of Philippine Islands, G.R. No.

134062, April 17, 2007, 521

GENERAL PRINCIPLES OF TAXATION SCRA 373).
(c) Benefits received principle – Taxpayers receive
NATURE AND CHARACTERISTICS OF TAXATION benefits from taxes through the protection the State
(1996, 2003, 2005) affords to them. For the protection they get arises their
obligation to support the government through the
Q: Describe the power of taxation. May a legislative payment of taxes (CIR v. Algue, Inc., G.R. No. L-28896,
body enact laws to raise revenues in the absence of a February 17, 1988, 158 SCRA 9).
constitutional provision granting said body the
power to tax? Explain. (2005 Bar) (d) Doctrine of symbiotic relationship – Taxation arises
because of the reciprocal relation of protection and
A:The power of taxation is inherent in the State being an support between the state and taxpayers. The state gives
attribute of sovereignty. As an incident of sovereignty, the protection and for it to continue giving protection, it must
power to tax has been described as unlimited in its range, be supported by the taxpayers.
acknowledging in its very nature no limits, so that
security against its abuse is to be found only in the INHERENT LIMITATIONS
responsibility of the legislature which imposes the tax on
Q: Enumerate the four (4) inherent limitations on
the constituents who are to pay it. (Mactan Cebu
taxation. Explain each item briefly. (2009 Bar)
International Airport Authority v. Marcos, 261 SCRA 667)
A: The inherent limitations on the power to tax are:
Being an inherent power, the legislature can enact laws to
raise revenues even without the grant of said power in the 1. Taxation is for a public purpose– The proceeds of the
Constitution. It must be noted that Constitutional tax must be used (a) for the support of the State or (b)
provisions relating to the power of taxation do not for some recognized objective of the government or
operate as grants of the power of taxation to the to directly promote the welfare of the community.
Government, but instead merely constitute limitations 2. Taxation is inherently legislative– Only the
upon a power which would otherwise be practically legislature has full discretion as to the persons,
without limit. (Cooley, Constitutional Limitations, 1927 8 th property, occupation or business to be taxed
Ed., p. 787) provided these are all within the State’s territorial
jurisdiction. It can also finally determine the amount
Power of Taxation as distinguished from Police
or rate of tax, the kind of tax to be imposed and the
Power and Eminent Domain (1989, 1991, 2003)
method of collection. (1 Cooley 176184)
Q: The City of Manila passed an ordinance imposing 3. Taxation is territorial– Taxation may be exercised
an annual tax of P5,000.00 to be paid by an operator only within the territorial jurisdiction of the taxing
of a massage clinic and an annual fee of P50.00 to be authority (61 Am. Jur. 88). Within the territorial
paid by every attendant or helper in the said clinic. Is jurisdiction, the taxing authority may determine the
the imposition a tax or a license fee? (1989 Bar) place of taxation” or “tax situs."
4. Taxation is subject to international comity– This is a
A:The imposition on the operator of the massage clinic is limitation which is founded on reciprocity designed
both a tax and a license fee. The amount of P5,000.00 to maintain a harmonious and productive
exceeds the cost of regulation, administration and control relationships among the various states. Under
but it is likewise imposed to regulate a non-useful international comity, a state must recognize the
business in order to protect the health, safety and morals generally-accepted tenets of international law,
of the citizenry in general. The P50.00 impositions on the among which are the principles of sovereign equality
helpers or attendants are license fees sufficient only for among states and of their freedom from suit without
regulation, administration and control. their consent, that limit the authority of a government
to effectively impose taxes on a sovereign state and
Theory and Basis of Taxation (1991, 2016) its instrumentalities, as well as on its property held,
Q: Briefly explain the following doctrines: lifeblood and activities undertaken in that capacity.
doctrine; necessity theory; benefits-received Q: Sure Arrival Airways (SAA) is a foreign
principle; and doctrine of symbiotic relationship. corporation, organized under the laws of the Republic
(2016 Bar) of Nigeria. Its commercial airplanes do not operate
A: within Philippine territory, or service passengers
embarking from Philippine airports. The firm is
(a) Lifeblood doctrine – Without revenue raised from represented in the Philippines by its general agent,
taxation, the government will not survive, resulting in Narotel. SAA sells airplane tickets through Narotel,
detriment to society. Without taxes, the government and these tickets are serviced by SAA airplanes
would be paralyzed for lack of motive power to activate outside the Philippines. The total sales of airplane
and operate it (CIR v. Algue, Inc., G.R. No. L-28896, February tickets transacted by Narotel for SAA in 2012
17, 1988, 158 SCRA 9). amounted to PIO,000,000.00 The Commissioner of
Internal Revenue (CIR) assessed SAA deficiency
(b) Necessity theory – The exercise of the power to tax income taxes at the rate of 30% on its taxable income,
emanates from necessity, because without taxes, finding that SAA’s airline ticket sales constituted
government cannot fulfill its mandate of promoting the income derived from sources within the Philippines.
general welfare and well-being of the people (CIR v. Bank
SAA filed a protest on the ground that the alleged law would be open to attack as class legislation only if all
deficiency income taxes should be considered as taxpayers belonging to one class were not treated alike.
income derived exclusively from sources outside the [Juan Luna Subdivision, Inc., v. Sarmiento, 91 Phil 371
Philippines since SAA only serviced passengers (1952)]
outside Philippine territory. It, thus, asserted that the
imposition of such income taxes violated the Q: Heeding the pronouncement of the President that the
principle of territoriality in taxation. Is the theory of worsening traffic condition in the metropolis was a sign
SAA tenable? Explain. (5%) of economic progress, the Congress enacted Republic Act
No. 10701, also known as An Act Imposing, a Transport
A: No. The activity which gives rise to the income is the Tax on the Purchase of Private Vehicles. Under RA 10701,
sale of ticket in the Philippines, hence, the income from buyers of private vehicles are required to pay a transport
sale of tickets is an income derived from Philippine tax equivalent to 5% of the total purchase price per
sources which is subject to the Philippine income tax. vehicle purchased. RA 10701 provides that the Land
Accordingly, there is no violation of the principle of Transportation Office (LTO) shall not accept for
territoriality in taxation (Air Canada v. CIR, G.R. No. registration any new vehicles without proof of payment of
169507, January 11, 2016, 778 SCRA 131). the 5% transport tax. RA 10701 further provide that
existing owners of private vehicles shall be required to
Public Purpose (1989, 1991) pay a tax equivalent to 5% of the current fair market :
Q: An ordinance of Quezon City on the operation of value of every vehicle registered with the LTO. However,
market stalls and the collection of market stall fees RA 10701 exempts owners of public utility vehicles and
created a market committee “to formulate, the Government from the coverage of the 5% transport
recommend and adopt subject to the ratification of tax.
the Sangguniang Panglungsod regulations in the A group of private vehicle owners sue on the ground that
operations of the market stalls.” It also entrusted the the law is unconstitutional for contravening the Equal
collection of the market stall fees to a private Protection Clause of the Constitution.
corporation. Does the entrusting of the collection of
the market stall fees destroy the “public purpose” of Rule on the constitutionality and validity of RA 10701.
the ordinance? (1989 Bar) (5%).
A: Yes, because a portion of the fees collected would be A: RA 10701 is valid and constitutional. A levy of tax is not
diverted as fees to private corporation. Entrusting of the unconstitutional because it is not intrinsically equal and
collection of the market stall fees violates the limitation uniform in its operation. The uniformity, rule does not
that local government units shall in no case let to any prohibit classification for purposes of taxation (British
private person the collection of local taxes, fees, charges American Tobacco v. Jose Isidro N. Camacho, G.R. No.
and other impositions. [Sec. 130 (c), R.A. No. 7160, The 163583, August 20, 2008, 562 SCRA 511).
Local Government Code] As a result of this prohibition,
public funds are therefore utilized for a private purpose, Uniformity of taxation, like the kindred concept of equal
which is to pay the private corporation for its services. protection, merely requires that all subjects or objects of
taxation, similarly situated are to be treated alike both in
CONSTITUTIONAL LIMITATIONS privileges and liabilities. Uniformity does not forfend
classification as long as: (1) the standards that are used
Equality and Uniformity (1988, 2000, 2003, 2004, therefore are substantial and not arbitrary, (2) the
2017) categorization is germane to achieve the legislative
Q: RC is a law-abiding citizen who pays his real estate purpose, (3) the law applies, all things being equal, to both
taxes promptly. Due to a series of typhoons and present and future conditions, and (4) the classification
adverse economic conditions, an ordinance is passed applies equally well to all those belonging to the same
by MM City granting a 50% discount for payment of class (Rufino R. Tan v. Ramon R. Del Rosario, Jr., G.R. Nos.
unpaid real estate taxes for the preceding year and 109289 and 109446, October 13, 1994, 237 SCRA 324,
the condonation of all penalties on fines resulting 331). All of the foregoing requirements of a valid
from the late payment. classification having been net and those which are singled
out are a class. in themselves, there is no violation of the
Arguing that the ordinance rewards delinquent “Equal Protection Clause” of the Constitution.
taxpayers and discriminates against prompt ones, RC
demands that he be refunded an amount equivalent Non Impairment of Obligations of Contracts (1997,
to one-half of the real taxes he paid. The municipal 2004)
attorney rendered an opinion that RC cannot be Q: A law was passed granting tax exemption to certain
reimbursed because the ordinance did not provide industries and investments for a period of five years.
for such reimbursement. RC files suit to declare the But three years later, the law was repealed. With the
ordinance void on the ground that it is a class repeal, the exemptions were considered revoked by
legislation. Will his suit prosper? Explain your answer the BIR, which assessed the investing companies for
briefly. (2004 Bar) unpaid taxes effective on the date of the repeal of the
A: The suit will not prosper. The remission or law.
condonation of taxes due and payable to the exclusion of NPC and KTR companies questioned the assessments
taxes already collected does not constitute unfair on the ground that, having made their investments in
discrimination. Each set of taxes is a class by itself and the full reliance with the period of exemption granted by
the law, its repeal violated their constitutional right Constitution (CIR v. De La Salle University, Inc., G.R. Nos.
against the impairment of the obligations and 196596, 198841; 198941, November 9, 2016).
contracts. Is the contention of the companies tenable
or not? Reason briefly. (b) No, provided that the revenues are used actually,
directly, and exclusively for educational purposes as
A: The contention is not tenable. The exemption granted provided under Article XIV, Section 4(3) of the 1987
is in the nature of a unilateral tax exemption. Since the Constitution. The requisites for availing the tax exemption
exemption given is spontaneous on the part of the under Article XIV, Section 4 (3) are as follows: (1) the
legislature and no service or duty or other remunerative taxpayer falls under the classification non-stock, non-
conditions have been imposed on the taxpayers receiving profit educational institution, and (2) the income it seeks
the exemption, it may be revoked at will by the to be exempted from taxation is used actually, directly and
legislature.[Manila Railroad Company v. Insular Collector exclusively for educational purposes; thus, so long as the
of Customs, 12 PhiL 146 (1915)] requisites are met, the revenues may be exempt from tax
(CIR v. De La Salle University, Inc., G.R. Nos. 196596,
KINDS OF TAXES 198841, 198941, November 9, 2016).
Direct and Indirect Taxes (1994, 2000, 2001, 2006) Q: Kilusang Krus, Inc. (KKI) is a non-stock, non-profit
Q: Distinguish “direct taxes” from “indirect taxes". religious organization which owns a vast tract of land
Give examples. (2006 Bar) in Kalinga. KKI has devoted 1 /2 of the land for
various uses: a church with a cemetery exclusive for
A: Direct taxes are demanded from the very person who, deceased priests and nuns, a school providing K to 12
as intended, should pay the tax which he cannot shift to education, and a hospital which admits both paying
another; while an indirect tax is demanded in the first and charity patients. The remaining 1/2 portion has
instance from one person with the expectation that he can remained idle. The KKI Board of Trustees decided to
shift the burden to someone else, not as a tax, but as part lease the remaining 1 /2 portion to a real estate
of the purchase price. (Maceda v. Macaraig, Jr., 223 SCRA developer which constructed a community mall over
217 [1993]) Examples of direct taxes are income tax, the property. Since the rental income from the lease
estate tax and donor’s tax. Examples of indirect taxes are of the property was substantial, the KKI decided to
value-added tax, percentage tax and excise tax on use the amount to finance (1) the medical expenses of
excisable articles. the charity patients in the KKI Hospital and (2) the
purchase of books and other educational materials
RULES ON EXEMPTION OF PROPERTIES ACTUALLY, for the students of KKI School.
EXCLUSIVELY AND DIRECTLY USED FOR RELIGIOUS,
EDUCATIONAL AND CHARITABLE PURPOSES (a) Is KKI liable for real property taxes on the land?
(2.5%)
Q: San Juan University is a non-stock, non-profit,
educational institution, It owns a piece of land in (b) Is KKl's income from the rental fees subject to
Caloocan City on which its three.2-storey school. income tax? (2018 BAR)
buildings stood. Two of the buildings are devoted to
classrooms, laboratories, à canteen, a bookstore, and A:
administrative offices. The third building is reserved (a) Yes. The Court held that the petitioner is a charitable
as dormitory for student athletes who are granted institution within the context of the 1973 and 1987
scholarships for a given academic year. In 2017, San Constitutions.
Juan University earned income from tuition fees and
from leasing a portion of its premises to various The test whether an enterprise is charitable or not is
concessionaires of food, books, and school supplies. whether it exists to carry out a purpose reorganized in
law as charitable or whether it is maintained for gain,
(a) Can the City Treasurer of Caloocan City collect real profit, or private advantage. Hence, the Lung Center was
property taxes on the land and building of San Juan organized for the welfare and benefit of the Filipino
University? Explain your answer. (5%) people.
(b) Is the income earned by San Juan University for As a general principle, a charitable institution does not
the year 2017 subject to income tax? Explain your lose its character as such and its exemption from taxes
answer. (2017 BAR) simply because it derives income from paying patients, so
A: long as the money received is devoted to charitable
objects and no money inures to the private benefit of the
(a) Yes, but only on the leased portion. Article XIV, Section persons managing or operating the institution. As well as
4(3) of the 1987 Constitution provides that the assets of a the reason of donation in the form of subsidies granted by
non-stock, non-profit educational institution shall be the government.
exempt from taxes and duties only if the same are used
actually, directly, and exclusively for educational (b) No. Those portions of its real property that are leased
purposes. The test of exemption from taxation is the use to private entities are not exempt from real property taxes
of the property for purposes mentioned in the as these are not actually, directly and exclusively used for
Constitution. The leased portion of the building may be charitable purposes.
subject to real property tax since such lease is for The petitioner failed to prove that the entirety of its real
commercial purposes, thereby, it removes the asset from property is actually, directly and exclusively used for
the property tax exemption granted under the
charitable purposes. While portions of the hospital are Makati office in June 2017 after KKl's project in Kuala
used for the treatment of patients and the dispensation of Lumpur, Malaysia was completed. (2018 BAR)
medical services to them, whether paying or non-paying,
other portions thereof are being leased to private A: The Tax Code provides that only resident citizen who
individuals for their clinics and a canteen. is a citizen of Philippines residing therein is taxable on all
income derived from sources within and without the
Hence, the portions of the land leased to private entities Philippines.
as well as those parts of the hospital leased to private
individuals are not exempt from such taxes. On the other Substituted filing requisites:
hand, the portions of the land occupied by the hospital • Employee receives purely compensation income
and portions of the hospital used for its patients, whether (regardless of amount) during the taxable year;
paying or non-paying, are exempt from real property
• Employee receives income from a single
taxes.
employer in the Philippines during the taxable
The requisites for availing the tax exemption under year;
Article XIV, Section 4 (3), namely: (1) the taxpayer falls • The amount of tax due from the employee at the
under the classification non-stock, non-profit educational end of the year equals the amount of tax withheld
institution ; and (2) the income it seeks to be exempted by the employer;
from taxation is used actually, directly and exclusively for • If married, the employee’s spouse also complies
educational purposes. The records of the case showed with all three aforementioned conditions, or
that the foundation’s operation is not for profit, but in otherwise receives no income;
pursuit of its primary purpose which is “to establish a • The employer files BIR Form 1604CF; and
school xxx the primary intention being to form the whole • Employee has BIR Form 2316 or Certificate of
man through the integration of a liberal Christian Final Tax Withheld At Source (BIR Form 2306)
education with professional competence for participation issued by his employer.
in Philippine development.”
(a) (Resident citizens) Taxable; Not required (if compliant
SITUS OF TAXATION with the substituted filing)

Q: Kronge Konsult, Inc. (KKI) is a Philippine (b) (Resident alien) Taxable; Not required (if compliant
corporation engaged in architectural design, with the substituted filing)
engineering, and construction work. Its principal
office is located in Makati City, but it has various (c) (Non-resident citizen) Taxable only on the Philippine
infrastructure projects in the country and abroad. sourced income; Not required (if compliant with the
Thus, KKI employs both local and foreign workers. substituted filing)
The company has adopted a policy that the • Sec 22 (E)(3): “Most of the time” – At least 183
employees' salaries are paid in the currency of the days abroad
country where they are assigned or detailed. Below
• A citizen of the Philippines who works and
are some of the employees of KKI. Determine whether derives income from abroad and whose
the compensation they received from KKI in 2017 is employment
taxable under Philippine laws and whether they are
• thereat requires him to be physically present
required to file tax returns with the Bureau of
abroad most of the time during the taxable year.
Internal Revenue (BIR).
(d) (Non-resident citizen) No Philippine sourced income;
(a) Kris Konejero, a Filipino accountant in KKl's Tax
Not required
Department in the Makati office and married to a
Filipino engineer also working in KKI. • Sec 22 (E)(2): Reside abroad for employment on
a permanent basis
(b) Klaus Kloner, a German national who heads KKl's
• A citizen of the Philippines who leaves the
Design Department in its Makati office.
Philippines during the taxable year to reside
(c) Krisanto Konde, a Filipino engineer in KKl's abroad, either as an immigrant or for
Design Department who was hired to work at the employment on a permanent basis.
principal office last January 2017. In April 2017, he
(e) (Non-resident citizen) Taxable only on the Philippine
was assigned and detailed in the company's project in
sourced income; Not required (if compliant with the
Jakarta, Indonesia, which project is expected to be
substituted filing)
completed in April 2019.
(d) Kamilo Konde, Krisanto's brother, also an • Sec. 22 (E)(4): Previously a non-resident citizen
engineer assigned to KKl's project in Taipei, Taiwan. who arrives in the Philippines
Since KKI provides for housing and other basic needs, • A citizen who has been previously considered as
Kamila requested that all his salaries, paid in nonresident citizen and who arrives in the
Taiwanese dollars, be paid to his wife in Manila in its Philippines at any time during the taxable year to
Philippine Peso equivalent. reside permanently in the Philippines shall
likewise be treated as a nonresident citizen for
(e) Karen Karenina, a Filipino architect in KKl's the taxable year in which he arrives in the
Design Department who reported back to KKl's Philippines with respect to his income derived
 from sources abroad until the date of his arrival The immunity of WHO from indirect taxes extends to the
in the Philippines. contractor by treating the sale of service as effectively
zero-rated when the law provided that, “services
CONSTRUCTION AND INTERPRETATION OF TAX rendered to persons or entities whose exemption under
LAWS special laws or international agreements to which the
Tax Exemption and Exclusion (1996,2005, 2007, Philippines is a signatory effectively subjects the supply
2017) of such service to zero percent (0%) rate” (Section 108(B)
3, NIRC). Accordingly, the BIR is wrong in assessing the
Q: Why are tax exemptions strictly construed against 12% VAT from the contractor, Precision Construction
the taxpayer? (1996 Bar) Corporation.

A: Tax exemptions are strictly construed against the DOUBLE TAXATION (1996, 1997, 2004, 2015, 2018,
taxpayer because such provisions are highly disfavored 2019)
and may almost be said to be odious to the law (Manila
Electric Company vs. Vera, 67 SCRA351). The exception Q: Differentiate between double taxation in the strict
contained in the tax statutes must be strictly construed sense and in a broad sense and give an example of
against the one claiming the exemption because the law each. (2015 Bar)
does not look with favor on tax exemptions, they being A: Double taxation in the strict sense pertains to the direct
contrary to the life-blood theory which is the underlying double taxation. This means that the taxpayer is taxed
basis for taxes. twice by the same taxing authority, within the same taxing
Q: An alien employee of the Asian Development Bank jurisdiction, for the same property and same purpose.
(ADB) who is retiring soon has offered to sell his car Example: Imposition of final withholding tax on cash
to you which he imported tax-free for his personal dividend and requiring the taxpayer to declare this tax-
use. The privilege of exemption from tax is granted to paid income in his income tax returns.
qualified personal use under the ADB Charter which On the other hand, double taxation in the broad sense
is recognized by the tax authorities. If you decide to pertains to indirect double taxation. This extends to all
purchase the car, is the sale subject to tax? Explain. cases in which there is a burden of two or more
(2005 Bar) impositions. It is the double taxation other than those
A: Yes. The sale is subject to tax. Section 107 (B) of the covered by direct double taxation (CIR v. Solidbank Corp.,
NIRC provides that: "In the case of tax-free importation of 436 SCRA 416). Example: Subjecting the interest income
goods into the Philippines by persons, entities or agencies of banks on their deposits with other banks to the 5%
exempt from tax where such goods are subsequently sold, gross receipts tax (GRT) despite of the same income
transferred or exchanged in the Philippines to non- having been subjected to 20% final withholding tax
exempt persons or entities, the purchasers, transferees or (FWT), is only a case of indirect double taxation. The GRT
recipients shall be considered the importer thereof, who is a tax on the privilege of engaging in business while the
shall be liable for any internal revenue tax on such FWT is a tax on the privilege of earning income.
importation”. Tax exemptions are to be construed strictly Q: X, a lessor of a property, pays real estate tax on the
and are not considered transferable in character. premises, a real estate dealer’s tax based on rental
Q: Pursuant to Sec. 11 of the “Host Agreement receipts and income tax on the rentals. X claims that
between the United Nations and the Philippine this is double taxation. (1996 Bar)
government, it was provided that the World Health A: There is no double taxation. Double taxation means
Organization (WHO), “its assets, income and other taxing for the same tax period the same thing or activity
properties shall be: a) exempt from all direct and twice, when it should be taxed but once, by the same
indirect taxes.” Precision Construction Corporation taxing authority for the same purpose and with the same
(PCC) was hired to construct the WHO Medical Center kind or character of tax. The real estate tax is a tax on
in Manila. Upon completion of the building, the BIR property; the real estate dealer’s tax is a tax on the
assessed a 12% VAT on the gross receipts of PCC privilege to engage in business; while the income tax is a
derived from the construction of the WHO building. tax on the privilege to earn an income. These taxes are
The BIR contends that the 12% VAT is not a direct nor imposed by different taxing authorities and are
an indirect tax on the WHO but a tax that is primarily essentially of different kind and character (Villanueva v.
due from the contractor and is therefore not covered City of Iloilo, 26 SCRA 578).
by the Host Agreement. The WHO argues that the VAT
is deemed an indirect tax as PCC can shift the tax Q: In 2018, City X amended its Revenue Code to
burden to it. Is the BIR correct? Explain. (2017 BAR) include a new provision imposing a tax on every sale
of merchandise by a wholesaler based on the total
A: No. Since World Health Organization (WHO), the selling price of the goods, inclusive of value-added
contractee, is exempt from direct and indirect taxes taxes (VAT). ABC Corp., a wholesaler operating within
pursuant to an international agreement where the the city, challenged the new provision based on the
Philippines is a signatory, the exemption from indirect following contentions: 1. The new provision is a form
taxes should mean that the entity or person exempt is the of prohibited double taxation because it essentially
contactor itself because the manifest intention of the amounts to City X imposing VAT which was already
agreement is to exempt the contractor so that no tax may being levied by the national government; and 2. since
be shifted to the contractee (CIR v. John Gotamco & Sons, the tax being imposed is akin to VAT, it is beyond the
Inc., G.R. No. L-31092, February 24, 1987, 148 SCRA 36).
power of City X to levy the same. Rule on each of ABC A: Yes, it will amount to indirect double taxation. Under
Corp.’s contentions. (2019 BAR) the law, direct double taxation exists if the following
requisites exist: i. Both taxes are imposed on the same
A: With regard to the first contention, ABC Corp is property or subject matter; ii. For the same purpose; iii.
incorrect. Under the NIRC, direct double taxation exists Imposed by the same taxing authority; iii. Within the same
only when all of the following requisites are present: The jurisdiction; iv. During the same taxing period; v. Covering
two taxes must be imposed on the same: 1. subject matter, the same kind or character of tax. If there is an element
2. purpose, 3. by the same taxing authority, 4. within the lacking, only indirect double taxation exists. The
same jurisdiction 5. during the same taxing period; 6. the Constitution only prohibits direct double taxation.
taxes must be of the same kind or character. In this case,
the taxing authorities are different. Hence, the tax to be ESCAPE FROM TAXATION (TAX AVOIDANCE V. TAX
imposed by the LGU is not a form of direct double EVASION)
taxation.
Tax avoidance and Tax Evasion (1989, 1996, 2000,
With regard to the second contention, ABC Corp is 2005, 2008, 2014, 2016)
incorrect. Under the LGC, LGU’s are empowered to enact
ordinances that will aid in their revenue generation, Q: Distinguish tax evasion from tax avoidance. (1996
which is consonance with the principle of the fiscal Bar)
autonomy of LGU’s. Although the tax to be imposed is akin A: Tax evasion is a scheme used outside of those lawful
to VAT, the LGU may nevertheless impose such local means to escape tax liability and, when availed of, it
business tax. usually subjects the taxpayer to further or additional civil
Q: Upon his retirement, Alfredo transferred his or criminal liabilities. Tax avoidance, on the other hand, is
savings derived from his salary as a marketing a tax saving device within the means sanctioned by law,
assistant to a time deposit with AAB Bank. The bank hence legal.
regularly deducted 20% final withholding tax on the Q:Maria Suerte, a Filipino citizen, purchased a lot in
interest income from the time deposit. Alfredo Makati City in 1980 at a price of P1 million. Said
contends that the 20% final tax on the interest property has been leased to MAS Corporation, a
income.con stituted double taxation because his domestic corporation engaged in manufacturing
salary had been already subjected to withholding tax. paper products, owned 99% by Maria Suerte. In
Is Alfredo’s contention correct? Explain your answer. October 2007, EIP Corporation, a real estate
(3%) developer, expressed its desire to buy the Makati
A: No. Double taxation means taxing for the same tax property at its fair market value of P300 million,
period the same thing or activity twice; when it should be payable as follows: (a) P60 million down payment;
taxed but once, for the same purpose and with the same and (b) balance, payable equally in twenty four (24)
kind of character of tax (CIR v. Citytrust Investment Phils., monthly consecutive installments. Upon the advice of
G.R. Nos. 139786, 140857, September 27, 2006). The 20% a tax lawyer, Maria Suerte exchanged her Makati
final tax is imposed on the interest income, while the tax property for shares of stock of MAS Corporation. A
earlier withheld is on the salary or compensation income. BIR ruling, confirming the tax-free exchange of
Thus, though both pertain to income tax, they do not property for shares of stock, was secured from the
pertain to the same thing or activity and consequently, no BIR National Office and a Certificate Authorizing
double taxation exists. Registration was issued by the Revenue District
Officer (RDO) where the property was located.
Q: KM Corporation, doing business in the City of Subsequently, she sold her entire stockholdings in
Kalookan, has been a distributor and retailer of MAS Corporation to EIP Corporation for P300 million.
clothing and household materials. It has been paying In view of the tax advice, Maria Suerte paid only the
the City of Kalookan local taxes based on Sections 15 capital gains tax of P29,895,000 (P100,000x 5% plus
(Tax on Wholesalers, Distributors or Dealers) and 17 P298,900,000 x 10%), instead of the corporate
(Tax on Retailers) of the Revenue Code of Kalookan income tax of P104,650,000 (35% on P299 million
City (Code). Subsequently, the Sangguniang gain from sale of real property). After evaluating the
Panlungsod enacted an ordinance amending the Code capital gains tax payment, the RDO wrote a letter to
by inserting Section 21 which imposes a tax on Maria Suerte, stating that she committed tax evasion.
"Businesses Subject to Excise, Value-Added and
Percentage Taxes under the National Internal Is the contention of the RDO tenable? Or was it tax
Revenue Code (NIRC)," at the rate of 50% of 1 % per avoidance that Maria Suerte had resorted to?
annum on the gross sales and receipts on persons Explain.(2008 Bar)
"who sell goods and services in the course of trade or A: The contention of the RDO is not tenable. Maria Suerte
business." KM Corporation paid the taxes due under resorted to tax avoidance and not tax evasion. Tax
Section 21 under protest, claiming that (a) local avoidance is the use of legal means to reduce tax liability
government units could not impose a tax on and it is the legal right of a taxpayer to decrease the
businesses already taxed under the NIRC and (b) this amount of what otherwise would be his taxes by means
would amount to double taxation, since its business which the law permits. (Heng Tong Textiles Co., Inc. v.
was already taxed under Sections 15 and 17 of the Commissioner). There is nothing illegal about transferring
Code. first the property to a corporation in a tax free exchange
(b) Does this amount to double taxation? (2018 BAR) and later selling the shares obtained in the exchange at a
lower tax than what could have been imposed if the a) The act of tax exemption is an act of taxation which is
property was sold directly. inherently legislative. Therefore, a mere executive
agreement cannot provide for a tax exemption.
Q: Lucky V Corporation (Lucky) owns a 10-storey
building on a 2,000 square meter lot in the City of
Makati. It sold the lot and building to Rainier for P80
million. One month after, Rainier sold the lot and COMPENSATION AND SET-OFF (1990, 1992, 1996,
building to Healthy Smoke Company (HSC) for P200 2001, 2005)
million, Lucky filed its annual return and declared its Q: May taxes be the subject of set-off or
gain from the sale of the lot and building in the compensation? Explain. (2005 Bar)
amount of P750, 000.00.
A: No. Taxes cannot be the subject of set-off or
An investigation conducted by the BIR revealed that compensation for the following reasons: (1) taxes are of
two months prior to the sale of the properties to distinct kind, essence and nature, and these impositions
Rainier, Lucky received P40 million from HSC and not cannot be classed in merely the same category as ordinary
from Rainier. Said amount of P40 million was debited obligations; (2) the applicable laws and principles
by HSC and reflected in its trial balance as “other inv. governing each are peculiar, not necessarily common, to
– Lucky Bldg.” The BIR concluded that there is tax each; and (3) public policy is better subserved if the
evasion since the real buyer of the properties of Lucky integrity and independence of taxes are maintained.
is HSC and not Rainier. It issued an assessment for [Republic v. Mambulao Lumber Company, 4 SCRA 622
deficiency income tax in the amount of P79 million (1962)].
against Lucky. Lucky argues that it resorted to tax
avoidance or a tax saving device, which is allowed by However, if the obligation to pay taxes and the taxpayer’s
the NIRC and BIR rules since it paid the correct taxes claim against the government are both overdue,
based on the sale to Rainier. On the other hand, demandable, as well as fully liquidated, compensation
Rainier and HSC also paid the prescribed taxes arising takes place by operation of law and both obligations are
from the sale by Rainier to HSC. Is the BIR correct in extinguished to their concurrent amounts. [Domingo v.
assessing taxes on Lucky? Explain. (2016 Bar) Garlitos, 8 SCRA 443 (1963)].
A: Yes. The BIR is correct in assessing the taxes on Lucky. Q: Can an assessment for a local tax be the subject of
set-off or compensation against a final judgment for a
There was no tax avoidance, instead there was tax evasion sum of money obtained by the taxpayer against the
on the part of Lucky because of the simulated sale to local government that made the assessment? Explain.
Rainier which had its apparent purpose to reduce the (2005 Bar)
income tax to be paid by Lucky on the sale to HSC.
A: No. Taxes and debts are of different nature and
The sale to Rainier was simulated as evidenced by the fact character; hence, no set-off or compensation between
that two months prior to the sale of the properties to these two different classes of obligations is allowed. The
Rainier, Lucky received P40 million from HSC and not taxes assessed are the obligations of the taxpayer arising
from Rainier. from law, while the money judgment against the
The intermediary transaction (the simulated sale to government is an obligation arising from contract,
Rainier), was prompted more on the mitigation of tax whether express or implied. Inasmuch that taxes are not
liabilities than for legitimate business purpose constitutes debts, it follows that the two obligations are not
one of tax evasion. susceptible to set-off or legal compensation. [Francia v.
Intermediate Appellate Court, 162 SCRA 753 (1988)].
EXEMPTION FROM TAXATION
It is only when the local tax assessment and the final
Constitutional Limitation to the power of Congress in judgment are both overdue, demandable, as well fully
granting tax exemptions (1989, 1992) liquidated may set-off or compensation be allowed.
[Domingo v. Garlitos, 8 SCRA 443 (1963)].
1) The President of the Philippines and the Prime
Minister of Japan entered into an executive TAXPAYER’S SUIT (1990, 1996)
agreement in respect of a loan facility to the
Philippines from Japan whereby it was stipulated Q: When may a taxpayer’s suit be allowed? (1996)
that interest on loans granted by private Japanese A: A taxpayer's suit may only be allowed when an act
financial institutions to private financial complained of, which may include a legislative enactment,
Institutions in the Philippines shall not be subject directly involves the illegal disbursement of public funds
to Philippine income taxes. (1992 Bar) derived from taxation. (Pascual vs. Secretary of Public
Is this tax exemption valid? Explain. Works, 110 Phil. 331)

A: Yes. The tax exemption is valid because an Q: A law imposes a tax of 1/5 of 1% if the export price
executive agreement has the force and effect of a of prawns produced in the Philippines. The law
treaty under the provision of the Revenue Code. provides that the proceeds of the tax shall be turned
Taxation is subject to International Comity. over to the Philippine Prawn Growers Association,
Inc. (PPGA), a non-profit private corporation
ALTERNATIVE ANSWER: registered with the Securities and Exchange
Commission to be used by PPGA exclusively to
undertake activities that promote the growth of the
Philippine prawns industry, such as undertaking
research on how to improve the productivity of
prawn farms in the Philippines, undertaking
marketing activities that will directly further the
growth of the industry.
The members of PPGA constitute 90% of all the Prawn
growers in the country representing 100% of the
country’s prawn exports. JN, a practicing lawyer and
taxpayer, filed a suit with the Supreme Court
questioning the constitutionality of the law on the
ground that the funds raised through taxation will be
used for a private purpose. Will said suit prosper?
Explain. (1990 Bar)
A: No, because Atty. JN is not prejudiced by the law. It is
not his tax money that is being used. In short, he has no
locus standi. Furthermore, assistance to the prawn
industry is for a public purpose because the industry is
one of the pillars of the economy contribution to
employment and foreign exchange (Domondon, Remedies,
pg 815)
POWERS AND FUNCTIONS OF THE COMMISSIONER
OF INTERNAL REVENUE
Power to inquire into bank deposits (1998, 1999,
2000, 2003, 2012)
Q: Can the Commissioner of Internal Revenue inquire
into the bank deposits of a taxpayer? If so, does this
power of the Commissioner conflict with RA 1405
(Secrecy of Bank Deposits Law) (1998 Bar)
A: The Commissioner of Internal Revenue is authorized to
inquire into the bank deposits of:
1. any taxpayer upon his written consent;
2. a decedent to determine his gross estate;
3. any taxpayer who has filed an application for
compromise of his tax liability by means of financial
incapacity to pay his tax liability;
4. A specific taxpayer or taxpayers subject of a request
for the supply of tax information from a foreign tax
authority pursuant to an international convention or
agreement on tax matters to which the Philippines is
a signatory. [Sec. 6(F), NIRC]
The limited power of the Commissioner does not conflict
with R.A. No. 1405 because the provisions of the Tax Code
granting this power is an exception to the Secrecy of Bank
Deposits Law as embodied in a later legislation.
Furthermore, in case a taxpayer applies for an application
to compromise the payment of his tax liabilities on his
claim that his financial position demonstrates a clear
inability to pay the tax assessed, his application shall not
be considered unless and until he waives in writing his
privilege under R.A. No. 1405, and such waiver shall
constitute the authority of the Commissioner to inquire
into the bank deposits of the taxpayer.