang gani ka, pabayaron pa jud kag tax.
Transcribed by: Olamit, Ara Princess O.
Diba that’s how crazy our tax is.
INTRODUCTION
Even if we die, we will still be subjected to taxation.
Now let’s begin with taxation.
May Succession na kayo? What do you call the
properties that are left behind by the decedent? The
For the entire semester, we will discuss two things:
estate. Those properties will be subjected to taxation.
First, the General Principles of Taxation and the
On top of that, it’s not enough that you die because
second is the Income Taxation Proper.
there is a certain limit for which the heirs, or your estae,
must have to pay the estate tax. At least one year, or
For your first exam, the coverage will be the entire
within one year you pay your taxes under normal
General Principles of Taxation.
circumstances. So you see? You’re already dead but you
are still being made to pay the tax. That’s why, probably
The first question that I always ask to my class is “Why
, some people would say that there are three
do we have to study taxation?”
permanent things in the world.
Aside from being a bar subject and aside from the
fact that you are all students, you are required to
1. Death - Mamatay man kayo lahat. Whether you
like it or not, we will all die. Each and everyday we
take the subject, why do we need to study taxation
are dying slowly.
to begin with? Why is it important? Why is it
important to learn how tax works here in the
2. God - Regardless of your religion, we all know that
God will be permanent in our lives.
Philippines?
3. Taxes - We cannot escape taxes. Even if we die, we
will always be subjected to taxation.
There are several reasons.

So more or less, since we encounter it daily, we should

We will encounter taxation daily.
know at least a little bit of how our Tax works here in
Even if we don’t know it, we are actually
the Philippines. Because, probably, if you are in the real
encountering taxation, right from the time that we
world right now, you are an employee or employer, you
were born until the time we die. For example, you
have you own businesses, you will be subjected to
were born, what about the money that your
taxation. How would you know that you are paying the
parents would spend in the hospital? That money is
correct taxes? Or how would you know that the taxes
worth subject to taxation. The money that will be
collected from you by the BIR are the correct amount of
given to the doctor will form part to the doctor’s PF
taxes that you should pay?
(professional fee). Again we are subjected to the
VAT or the percentage tax or probably it will be
Or let’s make it simpler. What about the compliance?
subjected to the income tax if the doctor will
Okay for you who are business people here, lagi kayong
declare it as an income to begin with. Okay.
na-pepenalty. Bakit yan? Diba. So magbabayad na lang
kayo ng penalty so that there would be no trouble. But
Let’s go to more contemporary context. When you buy
just think of how much. You just don’t know
gas to your cars. What do you see in your receipts? Diba
when and where to find. Diba, you can avoid that.
, there is a VAT component. Who pays for the VAT? It’s
not you guys but it is actually the seller (ex. Shell). But
And lastly, you have to study tax because this is a bar
you as the consumers are being made to shoulder the
subject. You need to pass taxation in order for you to
payment of VAT. So you are being affected with taxes. If
graduate in Ateneo and for you all to become a lawyer.
you buy new car right now, in 2018, there is an increase
So I think more or less, this taxation is one of the
in the excise tax law or the pens from the national
important subjects that you should know or understand
bookstore, those are subjected to tax.
a bit.
What if you are filthy rich and you would like to give out
a house and lot to your boylet or girlet. Or to your
DEFINITIONS OF TAXATION
husband and wife. You would like to give it for free. So
what kind of contract is that? That is donation. If you
If you look at a lot of books, there are different
donate something, you give something for free, you will
definitions of taxation.
be subjected to donor’s tax. And who will pay the
donor’s tax? It is not the person who will receive the gift
but it is actually the person who gives the gift.

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 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
Aban: Taxation is the power by which the sovereign
raises revenue to defray the necessary expenses of the
government.
Black’s Law Dictionary: Taxation is a process or an act
imposing a charge by governmental authority on
property, individuals, or transactions to raise money for
public purposes.
De Leon: Taxation is a means by which the State,
through its law-making body, raises income to defray
the necessary expenses of the government”.
From these definitions, we find that there are
THREE BASIC CONCEPTS OF TAXATION
1. Taxation is a power. It is a power wielded by the
State, to collect money, so that they have to spend
something for public purposes.
2. Taxation is a process. It’s basically a process. From
the time the Tax law is being made, is being
enforced, form the time it is collected, it is a whole
process that all of us encounter.
3. Taxation is a means. It is a means of survival.
Taxation is not only a way for the State to collect
money but also for the State to survive. It is a way
for the State to endure and survive.
I would like to impart to you this definition of taxation
by Domondon. I like this definition because it more or
less encompasses the nature and characteristics of
taxation. From this definition, andami nating masagot.,
andami nating discussion. So let’s begin.
Taxation is the inherent power of the State,
exercised through the legislature, to impose
burdens upon subjects and objects within its
jurisdiction, for the purpose of raising revenues to
carry out the legitimate objects of the government.
NATURE OF TAXATION
Most books would say that Taxation has a two-fold
nature.
(1) It is an inherent power and
(2) It is a legislative power in itself.
Some books would like to add one nature of
taxation.
(3) It is subject to inherent and constitutional
limitations.
So let’s go back to the definition.
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I. TAXATION IS THE INHERENT POWER
OF THE SOVEREIGN.
The power to tax is one of powers of the
government. This is basic in Constitutional Law.
What are the 3 inherent powers of the state? Police
power, Power of eminent domain, and power of
taxation.
It is inherent because the moment that the
state comes into being, the power to tax, along with
the other inherent powers will automatically come
out with it. ‘Pag merong state, meron ng power to
tax.
Thus:
(1) We do not need the Constitution in order
for the government to exercise the power
of taxation; and
(2) We don’t need any laws so that the
government may enact tax measures in
order for it to survive.
This is actually affirmed in the case of Pepsi
Cola vs. Municipality of Tanauan.
“The power of taxation is an essential and
inherent attribute of sovereignty
belonging as a matter of right to every
independent government, without being
expressly conferred by the people.”
The power to tax is tend to be the most powerful
among the inherent powers of the state.
Why is it powerful? Because the POWER TO TAX is
plenary, all encompassing, and unlimited.
What do you mean by that?
How is it being manifested?
What are the THREE OBJECTS OF TAXATION to
begin with?
1. Persons - (ex. Community tax)
2. Property - (ex. Real property tax)
3. Rights - (ex. Excise tax, income tax) When
you say income tax, the government does not
tax the money that you receive because you
are working or you are engaged in business,
what the government actually taxes is your
privilege of earning income.
What is your conclusion then? The power to tax
practically covers everything right?
Taxation practically covers everything. The
government can practically tax everything under
the sun. If you have certain property, possible that
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
the government can enact taxes. For example,
right now, grabe na ang traffic sa Davao.
June 21, 2018 (2nd half)
Transcribed by: Campaner, Marrie Allexa F.
The government would like to curve down the purchase
of vehicles, what can it do? One, it may raise the excise
tax. Or probably it may enforce taxes based on
ownership of cars (it’s a property tax). The government
can do this and you cannot do anything about it. It
encompasses all the spectrum involved in taxation, one
of which is the rate of taxes – if the government will say
that all the properties will be liable for 80% tax rate, can
it do that? Theoretically, yes! This is because the power
to tax is all-encompassing, plenary, and unlimited.
Later you will know that Taxes are burdens, this is a
natural effect of this principle – it is the most powerful
of all the inherent powers of the government. It is not
the most pervasive, but it is the most powerful.
Tio v. Videogram Regulatory Board
There is a certain law enacted by the government
back then regulating the videotapes. If the videotapes
are not locally made, it will be subjected to a tax, but
if it is locally made – tax free.
Valentin Tio is a videogram operator. His contention
is that the tax is very oppressive and harsh. If the
government should tax the videotapes, what will be
left to our business (Tio)?
Thus the constitutionality of the tax law was
challenged in that it is oppressive and harsh, and it is
in restrict of trade.
SC: Yes, it is actually very harsh, what is being
collected is big. But the mere fact that the tax
measure is oppressive in itself does not make it
unconstitutional.
“However, it is beyond serious question that a tax
does not cease to be valid merely because it regulates
, discourages, or even definitely deters the activities
taxed. 8 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 rest in the
discretion of the authority which exercises it. “
The SC is saying “the law is harsh but it is the law”. We
cannot do anything about it. That is how powerful the
power to tax of the government is.
The power to tax is the power to destroy
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This is the opinion of Justice Marshall in one US
case. The power to tax is a destructive power which can
pirece through personal, property and property rights
of the people. If the state should wield it, it can destroy
a particular business; all in the name of taxation.
The power to tax is NOT the power to destroy
This is according to Justice Holmes – “the
power to tax is not the power to destroy while this
court sits.”
Contradicting right? Because you cannot really deny
that power to tax is so powerful and it can destroy a
particular industry. But then, Justice Holmes says that it
is not a power to destroy.
How do we reconcile the two principles?
When we say that the power to tax is the power
to destroy, it refers to a valid tax law.
When we say that the power to tax is NOT the
power to destroy, it refers to an invalid tax law;
meaning it violated some inherent limitations or
constitutional limitations.
What is the implication of “Power to Tax is Not the
Power to Destroy”?
1. The courts may strike down an invalid tax law;
2. The power to tax is still subject to limitations –
(a) inherent limitations; and (b) Constitutional
limitations;
3. The power to tax involves the power to destroy
so it must be exercised with great caution (Phil
Health Care v. Commission)
Phil Health Care v. Commission
One of the issues here is the imposition of
Documentary Stamp Taxes (DST).
When the SC 1st decided the case, it said that
the PhilHealth should pay the tax imposed.
The PhilHealth filed a Motion for
Reconsideration.
The SC granted the MR. Naawa sya sa
PhilHealth, why? The deficiency assessment
is around 300M, it assets is only 259M.
“As a general rule, the power to tax is an
incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no
limits, so that security against its abuse is to
be found only in the responsibility of the
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
legislature which imposes the tax on the
constituency who is to pay it. So potent
indeed is the power that it was once opined
that "the power to tax involves the power to
destroy."
But: “Given the realities on the ground,
imposing the DST on petitioner would be
highly oppressive. It is not the purpose of the
government to throttle private business. On
the contrary, the government ought to
encourage private enterprise. Petitioner, just
like any concern organized for a lawful
economic activity, has a right to maintain a
legitimate business.”
“The power of taxation is sometimes called
also the power to destroy. Therefore it
should be exercised with caution to minimize
injury to the proprietary rights of a taxpayer.
It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen
that lays the golden egg."
CIR v. SM Prime Holdings
SM, et al. are cinematographic operators.
This involves VAT deficiency assessment –
kulang daw ang binayaran na VAT. The SM
did not want to pay, so it filed a protest.
BIR – SM lost
CTA – SM won
Republic went to SC to ask for the reversal
of the CTA decision.
SC: There is no need for SM to pay the VAT
for two reasons:
2. There is no law that says that
cinema operators are liable for VAT
3. If the cinema operators are made
liable to pay the VAT, it is already so
oppressive and unjust. Because
under the LGC they are already
being made to pay the 30%
amusement tax. And on top of that
is the 10% VAT should the court
adjudge it liable. And mind you,
these taxes are based on the gross
sales, walang deductions pa yan. So
ano nalang kikitain? Again, apply
the golden egg principle.
LIFEBLOOD THEORY
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Taxes are the lifeblood of the state, without
which the government cannot endure or survive. This is
the Article 19 of taxation. Ano ba Article 19 sa Civil Code
? “Everyone must in the exercise …” (abuse of rights
principle). So this phrase is very important, if you don’t
know if taxable or not, this is what you will answer; but
don’t do this in our exam!
Manifestations of the lifeblood doctrine:
1. NO INJUNCTION PRINCIPLE
GR: The collection of national taxes
cannot be enjoined. You should read the
case of Republic v. Caguioa, just focus
on the propriety of the judge in issuing
the writ of preliminary injunction.
E: The exception is the CTA Law. Upon
compliance with certain requirements,
the CTA may enjoin the collection of
taxes.
2. STRICT CONSTRUCTION OF TAX EXEMPTION
LAWS.
June 26, 2018 – Castro, SS
II. THE POWER OF TAXATION IS A
LEGISLATIVE FUNCTION.
It is legislative in character. It is the Congress,
the Senate and House of Representatives, they are
the one task creating our tax laws.
How are tax laws passed? First it is in the House of
Representative and then second it is submitted to
the Congress and the latter will make amendments
and propose its amendments and then Senate and
then that’s it the rest is history.
Pepsi Cola vs. Municipality of Tanauan -- SC said
that this is a power purely legislative. And which
the central legislative body cannot delegate either
to the executive or judicial department.
So basically when we say that the power of
taxation is legislative in character we still follow the
rule in your Constitution Law that the power of
taxation cannot be delegated. That is our GENERAL
RULE.
What is the scope the legislative power of the
Congress in the taxation aspect? Basically, it covers
the entire spectrum of taxation. Like what?
1. The object of taxation;
2.
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
The nature and kind;
3. The extent or the rate of that particular subject
or object;
4. The coverage of taxation.
Right like now the Philippine law
already covers sugar (e.g coke); cosmetic
surgery (before subject lang yan ng 3%, but
right now there is an added tax as long as the
cosmetic procedure is invasive in nature. Kung
haplas-haplas lang okay lang yan. I am
wondering in manicure and pedicure. Cosmetic
man din yan. Sir is wondering.)
5. Place or Situs of Taxation.
The Government or the Congress may
have a particular subject or object that will be
subjected to tax. As you can see later on, even
if you are a Filipino residing in the Philippines
but you have income abroad it will still be
taxed as part of your gross income. So diba
even if your income is outside in the
Philippines it will still be covered by our
Philippine taxation. And why is that? Because
the law says so. There is no other reason to it.
PRINCIPLE OF NON-DELEGATION
GR: The power of taxation cannot be delegated.
It is basically because, what the Congress has
right now is just a delegated power. If we take
out Congress it is actually the people who has
the power to negotiate. Because we inform the
State. But because of our Constitution, we
delegate it to certain group of people
sometimes they are idiots and they are divided
into Senate and House of Representatives.
XPNS: Those provided in Abakada vs. Ermita (please
read this case kasi madami matamaan na general
principles sa Taxation):
1. Delegation to the LGU
2. Delegation to the President
3. Delegation to the administrative agencies
4. Delegation to the people at large
5. Emergency powers of the President
1. DELEGATION TO THE LGU
What is our legal basis for the delegation to the
LGUs? It is under Article X, Section 5 of the
1987 Constitution:
Each LGU shall have the power to create
its own sources of revenues and to levy
taxes, fees and charges subject to such
guidelines and limitations as Congress
may provide consistent with the basic
policy of local autonomy. Such taxes,
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fees and charges shall accrue exclusively
to the local governments.
The first question will always be: what is the
nature of the LGU’s power to tax? Is it delegated
or direct grant? Delegated by who or by what?
Or is it a direct grant from where?
That is always the controversy going on for
quite some time. Even the SC cannot agree. If
you have shifted to the cases I gave you- may
iba sinasabi na delegated power meron din
naman na direct power tapos after na naman
delegated power na naman siya. But in the
Ferrer, Jr. vs. Bautista:
- It is against Herbert Bautista yung boyfriend
daw ni Kris Aquino. In this case, it is purely
delegated power. But how do we properly
interpret that? The first principle you have to
remember is that the LGU has no inherent
power to tax. That’s the very principle you have
to remember in the first place. And why is that?
Because the power to tax is lodge in the
National Government. But what is LGU? Is it a
government in itself? Is it a State in itself? The
LGU is a municipal corporation. They are
corporations created by law with special
functions, with special purpose, etc. And they
have been given the power to tax by virtue of
this Constitutional provision.
So it is merely DELEGATED POWER. Because if
there is no Constitution basically this LGU has
no authority to tax at all. It can tax only because
of that particular provision. This keeps us
thinking that the Constitution is supposed to be
there to limit the power of taxation. But right
now in our current set up it would seem that
the 1987 Constitution would expand the power
tax. It would not be limited to the national
government only. But the national government
may delegate the same to the LGU or municipal
corporations. So that is one way to argue.
Second, it is a DIRECT GRANT. It is a direct grant
from the Constitution. But what does that mean
? Once it is in the Constitution, we do not need
any enabling law for that to happen.
Automatically, the LGU has the power to tax
already because of that Constitutional provision.
The Congress may then set forth the limits of
the LGU’s power to tax and right now it is in the
Local Government Code.
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FROM THE LECTURES OF ATTY. DONALVO 2018
Whatever side you choose or argue on, you
always think of one thing- still the LGU do not
have the inherent power to tax.
Part 2
Inah del Rosario
How do you reconcile the two principles of the
delegation of taxation powers?
It is a mere delegated power. Without the
Constitution, the LGU’s will not have the power to
tax. It is not an inherent power. Nonetheless, it is
a direct grant by the Constitution. The express
provision of the Constitution, the LGU’s have the
power to tax without having to wait for an
executing law. The purpose of the Local
Government Code is merely to limit the powers to
tax.
The power of the LGU to tax is limited, not
plenary.
National Government: Power to tax is plenary.
Local Government: Power to tax is not plenary
because it is limited by the Local Government
Code.
2. DELEGATION TO THE PRESIDENT
ART. VI, SEC 28
(2) The Congress may, by law, authorize the
President to fix within specified limits, and
subject to such limitations and restrictions
as it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues,
and other duties or imposts within the
framework of the national development
program of the Government.
The powers of the President to tax is merely
delegated. The President has no inherent power
to tax. Remember that the power to tax is
inherently legislative in nature while the nature of
the function of the President is executive. His
power is necessarily related to the enforcement of
the laws.
But then, by this Constitutional fiat, he is
somehow given this limited power of taxation.
What is the SCOPE? It is limited to tariffs and
customs duties. This is related to importation or
exportation. (These terms are interchangeable
under Customs laws)
GARCIA VS. EXECUTIVE SECRETARY (1992)
EO 438 was issued by the President imposing
import duties. The rate was increased; then
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decreased by EO 475 with the exception of
crude oil and other oil products. Here comes
Cong. Garcia challenged constitutionality of
the EO on the ground that in issuing those EOs
the President is in effect exercising the power
to tax which is vested exclusively in the
Congress.
Do you see the flaw in his argument?
SC upheld the constitutionality of the EOs
based on Art. VI, Sec. 28(2).
There are 2 REQUIREMENTS FOR THE VALID
EXERCISE OF THE PRESIDENT OF THE POWER
TO TAX:
(1) There must be a law promulgated by
Congress authorizing the President to do
such thing.
(2) The exercise must be within the limits set
forth in the law.
What is the law that authorizes the President
to adjust/remove the rates? Formerly it was
the Tariff and Customs Code. Now, it is the
Customs Modernization and Tariff Act.
SOUTHERN CROSS VS. CEMENT
MANUFACTURERS
This is about the Safeguard Measures Act. If
you read the facts, you won’t understand a
thing. But, the principles laid down in the case
is actually easy to understand. There are BASIC
POSTULATES INGRAINED IN ART. VI, SECTION
28(2):
(1) It is the Congress which authorizes the
President to impose tariff rates import and
export quotas, tonnage and wharfage dues
, and other duties or imposts within the
framework of the national development
program of the Government.
Meaning this is a pure delegation to
the President
(2) It’s not enough for the Congress to allow
the President to exercise such power. That
delegation must be embodied in a law.
(3) The authorization of the President may
only be exercised within the specified
limits in the law and is further subject to
limitations and restrictions which Congress
may impose.
Once there is a law allowing the
President, he may never have a
vested right over such power.
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Because it may be adjusted later on
or taken away. We go back to the
basic principle that the Congress as
the legislative body has the inherent
power to tax.
3. DELEGATION TO THE ADMINISTRATIVE AGENCIES
This is also known as subordinate legislation.
2 TESTS FOR A VALID DELEGATION:
(1) Completeness Test
(2) Sufficient Standards Test
• Without passing these tests, there is no valid
delegation.
What is basic principle when we talk about
delegation to administrative bodies? The rules
and regulations issued by administrative bodies
must conform to the law. It can neither expand
nor constrict what is written in the red letter of
the law.
CIR VS FORTUNE TOBACCO
If there is discrepancy between the law and the
revenue regulation, it is the law which will prevail.
ABAKADA VS. ERMITA
This involves RA 9337 (amended the NIRC )
particularly the stand-by powers of the
President. The stand-by powers of the
President if exercised will raise the VAT
percentage. RA 9337 contains a proviso
authorizing the President, upon
recommendation of the Secretary of Finance to
raise the VAT rate to 12% effective Jan 1, 2006
after the ff. conditions are met:
1) VAT collection as a percentage of GDP
of the previous year exceeds 2 4/5%;
or
2) National Government deficit as a
percentage of GDP of the previous
year exceeds 1 1/2%
SC said that there was no delegation of
legislative power to the President. This is
because the President is mandated to increase
VAT percentage upon the happening or
existence of any of the conditions.
June 26, 2018, Part 3
Transcribed by: Dianne Marie Isidor
Based on the happening of the two facts, the
President is authorize to, what, increase the
VAT percentage.
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Does the President have the option to not
exercise the standby power?
A: Wala daw discretion kasi once na the
conditions will happen, the President has
no authority to not follow the increase of
the VAT rate.
So isipin nyo, sometimes its delegation, this is
one case that I found it difficult to understand.
The law says na, the President may increase
the VAT rate upon the happening of the
conditions.
Dissenting opinion of the case(as summarized
by sir):
The argument there is that it is still
discretionary on the part of the President
whether or not he or she will apply or exercise
his or her standby powers.
RA 8240 increased the tax rates on cigarettes
from 10% to 11%. By virtue of that law, the BIR
issued a Revenue Regulation No.17-99 which
provided (t)hat the new specific tax rate for
any existing brand of cigars, cigarettes packed
by machine, distilled spirits, wines and
fermented liquor shall not be lower than the
excise tax that is actually being paid prior to
January 1, 2000.
The effect of this is the BIR made a floor. . So,
essentially, what the BIR is saying that by virtue
of that revenue regulation, hanggang dito lang
yan. You cannot go below these even if there is
an increase in the excise tax rates. Your taxes
that you should pay will not go below a certain
threshold.
Q: So what’s the issue in this case?
A: The issue in this case is W/N the BIR exceed
in exercising its delegated power?
Ruling: The SC ruled in the affirmative. By
setting the floor for excise tax on cigarettes
you have already exceeded what was provided
by law. What was provided for by law is that
you just adjust the rates.
Principle:
The Rule is that administrative regulations
must be in harmony with the provisions of the
law. The revenue regulations must not expand,
modify, alter or amend thebasic law which it
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FROM THE LECTURES OF ATTY. DONALVO 2018
seeks to implement.
4. DELEGATION TO THE PEOPLE AT LARGE
This is through Initiative and Referendum. We
will not delve deeper into that. Because it is
actually impossible for people to exercise Tax
powers through Initiative and Referendum.
Who would want to make a law imposing new
taxes,
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diba? Probably siguro tax exemption. But this is
a very difficult thing to do as you already know
in your Constitutional law and Elections law.
III. TAX IS A BURDEN
Tax power involves the imposition of Burdens.
What are the subjects of taxation? Persons, Property
and Rights, right? It is all encompassing.
The state can tax anything under the sun. There is
almost no exception.
On top of that, it is a Forced Contribution. Pugson
ka nga mubayad. You pay your taxes otherwise
there will be sanctions. You may even go to prison.
You pay your taxes and you will not immediately
feel the benefits given by the government. Bayad
ka ngayon, yung taxes mo para sa mga roads na
iconstruct sa Ilocos, pano yan? Can you avail of that
? NO.
What about let’s put it in the context of, you know,
senior citizen discounts and vat exemption?
Alam nyo ba kung gano kalaki yan? 20% discount plus
12% vat exemption.
So sa 200 pesos, ang babayaran mo lang ay nasa around
150 or 160. So, malaki di ba? So order lang kayo ng
order(HAHAHA).But you cannot say that you know
because you are paying your taxes and you can now
avail of the senior citizen discount. Because you are not
yet a Senior Citizen. Basically what the government
offers, is really a chance for all of us to avail of the
government services later on. Hindi na pag may binigay
ka, kailangan meron din ibigay.
Can one refuse to pay the tax because he doesn’t
derive any benefits from it? The person cannot actually
refuse that. You can refuse, kung ayaw na nya,ayaw na
nyang magbayad, but there will be sanctions later on.
As one SC decision would say: Tax is the price we pay
for a civilized society. There is no need that one must
seen an actual or direct consideration. Because
remember that it is enough that the money made for
taxation is for profit, for cost and for the benefit of the
public in general. Tax is a burden to be used as a power
to destroy and at the same time it can also be used as a
power to build.
July 3, 2018 0:00-13:00
Lexi Singanon
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
JURISDICTION
Let’s begin with Jurisdiction. When you talk about
Jurisdiction in the concept of taxation, you talk about
territory.
1. TERRITORIALITY
When you say that taxation is jurisdictional in nature, it
means the power of taxation operates only within the
territorial limits of the taxing authority.
As a GENERAL RULE, once the object or subject is
already outside the Philippines, it is no longer subject to
Philippine taxation.
EXCEPTION: If there is a privity of relationship
between the taxing authority and the tax subject
or object.
How do you determine if there is a privity of
relationship between the taxing authority and the tax
subject or object?
There is a privity of relationship between the
taxing authority and the tax subject or object if
the taxing authority can afford protection to the
tax subject or object.
So everything boils down to protection.
Now, how do you specifically determine if the
government can afford protection to the tax subject or
object?
Generally, it devolves upon THREE FACTORS:
1. CITIZENSHIP of the tax subject or object;
2. RESIDENCE or LOCATION of the tax subject or
object; and
3. SOURCE of the tax subject or object.
When you talk about jurisdiction, you are also talking
about the territorial limits of the power to tax pursuant
to its territorial in nature. This also has something to do
with the SITUS of taxation.
2. SITUS OF TAXATION
What do you mean by situs of taxation?
It means place of taxation.
It doesn’t mean that if a particular tax subject or
object is here in the Philippines, it is already
covered. No. Because you also have to look at the
situs of taxation, the rules on situs of taxation.
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The rules on situs of taxation are the general rules that
states or taxing authorities follow when it comes to
taxation schemes and most of them, if not all, are
applicable to the Philippine taxation setting.
FACTORS CONSIDERED IN DETERMINING WHETHER OR
NOT A TAX SUBJECT OR OBJECT IS SUBJECT TO
PHILIPPINE TAXATION:
1. Kind of tax being imposed or levied;
2. The place where the thing or property is
located;
3. Residence of the person being taxed;
4. Citizenship of the person being taxed;
5. Source of the tax subject or object; and
6. Place where the excise or privilege or business
or occupation is being performed (the place of
exercise of these rights)
Must all these factors go together?
No need. It is enough that one or some of the
factors exist in order that the tax subject or object
may be covered by Philippine taxation.
DIFFERENT TYPES OF TAX SUBJECTS
Please take note that we’re still in the general principles
. Pag mag-exam na tayo sa general principles I don’t
want people to answer in the context of the NIRC
provisions. I want you to answer in the context of the
general principles.
a) INCOME TAX
What are the considerations that must be looked into
in order to determine the situs of taxation of income
tax?
There are three considerations:
1. CITIZENSHIP of the taxpayer;
2. RESIDENCE or LOCATION of the taxpayer; and
3. SOURCE of the income.
So those are the three factors. So parang “mix-and-
match” siya.
Examples:
1) Resident of the Davao and earning income in the
Davao. Taxable here.
You don’t have any problem with me when it
comes to Philippine taxation because I am
residing here in Davao, and I am earning income
here. What type of income? It’s compensation
income, coming from an employer-employee
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
relationship.
2) Resident of Davao but earning income abroad.
Income abroad taxable in the Philippines.
Now, suppose I own a restaurant in Hong Kong
, and I am living here in Davao City. I am a
Filipino citizen operating a Filipino restaurant
in Hong Kong.
Because of the fact that I am a Filipino citizen
who is residing here in the Philippines, even
my income from abroad are taxable under
Philippine laws. Why? Because the government
can afford protection on my part.
3) Non-resident Foreigner earning income in the
Philippines. Her income made in the Philippines is
taxable in the Philippines.
Let’s twist the problem a little bit further.
What if si Maria Ozawa, a Japanese citizen
working as a model here in the Philippines.
She’s not even residing here, but she earns
income here in the Philippines.
Does it mean that if she is not a resident here
in the Philippines, her income here are not
subject to Philippine income tax?
No, because there is still the source of income.
Where is the source of her income from her
modelling? Here in the Philippines. That’s why
even if she is not a resident and a citizen of the
Philippines, the government can still afford her
protection because she earns here and she is
contributing to the community.
4) Filipino residing abroad; has properties in the
Philippines
What about if I am a Filipino and I am residing
abroad, and I own a number of properties in the
Philippines? So even if I am not physically here
but the mere fact that I am a Filipino and the
source of my income is here in the Philippines,
then it will be subjected to Philippine taxation.
So those are the three considerations that you have to
look into to determine the situs of taxation of income
tax.
July 3, 2018
Emille Dane S. Viola
b) PROPERTY TAX
It’s easier to understand property tax because we can
see it. What is the situs of taxation when it comes to
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property? The first thing you have to consider is to
determine what type of property is subject to tax?
We have 2 KINDS OF PROPERTY UNDER PROPERTY
LAW:
1. Real Properties
2. Personal Properties
A. Real properties - the situs is where the property is
located. Here in the Philippines our real property tax is
governed by the Local Government Code, it is the Local
Government Unit that imposes real property tax.
For example, you have a land here in Davao City, it will
be subject to the real property taxes imposed or levied
by the local government of Davao. Properties outside
the jurisdiction of the city cannot be levied by them, so
we still apply the territoriality principle.
B. Personal property- distinguish first what kind of
personal property:
1. Tangible
2. Intangible
a) Tangible personal property –
GR : the situs is where the property is located.
However some authors would say that the
thing follows the owner, but Dean Quibod
follows the general rule where the property is
found. But usually when it comes to personal
properties the thing follows the owner.
b) Intangible personal property –
GR: mobilia sequntur personam –the thing
follows it’s owner.
This is because these properties have
to form and they are essentially rights which
follows the owner.
XPN: When the law specifically provides for
the situs of the personal property.
Example is the shares of stocks in a
corporation. Under the NIRC we have to first
determine whether or not the stocks is here
in the Philippines or outside to determine if
they are subject to Philippine income taxation
.
There’s this old case mentioned in the De
Leon book, here the decedent died outside
the Philippines but he owned a stock from a
Philippine corporation. The question there is
whether or not the stocks from the Philippine
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FROM THE LECTURES OF ATTY. DONALVO 2018

corporation is subject to estate tax, the SC
said yes. Normally we follow mobilia sequntur
personam, but the exception is when the
rights to intangible property is exercisable in
the Philippines, so because it is a stock from a
Philippine Corporation, the owner will
exercise his rights here in the Philippine
jurisdiction.
2. Petitioner had yards where some of the goods
were stored and those that were defective were
reconditioned.
3. United Africa Co., Ltd. sent its representative,
Hugh Watson Gibson, to the Philippines to look into the

TAX ON PERSONS

A state may impose taxes on a person subject to its

sovereignty. In the Philippines we have community tax
or the Cedula, if you are a resident in a particular
locality you should pay your community tax for that.

EXCISE OR PRIVILEGE TAXES

This is the tax on the enjoyment of a privilege.

GR: the situs is where the act is performed, where the

occupation is engaged in or where the business is done.

A. Donor’s tax - In case of donation we have to consider

the following:

a. the residency of the donor

b. the citizenship of the donor
c. and sometimes, the location of the property

B. Sales tax- the situs is the place where the sales

contract is consummated.

July 5, 2018
Patricia Balgoa

Read the case of CIA v. Collector.

CIA V. COLLECTOR
GR NO. L-5896 (Not in case list)

Facts:

1. Petitioner was engaged in the business of

selling surplus goods acquired from the Foreign
Liquidation Commission pursuant to an agreement with
the United States Government whereby petitioner
undertook to rehabilitate the Veterans Administration
Building (formerly Heacock Building) for and in
consideration of over a million pesos worth of surplus
goods.

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 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
availability of tractors for sale in the Philippines. Gibson
learned of the petitioner's business and contracted to
buy tractors from the latter, to be delivered f.a.s. (free
alongside ship), Manila, in good working condition and
capable of running off lighters under their own power.
A tractor expert, Mr. Tex Taylor, was employed by the
foreign company to select, inspect and test the tractors
before delivery.
4. Tex Taylor gave a list of tractors to petitioner,
to which the latter acquired and reconditioned.
Petitioner then presented such before the Philippine
Refining Co., affiliate of the foreign buyer. The latter
would then notify banks to which UAC had dollar
deposit to pay for the acquisition of the tractors.
Petitioner sold a total of 57 tractors.
Issue:
Whether or not petitioner is liable for the payment of
percentage or sales tax on its gross sales of the 57
tractors in question to the United Africa Co., Ltd. under
the provisions of Sec. 186 of the National Internal
Revenue Code
Ruling:
1. Petitioner argues that the goods in question did not
acquire a taxable situs in the Philippines because they
merely passed Philippine territory in transit and that
they were not intended for local use but for exportation
to a foreign country.
2. The sale of the tractors was consummated in the
Philippines, for title was transferred to the foreign
buyer at the pier in Manila; hence, the situs of the sale
is Philippines and it is taxable in this country.
3. As for the legislative policy to exempt consignments
abroad from tax in order to encourage exports, the
Solicitor General has pointed out that it is only the
exportation of locally produced or manufactured
products, and not every kind of exportation, that
Congress wanted to encourage and promote
ILOILO BOTTLERS V. CITY OF ILOILO
Facts:
Iloilo Bottlers Inc. filed a complaint with the CFI of Iloilo
for the recovery of the sum of P3,329.20,which
allegedly constituted payments of municipal license
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taxes under Iloilo City Tax Ordinance No. 5 series of
1960 that the company paid under protest. Among the
arguments of Iloilo Bottlers Inc. were as follows:
• -That it already closed its bottling plant at Muelle
Loney, Iloilo City, and transferred its bottling
operations to its new plant in Barrio Ungca,
Municipality of Pavia, Province of Iloilo, which is
outside the jurisdiction of the City of Iloilo
• That it could not anymore be liable to pay the
municipal license fee because its bottling plant (
was) not anymore inside the City of Iloilo, and that
moreover, since it itself (sold) its own products
to its(customers) directly, it could not be
considered as a distributor
• That the plaintiff does not maintain any store or
commercial establishment in the City of Iloilo
from which it distributes its products, but by
means of a fleet of delivery trucks, plaintiff
distributes its products from its bottling plant at
Barrio Ungca Municipality of Pavia, Iloilo, directly
to its customers in the different towns of the
Province of Iloilo as well as the City of Iloilo;
• That the plaintiff is already paying the National
Government a percentage Tax on all the softdrinks it
manufactures.
The CFI rendered on January 26, 1973 a decision in
favor of Iloilo Bottlers, Inc. declaring the Corporation
not liable under the ordinance. The City of Iloilo
appealed to the Court of Appeals which certified the
case to this Court.
Issue:
WON Iloilo Bottlers Inc. is liable is liable under Iloilo City
tax Ordinance No. 5, series of 1960, as amended, which
imposes a municipal license tax on distributors of soft-
drinks.
Ruling: YES.
Iloilo Bottlers, Inc. disclaims liability on two grounds:
1) Since it is not engaged in the independent business of
distributing soft-drinks, but that its activity of selling is
merely an incident to, or is a necessary consequence of its main
or principal business of bottling, then it is NOT liable
under the city tax ordinance.
2) Only manufacturers or bottlers having their plants
inside the territorial jurisdiction of the city are covered
by the ordinance.
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
The second ground is manifestly devoid of merit. It is
clear from the ordinance that three types of activities are
covered: (1) distribution, (2) manufacture and (3)
 bottling of softdrinks.
A person engaged in any or all of these activities is
subject to the tax. The first ground, however, merits
serious consideration. To determine whether an entity
engaged in the principal business of manufacturing, is likewise
engaged in the separate business of selling, its marketing system
or sales operations must be looked into.
There are two marketing systems: Under the first
system, the manufacturer enters into sales transactions
and invoices the sales at its main office where purchase orders are
received and approved before delivery orders are sent
to the company's warehouses, where in turn actual deliveries are
made. No warehouse sales are made; nor are separate stores
maintained where products may be sold independently
from the main office. The warehouses only serve as
storage sites and delivery points of the productsearlier
sold at the main office. Under the second system, sales
transactions are entered into and perfected at stores or
warehouses maintained by the company. Any one who
desires to purchase the product may go to the store or
warehouse and there purchase the merchandise. The
stores and warehouses serve as selling centers.
Entities operating under the first system are NOT
considered engaged in the separate business of selling
or dealing in their products, independent of
their manufacturing business. Entities operating under
the second system are considered engaged in the
separate business of selling.
In the case at bar, the company distributed its
softdrinks by means of a fleet of delivery trucks which
went directly to customers in the different places in
lloilo province. Sales transactions with customers were
entered into and sales were perfected and
consummated by route salesmen. Truck sales were
made independently of transactions in the main office.
The delivery trucks were not used solely for the purpose
of delivering softdrinks previously sold at Pavia. They
served as selling units. They were what were called,
until recently, "rolling stores". The delivery trucks were
therefore much the same as the stores and warehouses
under the second marketing system. Iloilo Bottlers, Inc.
thus falls under the second category above. That is, the
corporation was engaged in the separate business of
selling or distributing soft-drinks, independently of its
business of bottling them.
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The tax imposed under Ordinance No. 5 is an excise tax.
It is a tax on the privilege of distributing, manufacturing
or bottling softdrinks. Being an excise tax, it can be
levied by the taxing authority only when the acts,
privileges or businesses are done or performed within
the jurisdiction of said authority [Commissioner of
Internal Revenue v. British Overseas Airways Corp. and
Court of Appeals, G.R. Nos. 65773-74, April 30, 1987,
149 SCRA 395, 410.] Specifically, the situs of the act of
distributing, bottling or manufacturing softdrinks must
be within city limits, before an entity engaged in any
of the activities may be taxed in Iloilo City.
Where is it based?
Initially the business was based in Iloilo, but later on it
transferred to Fabia.
What is the nature of the tax involved here, license or
business tax?
Excise tax. Being an excise tax, it can be levied by the
taxing authority only when the acts, privileges or
businesses are done or performed within the
jurisdiction of said authority.
How did Iloilo Bottlers conduct its business pertaining
to its distribution?
They have their own salesmen and these salesmen sell
the softdrinks in the city of Iloilo.
In the case at bar, the company distributed its
softdrinks by means of a fleet of delivery trucks which
went directly to customers in the different places in
lloilo province. Sales transactions with customers were
entered into and sales were perfected and
consummated by route salesmen. Truck sales were
made independently of transactions in the main office.
The delivery trucks were not used solely for the purpose
of delivering softdrinks previously sold at Pavia. They
served as selling units. They were what were called,
until recently, "rolling stores". The delivery trucks were
therefore much the same as the stores and warehouses
under the second marketing system. Iloilo Bottlers, Inc.
thus falls under the second category above. That is, the
corporation was engaged in the separate business of
selling or distributing soft-drinks, independently of its
business of bottling them.
How does the company distribute the softdrinks?
The Court distinguished 2 marketing systems:
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
(1) The manufacturer enters into sales
transactions and invoices the sales at its main
office where purchase orders are received and
approved before delivery orders are sent to
the company's warehouses, where in turn
actual deliveries are made. No warehouse sales
are made; nor are separate stores maintained
where products may be sold independently
from the main office. The warehouses only
serve as storage sites and delivery points of the
products earlier sold at the main office.
(2) The sales transactions are entered into and
perfected at stores or warehouses maintained
by the company. Any one who desires to
purchase the product may go to the store or
warehouse and there purchase the
merchandise. The stores and warehouses serve
as selling centers.
What is the main difference between these 2 schemes
?
Entities operating under the first system are NOT
considered engaged in the separate business of selling
or dealing in their products, independent of their
manufacturing business. Entities operating under the
second system are considered engaged in the separate
business of selling.
In the first, the transaction occurs in the MAIN
WAREHOUSE. In the second, however, the transaction
does not only occur in the main warehouse, but it also
occurs inside the city.
What is the taxable transaction based on the
ordinance?
The tax imposed under Ordinance No. 5 is an excise tax.
It is a tax on the privilege of distributing, manufacturing
or bottling softdrinks.
Where is the situs of taxation when it comes to excise
tax?
The situs of taxation here is the place where the activity
is performed. In this case, it is the place of distribution.
Where does the sale transaction occur?
It occurs inside the City of Iloilo.
July 5, 2018
Transcribed by: Dianne Marie Isidor
14:00-28:00
CIR vs Baier Nickle
Baier-Nickle is a President of the company and at the
same time a commission agent of JUBANITEX, Inc.
JUBANITEX is engaged in the business of
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manufacture, marketing and wholesale of textiles.
Q: As President of that company and commission
agent, what does she receive, how much dose she
receive?
A: She receives arounds 1.7 million based on her 10%
commission.
Q:What did JUBANITEX do with respect to the
commission that she receives?
A: There is a withholding tax.
Q: What do you understand of that withholding
tax?Essentially what happens?
A: Withholding tax- before the person receives his
compensation there is already, a company will
withheld a part of his income.
In other words, there’s already a cut. Kuhaan dayon
ug tax.
A: So in this case, there was a withholding tax that
was, with regard to her income.
Q: What did Baier-Nickle do?Because a part of
her income was withheld. What was the action of
Baier-Nickle?
A: She claimed for a refund.
Q: What is the ground of her refund?
A: Because according to her, the taxable activity here,
did not happen in the Philippines.Since, she
performed her activity in Germany and she was a non
-resident here in the Philippines, hence, such activity
should not be taxable here.
Q: What did the BIR do to her claim for refund?
A: The BIR did not respond. It did not do anything.
So, she raised the matter here to the Court of Tax
Appeals(CTA).
Q: What did the Court of Tax Appeals do with
respect to her claim for refund?
A:The CTA first denied her claim. That’s why she
went to the Court of Appeals.
Q: What happened to the Court of Appeals?
A: It reversed the decision of the CTA. Meaning, the
CA granted her refund.
Q: What’s the issue here?
A: The issue here: W/N Baier-Nickle’s income is
taxable here?
Q: What’s the nature of this sales commission?
A: It’s in the nature of labor and service. Meaning,
it’s an income.
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
Q: What are the factors that were considered to
determine the taxability of the income?
A: a. Citizenship, b. Residency, c. Source of Income
Q; In this case, what matters most?
A: It is where she performed the taxable acticity.
Q: In this case, what is the situs of income?
A: The situs of income here, since this is a labor and
service income, it is the place where the labor and
service were performed.
Q: Where was the labor or service performed here
by Baier-Nickle?
A: According to her version, she performed it in
Germany.
Q: What did the SC say about this?
A: According to the SC ruling, there were no
evidences or documents that would support the
contention of Baier-Nickle that she indeed performed
such taxable activity in Germany.
Q: Because of lack of evidence, what happens now
? tool for promoting social justice.
A: Since there was lack of evidence, hence, upheld
the taxability of the income.
So, please take note of this case.
The point here is the source or situs of income.
The source of income of personal services. The
place where the services were actually rendered.
PURPOSES OF TAXATION
The PRIMARY PURPOSE OF TAXATION is for Raising
Income.
Is it the sole purpose? NO.
SECONDARY PURPOSES OF TAXATION:
1. Social Justice/Compensatory
An example of which is the discount given to the
Senior Citizens.
2. Regulatory/Sumptuary
Ex. The taxes imposed on liquors. The regulatory
purpose for these taxes is for the general welfare of
the people, like their health, and also for peace and
order. Basically, the Power of Taxation can be used
to implement Police Power.
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3. To implement the Eminent Domain powers of
government.
What is the HEART OF TAXATION? PUBLIC PURPOSE.
July 5 (28:00 - 42:03)
Ara Olamit
Q: Can you give an example where the power of
taxation is used for police power?
The power of taxation is also used for police power.
A: An example would be raising the taxes on alcohol.
Q: Okay alcohol. So why? What is the regulatory
purpose there?
A: For the general welfare of the people, for health
purposes.
Q: Okay. So basically what you’re saying is that power
of taxation can be used as an implement of police
power. Right? So let’s go now to the social justice. How
is it also made manifest? The power of taxation as a
A: A good example of social justice in power of taxation
would be the discount given to the senior citizens.
Q: Yes. That is also one way of looking at it. Is the social
justice provision under the Constitution applicable only
to the people in general? Does it also affect the
government?
A: Yes sir.
Q: Yes. It also applies to the government. How?
A: When they delegated the power to tax to the
municipal corporation or the local government unit.
Q: Okay. Case in point is what?
A: Batangas Power.
Q: What’s that case all about? How did the SC discuss
the social provision there? The power to tax. Can you
give a brief explanation why is it the power to tax given
to the LGU’s is actually a way to implement the social
justice provision?
A: For the need to provide to the poor.
Q: But why is it, based on that case, that the LGU is
granted the power to taxation?
A: The LGU is granted the power of taxation so that
they may, by themselves, also raise revenues.
Q: Okay. For purposes of decentralization. So that it can
have its own source of revenues. Let’s go now to public
purpose. How do you define public purpose?
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FROM THE LECTURES OF ATTY. DONALVO 2018
A: Public purpose is when the general welfare of the
people are taken into consideration.
Q: Okay now. What happens if that particular
community does not derive any benefit from
government? Does that circumstance take it out from
the term public purpose?
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A: It does not sir.
Q: Okay. Let’s just go to the case of Planters Products
vs. Fertiphil. Planters Products is what? What type of
person?
A: Juridical person. Private corporation.
Q: How about Fertiphil?
A: It is also a private corporation.
Q: What did Fertiphil do against Planters Products?
What is the respective business of Fertiphil and Planters
Products?
A: They are engaged in agricultural products.
Q: Then what happened during the time of Marcos?
A: There was an LOI issued by Marcos.
Q: Based on the LOI, what did Planters Products do
against Fertiphil?
A: Contribution was collected to make PPI viable.
Q: After Marcos was toppled, what happened next?
A: Fertiphil asked for a refund of all the contributions it
made.
Q: Moving on, what are the issues tackled in this case?
Was the LOI valid in this case? Is it valid to begin with?
The LOI somehow imposes a 10 peso per bag for the
viability of Planters. What is the nature of that 10 peso
payment? What is the nature of that collection?
A: It was in the nature of a tax.
Q: Why is it in the nature of a tax? Why did the SC say
that this is a tax?
Diba the purpose of that exaction was to make Planters
viable? Was it supposed to be for regulation?
A: No sir.
Q: Then if it is not for regulation, why do you say that it
is for tax purposes? Why is it considered a tax? What is
the primary purpose of taxation?
A: The primary purpose of taxation is to raise revenues.
Q: Yes, to raise revenue. Meaning, to raise income.
Going back here, why did the SC say that this is an
exercise of the power to tax? By the way, dati kasi, si
President Marcos, he has legislative powers. Ang LOI,
parang batas yan dati. That’s way back then. Going back
, why did the SC say that this is an exercise of the power
to tax?
Okay. It’s supposed to raise income, right? Raise income
. For what purpose? What is the ultimate end goal of
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
getting that 10 peso per bag?
A: For the viability of the PPI.
Q: In other words, for capitalization of PPI. There’s no
end point except to raise money so that we can
capitalize this particular corporation. Okay. Now, the SC
also said that this is for police power. How did the SC
argue on this? This is supposed to be for _____ because
this is regulatory. That 10 peso per bag is supposed to
be for regulatory purpose so that this (PPI) will become
viable. How did the SC argue on that?
Anyway, it can be argued that that exaction was
supposed to be for police power. Because anyway these
two powers (power to tax and police power) may go
together.
Let’s go now to the legality of the LOI. Why is it
considered as not legal? Why is it considered an illegal
power to tax?
A: Because there was already a declaration in the LOI
that the purpose of such would be for the private
company (PPI).
Q: What is the ultimate effect in giving the 10 pesos per
bag to a private corporation?
A: Such exaction would favor only that private
corporation.
Q: Meaning it gives an undue advantage and benefit on
the part of a private corporation. And what is our basic
principle with respect to the power of taxation? What is
the end goal there aside from raising revenues?
A: It is for public purpose
Q: For public purpose only. Again, what is the heart of
taxation?
A: The heart of taxation is public purpose.
Okay. Eto yung kaso na yun. So basically that’s it. You
read the cases.
July 17, 2018 Part 1
Johaina Madum
TAXATION VS. POLICE POWER
Can tax be used to implement police power? Can the
police power go together with power of taxation?
The answer is yes of course! In fact the reason
behind for making our tax laws is to promote police
power, like for example the sin tax we have, its to
regulate the people from buying the yosi or cigars,
it’s for public health. What about tax exemption or
tax leeway’s given to, ung bago ngayon sa TRAIN law
ung electric vehicles. There is some sort of
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incentives given to car manufacturer if they sell
hybrid or totally electric vehicle. In fact if it’s totally
electric vehicle its walang excise tax yan.
We say that police power can go together with power
of taxation, what thing about the police power is it is
not merely in money form, as you can see, it involves,
one is for confiscation of money and confiscation of
property, and under the police power you can
confiscate a property without giving something in
return and even without the consent of the owner of
such property, that is in the name of regulation. Like for
example example contrabands or drugs or marijuana. I
have client earlier he wants to file before that FDA to
legalized the cannabis oil, kasi maraming benefits.
According to him he has seen the effect of cannabis oil
to his dying grandma. According to him it’s a good
substitute daw for morphine. What about drugs? Not
only the police officer will confiscate that drugs, they
are going to take away your right and offer it to satan.
What is the guise of police power, it is the power to
regulate. If you have read the cases in your outline,
some would say that the exaction is for the power to
regulate and some would say that it’s the power to tax.
What is our main guiding principle?
The cases would say, that you LOOK AT THE PRIMARY
REASON OR PRIMARY GOAL.
If the principal purpose of exaction is raising
income or raising revenue, even if there is a
regulation that will have an effect of it, it would still
be considered as the power to tax.
So, all of the tax related principles that we have
learned so far, will apply it to that kind of exaction
.
However, if the principal purpose is to regulate,
even if there is an income generation as an
incidental to that law, that is actually an exercise of
police power.
Kung isipin mo parang madali lang, you just look at the
principle but if you read the cases, you would look at
the ruling first, pano ba kayo magbasa ng case,
pabaliktad? start with the wherefore, look for that tax
portion then, you go to the facts? But if you just read it,
like a normal human being would read it, una ka from
facts, issues to ruling, you could say that oh its to
regulate pero pag abot sa ruling the SC would say that
this is actually an exercise of power to tax.
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Like for example yong sa motor vehicle licensing fee,
ung case ng PAL v. EDU.
You’re paying the LTO for the registration para sa
motor vehicles natin, its to regulate diba? But the SC
says that its actually an exercise of the power to tax
. How does the supreme court justify under the EDU
case? You look at the primary purpose of the
exaction taken from, you know the registration of
the motor vehicle, the main purpose is to be used
for the constructions and maintenance of public
road and highways. But anyways aside from that,
according to the SC, the main purpose of the motor
vehicle registration fees is supposed to be for
raising income.
So anong effect, meron tayong mga rules diba? Lets
start from the random of cases. Lets start with
Republic v. Murcia.
Republic vs. Bacolod-Murcia Milling Co.
GR L-19824-26, 9 July 1999
FACTS: This is a joint appeal by three sugar centrals,
Bacolod Murcia Milling Co., Inc., Ma-ao Sugar Central
Co., Inc., and Talisay-Silay Milling Co., sister
companies under one controlling ownership and
management, from a decision of the Court of First
Instance of Manila finding them liable for special
assessments under Section 15 of Republic Act No.
632.
Sec. 15. Capitalization. — To raise the necessary
funds to carry out the provisions of this Act and the
purposes of the corporation, there shall be levied on
the annual sugar production a tax of TEN CENTAVOS
[P0.10] per picul of sugar to be collected for a period
of five (5) years beginning the crop year 1951-1952.
The amount shall be borne by the sugar cane
planters and the sugar centrals in the proportion of
their corresponding milling share, and said levy shall
constitute a lien on their sugar quedans and/or
warehouse receipts.
RA 632 created the Philippine Sugar Institute, a semi-
public corporation. In 1951, the Institute acquired
the Insular Sugar Refinery for P3.07 million payable
in installments from the proceeds of the sugar tax to
be collected under RA 632. The operation of the
refinery for 1954 to 1957 was disastrous as the
Institute suffered tremendous losses. Contending
that the purchase of the refinery with money from
the Institute’s fund was not authorized under RA 632
, and that the continued operation of the refinery is
inimical to their interest, Bacolod-Murcia Milling Co.,
Ma-ao Sugar Central, Talisay-Silay Milling Co. and the
Central Azucarera del Danao refused to continue
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with their contribution to said fund. The trial court
found them liable under RA 632.
ISSUE: Whether the defendants-appellants may
refuse to pay the special assessment. No
RULING: The nature of a “special assessment” similar
to the case has been discussed and explained in Lutz
vs. Araneta. The special assessment or levy for the
Philippine Sugar Institute (Philsugin) Fund is not so
much an exercise of the power of taxation, nor the
imposition of a special assessment, but the exercise
of police power for the general welfare of the entire
country.
This Court can take judicial notice of the fact that
sugar production is one of the great industries of our
nation, sugar occupying a leading position among its
export products; that it gives employment to
thousands of laborers in fields and factories; that it is
a great source of the state's wealth, is one, of the
important sources to foreign exchange needed by
our government, and is thus pivotal in the plans of a
regime committed to a policy of currency stability. Its
promotion, protection and advancement, therefore
redounds greatly to the general welfare.
As stated in Johnson vs. State ex rel. Marcy — "The
protection of a large industry constituting one of the
great source of the state's wealth and therefore
directly or indirectly affecting the welfare of so great
a portion of the population of the State is affected to
such an extent by public interests as to be within the
police power of the sovereign." (128 So. 857).
It is, therefore, an exercise of a sovereign power
which no private citizen may lawfully resist. Section
2a of the Charter authorizing Philsugin to “conduct
research work for the sugar industry in all its phases,
either agricultural or industrial, for the purpose of
introducing into the sugar industry such practices or
processes that will reduce the cost of production and
achieve greater efficiency in the industry, justifies the
acquisition of the refinery in question. The financial
loss resulting from the operation thereof is no means
an index that the industry did not profit therefrom,
as other gains of a different nature (such as
experience) may have been realized.
*This is a 1966 case. Ito yong usually na sinasabi nila, if
you read your text books, as your Sugar Central case.
There is this Republic Act 632 which created the
Philippine Sugar Institute (PhilSugIn) . This was created
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FROM THE LECTURES OF ATTY. DONALVO 2018

to conduct research work on sugar industry here in the 2007 the universal charge, what was challenged here
Philippines, mainly to improve existing methods of was Republic Act (RA) 9136, otherwise known as the
raising sugar cane and manufacturing of sugar by Electric Power Industry Reform Act of 2001 (EPIRA law)
product etc.. Anyway, they came also for the and Rule 18 of the Rules and Regulations (IRR) of that
capitalization of Philsugin, anong sabi nya? There shall law. Because this IRR and the law itself imposes a
be levied on the annual sugar production tax of TEN universal charge to all entities and end users for
CENTAVOS [P0.10] per picul of sugar to be collected. particular purposes the amount of the universal charges
Ano yang picul? Maimagine nyo nyang picul? Pwede ba are determined, fixed, and approved by the ERC. And
yan sa rice, diba sa rice kay ‘sack”, bakit sa sugar picul? then then ERC issued an order that it was approved
But anyway, 10 cents per picul of sugar, and then using
there of course this is an additional money that the end
the once acquired from this scheme, yang 10 cents na
users will have to pay so suko ang mga tao.
yan, Philsugin bought a factory, or refinery. But what
happened, it was a disaster in the sense that PHILSUGIN
incurred tremendous losses. So eventually sugar This was challenged by the petitioners on the grounds
centrals (Bacolod et.al) stop paying exaction of the 10 that the universal charge is an illegal exercise of the
cents. What are their reasons why they stop paying
these 10 cents. Ang sabi nila its not supposed to be a power of taxation because you are authorizing and
tax, because its not for revenue purpose, ano ito? It’s administrative body to exact something from the end
not for income, it’s a special assessment. Ok what is a user this cannot be done. This is a tax this is not a
special assessment?
regulation. Of course sabi ng respondents this is not a
Basically, a special assessment is levied on land. It is tax this is for a specific regulatory purpose: to ensure
levied on land because of the benefits that a land the viability of the country's electric power industry.
receives because of some public construction for
So the issue here is, is it a tax or not? This is important
example if the government make a road then tatamaan
yong propert. Aano bang levy sa property nayan? So as because this will ultimately determine whether or not
an effect the local or local government can make a the universal charge imposed is valid.
special assessment so that they could make an “amot”
to the improvement that happens because after all they
will be benefited and its only up to the extent of that The SC had a long discussion regarding the distinctions
benefit. Kung na recover na ang custom construction, between powers of taxation and police power. Let me
the special assessment will stop. This is what sugar
focus on that.
central was saying. Sabi nila, they’ll stop paying because
they don’t get any benefit from it, in fact tremendous
losses has been incurred. So anyway what is the nature POWER TO TAX POLICE POWER
of that exaction, is it a tax or a special assessment?
The power to tax is an On the other hand,
Anong sabi ng Supreme Court?
incident of sovereignty police power is the
and is unlimited in its power of the state to
July 17 (11:00-21:00) range, acknowledging in promote public welfare
Nikki Tan
its very nature no limits, by restraining and
so that security against its regulating the use of
The Supreme Court said that the 10 centavos is not a
abuse is to be found only liberty and property. It is
tax, not even a special assessment, but it’s a just an
in the responsibility of the the most pervasive, the
exaction for regulation an exercise of police power for
legislature which imposes least limitable, and the
the general welfare of the entire country it will aid the
the tax on the most demanding of the
entire sugar industry in the Philippines if the exaction is
made for the protection welfare and improvement of constituency that is to pay three fundamental
the entire sugar industry of the Philippines. it. powers of the State.
It is based on the principle The justification is
Then we have ROMEO P. GEROCHI, KATULONG NG that taxes are the lifeblood found in the Latin
BAYAN (KB) and ENVIRONMENTALIST CONSUMERS of the government, and maxims salus populi est
NETWORK, INC. (ECN), v DOE G.R. No. 159796 July 17, their prompt and certain suprema lex (the welfare

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availability is an of the people is the market;

imperious need.
Thus, the theory behind
the exercise of the power
to tax emanates from
necessity; without taxes,
government cannot fulfill
its mandate of promoting
the general welfare and
well-being of the people.
supreme law) and sic
utere tuo ut alienum non (d) To enhance the inflow of private capital and
laedas (so use your broaden the ownership base of the power generation,
property as not to injure transmission and distribution sectors;
the property of others).
(e) To ensure fair and non-discriminatory treatment of
As an inherent attribute public and private sector entities in the process of
of sovereignty which restructuring the electric power industry;
virtually extends to all
public needs, police
power grants a wide
panoply of instruments
through which the State,
as parens patriae, gives
effect to a host of its
regulatory powers.

The SC now said that the universal charge is not a tax,

but an exaction in the exercise of the State's police
power.
Just look at the primary purpose if it is for raising a
revenue it is a tax but if the main purpose its
merely to regulate even if there is money involved
then it is police power. The SC said you look at the
declaration of policy of the law you can discern that
this universal charge is allowed for it is an exercise
of police powers.

SECTION 2. Declaration of Policy. It is hereby declared

the policy of the State:

(a) To ensure and accelerate the total electrification of

the country;

(b) To ensure the quality, reliability, security and

affordability of the supply of electric power;

(c) To ensure transparent and reasonable prices of

electricity in a regime of free and fair competition and
full public accountability to achieve greater operational
and economic efficiency and enhance the
competitiveness of Philippine products in the global

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(f) To protect the public interest as it is affected by the
rates and services of electric utilities and other
providers of electric power;
(g) To assure socially and environmentally compatible
energy sources and infrastructure;
were excessive. What was the argument of Chevron
here? Chevron said that the royalty fees imposed had
no reasonable relation to the probable expenses of
regulation and that the imposition on a per unit
measurement of fuel sales was for a revenue generating
purpose, thus, akin to a "tax".

The SC said that the royalty fee is an exercise of police

(h) To promote the utilization of indigenous and new
power. The subject royalty fee was imposed primarily
and renewable energy resources in power generation in
for regulatory purposes, and not for the generation of
order to reduce dependence on imported energy;
income or profits as petitioner claims. Again we look at
the purpose and that is in the Policy Guidelines on the
(i) To provide for an orderly and transparent
Movement of Petroleum Fuel to and from the Clark
privatization of the assets and liabilities of the National
Special Economic Zone which provides:
Power Corporation (NPC);

DECLARATION OF POLICY
(j) To establish a strong and purely independent
regulatory body and system to ensure consumer
It is hereby declared the policy of CDC to develop and
protection and enhance the competitive operation of
maintain the Clark Special Economic Zone (CSEZ) as a
the electricity market; and
highly secured zone free from threats of any kind, which
could possibly endanger the lives and properties of
(k) To encourage the efficient use of energy and other
locators, would-be investors, visitors, and employees.
modalities of demand side management.

It is also declared the policy of CDC to operate and

So in the end if you look at the policies it’s not much on
manage the CSEZ as a separate customs territory
money making but it’s more of ensuring the total
ensuring free flow or movement of goods and capital
electrification of the country in general. So this is in
within, into and exported out of the CSEZ.26 (Emphasis
pursuit to the state’s police power objective.
supplied.)

And then what if the exaction is too big? What if I will

collect money from you ranging from 1,000,000-24,000,
From the foregoing, it can be gleaned that the Policy
000?
Guidelines was issued, first and foremost, to ensure the
safety, security, and good condition of the petroleum
That is the case of CHEVRON PHILIPPINES, INC. (
fuel industry within the CSEZ. The questioned royalty
Formerly CALTEX PHILIPPINES, INC.), Petitioner, vs.
fees form part of the regulatory framework to ensure "
BASES CONVERSION DEVELOPMENT AUTHORITY and
free flow or movement" of petroleum fuel to and from
CLARK DEVELOPMENT CORPORATION, G.R. No. 173863
the CSEZ. The fact that respondents have the exclusive
, September 15, 2010 the Board of Directors of
right to distribute and market petroleum products
respondent Clark Development Corporation (CDC)
within CSEZ pursuant to its JVA with SBMA and CSBTI
issued and approved Policy Guidelines on the
does not diminish the regulatory purpose of the royalty
Movement of Petroleum Fuel to and from the Clark
fee for fuel products supplied by petitioner to its client
Special Economic Zone (CSEZ). Now Chevron is a
at the CSEZ. In the case at bar, there can be no doubt
supplier of Nanox Philippines which is inside the CSEZ
that the oil industry is greatly imbued with public
and then CDC charged and demanded to Chevron the
interest as it vitally affects the general welfare.30 In
payment of royalty fees because there was this
addition, fuel is a highly combustible product which, if
regulation approved imposing royalty fees and then
left unchecked, poses a serious threat to life and
Chevron did not ought to pay because the royalty fees
property. Also, the reasonable relation between the

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royalty fees imposed on a "per liter" basis and the
regulation sought to be attained is that the higher the
volume of fuel entering CSEZ, the greater the extent
and frequency of supervision and inspection required to
ensure safety, security, and order within the Zone. As to
the issue of reasonableness of the amount of the fees,
we hold that no evidence was adduced by the
petitioner to show that the fees imposed are
unreasonable.
July 17, 2018 21:00-32:00
Jessa Puerin
The fuel is highly combustible and it can cause severe
damage if left unchecked. The more fuel ,the greater
the extent and frequency of supervision and inspection
required to ensure safety, security, and order within the
Zone. (Mas marami ang tao daw mas malaki ang tao).
REPUBLIC VS INTERNATIONAL COMMUNICATIONS
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Sir: The law in point here is the Public Service Act.
FACTS: On April 4, 1995, respondent ICC, holder of a
legislative franchise under Republic Act (RA) No. 7633
to operate domestic telecommunications, filed with
the NTC an application for a Certificate of Public
Convenience and Necessity to install, operate, and
maintain an international telecommunications leased
circuit service between the Philippines and other
countries, and to charge rates therefor, with
provisional authority for the purpose. Respondent ICC
filed a motion for partial reconsideration of the Order
insofar as the same required the payment of a permit
fee. In a subsequent Order dated June 25, 1997, the
NTC denied the motion. Therefrom, ICC went to the
CA on a petition for certiorari with prayer for a
temporary restraining order and/or writ of
preliminary injunction, questioning the NTC's
imposition against it of a permit fee of P1,190,750.50
as a condition for the grant of the provisional
authority applied for. In its original decision, dated
January 29, 1999, the CA ruled in favor of the NTC
whose challenged orders were sustained, and
accordingly denied ICC's certiorari petition. In time,
ICC moved for a reconsideration. This time, the CA, in
its Amended Decision dated September 30, 1999,
reversed itself, granting ICC its motion for
reconsideration. Petitioner NTC filed a motion for
reconsideration, but its motion was denied by the CA.
ISSUES: 1. Whether the fee in question is in the
nature of a tax, or is merely a regulatory measure.
RULING: 1. Section 40(g) of the Public Service Act is
not a tax measure but a simple regulatory provision
for the collection of fees imposed pursuant to the
exercise of the State‘s police power. A tax is imposed
under the taxing power of government principally for
the purpose of raising revenues. The law in question,
however, merely authorizes and requires the
collection of fees for the reimbursement of the
Commission's expenses in the authorization,
supervision and/or regulation of public services.
There can be no doubt then that petitioner NTC is
authorized to collect such fees. However, the amount
thereof must be reasonably related to the cost of
such supervision and/or regulation.
So let us recap.
How do you differentiate police power from power to
tax?
1. As to concept: Tax is the power that imposed
burdens to raise money for public use;
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FROM THE LECTURES OF ATTY. DONALVO 2018

whereas, police power is a power to make laws

for general welfare.
2. As to purpose: Tax is for revenue; police power
is for regulation.
3. As to amount: In tax, the amount is generally
unlimited, plenary and all-encompassing; in
police power, the amount should not exceed
the cost of regulation.
4. As to compensation: In tax, the compensation
is continuous protection and organized society;
in police power, the compensation is the
healthy economic standard of economy.
5. As to property taken: Tax is generally payable
in money (then later on you will realize that
the BIR can get the property and sell it in public
auction); in police power, it involves not only
money but other properties which may the
source of danger, safety and morals that
means to be regulated.
6. In relation to non-impairment clause: tax is
inferior to non-impairment clause of the
Constitution; police power is superior to non-
impairment clause.
POWER TO TAX VS. POWER OF EMINENT DOMAIN
What is the Power of Eminent Domain?
Eminent Domain - is the inherent power of the State to
take private property for public use after payment of
just compensation.
3 MAJOR REQUIREMENTS FOR THE VALID EXERCISE OF
POWER OF EMINENT DOMAIN:
1. The taking of private property
2. The taking is for public purpose
3. Just compensation must be paid to the
property owner.
Take note of the meaning of Just Compensation.
There is one requirement when it comes to LGUs:
There must a previous offer that must be made by the
local government unit to which the property owner has
rejected.
The power to tax can be used to implement Eminent
Domain. That is additional because if you browse
jurisprudence, as in the case of CIR VS CENTRAL LUZON,
the Supreme Court said that the power of taxation can
be used in conjunction of the power of eminent domain
.
CIR VS. CENTRAL LUZON
This is about the 20% senior citizen discount. The tax
benefit for taking up the 20% senior citizen discount.
Way back then, when business establishments will
provide for 20% discount, the discount can be claimed
as tax credit.
A tax credit is a peso for peso deduction for tax
liabilities. Babayaran kung tax is P100K, what if
nagbigay ako ng P20k as senior citizen discount
under the Senior Citizen’s Law, P100k less 20k, ang
bayronon sa government na lang is 80k. So, it is
peso for peso deduction.
The Supreme Court said here na this is actually an
exercise of eminent domain because these
establishments giving 20% senior citizen discount is
partaking with own property. They are forced to
give discounts to senior citizens and sabi ng
Supreme Court dito na “okay, that is not allowed
because we are going to take their money, their
income and give it for public purpose.” So, how are
we compensate those business establishments?
This is through giving of tax credits. Kaya sabi ng
Supreme Court dito na tax credit benefits granted
to these establishments can be deemed as their
just compensation for the private property taken
for public use.
As a result of the 20% discount as imposes by the
Republic Act, the respondents are entitled for just
compensation. That is way back then.
But here comes the amendment. What happened now
is this: the establishments or several establishments are
still required to give out the senior citizen discount to
senior citizen, and yet what are the benefits received by
these persons, is just a tax deduction.
Ang tax deduction kasi minus lang yan sa income,
hindi sa tax- but a deduction of your income. So
what is the effect? If the tax credit is a direct
deduction of your tax liability, the tax deduction
reduces your net income or reduces your net
taxable income- the effect of the tax liability of the
taxpayer is only indirect. Tax deduction is an
indirect deduction; it is no longer a peso for peso
deduction, but only a fraction of the total discount
gave out to the senior citizens.
CARLOS SUPERDRUG VS. VELASCO
Ang ground dito sa Superdrug, there is improper
exercise of the power of eminent domain. It
constitutes taking of private property without just
compensation and violates the equal protection clause.
Why? Because the tax deductions scheme for giving out

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of 20% discount does not fully reimbursed the For the period January 1995 to December 1995, in
petitioners or the establishments in general in giving conformity to the mandate of Sec. 4(a) of R.
out senior citizen discounts. This is an exercise of
eminent domain, but another, this is an exercise of
police power for the public welfare. Siguro moengon ko
yes but this an unnecessary evil so that they could help
the senior citizens.

The Supreme Court held that “the law is a legitimate

exercise of police power which, similar to the power of
eminent domain, has general welfare for its object.
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.
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.”

MANILA MEMORIAL VS. DSWD

In this case of Manila Memorial vs. DSWD, if you have
read this case, this essentially has the same principles
laid down in the Superdrug case. This is a tax deduction
, not a tax credit, but is still legal because in the end it
is the exercise of the police power and not the power
of eminent domain.

So if you are ask in your exam, is the senior citizen

discount is considered an exercise of power of eminent
domain? I think you have to answer this as an exercise
of police power citing first the Superdrug case and
second, the Manila Memorial case.

But if you are ask: can the power of taxation go

together with power of eminent domain since both are
for public purpose, then you cite the case of Central
Luzon.

Case Digests from the internet:

CIR v. CENTRAL LUZON DRUG CORPORATION, GR NO.
148512, 2006-06-26

Facts:

Central Luzon Drug Corporation has been a retailer of

medicines and other pharmaceutical products since
December 19, 1994. In 1995, it opened three (3)
drugstores as a franchisee under the business name and
style of "Mercury Drug."

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 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
Subsequently, on December 27, 1996, claiming that
according to Sec. 4(a) of R.A. No. 7432, the amount of
P219,778 should be applied as a tax credit, respondent
filed a claim for refund in the amount of P150,193... he
amount of P150,193 claimed as a refund represents the
tax credit allegedly due to respondent under R.A. No.
7432.
the CTA dismissed the petition, declaring that even if
the law treats the 20% sales discounts granted to senior
citizens as a tax credit, the same cannot apply when
there is no tax liability or the amount of the tax credit is
greater than the tax due
. In... the latter case, the tax credit will only be to the
extent of the tax liability.
Also, no refund can be granted as no tax was
erroneously, illegally and actually collected based on
the provisions of Section 230, now Section 229, of the
Tax Code.
Furthermore, the law does not state that a refund can
be claimed by the private establishment concerned as
an alternative to the tax credit.
Thus, respondent filed with the CA a Petition for Review
On May 31, 2001, the CA rendered a Decision stating
that Section 229 of the Tax Code does not apply in this
case. It concluded that the 20% discount given to senior
citizens which is treated as a tax credit pursuant to Sec.
4(a) of R.A. No. 7432 is considered just compensation...
and, as such, may be carried over to the next taxable
period if there is no current tax liability
Issues:
whether the 20% sales discount granted by respondent
to qualified senior citizens pursuant to Sec. 4(a) of R.A.
No. 7432 may be claimed as a tax credit or as a
deduction from gross sales in accordance with Sec. 2(1)
of Revenue
Regulations No. 2-94.
Ruling:
The CA and the CTA correctly ruled that based on the
plain wording of the law discounts given under R.A. No.
7432 should be treated as tax credits, not deductions
from income.
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The above provision explicitly employed the word "tax
credit." Nothing in the provision suggests for it to mean
a "deduction" from gross sales. To construe it otherwise
would be a departure from the clear mandate of the
law.
Thus, the 20% discount required by the Act to be given
to senior citizens is a tax credit, not a deduction from
the gross sales of the establishment concerned.
As a corollary to this, the definition of "tax credit" found
in Section 2(1) of Revenue Regulations No. 2-94 is...
erroneous as it refers to tax credit as the amount
representing the 20% discount that "shall be deducted
by the said establishment from their gross sales for
value added tax and other percentage tax purposes."
This definition is contrary to what our lawmakers... had
envisioned with regard to the treatment of the discount
granted to senior citizens.
Finally, for purposes of clarity, Sec. 229[11] of the Tax
Code does not apply to cases that fall under Sec. 4 of R.
A. No. 7432 because the former provision governs
exclusively all kinds of refund or credit of internal
revenue taxes that were erroneously or... illegally
imposed and collected pursuant to the Tax Code while
the latter extends the tax credit benefit to the private
establishments concerned even before tax payments
have been made.
The tax credit that is contemplated under the Act is a
form of just compensation, not a... remedy for taxes
that were erroneously or illegally assessed and
collected. In the same vein, prior payment of any tax
liability is not a precondition before a taxable entity can
benefit from the tax credit. The credit may be availed of
upon payment of the tax due, if any. Where... there is
no tax liability or where a private establishment reports
a net loss for the period, the tax credit can be availed of
and carried over to the next taxable year.
It must also be stressed that unlike in Sec. 229 of the
Tax Code wherein the remedy of refund is available to
the taxpayer, Sec. 4 of the law speaks only of a tax
credit, not a refund.
As earlier mentioned, the tax credit benefit granted to
the establishments can be deemed as their just
compensation for private property taken by the State
for public use. The privilege enjoyed by the senior
citizens does not come directly from the State, but
rather from the... private establishments concerned.
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
CARLOS SUPERDRUG CORP., ET. AL. vs. DSWD
G.R. No. 166494 June 29, 2007
FACTS
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Petitioners are domestic corporations and proprietors
operating drugstores in the Philippines. Meanwhile, AO
171 or the
Policies and Guidelines to Implement the Relevant
Provisions of Republic Act 9257, otherwise known as
the “Expanded Senior Citizens Act of 2003”was issued
by the DOH, providing the grant of twenty percent (20%
) discount in the purchase of unbranded generic
medicines from all establishments dispensing medicines
for the exclusive use of the senior citizens. DOH issued
Administrative Order No 177 amending A.O. No. 171.
Under A.O. No. 177, the twenty percent discount shall
not be limited to the purchase of unbranded generic
medicines only, but shall extend to both prescription
and non-prescription medicines whether branded or
generic. Thus, it stated that “[t]he grant of twenty
percent(20%) discount shall be provided in the
purchase of medicines from all establishments
dispensing medicines for the exclusive use of the senior
citizens.” Petitioners assert that Section 4(a) of the law
is unconstitutional because itconstitutes deprivation of
private property. Compelling drugstore owners
andestablishments to grant the discount will result in a
loss of profit and capital because 1)drugstores impose a
mark-up of only 5% to 10% on branded medicines; and
2) the lawfailed to provide a scheme whereby
drugstores will be justly compensated for thediscount.
ISSUE: WON Section 4(a) of the Expanded Senior
Citizens Act is unconstitutional or not violative of Article
3 Section 9 of the Constitution which provides that
private property shall not be taken for public use
without just compensation and the equal protection
clause of Article 3 Section 1?
RULING:
The permanent reduction in their total revenues is a
forced subsidy corresponding to the taking of private
property for public use or benefit. This constitutes
compensabletaking for which petitioners would
ordinarily become entitled to a just compensation. Just
compensation is defined as the full and fair equivalent
of the property takenfrom its owner by the expropriator
. The measure is not the taker’s gain but the
owner’sloss. The word Just is used to intensify the
meaning of the word compensation , and to convey the
idea that the equivalent to be rendered for the property
to be taken shall bereal, substantial, full and ample. A
tax deduction does not offer full reimbursement of the
senior citizen discount.As such, it would not meet the
definition of just compensation. Having said that, this
raises the question of whether the State, in promoting
thehealth and welfare of a special group of citizens, can
impose upon private establishmentsthe burden of
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018

partly subsidizing a government program.The Court realities of business and the State, in the exercise of
believes so. The law grants a twenty percent discount to police power, can intervene in the operations of a
senior citizens for medical and dentalservices, and business which may result in
diagnostic and laboratory fees; admission fees charged
by theaters, concerthalls, circuses, carnivals, and other
similar places of culture, leisure and amusement;
faresfor domestic land, air and sea travel; utilization of
services in hotels and similar lodgingestablishments,
restaurants and recreation centers; and purchases of
medicines for theexclusive use or enjoyment of senior
citizens. As a form of reimbursement, the law provides
that business establishments extending the twenty
percent discount to senior citizens may claim the
discount as a tax deduction.The law is a legitimate
exercise of police power which, similar to the power of
eminent domain, has general welfare for its object.
Police power is not capable of anexact 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 inthe
legislature by the constitution to make, ordain, and
establish all manner of wholesomeand reasonable laws,
statutes, and ordinances, either with penalties or
without, notrepugnant to the constitution, as they shall
judge to be for the good and welfare of
thecommonwealth, and of the subjects of the same.”
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,
thoughsheltered by due process, must yield to general
welfare.
Police power as an attribute to promote the common
good would be dilutedconsiderably if on the mere plea
of petitioners that they will suffer loss of earnings
andcapital, the questioned provision is invalidated.
Moreover, in the absence of evidencedemonstrating
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
itsfavor. Given these, it is incorrect for petitioners to
insist that the grant of the senior citizen discount is
unduly oppressive to their business, because petitioners
have not takentime to calculate correctly and come up
with a financial report, so that they have not beenable
to show properly whether or not the tax deduction
scheme really works greatly totheir disadvantage. The
Court is not oblivious of the retail side of the
pharmaceutical industry and thecompetitive pricing
component of the business. While the Constitution
protects propertyrights, petitioners must accept the

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 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
animpairment of property rights in the process.
Moreover, the right to property has a social dimension.
While Article XIII of theConstitution provides the
precept for the protection of property, various laws and
jurisprudence, particularly on agrarian reform and the
regulation of contracts and publicutilities, continuously
serve as a reminder that the right to property can be
relinquishedupon the command of the State for the
promotion of public good.
MANILA MEMORIAL PARK v. SECRETARY OF
DEPARTMENT OF SOCIAL WELFARE,
GR No. 175356, 2013-12-03
Facts:
Petitioners emphasize that they are not questioning the
20% discount granted to senior citizens but are only
assailing the constitutionality of the tax deduction
scheme prescribed under RA 9257 and the
implementing rules and regulations issued by the DSWD
and the DOF
Petitioners posit that the tax deduction scheme
contravenes Article III, Section 9 of the Constitution,
which provides that: "[p]rivate property shall not be
taken for public use without just compensation."...
petitioners cite
Central Luzon Drug Corporation, where it was ruled that
the 20% discount privilege constitutes taking of private
property for public use which requires the payment of
just compensation
Issues:
WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND
ITS IMPLEMENTING RULES AND REGULATIONS,
INSOFAR AS THEY PROVIDE THAT THE TWENTY
PERCENT (20%) DISCOUNT TO SENIOR CITIZENS MAY BE
CLAIMED AS A TAX DEDUCTION BY THE PRIVATE
ESTABLISHMENTS, ARE INVALID AND
UNCONSTITUTIONAL.
Ruling:
The Petition lacks merit.
The validity of the 20% senior citizen discount and tax
deduction scheme under RA 9257, as an exercise of
police power of the State, has already been settled in
Carlos Superdrug Corporation.
The permanent reduction in their total revenues is a
forced subsidy corresponding to the taking of private
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property for public use or benefit. This constitutes
compensable taking for which petitioners would
ordinarily become entitled to a just compensation.
A tax deduction does not offer full reimbursement of
the senior citizen discount. As such, it would not meet
the definition of just compensation.
Having said that, this raises the question of whether the
State, in promoting the health and welfare of a special
group of citizens, can impose upon private
establishments the burden of partly subsidizing a
government program.
The Court believes so.
As a form of reimbursement, the... law provides that
business establishments extending the twenty percent
discount to senior citizens may claim the discount as a
tax deduction.
The law is a legitimate exercise of police power which,
similar to the power of eminent domain, has general
welfare for its object.
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.
Given these, it is incorrect for petitioners to insist that
the grant of the senior citizen discount is unduly
oppressive to their business, because petitioners have
not taken time to calculate correctly and come up with
a financial report, so that they have not been able to...
show properly whether or not the tax deduction
scheme really works greatly to their disadvantage.
We, thus, found that the 20% discount as well as the tax
deduction scheme is a valid exercise of the police power
of the State.
The 20% discount is intended to improve the welfare of
senior citizens who, at their age, are less likely to be
gainfully employed, more prone to illnesses and other
disabilities, and, thus, in need of subsidy in purchasing
basic commodities.
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
the 20% discount is a regulation affecting the ability of
private establishments to price their products and
services relative to a special class of individuals, senior
citizens, for which the Constitution affords preferential
concern... it does... not purport to appropriate or
burden
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specific properties, used in the operation or conduct of
the business of private establishments, for the use or
benefit of the public, or senior citizens for that matter
The subject regulation may be said to be similar to, but
with substantial distinctions from, price control or rate
of return on investment control laws which are
traditionally regarded as police power measures.[77]
These laws generally regulate public... utilities or
industries/enterprises imbued with public interest in
order to protect consumers from exorbitant or
unreasonable pricing as well as temper corporate greed
by controlling the rate of return on investment of these
corporations... considering that they have a monopoly...
over the goods or services that they provide to the
general public.
On its face, therefore, the subject regulation is a police
power measure.
The obiter in Central Luzon Drug Corporation,[78]
however, describes the 20% discount as an exercise of
the power of eminent domain and the tax credit, under
the previous law, equivalent to the amount of discount
given as the just compensation... therefor.
It presupposes that the subject regulation, which
impacts the pricing and, hence, the profitability of a
private establishment, automatically amounts to a
deprivation of property without due process of law.
If this were so,... then all price and rate of return on
investment control laws would have to be invalidated
because they impact, at some level, the regulated
establishment's profits or income/gross sales, yet there
is no provision for payment of just compensation
The obiter is, thus, at odds with the settled doctrine...
that the State can employ police power measures to
regulate the pricing of goods and services, and, hence,
the profitability of business establishments in order to
pursue legitimate State objectives for the common
good, provided that the regulation does not go too far
as to... amount to "taking."
Principles:
Police power versus eminent domain.
Police power is the inherent power of the State to
regulate or to restrain the use of liberty and property
for public welfare.[58] The only limitation is that the
restriction imposed should be reasonable, not
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018

oppressive. The sources of income taken as a whole must be

sufficient to meet the ever expanding needs or
"property rights of individuals may be subjected to expenditures of the government regardless of
restraints and burdens in... order to fulfill the objectives
of the government.

The State "may interfere with personal liberty, property

, lawful businesses and occupations to promote the
general welfare [as long as] the interference [is]
reasonable and not arbitrary.

Eminent domain, on the other hand, is the inherent

power of the State to take or appropriate private
property for public use.

private property shall not be taken without due process

of law and the... payment of just compensation

In the exercise of police power, a property right is

impaired by regulation,[65] or the use of property is
merely prohibited, regulated or restricted[66] to
promote public welfare.

payment of just compensation is not required.

in the exercise of the power of eminent domain,

property interests are appropriated and applied to
some public purpose which necessitates the payment of
just compensation therefor.

Normally, the title to and possession of the property are

transferred to the... expropriating authority.

June 24 Part 1
SS Castro

PRINCIPLES OF SOUND TAX SYSTEM

Synonymous with the Canons of Sound Tax System or

Characteristics of Sound Tax System.

Keyword is F-A-T
1. Fiscal Adequacy
2. Administrative Feasibility
3. Theoretical Justice

FISCAL ADEQUACY
From the word itself adequate.

Fiscal Adequacy means the TAX SYSTEM must be able

to provide submission revenues in order to meet the
legitimate needs of the government, adequate or
sufficient.

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 TAXATION 1
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conditions, export taxes, and problems of
economic adjustments.
The taxes being collected by the government must be
enough to answer the government expenditures – even
in cases where there will be a deficit despite a 100%
collection on the internal revenue taxes. 1
dictates the need to raise the VAT rate. That’s
why when those 2 conditions will happen, the
President already has the authority to increase
VAT rate in order to make up for all those
deficiencies.
ADMINISTRATIVE FEASIBILTY

From the word itself feasible.

CHAVEZ VS. ONGPIN
There was an Executive Order issued by the
government increasing the values of the real
properties for real property taxation purposes.
The increase was more than 100%. This was
challenged by Francisco Chavez (former SolGen)
on the ground that it was oppressive for being
tantamount to confiscation of property without
due process of law.
Feasible meaning doable. A tax measure should be
easily implemented in order to assure the smooth flow
into the treasury the fiscally adequate amounts.
To put it simply, this means that the tax system
should be capable of being effectively
administered and enforced with the least
inconvenience to the taxpayer.

SC here ruled against Chavez. Without the
Executive Order which raised the real property
values the real properties would not mirror the
current value of the real properties considering
the changes brought about by the passage time.
And we also have to accept the fact of the
increasing expenses of the government, the
government will give value.
According to the SC, fiscal adequacy Fiscal
adequacy, which is one of the characteristics of a
sound tax system, requires that sources of
revenues must be adequate to meet government
expenditures and their variations.
ABAKADA vs. ERMITA
Lagi natin balik-balikan ang case na ito. There are
a lot of general principles of Taxation here, so
you should read this.
ABAKADA challenged the standby powers given
to the President to increase the VAT percentage
given certain conditions.
SC said here first condition is decided by the
President. But the second is that in case there is
any increase in the deficit, fiscal adequacy
Administrative feasibility requires easy tax collection on
the part of the government and easy tax payment of
the tax. But what happens in reality is that this
requirement is already fulfilled by merely following the
NIRC. What happens to the ease that should be felt by
the taxpayers? The process of paying the BIR Is so
stupid.
So it must be easy for the government to collect and
also taxes must be easy for the people to pay.
We have Saudia Arabia. There, it is very easy for the
people to pay their taxes because they are only
required to pay taxes 3 times a year.
Whereas right now, especially if you are not
registered taxpayer, you have to fill up the form and
submit it monthly and at the same time pay it
monthly.
Right now, there is a cute move by the government
under the TRAIN LAW, if are covered in the
percentage tax system, you are only required to
submit quarterly. Hindi na per month na grabe ka
hassle especially if small business ka lang. It takes a
day for one to pay his taxes.

1 Dead Quibod (2016 TSN): Salaries of EEs, medical services, and other governmental expenditures should be able to meet the
economic provisions of the country as well as problems on economic adjustment. The sources of revenue should be sufficient to
meet the varied levels of expenditure, regardless of business condition and problems on economic adjustment.
The tax system or the prevailing tax measures that the state have should be able to expand in response to variations in
public expenditures.

Ex. If there is only 20% collection for revenue this year, should the Congress increase the tax rate? NO. This is what fiscal adequacy
means: Problems with the collection and enforcement of the law should not be resolved through legislating or enacting more taxes.
The state, through the executive branch in charge of tax administration, should be able to enforce the tax laws.

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 TAXATION 1
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July 24, 2018 Part 2 What are the concepts that float in the lifeblood
Inah del Rosario
theory?
(1) The collection of taxes may not be enjoined by
THEORETICAL JUSTICE
an injunction, as a general rule. (No-injunction
This is the ability-to-pay theory.
Rule)
(2) The taxes cannot be subject of a compensation
The tax system must be based on the taxpayer’s ability
or set-off
to pay.
(3) The power to tax is unlimited and plenary
(4) The power to tax may also involve the power
It must not be so burdensome. Those who have more
to destroy.
shall pay more and those who have less shall pay less.

NO INJUNCTION RULE
Even if we have these kinds of principles of a sound tax
GR: The collection of taxes cannot be enjoined by
system, even if a certain tax law will violate these, it
the courts.
does not necessarily mean that the tax law will
XPNS:
automatically be unconstitutional.
(1) Local Taxes can be enjoined by the courts.
The no-injunction rule only applies to national
DIAZ VS. SECRETARY OF FINANCE
taxes.
This case involves the imposition of VAT by the BIR
on the collections of tollway operators. The SC
ANGELES CITY VS. ANGELES
said that all cars must be subject to VAT. Diaz
In the collection of local taxes, there is no
argued that it this is very difficult to implement,
express prohibition in the LGC that
specifically the issuance of receipts to persons. SC
prohibits courts from issuing an injunction
said:
to restrain local governments from
collecting taxes.
Non-observance of the canon, however, will not
render a tax imposition invalid except to the
(2) Under the CTA Law, RA 1125 as amended by RA
extent that specific constitutional or statutory
9282
limitations are impaired. Thus, even if the
imposition of VAT on tollway operations may
SEC. 11. Who May Appeal; Mode of Appeal;
seem burdensome to implement, it is not
Effect of Appeal. – x x x That when in the
necessarily invalid unless some aspect of it is
opinion of the Court the collection by the
shown to violate any law or the Constitution. aforementioned government agencies may
jeopardize the interest of the Government
So in the end, these are just principles or simple and/or the taxpayer the Court any stage of
guidelines for the lawmakers in making tax laws. But the proceeding may suspend the said
with respect to the legality of a tax law, the violation of collection and require the taxpayer either to
these canons by themselves does not necessarily deposit the amount claimed or to file a surety
constitute a violation of the statutory or constitutional bond for not more than double the amount
limitations of that tax law. with the Court.

THEORY AND BASIS OF TAXATION BASIS OF TAXATION: Benefits- Protection Theory

Please remember that the theory and basis of taxation
are two different things.
THEORY OF TAXATION: Necessity Theory
The power to tax emanates from a necessity in order
for the government to make for us an organized
society.
The existence of the government is a necessity.
This is also where the lifeblood theory comes in.
This is characterized by the relationship between the
taxpayer and the government.
There is a reciprocal duty between the taxpayer and
the government to support each other.
OTHER DOCTRINES
(1) PROSPECTIVITY OF TAX LAWS
GR: Tax laws do not have retroactive application.
To give retroactive effect to tax laws will
violate the right of the tax payer to due

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process. A taxpayer should always know when
to pay his obligations. How should a taxpayer
pay his dues when he doesn’t know of it?
E: Tax laws have retroactive application only
when the law explicitly says so.
What if before the repeal of a tax law there was
an assessment made by the government? You did
not pay the assessment not even after there was a
repeal. This is the case of
COMMISSIONER VS. ACOSTA
This concerns the manner in which the action for
tax refund was filed. Acosta applied the new NIRC
where it was not required to file a written claim for
the refund. However, the SC said that the old law
should be applied.
Tax laws are prospective in operation, unless the
language of the statute clearly provides otherwise.
Revenue statutes are substantive laws and in no
sense must their application be equated with that
of remedial laws. As well said in a prior case,
revenue laws are not intended to be liberally
construed. Considering that taxes are the lifeblood
of the government and in Holmes’s memorable
metaphor, the price we pay for civilization, tax laws
must be faithfully and strictly implemented.
(2) IMPRESCRIPTIBILITY OF TAXES
GR: The right of the government to collect taxes is
imprescriptible.
Without any law which provides for a prescriptive
period for the collection of taxes, the government
will have an unlimited time to collect the taxes
from the taxpayer.
Hence the law itself can provide for rules on
prescription.
For internal revenue taxes, normally, the
prescriptive period is 3 years from either the filing
of it or the filing of the income tax return or the
return required by the NIRC or date or the time of
payment of the tax, whichever comes later.
July 24,2018
Transcribed by: Dianne Marie Isidor
Is the imprescriptibility of tax laws still applicable
right now?
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Sabi nga ng batas natin, NIRC, db meron tayong
prescriptive period. Even the law says, even if in
cases of non-filing of tax returns, even in cases of
fraud employed by the taxpayer to defeat or refute
taxes, the government may have a 10 year
prescriptive period.
But the question is again, is the principle of
imprescriptibility of taxes still applicable, even with
this law?
The way I see the provision, I think the principle of
imprescriptibility of tax is still applicable.
1. When there is fraud involved.
2. If there is a failure to file the income tax
return or the income tax return filed is false.
You know why? Even if the prescriptive period is 10
years, when will you reckon the 10 year period?
From the time of discovery db? So kung dili sya
madiscvoer kunohay sa government, then the
government will have unlimited time to make an
assessment and demand for the payment of the taxes.
So, I think, more or less, the doctrine of
Imprescriptibility is still applicable up until this pont.
DOUBLE TAXATION
Okay, let us go now to the PRINCIPLE OF DOUBLE
TAXATION.
Some books would say that double taxation is one of
the inherent limitations, some books would also say
that double taxation is actually part of constitutional
limitaions. So, which is which?
For me, I would say, that double taxation is just a
constitutional limitation. It’s not an inherent limitation
. Why? Because of our basic premise that the power to
tax is plenary, all-encompassing and unlimited.
So, technically speaking, the government can tax a
subject twice kasi kailangan nila ng pera.
But what makes Double Taxation illegal? Because not
all forms of double taxation is actually illegal. Double
taxation is not illegal per se. It’s not prohibited because
it always happens. Like what? What if you’re doing
business? You’re paying income taxes and at the same
time weekly percentage tax or VAT. It’s the same
money and yet there are two types of tax being
imposed by the government.
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FROM THE LECTURES OF ATTY. DONALVO 2018
So, when will the Double taxation become illegal? So,
basically, there are two forms of Double Taxation:
1. Direct Double Taxation/Direct Double Taxation
2. Indirect Double Taxation/Indirect Double Taxation
When is there a Direct Double Taxation?
Ito yung ILLEGAL. Another term for it is Obnoxious
Double Taxation this is taken from dean and I guess he
took it from Aban book. Direct Double Taxation
happens when the same subject or property is taxed
twice, by the same taxing authority, for the same taxing
purpose, the same period and taxing all objects or
property within the same territory for the first time
without taxing them for the second time.
Another definition given is that:
The same property is taxed twice, where it should
be taxed only once, and that both taxes are
imposed to the same property or subject matter for
the same purpose, same taxing authority, within
the same jurisdiction, covering the same taxing
period, for the same kind or character of tax.
Make no mistake about this. YOU HAVE TO MEMORIZE
THIS DEFINITION because absent one of these elements
, there is only what you call as INDIRECT DOUBLE
TAXATION which is allowable by law.
Let’s run through the definition again: The taxpayer is
taxed twice, when he should be only taxed once and
the TAX IS:
1.For the same subject matter;
2.For the same purpose;
3.For the same taxing authority;
4.Within the sae jurisdiction;
5.During the same taxing period;
6.And the taxes are of the same kind and
character.
CITY OF MANILA VS COCA-COLA
Case in point: City of Manila vs Coca-Cola,
reiterated in the case of Swedish Match vs City of
Manila
So, this City of Manila, there is this old ordinance,
let’s say Ordinance A. Oridnance A exempted the
Coca-Cola from paying the manufacturing taxes.
Because the Coca-Cola is already subjected to
another kind of business tax. And then there was this
another ordinance, Ordinance B that was enacted
which took out the tax exemption of Coca-Cola. So,
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basically, the City of Manila, is already imposing two
types of taxes. But then, Orinance B was
subsequently declared as unconstitutional. So
nagrevert sya to Ordinance A ulit. Meanwhile, prior
to the repeal or the nullity of Ordinance B, the City
of Manila attempted to collect taxes from Coca-Cola.
Magbayad ka. Probably the City was thinking, during
that time that this ordinance was still effective, all
legal effects thereto are also effective.
Ang sabi ng Coca-Cola dito, we don’t want to pay
because, one of their arguments is that, this is double
taxation.
SC: Yes, this is actually a DOUBLE TAXATION.
Kasi sabi ng City dito, this is not Double Taxation,
because the purposes are different or the kind of tax is
different. The SC said, it’s still double taxation
because even if that is for manufacturer and the other
one is for distribution, it’s still in the same nature.
This is a form of business tax. And then the SC here
made a wrapped down of the requirements.
(FROM THE FULL TEXT OF THE CASE)
“Using the aforementioned test, the Court finds that
there is indeed double taxation if respondent is
subjected to the taxes under both Sections 14 and
21 of Tax Ordinance No. 7794, since these are being
imposed: (1) on the same subject matter – the
privilege of doing business in the City of Manila; (2)
for the same purpose – to make persons conducting
business within the City of Manila contribute tocity
revenues; (3) by the same taxing authority –
petitioner Cityof Manila; (4) within the same taxing
jurisdiction – within the territorial jurisdiction of the
City of Manila; (5) for the same taxing periods – per
calendar year; and (6) of the same kind or character
– a local business tax imposed on gross sales or
receipts of the business.”
So, probably nagkaproblema lang sa wordings sa
batas.
ERICSSON VS CITY OF PASIG
Another peculiar case that I found, that had led me
to DOUBLE TAXATION is the Ericsson vs City of Pasig.
Eto naman, there is a City Ordinance, there’s no
question about it. There’s a City Ordinance imposing
business taxes again which included Ericsson but the
problem is the City of Pasig wanted to collect these
business taxes on the basis of Gross Revenues. And
sabi naman ng Ericsson, hindi yan pwede. You cannot
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FROM THE LECTURES OF ATTY. DONALVO 2018
collect taxes on the basis of gross revenues because
the law says it must be based on gross receipts. Sabi
naman ng City, gross revenues and gross receiots are
actually the same. So babayad ka na lang para
walang gulo. Essentially ganyan ang sinasabi ng City
of Pasig.
Now, the issue here is will the tax based on the gross
revenues instead of gross receipts constitute Double
Taxation?
We’re talking about the same law and yet in this case
, this is with respect to the collection already. This is
why which I found this weird. Kasi we’re talking
about the collection here. But the argument here is
based on double taxation. Will there be a Double
Taxation if the tax is based on gross revenue instead
of gross receipts?
What is the difference between the two terms?
(FROM THE FULL TEXT OF THE CASE)
(n) Gross Sales or Receipts include
the total amount of money or its
equivalent representing the
contract price, compensation or
service fee, including the amount
charged or materials supplied with
the services and the deposits or
advance payments actually or
constructively received during the
taxable quarter for the services
performed or to be performed for
another person excluding
discounts if determinable at the
time of sales, sales return, excise
tax, and value-added tax (VAT);
 
x x x x
The law is clear. Gross receipts include money or its
equivalent actually or constructively received in
consideration of services rendered or articles sold,
exchanged or leased, whether actual or constructive.
Gross revenue covers money or its equivalent
actually or constructively received, including the
value of services rendered or articles sold,
exchanged or leased, the payment of which is yet to
be received.  4.
July 24, 2018 Part 4
By: M.A. CAMPANER
GROSS RECEIPTS vs GROSS REVENUES
GROSS RECEIPTS – whatever you have received. It is not
only limited to ACTUAL receipts but also includes those
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that are CONSTRUCTIVELY received by the taxpayer –
those which are placed in your control. Because what if
the other party pays through the bank, is it actually
received? NO. But in effect, the payor loses control of
the money upon the deposit and the recipient of the
money has total control of that money and may do
anything he wants to do with it.
GROSS REVENUES – is a broader term because it
includes money which you will still receive in the future.
So where is double taxation if the tax will be based on
gross revenues?
SC: “The imposition of local business tax
based on petitioners gross revenue will
inevitably result in the constitutionally
proscribed double taxation taxing of the
same person twice by the same jurisdiction
for the same thing inasmuch as petitioners
revenue or income for a taxable year will
definitely include its gross receipts already
reported during the previous year and for
which local business tax has already been
paid.” (Ericsson vs. City of Pasig)
In other words, if the tax base is on the gross
revenue, on the next year some items which
have already been taxed in the prior year
might also be included in the present year’s
tax. That is the main reason why the SC ruled
that the tax should be based on the gross
receipts.
Read also the case of CIR vs BPI, it’s in the outline. And
also the case of Nursery Care vs Acevedo.
As we have discussed, take out one of the requirements
of double taxation, then it becomes an INDIRECT
DOUBLE TAXATION.
WAYS OF ELIMINATING DOUBLE TAXATION:
1. TAX TREATIES
2. TAX CREDITS
3. TAX DEDUCTION
TAX REDUCTION
1. TAX TREATIES
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FROM THE LECTURES OF ATTY. DONALVO 2018

are mainly there to avoid international double taxation. 12% VAT on it, (2) Input Taxes is a form of tax credit.
The prime example I can give you is Pacquiao – he earns Why? Because the buyer is the one who shoulders the
income from boxing matches. Because the match is burden of VAT. Now the VAT component of your
done abroad, the host country will impose income taxes payment can be used as a direct deduction of your total
on him. When he arrives in the Philippines, because of VAT liabilities.
the fact that he is a resident citizen, he will also be
liable for taxes for the income he earned abroad. It’s July 24 Part 5
Ara Olamit
practically the same – same money, same purpose,
Let’s say you have tax deductions. How is it different
same earning, same type of tax, but then, the territory
from tax credits?
and the taxing authority are different.
3. TAX DEDUCTIONS
So tax treaties usually provides for tax exemption.
International Double Taxation takes place when a
is pretty much similar in intent with tax credits
person who is a resident of a contracting state and
because it will reduce the tax liability of the
derives income from, or own capital in another
taxpayer. But when you say tax deductions these
contracting state and both states impose tax on the
items will only indirectly reduce the taxes.
income or capital.

Like for example, in the computation of income

What is the purpose of international tax treaties? (CIR
taxes, right now, if you provide for senior citizens’
vs SC JOHNSON)
discounts, you can avail of a deduction. Deduction
1. The elimination of international juridical
which will form part of your business expenses. If
double taxation;
you have a lot of expenses, your income will reduce
2. To encourage the free-flow of goods and
, and smaller income would mean smaller taxes
services movement of capital and technology
that you have to pay.
between the two countries.
4. TAX REDUCTIONS.
2. TAX CREDITS

This is more of a legislative side. This would just

Are provided for by law. What is its nature? This is a
mean that Congress would enact a new law that
peso-for-peso deduction of the tax liability of a taxpayer
would reduce the tax liabilities of a taxpayer or the
. The amount of the tax credit is also the very amount
tax rate or the tax base of a particular tax measure.
which will be deducted from the tax due.
Like what happened now in Train Law. There was
an increase in a lot of excise taxes. There were new
Where do you get these tax credits? In NIRC, there is
items which were already excisable but the income
what we call Tax Credits for Foreign Income Taxes Paid.
tax rates and tax base were only adjusted. But
Like for instance what happen to Pacquiao before, he
according to Dean, even with the reduction of the
was pursued by Kim Henares. Henares claims that he is
tax rates and the tax base, these actually has no
requesting for the IRS (Internal Revenue Service)
bearing at all. Kumbaga parang palami lang sa
documents of Pacquiao so that we can apply the tax
mata.
credit. The tax liabilities of Pacquiao will be reduced by
the foreign income taxes he has paid abroad. But what
Pacquiao and his team did was they did not provide any
LIMITATIONS
document. So according to Henares he has no other
choice but to enforce the collection.
You have two kinds of limitations of taxing powers.
This is also found in Estate Taxation. There are some
1. Inherent Limitations; and
decedents who died with a will and they have
2. Constitutional Limitations
properties all over the world. What about the estate
taxes paid abroad? That can be used as deduction to
So what are the inherent limitations of the power to
the estate tax to be paid here. It is also found in Donor’s
tax? You have five (5).
Tax.

1. Public Purpose
Another form of tax credit is VAT. The component of
2. Inherently Legislative
VAT is actually two – (1) Output tax. It comes from the
3. Territorial
sales of a certain period and there is a corresponding

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4. International Comity Now, most of these items, we have already discussed.

5. Exception of Government Entities Like for example, public purpose. Diba sabi natin
“Public purpose is the heart of tax law”. The power of
taxation may be exercised only for a public purpose.

Second. Inherently Legislative. You know the drill here.

Generally, it is solely lodged in the Congress. What are
the exceptions? We have at least 5 diba? Cannot be
delegated is the General Rule, diba? What are the 5
exceptions?

1. Delegation to the President

2. Delegation to the LGUs
3. Delegation to the Administrative Bodies
4. Delegation to the people at large
5. Emergency Powers
(Abakada vs. Ermita)

What are the SOURCES OF TAX LAWS?

1. Constitution
2. Existing Statutes
3. NIRC and other related laws
4. Previously the TCCP now amended into CPMA
5. Local tax laws or ordinance
6. Local Government Code
7. Miscellaneous tax laws

Some books look also into the revenue regulations like

the memorandum orders and other issuances of the BIR
and other tax agencies. But I think these are just mere
interpretation of the law. BIR rulings, by the way, and
the revenue regulations are not laws themselves but
they have the force and effect of laws.

And also you have jurisprudence. It’s by reason of the

Civil Code. Supreme Court decisions will form part of
the laws of the land.

What is the nature of a tax law by the way? It’s civil in

nature because this is a public matter, collection,
although this can be said as a unilateral obligation of
the taxpayer to the government. It’s not penal because
the main purpose of these is for the collection or raising
income and not to penalize someone, although the
Congress is not precluded to put penal laws in the tax
laws in case of violation. It's also not political in nature.

And lastly you have Territorial. The rule is, generally,

territorial in nature. What is the exception? There is a
privity and relationship between the tax authority and
the tax subject or object. Please also take note on the
rules on Situs.

And then you have International Comity.

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International Comity has something to do with the
respect accorded by one nation to another. These are
declarations or agreement or interaction between
nations. Under International Comity, the property of
the state or government may not be taxed by another
state. The principle is actually based on public grounds:
1. Concept of Sovereign Equality
2. There is also the concept when one enters the
territory of another. There is already an
implied understanding between these states
that the entering state does not subject itself
to the jurisdiction of the other state or the host
state.
3. There is also this rule in international law that
foreign government may not be sued without
its consent.
Then we also have the exception of taxes of
government agencies, entities and instrumentalities.
When it comes to the government, exemption from
taxation is the general rule. Taxation is the exception.
Baliktad siya.
What is the reason behind this? Why is it the
government cannot tax itself? Why is it the government
is exempt from taxation?
The only logical reason I can think of is because it’s
stupid. By sheer stupidity. It’s like transferring money
from one pocket to another. Gobyerno gud yan. But it
does not preclude the government from promulgating a
law which taxes a government instrumentality or
agency especially when this government agency is
propriety in nature. Like for instance PAGCOR. While it
is true that PAGCOR is exempt from income taxes,
regular corporate income tax on its gambling operations
, it is liable for franchise taxes.
Oh diba, PAGCOR, gobyerno man yan? And yet the
government imposes taxes. And in the same way, this
PAGCOR is also liable for the regular corporate tax
under the NIRC for its non-gambling operations. Alright
? So i think that’s it. Let’s proceed with the
Constitutional Limitations next meeting.
28 July 2018 || Part 1 of 6 (00:00:01-00:20:00)
By: Patricia Nicole M. Balgoa
CONSTITUTIONAL LIMITATION
I. DUE PROCESS
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Art. III, Sec. 1, 1987 Phil. Const. No person shall be
deprived of life, liberty, or property without due
process of law, nor shall any person be denied the
equal protection of the laws.
How do you define ‘due process’?
My former Consti law professor, Atty. dela Banda, gave
us a stupid-sounding definition of due process, but it
actually works. According to him, due process is when
the process is due. Sounds stupid, right? But basically,
that’s it. All it is saying is that if the law affords you a
process, then the government must be able to give you
that process before the government will take away the
life, liberty, and property of an individual or a person.
Normally, when you say due process, this refers to the
PROCEDURAL DUE PROCESS of laws. It refers to
procedural fairness.
However, procedural due process is not enough
because we also have this concept of SUBSTANTIVE
DUE PROCESS.
Thus, due process presupposes that:
(1) There is a valid law; and
(2) A valid procedure.
Due process is also essential in taxation, not only in the
collection aspect and not only in the payment aspect. It
is also essential in the making of tax laws. Take note
that taxation is a burden in itself. It involves the taking
of property against persons.
Sometimes we just say that it is a unilateral obligation,
but once you did not pay your taxes, the government
can enforce its strong arm in order for it to collect the
money due it.
PEPSI V. MUNICIPALITY OF TANAUAN
SC Said: “This is not to say though that the
constitutional injunction against deprivation of
property without due process of law may be passed
over under the guise of the taxing power, except when
the taking of the property is in the lawful exercise of
the taxing power, as when:
(1) the tax is for a public purpose;
(2) the rule on uniformity of taxation is observed;
(3) either the person or property taxed is within the
jurisdiction of the government levying the tax; and
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
(4) in the assessment and collection of certain kinds of
taxes notice and opportunity for hearing are provided.
Due process is usually violated where the tax imposed is
for a private as distinguished from a public purpose; a
tax is imposed on property outside the State, i.e.,
extraterritorial taxation; and arbitrary or oppressive
methods are used in assessing and collecting taxes. But,
a tax does not violate the due process clause, as applied
to a particular taxpayer, although the purpose of the tax
will result in an injury rather than a benefit to such
taxpayer.
Due process does not require that the property subject
to the tax or the amount of tax to be raised should be
determined by judicial inquiry, and a notice and hearing
as to the amount of the tax and the manner in which it
shall be apportioned are generally not necessary to due
process of law.”
What the SC is saying here is that:
There must be a valid law imposing such tax. You also
have to consider the inherent limitation of taxation. If
the inherent limitation of taxation is violated in making
such tax laws, in levying taxes against persons or
property, then that law may be struck down as an
invalid law. It is a violation of the substantive due
process. In the same way, when there is a mandatory
procedure provided by law, then the government must
follow it before collecting money from the person or
property from whom the tax is levied.
Most of the cases in your outline involving taxation
pertains to procedural due process.
CIR V. METRO STAR
Facts:
In January 2001, a revenue officer was
authorized to examine the books of accounts of Metro
Star Superama, Inc. In April 2002, after the audit review,
the revenue district officer issued a formal assessment
notice against Metro Star advising the latter that it is
liable to pay P292,874.16 in deficiency taxes. Metro Star
assailed the issuance of the formal assessment notice as
it averred that due process was not observed when it
was not issued a pre-assessment notice. Nevertheless,
the Commissioner of Internal Revenue authorized the
issuance of a Warrant of Distraint and/or Levy against
the properties of Metro Star.
Metro Star then appealed to the Court of Tax
Appeals (CTA Case No. 7169). The CTA ruled in favor of
Metro Star.
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Issue:
Whether or not due process was observed in
the issuance of the formal assessment notice against
Metro Star.
Ruling: NO.
It is true that there is a presumption that the
tax assessment was duly issued. However, this
presumption is disregarded if the taxpayer denies ever
having received a tax assessment from the Bureau of
Internal Revenue. In such cases, it is incumbent upon
the BIR to prove by competent evidence that such
notice was indeed received by the addressee-taxpayer.
The onus probandi was shifted to the BIR to prove by
contrary evidence that the Metro Star received the
assessment in the due course of mail. In the case at bar,
the CIR merely alleged that Metro Star received the pre-
assessment notice in January 2002. The CIR could have
simply presented the registry receipt or the certification
from the postmaster that it mailed the pre-assessment
notice, but failed. Neither did it offer any explanation
on why it failed to comply with the requirement of
service of the pre-assessment notice. The Supreme
Court emphasized that the sending of a pre-assessment
notice is part of the due process requirement in the
issuance of a deficiency tax assessment,” the absence of
which renders nugatory any assessment made by the
tax authorities.
Taxes are the lifeblood of the government and
so should be collected without unnecessary hindrance.
But even so, it is a requirement in all democratic
regimes that it be exercised reasonably and in
accordance with the prescribed procedure.
Here, BIR forgot to send the preliminary assessment
notice (PAN) against the bus station. In the entire
process of collecting the taxes, especially if there are tax
deficiencies, the BIR will first call an informal
conference. During the conference, the BIR will explain
that there are deficiencies or discrepancies. After the
informal conference, if the BIR is not satisfied with the
explanation of the taxpayer, it will then issue a PAN.
The PAN is basically a document which states the facts,
law, and jurisprudence and the tax deficiency of a
taxpayer. I is just a piece of letter informing the
taxpayer to explain. It is not yet a demand letter. The
taxpayer then will need to explain. Then, when the BIR
is still not satisfied with the explanation of the taxpayer,
it will then issue a final assessment notice. This final
assessment notice differs from the PAN in the sense
that the final assessment notice is actually a demand
letter from the government. This is the time that the
taxpayer will file its protest.
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FROM THE LECTURES OF ATTY. DONALVO 2018
In this case, however, BIR forgot to issue a PAN. What
Metro Star is saying here is that its procedural right to
due process is violated because a PAN was not issued
before the final demand letter was sent to collect the
alleged deficiencies.
BIR is saying that they (PAN and final assessment
nnotice) are basically the same thing because both state
the facts, issues, ruling, and kung magkano ang dapat
bayaran. Thus, even if there is no PAN, it already sent a
final assessment notice, which is in writing and
therefore, Metro Star’s right to due process was not
violated.
According to the SC: BIR violated the right to due
process of this bus station because the law provides for
a mandatory procedure in making a tax assessment.
In sum, if there is a process that is due, then the state
must afford that process, lest there will be a violation of
the due process clause.
II. EQUAL PROTECTION
Art. III, Sec. 1, 1987 Phil. Const. No person shall be
deprived of life, liberty, or property without due
process of law, nor shall any person be denied the
equal protection of the laws.
Read this provision together with the uniformity and
equitability of taxation under Art. VI, Sec. 28 (1), 1987
Phil. Const. because these are related provisions.
Art. VI, Sec. 28 (1), 1987 Phil. Const. The rule of
taxation shall be uniform and equitable. The Congress
shall develop a progressive system of taxation.
As you will notice, the equal protection clause is
essentially the same with the uniformity and
equitability clause of the Constitution.
As of now, it would seem that there is no longer any
difference between equity of taxation and uniformity of
taxation. However, if you want to be technical about it:
• Equity of taxation: Taxes must be based on the
taxpayer’s ability to pay
• Uniformity of taxation: When the SC discusses
uniformity, this concept always includes the
concept of equitability of taxation.
Criterion that must be had to follow the equal
protection and uniformity rule:
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The tax laws operate uniformly in all persons under
similar circumstance and all persons are treated the
same manner in both the privileges conferred and the
liabilities imposed.
So there is some sort of a discrimination, ie: one class
will be taxed, and the other class will not be taxed. So
there will always be a discrimination. Hat is a fact of life.
But then, while there is this discrimination, what the
law allows is that there will be a reasonable
classification between the taxable object. The State can
make a classification as to the taxability of persons or
property, as long as the classification is reasonable and
based on real and substantial differences.
TAKE NOTE, there are four requirements for a valid
classification:
(1) There must be a substantial distinction;
(2) The classification must be germane to the
purpose of law;
(3) It must apply to future and existing conditions
; and
(4) It must be applicable to all members of the
same class.
FERRER V. BAUTISTA
Facts:
• The City of Quezon passed two ordinances.
• The first one was the Socialized Housing Tax of QC
allowing the imposition of special assessment (1/2
of the assessed valued of land in excess of P100k)
• The second one was Ordinance No. SP-2235, S-
2013 on Garbage Collection Fees imposing fees
depending on the amount of the land or floor area
).
• Jose Ferrer, as a property in Quezon City
questioned the validity of the city ordinances.
• According to Ferrer:
-The city has no power to impose the tax.
-The SHT violates the rule on equality because it
burdens real property owners with expenses to provide
funds for the housing of informal settlers.
-The SHT is confiscatory or oppressive.
Issue:
Whether or not the Socialized Housing Tax
violates the equal protection clause.
Ruling: NO.
There is no violation of the rule on equality
 TAXATION 1
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There is a substantial distinction between: real Ruling:

property owner and an informal settler. In fact, the NO. The SC ruled that the law is valid. There was
Supreme Court said that the disparity is so obvious. It is no violation of equality or uniformity in taxation.
inherent in the power to tax that a State is free to select The due process clause of the Constitution may be
the subjects of taxation. Inequities which result from a invoked only when a tax instance is so arbitrary that it
singling out of one particular class for taxation or finds no support in the Constitution. An obvious
exemption infringe no constitutional limitation. example is where it can be shown to amount to the
All these requisites are complied with: An confiscation of property. That would be a clear abuse of
ordinance based on reasonable classification does not power. It
violate the constitutional guaranty of the equal
protection of the law. The requirements for a valid and
reasonable classification are: (1) it must rest on
substantial distinctions; (2) it must be germane to the
purpose of the law; (3) it must not be limited to existing
conditions only; and (4) it must apply equally to all
members of the same class.

One of the issues raised in this case is the violation of

the equal protection clause. According to Ferrer, the
ordinance is actually a violation of the equal protection
clause because you are giving preference to squatters
or informal settlers and you are charging the
landowners to provide homes for the settlers.

The Supreme Court said that the equal protection

clause is not violated. Equal protection clause requires
that all persons and things similarly situated must be
treated alike both as to rights conferred and
responsibilities imposed. In this case, for the purpose
of undertaking and continuing urban development,
disparities between a real property owner and an
informal settler, as two distinct classes are too obvious,
need not be discussed at length.

SISON V. ANCHETA

Facts:
This pertains to the modified gross income tax
wherein the individuals who are purely compensation
income earner were subject to a set of graduated and
progressive rates. Individuals who are self-employed,
professionals are engaged in business were also taxed
on graduated rates. But the rates for these individuals
were higher compared to the rates of individuals who
are purely compensation earners. So the tax law was
questioned claiming there was discrimination or
violation of equality, that it was not based on
substantial distinction which makes real differences
because they are the same tax payers, earning income.

Issue:
WON the tax law is arbitrary and violates
equality.

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then becomes the duty of this Court to say that such an
arbitrary act amounted to the exercise of an authority
not conferred. That properly calls for the application of
the Holmes dictum. It has also been held that where the
assailed tax measure is beyond the jurisdiction of the
state, or is not for a public purpose, or, in case of a
retroactive statute is so harsh and unreasonable, it is
subject to attack on due process grounds.
AS TO THE EQUAL PROTECTION CLAUSE, The
Constitution does not require things which are different
in fact or opinion to be treated in law as though they
were the same." Hence the constant reiteration of the
view that classification if rational in character is
allowable. As a matter of fact, in a leading case of Lutz V
. Araneta, this Court, through Justice J.B.L. Reyes, went
so far as to hold "at any rate, it is inherent in the power
to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that '
inequalities which result from a singling out of one
particular class for taxation, or exemption infringe no
constitutional limitation.'"
"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. The taxing power has
the authority to make reasonable and natural
classifications for purposes of taxation, ... As clarified
by Justice Tuason, where "the differentiation"
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." There
is quite a similarity then to the standard of equal
protection for all that is required is that the tax "applies
equally to all persons, firms and corporations placed in
similar situation."
July 28 Part 2
Johaina Madum
Discrimination is allowed as long as the discrimination is
reasonable. And then the SC also here made a
discussion about the uniformity and equity clause, the
SC defines the uniformity equity clause, when the tax
operates with the same force and effect in every place
where the subject maybe found. I think this is the case
which states that uniformity of taxation pertains to
geographical uniformity.
TIU VS. CA
This is a 1999 case. What is being challenged here is the
EO promulgated by the president, which segregated the
area of a special economic zone and enjoyed tax-and-
duty free privileges. The SC said here that the EO is
constitutional and there is no violation of the equal
protection clause.
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Again, the supreme court run down the elements of a
valid classification, that there is substantial distinction
between an ordinary place or area compared to the
secured area. Mainly because of the investment
involved. When you’re inside the secured area basically
the investors here are big time already, there is so much
money involved, that is why there is need for a
delineation.
Tiu v Ca
G.R. No. 127410. January 20, 1999
Facts:
On March 13, 1992, Congress, with the approval of
the President, passed into law RA 7227. This was for
the conversion of former military bases into
industrial and commercial uses. Subic was one of
these areas. It was made into a special economic
zone.
In the zone, there were no exchange controls. Such
were liberalized. There was also tax incentives and
duty free importation policies under this law.
On June 10, 1993, then President Fidel V. Ramos
issued Executive Order No. 97 (EO 97), clarifying
the application of the tax and duty incentives. It said
that    On Import Taxes and Duties. — Tax and duty-
free importations shall apply only to raw materials,
 capital goods and equipment brought in by business
enterprises into the SSEZ
On All Other Taxes. — In lieu of all local and national
taxes (except import taxes and duties), all business
enterprises in the SSEZ shall be required to pay the
tax specified in Section 12(c) of R.A. No. 7227.
Nine days after, on June 19, 1993, the President
issued Executive Order No. 97-A (EO 97-A), specifying
the area within which the tax-and-duty-free privilege
was operative.
Section 1.1.     The Secured Area consisting of the
presently fenced-in former Subic Naval Base shall be
the only completely tax and duty-free area in the
SSEFPZ. Business enterprises and individuals (
Filipinos and foreigners) residing within the Secured
Area are free to import raw materials, capital goods,
equipment, and consumer items tax and duty-free.
Petitioners challenged the constitutionality of EO 97-
A for allegedly being violative of their right to equal
protection of the laws. This was due to the limitation
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of tax incentives to Subic and not to the entire area
of Olongapo. The case was referred to the Court of
Appeals.
The appellate court concluded that such being the
case, petitioners could not claim that EO 97-A is
unconstitutional, while at the same time maintaining
the validity of RA 7227.
The court a quo also explained that the intention
of Congress was to confine the coverage of the SSEZ
to the "secured area" and not to include the "entire
Olongapo City and other areas mentioned in Section
12 of the law.
Hence, this was a petition for review under Rule 45
of the Rules of Court.
Issue:
Whether the provisions of Executive Order No. 97-A
confining the application of R.A. 7227 within the
secured area and excluding the residents of the zone
outside of the secured area is discriminatory or not
owing to a violation of the equal protection clause
Held: No. Petition dismissed.
The fundamental right of equal protection of the
laws is not absolute, but is subject to
reasonable classification. If the groupings are
characterized by substantial distinctions that make
real differences, one class may be treated and
regulated differently from another.
The classification must also be germane to the
purpose of the law and must apply to all those
belonging to the same class.
Inchong v Hernandez- Equal protection does not
demand absolute equality among residents; it merely
requires that all persons shall be treated alike, under
like circumstances and conditions both as to
privileges conferred and liabilities enforced.
Classification, to be valid, must (1) rest on substantial
distinctions, (2) be germane to the purpose of the
law, (3) not be limited to existing conditions only,
and (4) apply equally to all members of the same
class.
RA 7227 aims primarily to accelerate the conversion
of military reservations into productive uses. This
was really limited to the military bases as the law's
intent provides. Moreover, the law tasked the BCDA
to specifically develop the areas the bases occupied.
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Among such enticements are: (1) a separate customs
territory within the zone, (2) tax-and-duty-free
importations, (3) restructured income tax rates
on business enterprises within the zone, (4) no
foreign exchange control, (5) liberalized regulations
on banking and finance, and (6) the grant of resident
status to certain investors and of working visas to
certain foreign executives and workers. The target of
the law was the big investor who can pour in capital.
Even more important, at this time the business
activities outside the "secured area" are not likely to
have any impact in achieving the purpose of the law,
which is to turn the former military base to
productive use for the benefit of the Philippine
economy. Hence, there was no reasonable basis to
extend the tax incentives in RA 7227.
It is well-settled that the equal-protection guarantee
does not require territorial uniformity of laws.  As
long as there are actual and material differences
between territories, there is no violation of the
constitutional clause.
Besides, the businessmen outside the zone can
always channel their capital into it.
RA 7227, the objective is to establish a "self-
sustaining, industrial, commercial, financial and
investment center”. There will really be differences
between it and the outside zone of Olongapo.
The classification of the law also applies equally to
the residents and businesses in the zone. They are
similarly treated to contribute to the end goal of the
law
ABAKADA VS. ERMITA
This case is kinda weird because one of the arguments
of the petitioner here is about the equal protection
clause. It has something to do with the input taxes, na
explain ko na sa inyo yan before diba? There are two
taxes involved, the output tax which comes from sales
and the input tax which is in a form of tax credit, which
will reduce your VAT liabilities. Now there is a certain
limit on the input taxes that can be credited to your
output tax, its like 70%. And they are saying that this
70% rule from maximum amount that we can claim as a
tax credit violates the equal protection clause. It is
because this only benefit those big businesses and not
those people, or those on a level of a small business
enterprises. The SC said here that there is no violation
of equal protection clause.
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The interpretation given by the petitioners here is
actually fallacy because the maximum amount
claimable is only 70% and it doesn’t end there, because
even if the tax payers cannot fully utilize the 70 percent,
for
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example nagsobra sila beyond the 70 percent, like
somobra sila sa 80%, its ok, this tax payers can still claim
it on the subsequent taxable quarter. So magamit
gihapon nila either way. In fact there is no classification
involved here to begin with, di ka nman nila gina classify
as a tax payer, the law does not classify the taxpayers.
The law only set-up a ceiling on how much tax credit
that a tax payer can claim during that time.
On the other hand, it cannot be said also that even if
there is classification between businessman, it cannot
be said that there is a reasonable classification, because
the law itself provides a revenue on what accounts the
smaller business enterprises. If these enterprises do not
reach a certain amount on there gross income, they will
not be subjected to VAT. So on small businesses, they
are either VAT exempted or required to pay a
percentage of only 3% compared to 12%.
Excerpt from the ABAKADA V. ERMITA:
“The equal protection clause under the Constitution
means that no person or class of persons shall be
deprived of the same protection of laws which is
enjoyed by other persons or other classes in the
same place and in like circumstances.[83]
Petitioners point out that the limitation on the
creditable input tax if the entity has a high ratio of
input tax, or invests in capital equipment, or has
several transactions with the government, is not
based on real and substantial differences to meet a
valid classification.
The argument is pedantic, if not outright baseless.
The law does not make any classification in 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. Petitioners
alleged distinctions are based on variables that bear
different consequences. While the implementation
of the law may yield varying end results depending
on ones profit margin and value-added, the Court
cannot go beyond what the legislature has laid down
and interfere with the affairs of business.
The equal protection clause does not require the
universal application of the laws on all persons or
things without distinction. This might in fact
sometimes result in unequal protection. What the
clause requires is equality among equals as
determined according to a valid classification. By
classification is meant the grouping of persons or
things similar to each other in certain particulars and
different from all others in these same particulars.”
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BRITISH AMERICAN TOBACCO VS. CAMACHO ET AL
The allegation is that there is discrimination between
the new and old brand and also involves the
classification tax fees provision.
American Tobacco v. Camacho
FACTS:
On June 2001, petitioner British American Tobacco
introduced and sold Lucky Strike, Lucky Strike Lights
and Lucky Strike Menthol Lights cigarettes w/ SRP P 9
.90/pack - Initial assessed excise tax: P 8.96/pack (Sec
. 145 [c])
On August 8, 2003, Sec. 145 of the NIRC RR 22-2003
was implemented which revised tax classification of
certain new brands introduced in the market after
January 1, 1997 based on the survey of their current
net retail prices.  This increased the excise tax to P13.
44 since the average net retail price is above P
10/pack.  considered valid and reasonable provided that: (1) it
This cause petitioner to file before the RTC of Makati
a petition for injunction with prayer for issuance of a
Temporary Restraining Order and/or Writ of
Preliminary Injunction sought to enjoin the
implementation of Sec. 145 of the NIRC, RR No. 22-
2003 on the ground that they discriminate against
new brands of cigarettes in violation of the equal
protection and uniformity provisions  of the
Constitution 
Issue: W/N RA 9334 of the classification freeze
provision is unconstitutional for violating the  equal
protection and uniformity provisions  of the
Constitution
Held:
No. In Sison Jr. v. Ancheta, the court held that "xxx 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. 
If the law be looked upon in tems of burden on
charges, those that fall within a class should be
treated in the same fashion, whatever restrictions
cast on some in the group equally binding on the rest
. xxx"  Thus, classification if rational in character is
allowable. In Lutz v. Araneta: "it is inherent in the
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power to tax that a state be free to select the
subjects of taxation, and it has been repeatedly held
that 'inequalities which result from a singling out of
one particular class for taxation, or exemption
infringe no constitutional limitation"  SC previously
held: "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. The taxing
power has the authority to make reasonable and
natural classifications for purposes of taxation"
Under the rational basis test, a legislative
classification, to survive an equal protection
challenge, must be shown to rationally further a
legitimate state interest. The classifications must be
reasonable and rest upon some ground of difference
having a fair and substantial relation to the object of
the legislation
 
A legislative classification that is reasonable does not
offend the constitutional guaranty of the equal
protection of the laws. The classification is
rests on substantial distinctions; (2) it is germane to
the purpose of the law; (3) it applies, all things being
equal, to both present and future conditions; and (4)
it applies equally to all those belonging to the same
class. 
Moreover, petitioner failed to clearly demonstrate the
exact extent of such impact as the price is not the only
factor that affects competition
ABAKADA VS. PURISIMA
Sa Abakada v. Purisima, this is different from the
Abakada v. Ermita which involves the old VAT law.
Pag sinabing Abakada v. Purisima, this involves
government employees especially those employees
connected with BIR and BOC. This is about the tax
incentives given to BIR and BOC officials, kung mag
exceed sila sa target sila meron silang mga
incentives. This is the reason why pataka silag kuhag
ug taxes, because if they will exceed their target they
will receive incentives.
Petitioner challenged this provision of RA 9335
because it merely limited the scope of incentives to
BIR and BOC employees. The SC said that the
classification has a reasonable foundation or rational
basis. There is a reasonable distinction between
employees of this institutions and to other
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government institutions. These people, the BIR and
BOC employees have the common distinct primary
function of generating revenues for the national
government through the collection of taxes, custom
duties, fees and charges.
ABAKADA V. PURISIMA
Facts:
Petitioners seeks to prevent respondents from
implementing and enforcing Republic Act (RA) 9335.
R.A. 9335 was enacted to optimize the revenue-
generation capability and collection of the Bureau of
Internal Revenue (BIR) and the Bureau of Customs (
BOC). The law intends to encourage BIR and BOC
officials and employees to exceed their revenue
targets by providing a system of rewards and
sanctions through the creation of a Rewards and
Incentives Fund (Fund) and a Revenue Performance
Evaluation Board (Board). It covers all officials and
employees of the BIR and the BOC with at least six
months of service, regardless of employment status.
Petitioners, invoking their right as taxpayers filed this
petition challenging the constitutionality of RA 9335,
a tax reform legislation. They contend that, by
establishing a system of rewards and incentives, the
law “transforms the officials and employees of the
BIR and the BOC into mercenaries and bounty
hunters” as they will do their best only in
consideration of such rewards. Thus, the system of
rewards and incentives invites corruption and
undermines the constitutionally mandated duty of
these officials and employees to serve the people
with utmost responsibility, integrity, loyalty and
efficiency.
Petitioners also claim that limiting the scope of the
system of rewards and incentives only to officials and
employees of the BIR and the BOC violates the
constitutional guarantee of equal protection. There is
no valid basis for classification or distinction as to
why such a system should not apply to officials and
employees of all other government agencies.
Issue:
Whether or not the scope of the system of rewards
and incentives limitation to officials and employees
of the BIR and the BOC violates the constitutional
guarantee of equal protection. - YES.
Ruling:
The equal protection clause recognizes a valid
classification, that is, a classification that has a
reasonable foundation or rational basis and not
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arbitrary. With respect to RA 9335, its expressed
public policy is the optimization of the revenue-
generation capability and collection of the BIR and
the BOC Since the subject of the law is the revenue-
generation capability and collection of the BIR and
the BOC, the incentives and/or sanctions provided in
the law should logically pertain to the said agencies.
Moreover, the law concerns only the BIR and the
BOC because they have the common distinct primary
function of generating revenues for the national
government through the collection of taxes, customs
duties, fees and charges.
Both the BIR and the BOC principally perform the
special function of being the instrumentalities
through which the State exercises one of its great
inherent functions – taxation. Indubitably, such
substantial distinction is germane and intimately
related to the purpose of the law. Hence, the
classification and treatment accorded to the BIR and
the BOC under R.A. 9335 fully satisfy the demands of
equal protection.
III. PROGRESSIVE SYSTEM OF TAXATION
ARTICLE VI, SECTION 28(1), the provision involves
Progressive system of taxation.
ARTICLE VI, SECTION 28(1),
(1) The rule of taxation shall be uniform and
equitable. The Congress shall evolve a
progressive system of taxation.
Please do not confuse it with progressive tax.
Progressive system of taxation is different from a
progressive tax or a progressive rate.
A progressive system is one where the system of
taxation of a country is more inclined with direct taxes.
It has more direct taxes than indirect taxes.
While a progressive tax rate means that a tax rates go
higher as the tax base goes higher.
Kung mudako imong income, mudako pud imong
tax. But in several cases like for example in
Tolenino v. Secretary and Abakada v. Ermita.
What is the nature of this constitutional provision? Is
this mandatory? Because the VAT laws here in these
cases are challenged, accordingly it violates
constitutional provisions of progressive system of
taxation.
But the SC interpreted, that these are merely policy
guidelines in making tax laws. This is directory in
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
nature. As much as possible, the congress must
avoid indirect taxes and put into premium direct
taxes. But it’s not mandatory. Nothing in the
constitution prevents the government from
enacting a law which provides for indirect taxes.
IV. DELEGATION TO THE PRESIDENT TO
FIX TARIFF RATES
We already discussed this. In connection with this we
have Article VI, Section 24.
V. ORIGIN OF APPROPRIATION,
REVENUE AND TARIFF BILLS
ARTICLE VI, SECTION 24. All appropriation, revenue
or tariff bills, bills authorizing increase of the public
debt, bills of local application, and private bills shall
originate exclusively in the House of Representatives,
but the Senate may propose or concur with
amendments
VI. VOTING REQUIREMENT IN
GRANTING TAX EXEMPTION
ARTICLE VI SECTION 28(4). No law granting any tax
exemption shall be passed without the concurrence
of a majority of all the Members of the Congress
The case on point here is the case of CAMP JOHN HAY V
. LIM, this is about RA 7227, the Bases Conversion and
Development Act of 1992. This law gives authority to
the President to create through an executive
proclamation, a special economic zone. But the
problem here is, President Ramos created an economic
zone through an EO which carries with it a tax
incentives. The issue in this case is whether or the EO is
unconstitutional. The SC said YES. There are actually 3
reasons here why the presidential proclamation is void:
1. The implementing authority cannot exceed,
modify or supplant what was stated in the law.
The law itself says the only the Subic SEZ
enjoys those exemptions.
2. The nature of the assailed privileges is in the
nature of a tax exemption. Only the legislative
branch can grant exemptions. The president’s
power to grant exemptions is only limited to
tariff, custom duties, etc.
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3. The grant of tax exemption is a
circumvention of the constitutional provision
which requires a concurrence of the majority
of all the members of congress.
CAMP JOHN HAY VS LIM
FACTS: R.A. 7227 was enacted granting to Subic SEZ tax
privileges and tax exemptions. President Ramos issued
Proclamation No. 420, the title of which was earlier
indicated, which established a SEZ on a portion of Camp
John Hay which granted the John Hay SEZ the same tax
exemption enjoyed by Subic SEZ under R.A. 7227.
ISSUE: Whether the tax exemptions and other financial
incentives granted to the Subic SEZ under R.A. No. 7227
(Bases Conversion and Development Act of 1992), are
applicable to the John Hay SEZ.
RULING: The argument that the President's "power to
create Special Economic Zones carries with it the power
to provide for tax and financial incentives," does not lie.
It is the legislative branch which has the inherent power
not only to select the subjects of taxation but to grant
exemptions. Paragraph 4, Section 28 of Article VI of the
Constitution is crystal clear: "[n]o law granting any tax
exemption shall be passed without the concurrence of a
majority of all the Members of the Congress." Hence, it
is only the legislature, as limited by the provisions of the
Constitution, which has full power to exempt any
person or corporation or class of property from taxation
. The Constitution itself may provide for specific tax
exemptions or local governments may pass ordinances
providing for exemption from local taxes, but,
otherwise, it is only the legislative branch which has the
power to grant tax exemptions, its power to exempt
being as broad as its power to tax. There is absolutely
nothing in R.A. No. 7227 which can be considered a
grant of tax exemption in favor of public respondent
BCDA. Rather, the beneficiaries of the tax exemptions
and other incentives in Section 12 (the only provision in
R.A. No. 7227 which expressly grants tax exemptions)
are clearly the business enterprises located within the
Subic SEZ. Contrary to public respondents'
interpretation, the Decision of October 24, 2003 does
not "tie the hands" of executive or administrative
agencies from implementing any present or future
legislation which affords tax or other financial
incentives to qualified persons doing business in the
John Hay SEZ or elsewhere. The second sentence of
Section 3 of Proclamation No. 420 was declared null
and void only insofar as it purported to grant tax
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FROM THE LECTURES OF ATTY. DONALVO 2018

exemptions and other financial incentives to business
enterprises located in John Hay SEZ. However, where
there is statutory basis for exemptions or incentives,
there is nothing to prevent qualified persons from
applying for and availing thereof.
Can the president remove now the motels, lodges,
golf course? The answer is YES of course. It is because it
involves the subject of taxation. Now, can the president
say that I don’t want the 20%, because it is too

VII. PRESIDENT’S VETO POWER ON

APPROPRIATION, REVENUE AND TARIFF BILLS

ARTICLE VII, SECTION 27. (2) The President shall have

the power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall
not affect the item or items to which he does not object
.

What is an item? What is the general rule on veto?

GR: Veto all or veto none.

EXP: With respect to tax laws, the president can

veto an item.

The Congress passed a law and then the President has

power to veto it. Just like what happened in the TRAIN
law, inaprobahan nya but there are certain provisions
which were vetoed. We will discuss more bout this
when we reach income taxation.
What do you understand by the term “ITEM”? Ano yang
item nayan? Uyy item sila, iba yong item nayan ha…
Item veto is allowed when it comes to revenue bill etc.
only, but when it comes to other laws, it should be in a
line item only.
So what do you mean by “item”?
In the case of CIR V. TAX APPEALS AND MANILA GOLF
defines “item” is in a revenue bill does not refer to an
entire section imposing a particular kind of tax, but
rather to the subject of the tax and the tax rate. In the
portion of a revenue bill which actually imposes a tax, a
section identifies the tax and enumerates the persons
liable therefore with the corresponding tax rate

So again dalawa ang item na yan, dalawa ang covered

sa item, number one, it maybe the subject of the tax,
ano yan sya ,hotel, bar, restaurants, golf courses and
other places for entertainment. Second, tax rate, when
you talk about the tax rate, this is a particular item . So,
it’s just either of these two, that president can veto. For
example there is new tax law passed by congress,
imposing taxes to hotels, motels, inn, bar, resthouses,
lodges, golf course and other places of entertainment
for tax of 20% , lets say if their gross income reaches 3
millions.

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burdensome. Can the president do that? YES, because it
refers to the tax rate. How about if the president would
say that I don’t want the qualification, if the gross sale
or receipt of this establishment would exceed 3 million.
Does it refer to a tax rate or tax subject? Is the
president allowed to do that? You read the case if CIR v.
Tax Appeals and Manila Golf.
CIR v Court of Tax Appeals and Manila Golf
FACTS: Manila Golf & Country Club, Inc., a non-stock
corporation who maintains a golf course and operates a
clubhouse with a lounge, bar & dining room exclusively
for its members & guests claims that they should have
been exempt from payment of privilege taxes were it
not for the last paragraph of Section 191-A of RA No.
6110, otherwise known as "Omnibus Tax Law".
By virtue of RA No. 6110, the CIR assessed the Manila
Golf and Country Club fixed taxes as operators of golf
links and restaurant, and also percentage tax (caterer's
tax) for its sale of foods and fermented liquors/wines
for the period covering September 1969 to December
1970 in the amount of P32,504.96 in which the club
protested claiming the assessment to be without basis
because Section 42 was vetoed by then President
Marcos.
CIR denied the protestation of the club, who maintain
that Section 42 was not entirely vetoed but merely the
words "hotel, motels, resthouses" on the ground that it
might restrain the development of hotels which is
essential to the tourism industry.
ISSUE: Whether or not the presidential veto referred to
the entire section or merely to the imposition of 20%
tax on gross receipt of operators or proprietors of
restaurants, refreshment parlors, bars and other eating
places which are maintained within the premises or
compound of a hotel, motel or resthouses.
DECISION: The presidential veto referred merely to the
inclusion of hotels, motels, and rest houses in the 20%
caterer's tax bracket but not to the whole section. It
was then agreed by the SC with then Solicitor General
Estelito Mendoza and his associates that inclusion of
hotels, motels, and rest houses in the 20% caterer's tax
bracket are "items" in themselves within the meaning
of Sec. 20(3), Article VI of the 1935 Constitution.
An "item" in a revenue bill does not refer to an entire
section imposing a particular kind of tax, but rather to
the subject of the tax and the tax rate. In the portion of
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a revenue bill which actually imposes a tax, a section
identifies the tax and enumerates the persons liable
therefore with the corresponding tax rate. To construe
the word "item" as referring to the whole section would
tie the President's hand in choosing either to approve
the whole section at the expense of also approving a
provision therein which he deems unacceptable or veto
the entire section at the expense of foregoing the
collection of the kind of tax altogether. The evil which
was sought to be prevented in giving the President the
power to disapprove items in a revenue bill would be
perpetrated rendering that power inutile
VIII. TAXES LEVIED FOR SPECIAL PURPOSE
ARTICLE VI, SECTION 29(3). All money
collected on any tax levied for a special purpose shall
be treated as a special fund and paid out for such
purpose only. If the purpose for which a special fund
was created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the general
funds of the Government.
Example for this is the Coco Levy fund and yong motor
vehicle registration fees the purpose is to raise money
in order to build and maintain public roads and
highways etc.. That’s a specific purpose.
IX. GRANT TO LGU’S TO CREATE ITS
OWN SOURCE OF REVENUE.
We already discussed this.
X. FLEXIBLE TARIFF CLAUSE
ARTICLE VI, SECTION 28(2). The Congress may
, by law, authorize the President to fix within
specified limits, and subject to such limitations and
restrictions as it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the
national development program of the Government.
We also discussed this in detail.
XI. EXEMPTION FROM REAL PROPERTY
TAXES
ARTICLE VI, SECTION 28(3). Charitable
institutions, churches and personages or convents
appurtenant thereto, mosques, non-profit cemeteries,
and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
, or educational purposes shall be exempt from
taxation
Now let’s go to the more important provision. I said this
is important because from time to time, like for
example from last bar examination lumabas to. Let’s
just summarize this constitutional provision.
The first question is, what kind of tax is covered under
this provision?
- It covers REAL PROPERTY TAXES ONLY. It does
not refer to income, it does not refer to any
receipt, any donation. It just refers to real
property taxes.
Second, what are the institutions covered here?
- Institutions are exclusive, first you charitable
institutions, churches and personages or
convents, and mosque, meaning religious
buildings. Second non profit cemeteries, and
lastly all lands, buildings, and improvements,
actually, directly, and exclusively used for
religious, charitable, or educational purposes.
What are the requirements so that these institutions
will be able to avail of real property tax exemption?
- The requirement is this, that all lands,
buildings, and improvements, ACTUALLY,
DIRECTLY, AND EXCLUSIVELY USED for religious
, charitable, or educational purposes.
*Sir talking about his recit with Father Gus.
July 28, 2018 Part 3
Lexi Singanon
What do you mean by “actually, directly, and
exclusively used”? Does it mean that such property in
order to be exempt from real property tax, should be
actually and strictly used for educational purposes only?
What if majority of the entire property of the
educational institution is used for school or educational
purposes, and a portion thereof, example, the “Arrneo”,
di ba? Ano ba ginagawa ng mga bangko diyan?
Nagarenta man yan sila di ba? But the income derived
from the rental payments are used to supplement
school needs.
So, the SC actually has two interpretations for this
“actually, directly, and exclusively used” requirement.
1. Most old cases would use the liberal meaning
– even if the property is not directly used for
religious, charitable, or educational purposes,
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but these facilities are incidental to or are
reasonably necessary for the accomplishment
of the main purpose (religious, charitable, or
educational), they are covered in the
exemption.
2. Some newer cases would also say, that the
“actually, directly, and exclusively used”
requirement is actually restrictive – if you are
not actually using them for religious, charitable
, or educational purposes, then they are not
tax exempt.
Cases:
Roman Catholic Bishop v. Ilocos Norte
GR No. 27588, December 31, 1927
Ilocos Norte wanted to collect real property taxes
against the church. According to them, yes, there
may be a church, but there is also a dormitory and
a vegetable garden. What should only be covered
by the tax exemption is the portion where the
church is situated because it is the only portion
actually used for religious purposes, and not the
the dormitory and vegetable garden.
What did the SC say here?
“The exemption in favor of the convent in the
payment of the land tax (sec. 344 [c]
Administrative Code) refers to the home of the
parties who presides over the church and who has
to take care of himself in order to discharge his
duties. It therefore must, in the sense, include
not only the land actually occupied by the church
, but also the adjacent ground destined to the
ordinary incidental uses of man. Except in large
cities where the 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 case of a
convent, it use is limited to the necessities of the
priest, which comes under the exemption.lawphi1
.net
In regard to the lot which formerly was the
cemetery, while it is no longer used as such,
neither is it used for commercial purposes and,
according to the evidence, is now being used as a
lodging house by the people who participate in
religious festivities, which constitutes an
incidental use in religious functions, which also
comes within the exemption.”
Abra Valley College v. Aquino
162 SCRA 106
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FROM THE LECTURES OF ATTY. DONALVO 2018
This case involves a school, which has several
portions in the college building that are rented out
to commercial establishments. Meron siyang
canteen concessionaires, book supplies, etc. And
then the 2nd floor was being used by the principal
and his family as residence.
“The college lot and building in question which
were subjected to seizure and sale to answer for
the unpaid tax are used: (1) for the educational
purposes of the college; (2) as the permanent
residence of the President and Director thereof, Mr
. Pedro V. Borgonia, and his family including the
in-laws and grandchildren; and (3) for commercial
purposes because the ground floor of the college
building is being used and rented by a commercial
establishment, the Northern Marketing
Corporation.”
Issue: What is the tax liability of Abra Valley
College?
To be more specific, what is the tax liability of the
real property of Abra Valley College?
Held: To determine the taxability of the property,
you must first distinguish how is that portion of
the property being used. There seems to be no
problem with the building which is being used by
the school because this actually, directly, and
exclusively used for educational purposes.
What about the portion of the lot which is being
used by the President and his family? As well as
that portion that is being rented out to commercial
establishments?
The SC said:
“It must be stressed however, that while this
Court allows a more liberal and non-restrictive
interpretation of the phrase "exclusively used for
educational purposes" as provided for in Article VI
, Section 22, paragraph 3 of the 1935 Philippine
Constitution, reasonable emphasis has always
been made that exemption extends to facilities
which are incidental to and reasonably necessary
for the accomplishment of the main purposes.
Otherwise stated, the use of the school building
or lot for commercial purposes is neither
contemplated by law, nor by jurisprudence. Thus,
while the use of the second floor of the main
building in the case at bar for residential
purposes of the Director and his family, may find
justification under the concept of incidental use,
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which is complimentary to the main or primary
purpose—educational, the lease of the first floor
thereof to the Northern Marketing Corporation
cannot by any stretch of the imagination be
considered incidental to the purpose of
education.”
Lung Center v. Quezon City
GR No. 144104, June 29, 2004
There are 2 main issues here:
1. What is the definition of a charitable
institution?
2. What is the extent of the real property
tax exemption afforded to charitable
institutions?
Lung Center of the Philippines is a hospital that is
situated in the middle of a big vast tract of land. A
big space at the ground floor is being leased to
private parties, for canteen and small store spaces,
and to medical or professional practitioners who
use the same as their private clinics for their
patients whom they charge for their professional
services. Almost one-half of the entire area on the
left side of the building along Quezon Avenue is
vacant and idle, while a big portion on the right
side, at the corner of Quezon Avenue and
Elliptical Road, is being leased for commercial
purposes to a private enterprise known as the
Elliptical Orchids and Garden Center.
So what happened is, Quezon City assessed both
the land and the hospital building for real property
taxes, and then the Lung Center applied for real
property tax exemptions but it was eventually
denied.
According to Lung Center, a minimum of 60% of
its hospital beds are exclusively used for charity
patients and that the major thrust of its hospital
operation is to serve charity patients. As such, it is
a charitable institution and therefore, it should be
exempt from real property taxes.
Issues:
1. Is Lung Center a charitable institution?
YES.
The argument of Quezon City is that Lung Center
cannot be a charitable institution because it
receives income from paying clients. For a
charitable institution to be exempt from real
property taxes, it must not be earning profits.
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But what is the test in determining whether an
entity is a charitable institution?
The test whether an enterprise is charitable or not
is whether it exists to carry out a purpose
reorganized in law as charitable or whether it is
maintained for gain, profit, or private advantage.
So where do you look in order to know whether an
institution is indeed charitable or not?
The SC said that you look into its corporate
documents and its by-laws. That’s why the SC
found that Lung Center is indeed a charitable
institution.
“We hold that the petitioner is a charitable
institution within the context of the 1973 and 1987
Constitutions. To determine whether an enterprise
is a charitable institution/entity or not, the
elements which should be considered include
the statute creating the enterprise, its corporate
purposes, its constitution and by-laws, the
methods of administration, the nature of the
actual work performed, the character of the
services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the
properties.”
Now here comes the contention of the government
that since it is gaining profit, it is no longer a
charitable institution, to which the SC held that:
“As a general principle, a charitable institution
does not lose its character as such and its
exemption from taxes simply because it derives
income from paying patients, whether out-patient,
or confined in the hospital, or receives subsidies
from the government, so long as the money
received is devoted or used altogether to the
charitable object which it is intended to achieve
; and no money inures to the private benefit of
the persons managing or operating the
institution.”
So even if it’s receiving income pero saan papunt
ang pera? It’s still for the purpose of giving out
free services for the benefit of those who cannot
afford medical services.
And there’s this another contention of the
government: It’s still not a pure charitable
institution because it derives subsidies from the
government. The SC held that it still doesn’t
matter because it does not destroy the charitable
character of the institution as long as it uses the
subsidies granted by the government for the
furtherance of its charitable purposes.
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“Under P.D. No. 1823, the petitioner is entitled to
receive donations. The petitioner does not lose its
character as a charitable institution simply because
the gift or donation is in the form of subsidies
granted by the government.”
2. Is the entirety of Lung Center’s real
property exempted from real property
taxes? NO.
Now, according to the Lung Center, the entire
property is dominantly and primarily used for
charitable purposes. Because in the end the SC
held that not all of the properties owned by Lung
Center is exempt from real property tax.
“Under the 1973 and 1987 Constitutions and Rep.
Act No. 7160 in order to be entitled to the
exemption, the petitioner is burdened to prove,
by clear and unequivocal proof, that (a) it is a
charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used
for charitable purposes. "Exclusive" is defined as
possessed and enjoyed to the exclusion of others;
debarred from participation or enjoyment; and "
exclusively" is defined, "in a manner to exclude; as
enjoying a privilege exclusively." If real property is
used for one or more commercial purposes, it is
not exclusively used for the exempted purposes
but is subject to taxation. The words "dominant
use" or "principal use" cannot be substituted for
the words "used exclusively" without doing
violence to the Constitutions and the law. Solely is
synonymous with exclusively.
What is meant by actual, direct and exclusive use
of the property for charitable purposes is the
direct and immediate and actual application of
the property itself to the purposes for which the
charitable institution is organized. It is not the
use of the income from the real property that is
determinative of whether the property is used for
tax-exempt purposes.
The petitioner failed to discharge its burden to
prove that the entirety of its real property is
actually, directly and exclusively used for
charitable purposes. While portions of the
hospital are used for the treatment of patients
and the dispensation of medical services to them,
whether paying or non-paying, other portions
thereof are being leased to private individuals for
their clinics and a canteen. Further, a portion of
the land is being leased to a private individual for
her business enterprise under the business name
"Elliptical Orchids and Garden Center."
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It's pretty much the same here in Ateneo. It’s a non-
stock non-profit educational institution “daw” but that
portion being rented out to and used by Mercury Drug
is not exempt from real property tax.
XII. TAX EXEMPTION OF REVENUES,
ASSETS, INCLUDING DONATIONS TO
EDUCATIONAL INSTITUTIONS (Art. XIV, Sec. 4 (3)
and (4))
ART. XIV, SEC. 4 (3) AND (4)
1. All revenues and assets of non-stock, non-
profit educational institutions used actually,
directly, and exclusively for educational
purposes shall be exempt from taxes and
duties. Upon the dissolution or cessation of
the corporate existence of such institutions,
their assets shall be disposed of in the
manner provided by law.
Proprietary educational institutions,
including those cooperatively owned, may
likewise be entitled to such exemptions,
subject to the limitations provided by law,
including restrictions on dividends and
provisions for reinvestment.
2. Subject to conditions prescribed by law, all
grants, endowments, donations, or
contributions used actually, directly, and
exclusively for educational purposes shall be
exempt from tax.
Lets discuss first (1) Non Stock, Non-Profit Educational
Institutions.
What is the coverage of tax exemption NSNP
Educational Institutions? The coverage is all revenues
and assets which means income as well as the
properties of this educational institutions so long they
are non stock and non profit they are exempt from
taxes and duties.
Second, what is the requirement for before these
institutions revenue and assets will be exempt from
taxes duties?
The requirement is that the revenues and
assets are actually, directly, and exclusively used for
educational purpose. This time what is involved is not
only the real property but the assets: the money, the
properties of these institutions, it also includes the
income of these educational institutions. So it is safe to
say generally speaking NSNP Educational Institutions all
of their income is not subject to income tax because of
this constitutional provision.
As to the revenues what is important here is
that where the revenue will be placed A. Say for
example, this school Ateneo we are renting a space to
Mercury Drug.Where will the net income go?
A. If its rent income will go to
educational purposes then that
income/revenue is EXEMPT FROM
TAXATION take note we are not
talking about property taxes here
only income taxes

Let us outline this provision. This is quite similar to the

previous constitutional limitation that we discussed. It’s
pretty much almost the same but there are substantial
differences.

What are the type of schools mentioned here? Take

note that this constitutional provision we are talking
about right now pertains to educational institutions.
July 28,2018
1:00-1:20
Nikki Tan
TYPES OF EDUCATIONAL INSTITUTIONS

There are two types of educational institution

mentioned:
1. Non Stock, Non-Profit Educational Institutions (
NSNP); or
2. Proprietary Educational Institutions

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B. What if you will invest this
income? You will invest this income
taken from the rents of Mercury Drug
and then the income from this
investment you will apply it to
educational purposes. So from
Mercury Drug to Ateneo, Ateneo
used it for investment and that
investment will earn income and
then use it again for school means.
And it would be that money since
Ateneo has already invested it
outside, the money taken from
Mercury Drug that income is NOT
COVERED by the exemption.
C. But then if it has income from that
investment which ultimately that
Ateneo uses it for educational
purposes because it is actually,
directly, and exclusively used for
educational purpose that income will
be EXEMPT FROM TAXATION.
Is this tax exemption self executing?
Yes,you do not need a law for that.
So to summarize to avail of this tax exemption
of this constitutional provision the following
are the requisites:
1. It must be a Non Stock, Non-Profit
Educational Institutions (NSNP); and
2. Coverage: The revenues and the
assets must be actually, directly, and
exclusively used for educational
purposes.
Next, (2) Proprietary Educational Institutions are there
revenues and assets also tax exempt?
Nakalagay dito sa provisions:
Proprietary educational institutions, including those cooperatively ownedcorporation,
exemptions, subject to the limitations provided by law, including restrictions on dividends andtrust
for reinvestment.
In other words, when it comes to proprietary
educational institutions they do not have an automatic
tax exemption on there revenue and assets there must
be an enabling law. Under the current setup, these
proprietary educational institutions are not tax exempt
on their revenue and assets under this constitutional
provision but they can avail of the 10% preferential tax
rate under the National Internal Revenue Code (NIRC).
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What about the real properties of these proprietary
institutions?
These properties of the proprietary educational
institutions are tax exempt only: when they are actually,
directly, and exclusively used for education purposes.
Then we have
Section 28. Article VI, 1987 Constitution
 (3) Charitable institutions, churches and
parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly,
and exclusively used for religious, charitable, or
educational purposes shall be exempt from
taxation.
Then we have constitutional provisions that deal with
grants, endowments, donations:
Section 4. Article XIV, 1987 Constitution
(4) Subject to conditions prescribed by
law, all grants, endowments, donations, or
contributions used actually, directly, and
exclusively for educational purposes shall be
exempt from tax.
Pretty much the same, it’s about donations to
these institutions this is not self executing because
there must be a law providing for exemption. This is
covered by NIRC Section 101
Section 101. NIRC
(3) Gifts in favor of an educational and/or
charitable, religious, cultural or social welfare
corporation, institution, accredited
nongovernment organization, trust or
philanthropic organization or research
institution or organization: Provided, however,
That not more than thirty percent (30%) of said
gifts shall be used by such donee for
administration purposes. For the purpose of
this exemption, a 'non-profit educational and/or
charitable
may likewiseinstitution,
be entitledaccredited
to such
nongovernment organization, or
provisions
philanthropic organization and/or research
institution or organization' is a school, college
or university and/or charitable corporation,
accredited nongovernment organization, trust
or philanthropic organization and/or research
institution or organization, incorporated as a
nonstock entity, paying no dividends, governed
by trustees who receive no compensation, and
devoting all its income, whether students' fees
or gifts, donations, subsidies or other forms of
philanthropy, to the accomplishment and
promotion of the purposes enumerated in its
Articles of Incorporation.
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FROM THE LECTURES OF ATTY. DONALVO 2018
Under the current set up only NSNP Educational
Institution may avail of the tax exemption.
Then you have Non-Impairment of Supreme Court
Jurisdiction in Tax Cases:
Section 5. Article VIII, 1987 Constitution
The Supreme Court shall have the following
powers:
2. Review, revise, reverse, modify, or affirm on
appeal or certiorari, as the law or the Rules of
Court may provide, final judgments and orders of
lower courts in:
b. All cases involving the legality of any tax,
impost, assessment, or toll, or any penalty imposed
in relation thereto.
We also have Non Imprisonment for Non Payment of
Poll Tax
Section 20. Article III, 1987 Constitution
No person shall be imprisoned for debt or non-
payment of a poll tax.
And the Freedom of Speech and of the Press
Section 4. Article III, 1987 Constitution
No law shall be passed abridging the freedom of
speech, of expression, or of the press, or the right
of the people peaceably to assemble and petition
the government for redress of grievances.
Then you have Religious Freedom
Section 5. Article III, 1987 Constitution
No law shall be made respecting an establishment
of religion, or prohibiting the free exercise thereof
. The free exercise and enjoyment of religious
profession and worship, without discrimination or
preference, shall forever be allowed. No religious
test shall be required for the exercise of civil or
political rights.
Then just read on the cases: Tolentino v Sec. of Finance
and American Bible v City of Manila which were under
your Constitutional Law 1 cases.
Then we have Non-Impairment of Contracts
Section 10. Article III, 1987 Constitution
No law impairing the obligation of contracts shall
be passed.
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What do you mean by impairing the obligation?
To impair the obligations of the contracts is to
alter or change the terms and effects of the contract
and that is the contemplation of the law to weaken the
position of rights of one or all of the parties to it.
POLICE POWER POWER TO TAX
Superior to the non- Inferior to the non-
impairment clause impairment clause
What about the legislative franchises are these covered
by the non-impairment clause of the constitution. This
is actually discussed in the case of
Meralco vs Province of Laguna
G.R. No. 131359. May 5, 1999
Contractual tax exemptions, in the real sense of
the term and where the non-impairment clause of
the Constitution can rightly be invoked, are those
agreed to by the taxing authority in contracts,
such as those contained in government bonds or
debentures, lawfully entered into by them under
enabling laws in which the government, acting in
its private capacity, sheds its cloak of authority
and waives its governmental immunity.
Truly, tax exemptions of this kind may not be
revoked without impairing the obligations of
contracts. These contractual tax exemptions,
however, are not to be confused with tax
exemptions granted under franchises. A franchise
partakes the nature of a grant which is beyond the
purview of the non-impairment clause of the
Constitution.
Indeed, Article XII, Section 11, of the 1987
Constitution, like its precursor provisions in the
1935 and the 1973 Constitutions, is explicit that no
franchise for the operation of a public utility shall
be granted except under the condition that such
privilege shall be subject to amendment, alteration
or repeal by Congress as and when the common
good so requires.
TAXPAYER’S SUIT
Then we talk about the Taxpayer’s Suit
It is more of a constitutional law concept which
is related to the judicial review aspect.
The Power of Judicial Review
Is the power of the Supreme Court to declare a
treaty, international or executive agreement, law, etc.
unconstitutional not just the law but also the
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018

application of the law. The issue must be raised on the earliest

Elements of Judicial Review:
1. There must be an actual case or controversy;
2. There must be a locus standi;
3.
opportunity; and
4. The issue must be the very lis mota of the case
Where does Taxpayer Suit come in?
On the second element or (2) there must be a
locus standi. A taxpayer has a standing to file and action
questioning the validity of law based on the: theory that
expenditure of public funds by the officer of the
government for the purpose of administering or
implementing a valid law constitutes a misapplication of
funds.

Strictly speaking there is a taxpayers suit, a taxpayer has

a standing to file if:
1. He is a sufficient interest in preventing the
illegal expenditure of money raised by taxation
; and
2. He will sustain a direct injury in the
enforcement of the law

Read the 3 cases, kaya niyo na yan let’s go now to

escape from taxation.

ESCAPE FROM TAXATION

How do you differentiate escape from taxation and tax

exemption?

ESCAPE FROM TAX EXEMPTION

TAXATION
It is the taxpayer’s These are the laws
employment of any promulgated by the
means regardless of its Congress wherein the
legality to reduce or to taxpayer will not suffer
altogether avoid the the burden of taxation
payment of taxes

The ways to avoid the payment of taxes:

1. Tax Shifting
2. Tax Avoidance
3. Tax Evasion

1. Tax Shifting
The taxpayer shifts the burden of taxation to
some other person.

Ways of shifting the taxation:

a. Including the tax in the purchase price
; or
Ex. Attorneys Fee 100,000 already
included in it is the 3%
Percentage Tax
b. Adding the tax on your selling price

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Ex. Bill it separately; magbill ako
ng 100,000 patungan ko pa ng 3%
In either of way the burden of taxation will always be
on the part of the person paying my services, however
not all taxes can be shifted.
Taxes that can be shifted to another:
1. Franchise Tax;
2. Contractors Tax;
3. VAT
4. Documentary Stamp Tax (DST);
5. SPA Tax;
6. Percentage Tax
The incidence and the impact of taxation please do not
be confused with these two items.
Why is it that in Indirect Taxes the burden can be
shifted to another person?
It is because in indirect taxes the impact and the
incidence of taxation may be split.
IMPACT OF INCIDENCE OF
TAXATION TAXATION
It refers to the liability of It refers to the burden of
the payment of tax paying the tax
In Direct Taxation the impact and incidence of taxation
will always fall upon one person only.
July 28, 2018
Jessa Puerin
In Indirect Taxes, it is different because the incidence of
taxation may fall of some other person.
Simply lang VAT, the selling price supposedly is
P100 pesos, because of the VAT I will charge P112
to the buyer. Who will bear the tax? It’s actually
the buyer. But what if the buyer will not pay the
tax? What if the buyer will not pay the VAT? Ayaw
niya magbayad ng additional P12. Oh sige benta
ko na lang P100 wag na lang ang P12, does that
mean the seller will not longer liable to the
government. No, because at the end of the day , it
is the impact of taxation falls on the buyer and he
will be the one to remit the VAT to the
government. Iyong buyer na ayaw magbayad,
wala lang siya.
That is the significance of impact and incidence of
taxation.
DIAGEO PHILIPPINES VS. CIR
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This is about a refund. Diageo here is engaged in the
importing and exporting of liquors. So ang ginagawa
niya magpurchase siya ng alcohol from the outside, it
pays its excise taxes around P12M. What happens that
its exported a course to their neighboring countries. So
export sale siya. If it’s an export sale normally it is
subject to zero rated transaction. So in effect to put it
roughly supposedly if you will export something you
will not be liable for any excise taxes and then the
Diageo filed a claim for a refund. Refund or credit of any
excise taxes paid for the locally goods for those
manufactured which are actually exported. The BIR
denied the claim for refund because the BIR said that
Diageo is not the proper person to file for a refund.
Simply because Diageo in purchasing the property, in
purchasing the goods and raw materials, it pays the
selling price only. The person who are ultimately liable
for the taxes is not Diageo but it’s actually the suppliers.
Which is precisely the decision of the court here. Diageo
cannot claim for refund of excise taxes it paid because it
(Diageo) only bears the burden of tax and not the
liability of the tax in other words the statutory taxpayer
is the proper party to claim a refund of indirect taxes.
2. Tax Avoidance
When we say tax avoidance this is the exploitation
by the taxpayer of legally permissible scheme or
methods of assessing taxable property or income in
order to reduce not entirely in order avoid the
payment of tax liability.
To put it simply the taxpayer merely exploits a legal
loophole in order for him to avoid the payment of
taxes.
Possible ba yan? Yes it is entirely possible. Uso yan
dati when I think it is applicable until now.
Estate planning, before the TRAIN Law, ngayon kasi
pareho na lang ang tax rates sa estate tax and
donors tax. But before the train law, the rates for
donor taxes are actually lower especially if you
donate it to a relative.
So if the person is already dying, he slowly donates
his properties until such time that he is already dead
, the estate will pay minimal estate taxes only. So tax
avoiding siya. Is that allowed? It is actually allowed
because you are only exploiting a little loophole. I
know that I am dying, previously sa Train Law, P100,
000 donation per year is donor’s tax exempt. Mag
donate diay ko 100, 000 kada tuig and at the time I
am almost dying, I have no more properties left,
wala na akong estate taxes na babayaran. Tax free
lahat. Is that allowed? Yes, because you are
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018
exploiting a little loophole.
Right now, applicable pa ba siya? I think to some
extent even if donor’s taxes and estate taxes now
are the same, you can still exploit that. You can still
donate yearly to a maximum of 200,000 pesos since
it is still tax free. And that is allowed.
3. Tax Evasion
Tax evasion, by the way, is different from tax avoidance
since it is an illegal means to reduce and avoid the
payment of taxes. This is no longer exploiting a legal
loophole but you are actually defeating the payment of
taxes. Through illegal means you employ fraud, use
false pretenses and forbidden devices in order to lessen
and defeat the payment of taxes.
What are the factors to consider integrated in tax
evasion?
1. The ends to be achieved- payment of less than
that known by the taxpayer to be legally due or
the nonpayment of tax for additional tax is due
2. The accompany state of mind which is
described as being even for in bad faith
deceitful, deliberate and not incidental-
meaning there is an intent to deceive or to
defraud the government
3. Course of action or failure of action which is
unlawful- an overt action or non-action which
is considered unlawful
CIR VS. ESTATE OF TODA
One case is CIR vs Estate of Toda. If I remember it
correctly, there was this person who owns a
corporation and then this person sold it to a certain
person again. Let us say Person A sold it to person B,
and then after that the person B sold it to another
corporation C. In the end when person A died, he
paid taxes nagkuha pa siya ng legal opinion sa BIR and
eventually he was free from tax.
But then the BIR assessed him of deficiency estate
taxes. Sabi niya bayad ka man this has already been
paid you even secured a legal opinion for this type of
transaction. The BIR said no, that is actually or you
cannot use that as the legal opinion the we made
because what you mean is actually to defraud the
government if I may not spoke of everything of the
income tax due for that estate for the transfer etc.,
kasi minimal transfer, minimal taxes lang binayaran
nila.
So in the end the main issue being discussed here by
the supreme court is whether or not a tax evasion.
This is the case ot tax evasion or tax avoidance. Then
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there are requisites to adhere, the three factors: one,
the end to be achieved-to defeat taxes or reduce
taxes; second, the intent to defraud or in bad faith;
third, course of action.
n this case, all factors are present. Why?
1) The ends to be achieved through transactions
making the transaction deemed to transferring
the shares to B, then from B transferring to C
another corporation. All those transaction
resulted to reduction of the taxes. Miskan gamay
gibayaran niya.
2) The scheme employed, there is no other
intention but a fraudulent intention to defeat the
government in collecting the tax due- because
the transaction was actually a sham. There is no
exchange of money,so the person in between of
person B is just an intermediary for everything
and merely use as a conduit in order to save
taxes.
The obvious objective of the transaction is to
create a tax shelter and no other. This person B
never controlled or benefited from the property
in fact he sold right away. Gibaligya niya dayon.
Pagsale ni person A to person B there was a deed
of sale and then this person B on the very same
day sold it to person C. okay lang sana yun but
the problem is this, the deed of sale executed
from person B to corporation C was notarized
ahead than the sale between person A and
person B. Gets niyo yan kaya next time later on
you should be careful about your notarial book.
When you notarized something see to it that
mauna ang authority bago and deed of sale. The
deed of sale in front was notarized was made of
the same day the deed of sale was even
notarized ahead of the previous deed of sale. So
in other words there was completely no other
purpose of those transaction except to reduce
the taxes and to mislead the BIR as to the true
nature of the transaction entered by this persons
A, B, and C. Let’s check. It’s achieve, yes
nabawasan ang tax. No.2, state of mind, yes
there is fraud because the transaction is a sham.
3) No. 3, unlawful course of action. What is the
illegal act here is that the intermediary
transaction between person A and person B was
merely is a sham. It’s fraudulent in nature. Atik
atik lang walay unod. Giliba lang nila ang
gobyerno.
But I have certain reservation of this court
decision here. I think there is something wrong
 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018

with the decision because person A is a
corporation. It was only owned by the majority or
almost of it or the vast majority of that
corporation is owned by this person, person A. So
medyo weird siya.
TAX EXEMPTION
because it is strictly construed with the taxpayer gud.
There must be clear intention on the part of the
government to exempt a taxpayer from taxation.
What are the rule on exclusions? What about a tax
subject is excluded by law. Wala siya naapil sa taxable

Tax exemption is the grant of immunity express or

implied to a particular person(s) or corporation of the
obligation for payment of taxes. It is the act of the State
or the prerogative to collect taxes upon certain subject
or object of taxation.

What is the basis of tax exemption? In tax exemption,

the grant of tax exemption is part and parcel of the
government’s power to grant tax. The power to tax
necessarily involves the power to create tax exemption.

What is the nature of tax exemption? Tax exemption is

in the nature of a waiver of the state. Hence, this is
strictly construed against the taxpayer and evenly in
favor of the government. It is granted only upon the
clear intention which should not exist by mere
implication.

What are the PRINCIPLES ONE MUST REMEMBER

ABOUT TAX EXEMPTIONS:
1. Tax exemptions are not presumed. Tax
exemption is highly disfavored because it affects
the very life of the state. Lifeblood theory naman
tayo.
2. Tax exemption are strictly construed against the
taxpayer and in favor of the government. And in
line with this, tax exemption is strictly construed,
and the consequences are as follows:
a) The taxpayer who claims tax exemption
should prove that he is exempted from tax
. There is a law providing for such tax
exemption;
b) The taxpayer must also be able to prove
that he is included among the tax subjects
or objects declared by law to be tax
exempt

What are the kinds of tax exemption?

1. Express
2. Implied and;
3. Contractual

Wala tayong problema sa Express tax exemption

because it is specifically provided by law. But is there an
implied tax exemption? Meron din tayong implied tax
exemption. Some books would say that this is not
possible because tax exemption dapat klaro siya

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items ba. So In that aspect probably there is an implied
tax exemption but if you want just to be strict about it,
it is not legally possible because there must be a clear
intention on the part of the government to exempt tax
subject or object through law.
Equitable Recoupment where the refund of a
tax illegally or erroneously corrected or overpaid by a
taxpayer is barred by prescription, a tax presently being
assessed against taxpayer may be recouped or set-off
against the tax already barred by prescription.

COMPENSATION So basically it goes like this, the taxpayer has a claimed

And we also have concept of compensation. of tax refund from the government. The taxpayer did
Compensation is an ObliCon. It is the mode of not avail of the refund, so nag prescribe. The following
distinguishing an obligation when two persons, in their year the government assessed tax deficiency against
own right, are creditors and debtors of each other. this taxpayer. Under the doctrine of equitable
recoupment, even if the taxpayer’s claim of refund is
There are TWO TYPES OF COMPENSATION: already prescribed, he can still set-off the taxes.
1. Legal compensation- arises as a matter of law.
When the requisites of legal compensation are This is not applicable in our jurisdiction because says for
complied with, the compensation will a prescriptive period for the claim of tax refund.
automatically take place even the parties are Equitable recoupment to be applicable was still
unaware of it. The requisites of a legal provided by law. This is not under our NILR or tax laws
compensation under Article of 1279 of the in that matter.
New Civil Code are:
a. The obligors are principally bound as TAX AMNESTY
creditors and debtors of each other;
b. Both debts consist of some of money or TAX AMNESTY is a general pardon to taxpayers or the
consumable goods intentional overlooking by the State of its authority to
c. Both debts must be due impose penalties on persons otherwise guilty of
d. Both debts are liquidated and demandable violating a tax law.
e. That over neither of them there be any
retention or controversy July 28 Part 6
Dane Viola
2. Conventional compensation- arises by mere
agreement of the parties.
CONSTRUCTION AND INTERPRETATION OF TAX LAWS
GR: Taxes cannot be subject to compensation.
Because the taxpayer and the Government are
1st Rule: If the law is clear, there’s no need to interpret
not creditors and debtors of each other.
it.
- Because the obligation of the taxpayer is
Where the provision of law speaks categorically there is
one created by law. Balaod ang
no need of an interpretation, all that has to be done is
nagbuhat ana so that the taxpayer will
to apply in in the cases which fall under its terms.
pay the taxes. Please take note that
even the taxpayer is sustain? (not clear),
Relate this with the Robredo recount- 25% daw should
there is no assurance on the part of the
be counted in her favor. But what did the COMELEC
government that I give something to
Rules say? It’s clear that it must be shaded completely.
you in concrete terms di ba. So you
Is there a provision in the Omnibus Election Code saying
cannot say that these two parties are
that the intent of the voter must prevail? If Robredo is
mutually creditor and debtor of each
saying that the 25% rule should be counted in her favor
other.
and there is this provision of the OEC that the intent of
the voter must prevail, I think the COMELEC Res even if
- Second, taxes are not obligations. Taxes
it says it must be completely shaded it must yield to the
are not contractual obligations. Taxes
OEC.
are not considered debts to begin with.
When is statutory construction needed?
- Lastly, the Lifeblood Theory.
This is only needed when there’s doubt in the
What is the DOCTRINE OF EQUITABLE RECOUPMENT?
interpretation in the provision of a tax law.

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 TAXATION 1
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General Rule: In case of doubt laws must be construed There are 2 things you have to remember here:
strictly against the State and liberally in favor of the tax
payer. 1. There must be a law.
2. There must be a doubt on that tax law.

The rules is that a law shall not be construed as

imposing a tax without a clear and express provision for
that.

CIR V FORTUNE TOBACCO

There’s this revenue regulation and the BIR is

essentially saying that the tax payer is supposed to
prove the invalidity of the revenue regulation because
after all, tax laws are construed strictly against the tax
payer and in favor of the government. What the SC is
essentially saying is this: the strict interpretation of tax
law presupposes that there is any law to begin with.

There’s also a rule here about tax exemption or tax

refund. The tobacco company is claiming for a refund
that’s why the tobacco company must prove that it is
entitled to a refund, and that the tax law entitles it to a
refund. Tax refunds are supposedly construed strictly
against the tax payer and in favor of the State.

So when it comes to the rule on the interpretation of

tax law and tax exemptions, baliktad. What the SC said
here is this: BIR is correct because the tax exemptions
including tax refund are strictly construed against a tax
payer because this is in derogation of the right of the
tax payer. But for the rule on the tax exemption and tax
refund to apply, it presupposes that there is an
existence of a tax law to begin with and there is a
provision which excludes a tax payer from taxation
thereof.

Which is why in this case, the SC expounded on the rule

on interpretation of tax laws. Tax laws are strictly
construed against the government so the BIR must be
able to show that it is allowed by law to implement that
revenue regulation which provides for a floor or a
ceiling of the tobacco prices.

From FT:
A claim for tax refund may be based on statutes
granting tax exemption or tax refund. In such case, the
rule of strict interpretation against the taxpayer is
applicable as the claim for refund partakes of the
nature of an exemption, a legislative grace, which
cannot be allowed unless granted in the most explicit
and categorical language. The taxpayer must show that
the legislature intended to exempt him from the tax by
words too plain to be mistaken.

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 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018

The rule in the interpretation of tax laws is that a 2. Another mandatory provision is the rules on appeal
statute will not be construed as imposing a tax unless it . Appeal is not a matter of right, it is just a privilege.
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 answering the question of who is subject to tax

statutes, it is basic that 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. As burdens, taxes should not be unduly
exacted nor assumed beyond the plain meaning of the
tax laws.

The rule on tax exemptions is also applicable in tax

exclusions, tax refunds, tax amnesty and tax pardons
because they are essentially of the same nature – they
are all in derogation of the right of the State to impose
taxes and to collect them.

AMINISTRATIVE RULES AND REGULATIONS

They must be in harmony of the provisions of law. In

case there is conflict in the revenue regulation and the
NIRC, the NIRC will prevail.

MANDATORY AND DIRECTORY PROVISIONS OF LAW

• MANDATORY PROVISIONS
As a general rule our tax laws provide for mandatory
provisions – taxes are the life blood of the State.
Specifically the mandatory provisions provided for the
security of the citizens, those that require the equality
of taxation as to the nature and amount of taxation.
Normally these pertains to the mandatory requirement
such that when the government will not follow the
provisions, such government actions will be considered
void.

Example:

1. Provisions for the levy of properties: publication,

notice to the tax payer and incase the tax payer is
not around there must be witness etc. Those things
must be followed before the government could
actually get the property and sell it to public
auction.

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 TAXATION 1
FROM THE LECTURES OF ATTY. DONALVO 2018

2. And we also have assessment and decisions
and rulings on the disputed assessment, it must
contain the facts, the law or jurisprudence or legal
basis on which the assessment is based, otherwise
the assessment is void.
3. As a tax payer you have the procedures for protest
which are mandatory.
4. Rules on waiver. Under the tax code, the 3 yr
prescriptive period in the collection and
assessment, the government only has 3 yrs to make
an assessment but this can be extended through
the waiver executed by the tax payer.
There are rules to be followed on waivers:
a. it must be I writing,
b. signed by the tax payer, the Commissioner or
his authorized representative,
c. waiver must be for a definite period,
d. waiver must be for a specific tax period only.
All those things must have to be followed otherwise the
waiver will not be valid because this will already be in
derogation on the right of the tax payer for giving out a
defense.
• DIRECTORY PROVISIONS
These are provisions providing for the direction of the
officers to secure methodological ay systematic modes
of proceedings.
Golf Air v CIR
San Pablo Manufacturing v CIR
(lifted from 2015 tsn)
it’s good as exportation. We are millers and therefore
we are exempt from tax.
But what the SC said was, NO. You are still subject to 3%
miller’s tax. Why? If you take a look at the law, who are
the persons exempt from tax?
1. Proprietor of the factory
2. Operator of the factory
3. Miller himself
In this case, SPMC is selling its product to another
Filipino corporation which, in turn, exports the products
. It would have been different if SPMC was selling.
Where the law enumerates the subject upon which it
applies to be considered as excluding from its effects all
those not included in its express mention. Expresio
unius est exclusion alterius.
ASPECTS OR STAGES OF TAXATION
Most books would say the there are only 3 stages of
taxation:
1. Levy
2. Assessment and Collection
3. Payment
Some books would provide a 4th which is Refund, but
some would include it with payment.
Levy- Legislative in character, this is tax legislation
Assessment, collection, payment or refund- these refer
to tax administration.

In this case the SC applied the statcon rule expression

unius est exclusion alterius (anything that is not
included in the enumeration is excluded therefrom).
That’s the basic thrust of the decision.
SPMC is engaged in the business of milling,
manufacturing and exporting coconuts and its other
products. It supplies these products for UniChem. And
UniChem is exporting these products.

BIR assessed SPMC of percentage tax deficiency. Kasi

miller sya eh – subject to a 3% miller’s tax. Sabi ng
SPMC, “we are supposed to be tax exempt because we
are millers and the products that we provide are
exported.” Because if you read the tax law: “provided
however that this tax shall not apply to coconut oil,
palm oil, copra,…etc.” (read from case)

SPMC said that they are tax exempt. They give it to

UniChem, and at the same time UniChem exports it – so

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