Taxation Review 1st Reading Review Proper My Reviewer

7/31/2019 Taxation Review 1st Reading Review Proper My Reviewer

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I. GENERAL PRINCIPLES OF TAXATION

TAXATION, IN GENERAL

1. Why are tax laws construed strictly against the State and liberallyin favor of the State ?

SUGGESTED ANSWER: In case of doubt, tax laws must be construed strictlyagainst the State and liberally in favor of the taxpayer because taxes, as burdens whichmust be endured by the taxpayer, should not be presumed to go beyond what the lawexpressly and clearly declares. (Lincoln Philippine Life Insurance Company, Inc., etc.,v. Court of Appeals, et al., 293 SCRA 92, 99)

2. Why are tax exemptions are strictly construed against thetaxpayer and liberally in favor of the State ?

SUGGESTED ANSWER: Taxes are necessary for the continued existence of theState.

3. Strict interpretation of tax exemption laws. Taxes are whatcivilized people pay for civilized society. They are the lifeblood of the nation. Thus,statutes granting tax exemptions are construed stricissimi juris against the taxpayerand liberally in favor of the taxing authority. A claim of tax exemption must beclearly shown and based on language in law too plain to be mistaken. Otherwisestated, taxation is the rule, exemption is the exception. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing Mactan CebuInternational Airport Authority v. Marcos, G.R. No. 120082, September 11, 1996, 261SCRA 667, 680) The burden of proof rests upon the party claiming the exemption toprove that it is in fact covered by the exemption so claimed. (Quezon City, supraciting Agpalo, R.E., Statutory Construction, 2003 ed., p. 301)

4. Rationale for strict interpretation of tax exemption laws. Thebasis for the rule on strict construction to statutory provisions granting taxexemptions or deductions is to minimize differential treatment and foster impartiality,fairness and equality of treatment among taxpayers. (Quezon City, et al., v. ABS-CBNBroadcasting Corporation, G. R. No. 166408, October 6, 2008) He who claims anexemption from his share of common burden must justify his claim that thelegislature intended to exempt him by unmistakable terms. For exemptions fromtaxation are not favored in law, nor are they presumed. They must be expressed inthe clearest and most unambiguous language and not left to mere implications. Ithas been held that exemptions are never presumed the burden is on the claimant toestablish clearly his right to exemption and cannot be made out of inference orimplications but must be laid beyond reasonable doubt. In other words, sincetaxation is the rule and exemption the exception, the intention to make anexemption ought to be expressed in clear and unambiguous terms. (Quezon City,supra citing Agpalo, R.E., Statutory Construction, 2003 ed., p. 302)

5. What is the effect of a BIR reversal of a previous ruling interpretinga law as exempting a taxpayer ?

SUGGESTED ANSWER: A reversal of a BIR ruling favorable to a taxpayer wouldnot necessarily create a perpetual exemption in his favor, for after all the governmentis never estopped from collecting taxes because of mistakes or errors on the part of its


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agents. (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, etal., 293 SCRA 92, 99)

6. Why is the right to collect taxes imprescriptible ?SUGGESTED ANSWER:a. As a general rule, revenue laws are not intended to be liberally construed,

and exemptions are not given retroactive application, considering that taxes are thelifeblood of the government and in Holmes memorable metaphor, the price we pay forcivilization, tax laws must be faithfully and strictly implemented. (Commissioner ofInternal Revenue v. Acosta, etc.,G. R. No. 154068, August 3, 2007) However, statutesmay provide for prescriptive periods for the collection of particular kinds of taxes.

b. Tax laws, unlike remedial laws, are not to be applied retroactively.Revenue laws are substantive laws and their application must not be equated withremedial laws. (Acosta, supra)

7. It is said that taxes are the lifeblood of the government and anydelay in its collection would impair the rendition of government services.May the collection of taxes be restrained by a court ?

SUGGESTED ANSWER: As a general rule, No court shall have the authority togrant an injunction to restrain the collection of any national internal revenue tax, fee orcharge. (Sec. 218, NIRC)

However, the Court of Tax Appeals is empowered to enjoin the collection of taxesthrough administrative remedies when collection could jeopardize the interest of thegovernment or taxpayer. (Sec. 11, Rep. Act No. 1125)

8. What are the grounds and procedure for suspension of collectionof taxes ?

SUGGESTED ANSWER: Where the collection of the amount of the taxpayersliability, sought by means of a demand for payment, by levy, distraint or sale ofproperty of the taxpayer, or by whatever means, as provided under existing laws, may

jeopardize the interest of the government or the taxpayer, an interested party may filea motion for the suspension of the collection of the tax liability (Sec. 1, Rule 10, RRCTAeffective December 15, 2005) with the Court of Tax Appeals.

The motion for suspension of the collection of the tax may be filed together withthe petition for review or with the answer, or in a separate motion filed by theinterested party at any stage of the proceedings. (Sec. 3, Rule 10, RRCTA effectiveDecember 15, 2005)

9. Explain the sumptuary purpose of taxation.SUGGESTED ANSWER: The sumptuary purpose of taxation is to promote the

general welfare and to protect the health, safety or morals of the inhabitants. It is inthe joint exercise of the power of taxation and police power where regulatory taxes arecollected.

Taxation may be made the implement of the states police power. The motivationbehind many taxation measures is the implementation of police power goals.[Southern Cross Cement Corporation v. Cement Manufacturers Association of thePhilippines, et al., G. R. No. 158540, August 3, 2005 citing Lutz v. Araneta, 98 Phil. 148,152 (1955); in turn citing Great Atl. & Pac. Tea Co. v. Grosjean, 302 U.S. 412; U.S. v.Biutler, 297 U.S. 1; McCulloch v. Maryland, 4 Wheaton 316] The reader should note


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that the August 3, 2005 Southern Cross case is the decision on the motion forreconsideration of the July 8, 2004 Southern Cross decision.

The so-called sin taxes on alcohol and tobacco manufacturers help dissuade theconsumers from excessive intake of these potentially harmful products. (SouthernCross Cement Corporation v. Cement Manufacturers Association of the Philippines, etal., G. R. No. 158540, August 3, 2005)

10. Explain the compensatory purpose of taxation. SUGGESTEDANSWER: The compensatory purpose of taxation is to implement the social justiceprovisions of the constitution through the progressive system of taxation, which wouldresult to equal distribution of wealth, etc.

Progressive income taxes alleviate the margin between rich and poor. (SouthernCross Cement Corporation v. Cement Manufacturers Association of the Philippines, etal., G. R. No. 158540, August 3, 2005)

11. What are the distinctions between a tax and a license fee ?SUGGESTED ANSWER: The following are the distinctions between a tax and a

license fee:

a. PURPOSE: A tax is imposed for revenue purposes WHILE a license fee isimposed for regulatory purposes. (Unless it is a joint exercise of both the police powerand the power of taxation)

b. BASIS: A tax is imposed under the power of taxation WHILE a license feeis imposed under police power.

c. AMOUNT: There is no limit as to the amount of a tax WHILE the amountof license fee that could be collected is limited to the cost of the license and theexpenses of police surveillance and regulation.

d. TIME OF PAYMENT: Taxes are normally paid after the start of a businessWHILE a license fee before the commencement of business.

e. EFFECT OF NON-PAYMENT: Failure to pay a tax does not make thebusiness illegal WHILE failure to pay a license fee makes the business illegal.

f. SURRENDER: Taxes being the lifeblood of the state, cannot besurrendered except for lawful consideration WHILE a license fee may be surrenderedwith or without consideration.

12. Distinguish taxation from police power.SUGGESTED ANSSWER: Taxation is distinguishable from police power as to the

means employed to implement these public goals. Those doctrines that are unique totaxation arose from peculiar considerations such as those especially punitive effects(Southern Cross Cement Corporation v. Cement Manufacturers Association of thePhilippines, et al., G. R. No. 158540, August 3, 2005 citing U. S. Chief Marshall whoonce said, the power to tax involves the power to destroy, McCulloch v. Maryland, 4Wheaton 316, cited in Sison v. Ancheta, G. R. No. L 59431, July 25, 130 SCRA 654)and the belief that taxes are lifeblood of the state. (Southern Cross CementCorporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No.158540, August 3, 2005 citing [T]axes being the lifeblood of the government, theirprompt and certain availability is of the essence. Sison v. Ancheta, id., citing Vera v.Fernandez, G. R. No. L-31364, March 30, 1979, 89 SCRA 199]

These considerations necessitated the evolution of taxation as a distinct legalconcept from police power. (Southern Cross Cement Corporation, supra)


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If the question asks for an enumeration of the distinctions between the power oftaxation and police power, the candidate should reformulate no. 17 above.

13. What is the purpose of the Sugar Adjustment Act ?SUGGESTED ANSWER: The Sugar Adjustment Act which increased existing taxes

on sugar was enacted to stabilize the sugar industry to prepare it for the loss of its

quota in the U.S. market was levied for a regulatory purpose to protect and promotethe sugar industry which is also for a public purpose. (Lutz v. Araneta, 98 Phil. 148)

The Philsugin fund, an imposition on sugar, to raise funds to conduct research forthe improvement of the sugar industry, is for the purpose of stabilizing the sugarindustry which one of the pillars of the Philippine economy which affects the welfare ofthe State. The levy is not so much an exercise of the power of taxation, nor theimposition of a special levy, but the exercise of police power which is for the generalwelfare of the entire country, therefore for a public purpose. (Republic v. Bacolod-Murcia Co., et al., G.R. No. L-19824, July 9, 1966)

14. Section 40 (g) of the Public Service Act authorizes the collectionof x x x fees as reimbursement of its expenses in the authorization,supervision and/or regulation of the public services: x x x g) For each permit,authorizing the increase in equipment, the installation of new units orauthorizing the increase of capacity, or the extension of means or generalextensions in the services, twenty centavos for each one hundred pesos orfraction of the additional capital necessary to carry out the permit.(paraphrasing supplied)

Is the imposition a tax measure ? Explain.SUGGESTED ANSWER: No. It is not a tax measure but a simple regulatory

provision for the collection of fees imposed pursuant to the exercise of the Statespolice power. A tax is imposed under the taxing power of government principally forthe purpose of raising revenues. The law in question, however, merely authorizes andrequires the collection of fees for the reimbursement of the Commissions expenses inthe authorization, supervision and/or regulation of public services. (Republic, etc., v.International Communications Corporation (ICC), G. R. No. 141667, July 17, 2006)

15. How may the power of taxation also be used to implement powerof eminent domain?

SUGGESTED ANSWER: Tax measures are but enforced contributions exacted onpain of penal sanctions and clearly imposed for public purpose. In most recentyears, the power to tax has indeed become a most effective tool to realize social

justice, public welfare, and the equitable distribution of wealth. (Commissioner ofInternal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005)

Establishments granting the 20% senior citizens discount may claim thediscounts granted to senior citizens as tax deduction based on the net cost of thegoods sold or services rendered: Provided, That the cost of the discount shall beallowed as deduction from gross income for the same taxable year that the discountis granted. Provided, further,That the total amount of the claimed tax deduction netof value added tax if applicable, shall be included in their gross sales receipts for taxpurposes and shall be subject to proper documentation and to the provisions of theNational Internal Revenue Code, as amended. [M.E. Holding Corporation v. Court of

Appeals, et al., G.R. No. 160193, March 3, 2008 citing Expanded Senior Citizens Act of2003, Sec. 4 (a)]


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16. What is purpose for the limitations on the power of taxation ?SUGGESTED ANSWER: The inherent and constitutional limitations to the power

of taxation are safeguards which would prevent abuse in the exercise of thisotherwise unlimited and plenary power.

The limitations also serve as a standard to measure the validity of a tax law or the

act of a taxing authority. A violation of the limitations serves to invalidate a tax law oract in the exercise of the power to tax.

INHERENT LIMITATIONS

1. What are the inherent limitations on the power oftaxation ?

SUGGESTED ANSWER: The inherent limitations area. Public purpose. The revenues collected from taxation should be devoted

to a public purpose.b. No improper delegation of legislative authority to tax. Only the

legislature can exercise the power of taxes unless the same is delegated to some othergovernmental body by the constitution or through a law which does not violate anyprovision of the constitution.

c. Territoriality. The taxing power should be exercised only within territorialboundaries of the taxing authority.

d. Recognition of government exemptions; ande. Observance of the principle of comity. Comity is the respect accorded by

nations to each other because they are equals. On the other hand taxation is an act ofsovereign. Thus, the power should be imposed upon equals out of respect.

Some authorities include no double taxation.

2. When are taxes considered as being for a public purpose ?SUGGESTED ANSWER: The tax revenues are for a public purpose if utilized for

the benefit of the community in general. An alternative meaning is that tax proceedsshould be utilized only to attain the objectives of government.

Public use is no longer confined to the traditional notion of use by the public butheld synonymous with public interest, public benefit, public welfare, and publicconvenience. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation,G.R. No. 159647, April 16, 2005)

3. Define a taxpayers suit.SUGGESTED ANSWER: Taxpayers suit is a case where the act complained of

directly involves the illegal disbursement of public funds derived from taxation. (JusticeMelo, dissenting in Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110)

4. What is locus standi ?SUGGESTED ANSWER: Locus standi is a right of appearance in a court of justice

on a given question. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)It is a partys personal and substantial interest in the case, such that the party has

sustained or will sustain (Ibid.)direct injury as a result of the government act beingchallenged. It calls for more than just a generalized grievance.

A party need not be a party to the contract to challenge its validity. (Ibid.)


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5. What is meant by the term material interest ? SUGGESTEDANSWER: The term interest means a material interest, an interest in issueaffected by the decree, as distinguished from mere interest in the question involved, ora mere incidental interest. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)

6. What is the rationale for locus standi?

SUGGESTED ANSWER: The rationale for requiring a party who challenges theconstitutionality of a statute to allege such a personal stake in the outcome of thecontroversy is to ensure that a concrete adverseness which sharpens the presentationof issues upon which the court so largely depends for illumination of differentconstitutional questions. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)

7. When may locus standibe brushed aside ?SUGGESTED ANSWER: In cases of paramount importance where serious

constitutional questions are involved, the standing requirements may be relaxed and asuit may be allowed to prosper even where there is no direct injury to the partyclaiming the right of judicial review. [Coconut Oil Refiners Association, Inc., etc., et al.,vs. Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Bayan (Bagong Alyansang

Makabayan) v. Zamora, G. R. No. 138570, October 10, 2000, 342 SCRA 449, in turnciting Kilosbayan, Inc. v. Guingona, Jr., G. R. No. 113375, May 5, 1994, 232 SCRA 110]

8. What are the requirements that must be met beforetaxpayers, concerned citizens and legislators may be accorded standing tosue ?

SUGGESTED ANSWER:a. The case should involve constitutional issues;b. For taxpayers, there must be a claim of illegal disbursement of public

funds or that the tax measure is unconstitutional.c. For voters, there must be a showing of obvious interest in the validity of

the election law in question.d. For concerned citizens, there must be a showing that the issues raised

are of transcendental importance which must be settled early.e. For legislators, there must be a claim that the official action complained

of infringes upon their prerogatives as legislators. (David, et al., v. President GloriaMacapagal-Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)

9. What are the requisites for challenging constitutionality oflaw including a tax law ?

SUGGESTED ANSWER: The party bringing suit must show not only that thelaw or act is invalid, but also that he has sustained or is in immediate, or imminentdanger of sustaining some direct injury as a result of its enforcement and not merely

that he suffers thereby in some indefinite way. (Soriano III v. Lista, et al., G. R. No.153881, March 24, 2003)

10. Locus standi being merely a matter of procedure, have beenwaived in certain instances where a party who is not personally injured maybe allowed to bring suit. Give some examples.

SUGGESTED ANSWER: The following are examples of instances where suits havebeen brought by parties who have not have been personally injured by the operation of


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a law or any other government act but by concerned citizens, taxpayers or voters whoactually sue in the public interest:

a. Taxpayers suits to question contracts entered into by the nationalgovernment or government-owned or controlled corporations allegedly incontravention of the law.

b. A taxpayer is allowed to sue where there is a claim that public funds are

illegally disbursed, or that public money is being deflected to any improper purpose, orthat there is a wastage of public funds through the enforcement of an invalid orunconstitutional law. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)

11. The petitioners impugn the validity of the establishment of taxand duty-free shops within the Subic Special Economic Zone (SSEZ) and theremoval of consumer goods and items from the zones without payment ofcorresponding duties and taxes for the reason that this constitute executivelegislation in violation of the rule on separation of powers, that only rawmaterial, capital and equipment should be allowed the privilege. Rule onthe objections and reason out your answer briefly.

SUGGESTED ANSWER: The objections should not be given credence. It is legal

to setup duly authorized duty-free shops in the SSEZ to sell tax and duty-free consumeritems in the Secured Area. This is in line with the policy enunciated in the law that theSubic Special Economic Zone shall be developed into a self-sustaining, industrial,commercial, financial and investment center to generate employment opportunities inand around the zone and to attract and promote productive foreign investments.

While it is true that Section 12 (b) of Rep. Act No. 7227 mentions only rawmaterials, capital and equipment, this does not necessarily mean that the tax and dutyfree buying privilege is limited to these types of articles to the exclusion of consumergoods.

It must be remembered that in construing statutes, the proper course is to startout and follow the true intent of the Legislature and to adopt that sense whichharmonizes best with the context and promotes to the fullest manner the policy andobjects of the Legislature.

The concept of inclusio unius est exclusio alterius does not find applicationbecause the phrase tax and duty-free importations of raw materials, capital andequipment was merely cited as an example of incentives that the SSEZ is authorizedto grant, in line with its being a free port zone. Thus, the legislative intent is thatconsumer goods entering the SSEZ which satisfy the needs of the zone and areconsumed there are not subject to duties and taxes in accordance with Philippine law.(Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No.132527, July 29, 2005)

` Would your answer be the same if a Presidential Proclamation allowedfor the limited withdrawal from the Clark Special Economic Zone or the John

Hay Economic Zone of consumer goods tax and duty-free ?SUGGESTED ANSWER: The answer would not be the same. This time the

Presidential Proclamation would be invalid as the statutory tax exempt privilege wasgranted only to the Subic Special Economic Zone and not to John Hay or Clark. This isso because the Constitution mandates that no law granting tax exemption shall bepassed without the concurrence of a majority of all the members of Congress.(Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No.132527, July 29, 2005 citingJohn Hay Peoples Alternative Coalition, et al., v. Lim, etc.,et al., G.R. No. 119775, October 24, 2003, 414 SCRA 356)


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Furthermore, the law is very clear that the exportation or removal of goodsfrom the territory of the Subic Special Economic Zone to other parts of the Philippineterritory shall be subject to customs duties and taxes under the Customs and TariffCode and other relevant tax laws of the Philippines. (Ibid.)

11-A. Nature of actual case or controversy. An actual case or

controversy involves a conflict of legal rights, an assertion of opposite legal claimssusceptible of judicial adjudication. (ABAKADA Guro Party List, etc., v. Purisima, etc.,et al., G. R. No. 166715, August 14, 2008 citing Cruz, Isagani, PHILIPPINECONSTITUTIONAL LAW, 1995 edition, p. 23)

11-B. Criteria of being ripe for judicial determination. A closely relatedrequirement is ripeness, that is, the question must be ripe for adjudication. And aconstitutional question is ripe for adjudication when the governmental act beingchallenged has a direct adverse effect on the individual challenging it. (ABAKADAGuro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing

Bernas, Joaquin, THE 1987 CONSTITUTION OF THE REPUBLIC OF THEPHILIPPINES: A COMMENTARY, 1996 edition, pp. 848-849) Thus, to be ripe for judicial

adjudication, the petitioner must show a personal stake in the outcome of the case oran injury to himself that can be redressed by a favorable decision of the Court.[ABAKADA Guro Party List, etc., supra, v. Purisima, etc., citing Cruz v. Secretary ofEnvironment and Natural Resources, 400 Phil. 904 (2000), Vitug, J., separate opinion]

11-C. Personal injury must be shown for judicial controversy to be ripefor judicial determination. In this case, aside from the general claim that thedispute has ripened into a judicial controversy by the mere enactment of the laweven without any further overt act. (ABAKADA Guro Party List, etc., v. Purisima, etc.,et al., G. R. No. 166715, August 14, 2008 citing La Bugal-BLaan Tribal Association,Inc. v. Ramos, G.R. No. 127882, 01 December 2004, 445 SCRA 1)

Thus, where petitioners fail either to assert any specific and concrete legal claimor to demonstrate any direct adverse effect of the law on them or are unable to showa personal stake in the outcome of this case or an injury to themselves their petitionis procedurally infirm. (ABAKADA Guro Party List, etc., supra)

11-D. Constitutionality of law is exception to the doctrine of ripe forjudicial determination. This notwithstanding, public interest requires theresolution of the constitutional issues raised by petitioners. The grave nature of theirallegations tends to cast a cloud on the presumption of constitutionality in favor ofthe law. And where an action of the legislative branch is alleged to have infringed theConstitution, it becomes not only the right but in fact the duty of the judiciary tosettle the dispute. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No.166715, August 14, 2008 citing Taada v. Angara, 338 Phil. 546 (1997)]

12. The VAT law provides that, the President, upon therecommendation of the Secretary of Finance, shall, effective January 1, 2006,raise the rate of value-added tax to twelve percent (12%) after any of thefollowing conditions have been satisfied. (i) value-added tax collection as apercentage of Gross Domestic Product (GDP) of the previous year exceedstwo and four-fifth percent (2 4/5%) or (ii) national government deficit as a


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percentage of GDP of the previous year exceeds one and one-half percent (1%).

Was there an invalid delegation of legislative power ?SUGGESTED ANSWER: No. There is no undue delegation of legislative power

but only of the discretion as to the execution of the law. This is constitutionallypermissible.

Congress does not abdicate its functions or unduly delegate power when itdescribes what job must be done, who must do it, and what is the scope of hisauthority. In the above case the Secretary of Finance becomes merely the agent of thelegislative department, to determine and declare the even upon which its expressedwill takes place. The President cannot set aside the findings of the Secretary ofFinance, who is not under the conditions acting as the execute alter ego orsubordinate. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056,September 1, 2005 and companion cases citing various cases]]

13. The power to tax should be exercised only within the territorialboundaries of the taxing authority. In theory, it is only within a states territorialboundaries that a state could give protection, hence it is only within that territory that

it could demand support in the form of taxes.

14. Situs of taxation is the place or the authority that has the powerto collect taxes. It is premised upon the symbiotic relation between the taxpayer andthe State.

15. The place that gives protection is the place that has the right todemand that it be supported in the form of taxes so it could continually giveprotection.

16. The situs of real property taxes is the place where the property islocated because it is that place that gives protection. The applicable conceptis lex situs or lex rei sitae.

17. The situs of taxation of tangible personal property is the placewhere the owner is located because it is that place that gives protection to theowner which protection extends to the tangible personal property. The applicableconcept is mobilia sequuntur personam.

18. Intangible personal property may have obtained a business situsin a particular place even if located elsewhere. Thus, the dividends earned fromdomestic corporations are considered as income from within, irrespective where theshares of stock of such domestic corporation is located.

19. The situs of income taxation is determined by the nationality,residence of the taxpayer and source of income. Please refer to generalprinciples of income taxation under income taxation.

20. The situs of excise taxes is the place where the privilege isexercised because it is that place that gives protection.


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21. The situs of transfer taxes, such as estate and donors taxes, isdetermined by the nationality and residence of the taxpayer and the placewhere the property is located. Please refer to estate and donors taxes.

22. Juliane a non-resident alien appointed as a commission agent bya domestic corporation with a sales commission of 10% all sales actually

concluded and collected through her efforts. The local company withheld theamount of P107,000 from her sales commission and remitted the same to theBIR.

She filed a claim for refund alleging that her sales commission is nottaxable because the same was a compensation for her services rendered inGermany and therefore considered as income from sources outside thePhilippines.

Is her contention correct ?SUGGESTED ANSWER: Yes. The important factor which determines the source of

income of personal services is not the residence of the payor, or the place where thecontract for service is entered into, or the place of payment, but the place where theservices were actually performed.

Since the activity of securing the sales were in Germany, then the income did notoriginate from sources from within the Philippines. (Commissioner of Internal Revenuev. Baier-Nickel, G. R. No. 153793, August 29, 2006)

NOTE AND COMMENTS: In the above case, the Supreme Court reiterated the rulethat source of income relates to the property, activity or service that produced theincome. With respect to rendition of labor or personal service, it is the place where thelabor or service was performed that determines the source of the income.

The above Baier-Nickel case discussed the import of the landmark cases (Howdenand BOAC) involving sources of income for tax purposes both of which may bedangerous for Bar purposes:

23. A domestic insurance company decided to reinsure with a foreignreinsurer the risks it has undertaken with its local clients. The foreignreinsurer does not have an office, neither does it do business in thePhilippines. Are the reinsurance premiums subject to Philippine incometaxation ?

SUGGESTED ANSWER: Yes because the undertaking of the foreign insurancecompany to indemnify the local insurance company is the activity that produced theincome.

The reinsurance premiums remitted to the foreign reinsurer had for their sourcethe undertaking to indemnify the local insurer against liability. Said undertaking is theactivity that produced there insurance premiums, and the same took place in thePhilippines. The reinsured, the liabilities insured and the risk originally undertaken bythe local insurance company, upon which the reinsurance premiums and indemnitywere based, were all situated in the Philippines. (Alexander Howden & Co., Ltd. v.Collector of Internal Revenue, 121 Phil. 579; 13 SCRA 601 (1965) cited in Baier-Nickel)

24. BOAC, a foreign airline company which does not maintainany flight to and from the Philippines sold air tickets in the Philippines,through a general sales agent, relating to the carriage of passengers andcargo between two points, both outside the Philippines.

Is BOAC subject to income taxes on the sale of the tickets ?


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SUGGESTED ANSWER: Yes. The source of income which is taxable is thatactivity which produced the income. The sale of tickets in the Philippines is theactivity that determines whether such income is taxable in the Philippines.

The tickets exchanged hands here and payments for fares were also made here inPhilippine currency. The situs of the source of payments is the Philippines. the flow ofwealth proceeded from and occurred, within the Philippine territory, enjoying the

protection accorded by the Philippine Government. In consideration of such protection,the flow of wealth should share the burden of supporting the government.(Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC),149 SCRA 395 cited in Bauer-Nickel)

NOTES AND COMMENTS: The concept of imposition of the gross Philippine billingsthat taxes only flights that originate from the Philippines apply only to resident foreigncorporations doing business in the Philippines [Sec. 28 (A) (3) (a), NIRC of 1997] ANDNOT TO incomes of non-resident foreign corporations that are taxed on the grossincome. [Sec. 28 (B) (1)]

25. No improper delegation of legislative authority to tax. Thepower to tax is inherent in the State, such power being inherently legislative, based

on the principle that taxes are a grant of the people who are taxed, and the grantmust be made by the immediate representatives of the people; and where the peoplehave laid the power, there it must remain and be exercised. (Commissioner ofInternal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008citing COOLEY TAXATION, 3rd Ed., p. 43 cited in DIMAAMPAO, TAX PRINCIPLE ANDREMEDIES, p. 13)

26. Instances where the national revenue officers had ventured inthe area of unauthorized administrative legislation.

a. By adding the qualification that the tax due after the 12% increasebecomes effective shall not be lower than the tax actually paid prior to 1 January2000, Revenue Regulation No. 17-99 effectively imposes a tax which is the higheramount between the ad valorem tax being paid at the end of the three (3)-yeartransition period and the specific tax under paragraph C, sub-paragraph (1)-(4), asincreased by 12%a situation not supported by the plain wording of Section 145 ofthe Tax Code. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G.R. Nos. 167274-75, July 21, 2008)

b. Respondent was not informed in writing of the law and the facts onwhich the assessment of estate taxes was made pursuant to Section 228 of the 1997

Tax Code, as amended by Republic Act (R.A.) No. 8424. She was merely notified ofthe findings by the Commissioner, who had simply relied upon the old provisions ofthe law and Revenue Regulation No. 12-85 which was based on the old provision ofthe law. The Court held that in case of discrepancy between the law as amended andthe implementing regulation based on the old law, the former necessarily prevails.

The law must still be followed, even though the existing tax regulation at that timeprovided for a different procedure. (Ibid., Commissioner of Internal Revenue v. Reyes,G.R. No. 159694, 27 January 2006, 480 SCRA 382 in turn citing Philippine PetroleumCorp. v. Municipality of Pililla, Rizal, 198 SCRA 82, 88, 3 June 1991, likewise citingShell Philippines, Inc. v. Central Bank of the Philippines, 162 SCRA 628, 634, 27 June1988)

c. The tax authorities gave the term tax credit in Sections 2(i) and 4 ofRevenue Regulation 2-94 a meaning utterly disparate from what R.A. No. 7432


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provides. Their interpretation muddled up the intent of Congress to grant a merediscount privilege and not a sales discount. The Court, striking down the revenueregulation, held that an administrative agency issuing regulations may not enlarge,alter or restrict the provisions of the law it administers, and it cannot engraftadditional requirements not contemplated by the legislature. (Ibid.,Commissioner ofInternal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, 15 April 2005,

456 SCRA 414)d. Commissioner Jose Ong issued Revenue Memorandum Order (RMO) No.

15-91, as well as the clarificatory Revenue Memorandum Circular (RMC) 43-91,imposing a 5% lending investors tax under the 1977 Tax Code, as amended byExecutive Order (E.O.) No. 273, on pawnshops. The Commissioner anchored theimposition on the definition of lending investors provided in the 1977 Tax Code which,according to him, was broad enough to include pawnshop operators. However, theCourt noted that pawnshops and lending investors were subjected to different taxtreatments under the Tax Code prior to its amendment by the executive order; thatCongress never intended to treat pawnshops in the same way as lending investors;and that the particularly involved section of the Tax Code explicitly subjected lendinginvestors and dealers in securities only to percentage tax. And so the Court affirmed

the invalidity of the challenged circulars, stressing that administrative issuancesmust not override, supplant or modify the law, but must remain consistent with thelaw they intend to carry out. (Ibid., citing Commissioner of Internal Revenue v.Michel J. Lhuillier Pawnshop, Inc., 453 Phil. 1043 (2003), at 1052 in turn citingCommissioner of Internal Revenue v. Court of Appeals, G.R. No. 108358, 20 January1995, 240 SCRA 368, 372; Romulo, Mabanta, Buenaventura, Sayoc & De los Angelesv. Home Development Mutual Fund, G.R. No. 131082, 19 June 2000; 333 SCRA 777,786)

e. The then acting Commissioner issued RMC 7-85, changing theprescriptive period of two years to ten years for claims of excess quarterly income taxpayments, thereby creating a clear inconsistency with the provision of Section 230 ofthe 1977 Tax Code. The Court nullified the circular, ruling that the BIR did not simplyinterpret the law; rather it legislated guidelines contrary to the statute passed byCongress. [Ibid., Philippine Bank of Communications v. Commissioner of InternalRevenue, 361 Phil. 916 (1999)]

f. The Supreme Court ruled as invalid RMO 4-87 which had construed theamnesty coverage under E.O. No. 41 (1986) to include only assessments issued bythe BIR after the promulgation of the executive order on 22 August 1986 and notassessments made to that date. The Supreme Court resolved in the negative. [Ibid.,Commissioner of Internal Revenue v. CA, et al., 310 Phil. 392 (1995)]

27. The rule-making power must be confined to details forregulating the mode or proceedings in order to carry into effect the law asit has been enacted.

a. It cannot be extended to amend or expand the statutory requirementsor to embrace matters not covered by the statute. [Commissioner of InternalRevenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citingLandbank of the Philippines v. Court of Appeals, 327 Phil. 1047, 1052 (1996)] Anadministrative agency issuing regulations may not enlarge, alter or restrict theprovisions of the law it administers, and it cannot engraft additional requirements notcontemplated by the legislature. (Ibid., Commissioner of Internal Revenue v. CentralLuzon Drug Corporation, G.R. No. 159647, 15 April 2005, 456 SCRA 414)


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The plain meaning rule or verba legis in statutory construction should beapplied such that where the words of a statute are clear, plain and free fromambiguity, it must be given its literal meaning and applied without attemptedinterpretation. (Ibid.)

b. Administrative regulations must always be in harmony with theprovisions of the law because any resulting discrepancy between the two will always

be resolved in favor of the basic law. [Commissioner of Internal Revenue v. FortuneTobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing Landbank of thePhilippines v. Court of Appeals, 327 Phil. 1047, 1052 (1996)]

CONSTITUTIONAL LIMITATIONS

1. What are the constitutional limitations on the power of taxation ?SUGGESTED ANSWER:The general or indirect constitutional limitations as well as

the specific or direct constitutional limitations.

2. What are the general or indirect constitutional limitations on thepower of taxation ?

SUGGESTED ANSWER: The general or indirect constitutional limitations are thefollowing:

a. Due process clause;b. Equal protection clause;c. Freedom of the press;d. Religious freedom;e. No taking of private property without just compensation;f. Non-impairment clause;g. Law-making process:

1) Bill should embrace only one subject expressed in the title thereof;2) Three (3) readings on three separate days;3) Printed copies in final form distributed three (3) days before passage.

h. Presidential power to grant reprieves, commutations and pardons andremittal of fines and forfeiture after conviction by final judgment.

3. What are the specific or direct constitutional limitation ?SUGGESTED ANSWER:a. No imprisonment for non-payment of a poll tax;b. Taxation shall be uniform and equitable;c. Congress shall evolve a progressive system of taxation;d. All appropriation, revenue or tariff bills shall originate exclusively in the

House of Representatives, but the Senate may propose and concur with amendments;e. 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 towhich he does not object;f. Delegated power of the President to impose tariff rates, import and export

quotas, tonnage and wharfage dues:1) Delegation by Congress2) through a law3) subject to Congressional limits and restrictions4) within the framework of national development program.


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g. Tax exemption of charitable institutions, churches, parsonages andconvents appurtenant thereto, mosques, and all lands, buildings and improvements ofall kinds actually, directly and exclusively used for religious, charitable or educationalpurposes;

h. No tax exemption without the concurrence of majority vote of allmembers of Congress;

i. No use of public money or property for religious purposes except if priestis assigned to the armed forces, penal institutions, government orphanage orleprosarium;

j. Money collected on tax levied for a special purpose to be used only forsuch purpose, balance if any, to general funds;

k. The Supreme Court's power to review judgments or orders of lower courtsin all cases involving the legality of any tax, impose, assessment or toll or the legalityof any penalty imposed in relation to the above;

l. Authority of local government units to create their own sources ofrevenue, to levy taxes, fees and other charges subject to guidelines and limitationsimposed by Congress consistent with the basic policy of local autonomy;

m. Automatic release of local government's just share in national taxes;

n. Tax exemption of all revenues and assets of non-stock, non-profiteducational institutions used actually, directly and exclusively for educationalpurposes;

o. Tax exemption of all revenues and assets of proprietary or cooperativeeducational institutions subject to limitations provided by law including restrictions ondividends and provisions for reinvestment of profits;

p. Tax exemption of grants, endowments, donations or contributions usedactually, directly and exclusively for educational purposes subject to conditionsprescribed by law.

3-A. No denial of due process when the respondent is given theopportunity to file affidavits and other pleadings during the preliminaryinvestigation. A respondent cannot claim denial of due process when she wasgiven the opportunity to file her affidavits and other pleadings and submit evidencebefore the DOJ during the preliminary investigation of her case and before theInformation was filed against her.

Due process is merely an opportunity to be heard. In addition, preliminaryinvestigation conducted by the DOJ is merely inquisitorial. It is not a trial of the caseon the merits. Its sole purpose is to determine whether a crime has been committedand whether the respondent therein is probably guilty of the crime. It is not theoccasion for the full and exhaustive display of the parties evidence. Hence, if theinvestigating prosecutor is already satisfied that he can reasonably determine theexistence of probable cause based on the parties evidence thus presented, he mayterminate the proceedings and resolve the case. (Santos v. People, et al, G. R. No.173176, August 26, 2008 citing De Ocampo v. Secretary of Justice, G.R. No. G.R. No.147932, 25 January 2006, 480 SCRA 71, 81-82)

4. Equal protection of the law clause is subject to reasonableclassification. If the groupings are characterized by substantial distinctions thatmake real differences, one class may be treated and regulated differently fromanother. The classification must also be germane to the purpose of the law and must


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apply to all those belonging to the same class. (Tiu, et al., v. Court of Appeals, et al.,G.R. No. 127410, January 20, 1999)

4-A. The equal protection of the laws clause of the Constitutionallows classification. Classification in law, as in the other departments ofknowledge or practice, is the grouping of things in speculation or practice because

they agree with one another in certain particulars. A law is not invalid because ofsimple inequality. The very idea of classification is that of inequality, so that it goeswithout saying that the mere fact of inequality in no manner determines the matter ofconstitutionality.

All that is required of a valid classification is that it be reasonable, which meansthat the classification should be based on substantial distinctions which make for realdifferences, that it must be germane to the purpose of the law; that it must not belimited to existing conditions only; and that it must apply equally to each member ofthe class. This Court has held that the standard is satisfied if the classification ordistinction is based on a reasonable foundation or rational basis and is not palpablyarbitrary. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715,August 14, 2008]

4-B. State has discretion to make the classification. In the exercise ofits power to make classifications for the purpose of enacting laws over matters withinits jurisdiction, the state is recognized as enjoying a wide range of discretion. It is notnecessary that the classification be based on scientific or marked differences ofthings or in their relation. Neither is it necessary that the classification be made withmathematical nicety. Hence, legislative classification may in many cases properly reston narrow distinctions, for the equal protection guaranty does not preclude thelegislature from recognizing degrees of evil or harm, and legislation is addressed toevils as they may appear. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G.R. No. 166715, August 14, 2008]

4-C. Equal protection does not demand absolute equality. The equalprotection clause exists to prevent undue favor or privilege. It is intended to eliminatediscrimination and oppression based on inequality. Recognizing the existence of realdifferences among men, the equal protection clause does not demand absoluteequality. It merely requires that all persons shall be treated alike, under likecircumstances and conditions, both as to the privileges conferred and liabilitiesenforced. (Santos v. People, et al, G. R. No. 173176, August 26, 2008 citing Himaganv. People, G.R. No. 113811, 7 October 1994, 237 SCRA 538, 551.

It is imperative to duly establish that the one invoking equal protection andthe person to which she is being compared were indeed similarly situated, i.e., thatthey committed identical acts for which they were charged with the violation of thesame provisions of the NIRC; and that they presented similar arguments and evidencein their defense - yet, they were treated differently. (Santos, supra)

5. What are the requisites for the validity of a classification ?SUGGESTED ANSWER: Classification, to be valid, must(a) rest on substantial distinctions,(b) be germane to the purpose of the law,(c) not be limited to existing conditions only, and


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(d) apply equally to all members of the same class. (Tiu, et al., v. Court ofAppeals, et al., G.R. No. 127410, January 20, 1999)

6. The law grant of tax and duty-free status under Rep. ActNo. 7227, to retailers inside the SSEZ without granting the same to thoseoutside the SSEZ. Is there a violation of the equal protection clause ?

SUGGESTED ANSWER: There is no violation of equal protection because thereexists a valid classification as shown below:

a. Significant distinctions exist between the two groups. Those outside ofthe SSEZ maintain their business within Philippine customs territory while those withinthe SSEZ operate within the so-called separate customs territory. To grant the sameprivileges would clearly defeat the statues intent to carve a territory out of the militaryreservations in Subic Bay where free flow of goods and capital is maintained.

b. The classification is germane to the purpose of Rep. Act No. 7227. Asheld in Tiu, the real concern of the law is to convert the lands formerly occupied by theUS military bases into economic or industrial areas. In furtherance of such objective,Congress deemed it necessary to extend economic incentives, in terms of a completepackage of tax incentives and other benefits, to the establishments within the zone toattract and encourage foreign and local investors.

c. The classification is not limited to the existing conditions when the lawwas promulgated but to future conditions as well, inasmuch as the law envisioned theformer military reservation to ultimately develop into a self-sustaining investmentcenter.

d. The classification applies equally to all retailers found within the securedarea. As ruled in Tiu, the individuals and businesses within the secured area, beingin like circumstances or contributing directly to the achievement of the end purposes ofthe law, are not categorized further. They are all similarly treated, both in privilegesgranted and in obligations required. (Coconut Oil Refiners Association, Inc., etc., et al.,v. Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Tiu, et al., v. Court of

Appeals, et al., G.R. No. 127410,January 20, 1999, 301 SCRA 278)

7. Is the statutory grant of tax and duty-free importation intothe Subic Special Economic Zone violative the preferential use concept ofthe Constitution ?

SUGGESTED ANSWER: No. The mere fact that the law authorizes the importationand trade of foreign goods does not suffice to declare it unconstitutional on thisground.

While the Constitution does not encourage the unlimited entry of foreign goods,services and investments into the country, it does not prohibit them either. In fact, itallows an exchange on the basis of equality and reciprocity, frowning only in foreigncompetition that is unfair. (Coconut Oil Refiners Association, Inc., etc., et al., v. Torres,

etc., et al., G. R. No. 132527, July 29, 2005 citing Tanada v. Angara, G. R. No. 118295,May 2, 1997, 272 SCRA 18)

8. Equality and uniformity of taxation may mean the same as equalprotection. In such a case, the terms would mean that all subjects and objects oftaxation which are similarly situated shall be subject to the same burdens and grantedthe same privileges without any discrimination whatsoever.


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9. Uniformity may have a restrictive meaning different fromequality and equal protection. It would mean then that the same rate shall beimposed for the same subjects and objects within the territorial boundaries of a taxingauthority.

10. It is inherent in the power to tax that the State be free to select

the subjects of taxation, and it has been repeatedly held that, "inequalities whichresult from a singling out of one particular class of taxation, or exemption, infringe noconstitutional limitation." (Commissioner of Internal Revenue, et al., v. Santos, et al.,277 SCRA 617)

10-A. The law providing financial rewards to tax collectors isconstitutional. Public service is its own reward. Nevertheless, public officers may bylaw be rewarded for exemplary and exceptional performance. A system of incentivesfor exceeding the set expectations of a public office is not anathema to the concept ofpublic accountability. In fact, it recognizes and reinforces dedication to duty, industry,efficiency and loyalty to public service of deserving government personnel.

The U.S. Supreme Court validated a law which awards to officers of the customs

as well as other parties an amount not exceeding one-half of the net proceeds offorfeitures in violation of the laws against smuggling. [ABAKADA Guro Party List, etc.,v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing United States v.Matthews, 173 U.S. 381 (1899)]

The offer of a portion of such penalties to the collectors is to stimulate andreward their zeal and industry in detecting fraudulent attempts to evade payment ofduties and taxes. [ABAKADA Guro Party List, etc., supra citing Dorsheimer v. UnitedStates, 74 U.S. 166 (1868)]

In the same vein, employees of the BIR and the BOC may by law be entitled to areward when, as a consequence of their zeal in the enforcement of tax and customslaws, they exceed their revenue targets. Public service is its own reward.Nevertheless, public officers may by law be rewarded for exemplary and exceptionalperformance. A system of incentives for exceeding the set expectations of a publicoffice is not anathema to the concept of public accountability. In fact, it recognizesand reinforces dedication to duty, industry, efficiency and loyalty to public service ofdeserving government personnel. (ABAKADA Guro Party List, etc., supra)

10-B. Rewards law establishes safeguards to ensure that the rewardsystem will not create bounty hunters. The Attrition Act of 2005 RA 9335establishes safeguards to ensure that the reward will not be claimed if it will be eitherthe fruit of bounty hunting or mercenary activity or the product of the irregularperformance of official duties. One of these precautionary measures is embodied inSection 8 of the law:

SEC. 8. Liability of Officials, Examiners and Employees of the BIR and theBOC. The officials, examiners, and employees of the [BIR] and the [BOC]who violate this Act or who are guilty of negligence, abuses or acts ofmalfeasance or misfeasance or fail to exercise extraordinary diligence in

the performance of their duties shall be held liable for any loss or injurysuffered by any business establishment or taxpayer as a result of such violation,negligence, abuse, malfeasance, misfeasance or failure to exercise extraordinary

diligence. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No.166715, August 14, 2008)


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10-C. The rewards law to tax collectors does not violate equalprotection. Equality guaranteed under the equal protection clause is equality underthe same conditions and among persons similarly situated; it is equality amongequals, not similarity of treatment of persons who are classified based on substantialdifferences in relation to the object to be accomplished. When things or persons are

different in fact or circumstance, they may be treated in law differently.The guaranty of equal protection of the laws is not a guaranty of equality in the

application of the laws upon all citizens of the [S]tate. It is not, therefore, arequirement, in order to avoid the constitutional prohibition against inequality, thatevery man, woman and child should be affected alike by a statute. Equality ofoperation of statutes does not mean indiscriminate operation on persons merely assuch, but on persons according to the circumstances surrounding them. It guaranteesequality, not identity of rights.

The Constitution does not require that things which are different in fact betreated in law as though they were the same. The equal protection clause does notforbid discrimination as to things that are different. It does not prohibit legislationwhich is limited either in the object to which it is directed or by the territory within

which it is to operate. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R.No. 166715, August 14, 2008]

The equal protection clause recognizes a valid classification, that is, aclassification that has a reasonable foundation or rational basis and not arbitrary.1[22]

With respect to RA 9335, its expressed public policy is the optimization of therevenue-generation capability and collection of the BIR and the BOC. Since thesubject of the law is the revenue- generation capability and collection of the BIR andthe BOC, the incentives and/or sanctions provided in the law should logically pertainto the said agencies. Moreover, the law concerns only the BIR and the BOC becausethey have the common distinct primary function of generating revenues for thenational government through the collection of taxes, customs duties, fees andcharges.

Both the BIR and the BOC are bureaus under the DOF. They principally performthe special function of being the instrumentalities through which the State exercisesone of its great inherent functions taxation. Indubitably, such substantial distinctionis germane and intimately related to the purpose of the law. Hence, the classificationand treatment accorded to the BIR and the BOC under RA 9335 fully satisfy thedemands of equal protection. [ABAKADA Guro Party List, etc. supra)]

10-D. The prosecution of one guilty person while others equally guiltyare not prosecuted, however, is not, by itself, a denial of the equalprotection of the laws. Where the official action purports to be in conformity to thestatutory classification, an erroneous or mistaken performance of the statutory duty,although a violation of the statute, is not without more a denial of the equalprotection of the laws. The unlawful administration by officers of a statute fair on itsface, resulting in its unequal application to those who are entitled to be treated alike,is not a denial of equal protection unless there is shown to be present in it an elementof intentional or purposeful discrimination. This may appear on the face of the actiontaken with respect to a particular class or person, or it may only be shown by extrinsicevidence showing a discriminatory design over another not to be inferred from theaction itself.

1


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But a discriminatory purpose is not presumed, there must be a showing ofclear and intentional discrimination. [Santos v. People, et al, G. R. No. 173176,August 26, 2008 citing People v. Dela Piedra, 403 Phil. 31, 54-56 (2001)]

10-E. There is no denial of equal protection where the prosecutionexercises its discretion in determining probable cause. The discretion of who

to prosecute depends on the prosecutions sound assessment whether the evidencebefore it can justify a reasonable belief that a person has committed an offense. Thepresumption is that the prosecuting officers regularly performed their duties, and thispresumption can be overcome only by proof to the contrary, not by merespeculation. There must be evidence to overcome this presumption. The mereallegation a Cebuana, was charged with the commission of a crime, while aZamboanguea, was not, is insufficient to support a conclusion that the prosecutionofficers acted in denial of the equal protection of the laws. (Santos v. People, et al, G.R. No. 173176, August 26, 2008)

10-F. Equal protection should not be used to protect commission ofcrime. While all persons accused of crime are to be treated on a basis of equality

before the law, it does not follow that they are to be protected in the commission ofcrime. It would be unconscionable, for instance, to excuse a defendant guilty ofmurder because others have murdered with impunity. The remedy for unequalenforcement of the law in such instances does not lie in the exoneration of the guiltyat the expense of society x x x. Protection of the law will be extended to all personsequally in the pursuit of their lawful occupations, but no person has the right todemand protection of the law in the commission of a crime.

Likewise, [i]f the failure of prosecutors to enforce the criminal laws as to somepersons should be converted into a defense for others charged with crime, the resultwould be that the trial of the district attorney for nonfeasance would become an issuein the trial of many persons charged with heinous crimes and the enforcement of lawwould suffer a complete breakdown. (Santos v. People, et al, G. R. No. 173176,August 26, 2008)

11. A fixed annual license fee on those engaged in the business ofgeneral enterprise was also imposed on the sale of bibles by a religious sect.Is this valid or violative of the constitutionally guaranteed freedom ofreligion ?

SUGGESTED ANSWER: It is not valid because it violates the constitutionallyguaranteed freedom of religion. As a license fee is fixed in amount and unrelated tothe receipts of the taxpayer, such a license fee, when applied to a religious sect isactually imposed as a condition for the free exercise of religion. A license fee restrainsin advance those constitutional liberties of press and religion and inevitably tends tosuppress their exercise.

12. A lawful tax on a new subject, or an increased tax on an old one,does not interfere with a contract or impairs its obligation, within the meaningof the constitution. Even though such taxation may affect particular contracts, as itmay increase the debt of one person and lessen the security of another, or may imposeadditional burdens upon one class and release the burdens of another, still the taxmust be paid unless prohibited by the constitution, nor can it be said that it impairs the


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d. local taxation will be fair, uniform and just. (Manila Electric Company v.Province of Laguna, et al., G.R. No. 131359, May 5, 1999)

17-A. Taxing power of the local government is limited. The taxingpower of local governments is limited in the sense that Congress can enact legislationgranting tax exemptions.

While the system of local government taxation has changed with the onset ofthe 1987 Constitution, the power of local government units to tax is still limited.

While the power to tax by local governments may be exercised by locallegislative bodies, no longer merely be virtue of a valid delegation as before, butpursuant to direct authority conferred by Section 5, Article X of the Constitution, thebasic doctrine on local taxation remains essentially the same, the power to tax is[still] primarily vested in the Congress. (Quezon City, et al., v. ABS-CBNBroadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Governmentof Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6,2006, 484 SCRA 169 in turn referring to Mactan Cebu International Airport Authority,v. Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680)

17-B. Further amplification by Bernas of the local governments powerto tax. What is the effect of Section 5 on the fiscal position of municipalcorporations? Section 5 does not change the doctrine that municipal corporations donot possess inherent powers of taxation. What it does is to confer municipalcorporations a general power to levy taxes and otherwise create sources of revenue.

They no longer have to wait for a statutory grant of these powers. The power of thelegislative authority relative to the fiscal powers of local governments has beenreduced to the authority to impose limitations on municipal powers. Moreover, theselimitations must be consistent with the basic policy of local autonomy. Theimportant legal effect of Section 5 is thus to reverse the principle that doubts areresolved against municipal corporations. Henceforth, in interpreting statutoryprovisions on municipal fiscal powers, doubts will be resolved in favor of municipalcorporations. It is understood, however, that taxes imposed by local governmentmust be for a public purpose, uniform within a locality, must not be confiscatory, andmust be within the jurisdiction of the local unit to pass. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing CityGovernment of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No.162015, March 6, 2006, 484 SCRA 169)

17-C. Reconciliation of the local governments authority to tax and theCongressional general taxing power. Congress has the inherent power to tax,which includes the power to grant tax exemptions. On the other hand, the power oflocal governments, such as provinces and cities for example Quezon City, to tax isprescribed by Section 151 in relation to Section 137 of the LGC which expresslyprovides that notwithstanding any exemption granted by any law or other special law,the City or a province may impose a franchise tax. It must be noted that Section 137of the LGC does not prohibit grant of future exemptions.

The Supreme Court in a series of cases has sustained the power of Congress togrant tax exemptions over and above the power of the local governments delegatedpower to tax. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No.166408, October 6, 2008 citing City Government of Quezon City, et al. v. BayanTelecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 16)


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Indeed, the grant of taxing powers to local government units under theConstitution and the LGC does not affect the power of Congress to grant exemptionsto certain persons, pursuant to a declared national policy. The legal effect of theconstitutional grant to local governments simply means that in interpreting statutoryprovisions on municipal taxing powers, doubts must be resolved in favor of municipalcorporations. [Ibid., referring to Philippine Long Distance Telephone Company, Inc.

(PLDT) vs. City of Davao]

18. The withdrawal of a tax exemption should not be construed asprohibiting future grants of exemption from all taxes. Indeed, the grant oftaxing powers to local government units under the Local Government Code does notaffect the power of Congress to grant exemptions to certain persons, pursuant to adeclared national policy. The legal effect of the constitutional grant to localgovernments simply means that in interpreting statutory provisions on municipaltaxing powers, doubts must be resolved in favor of municipal corporations. (PhilippineLong Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867,August 22, 2001)

18-A. Tax exemptions in franchises are always subject to withdrawal.Moreover, Smarts franchise was granted with the express condition that it is subjectto amendment, alteration, or repeal. (1987 CONSTITUTION, Art. XII, Sec. 11)

It is enough to say that the parties to a contract cannot, through the exerciseof prophetic discernment, fetter the exercise of the taxing power of the State. For notonly are existing laws read into contracts in order to fix obligations as betweenparties, but the reservation of essential attributes of sovereign power is also read intocontracts as a basic postulate of the legal order. The policy of protecting contractsagainst impairment presupposes the maintenance of a government which retainsadequate authority to secure the peace and good order of society.

In truth, the Contract Clause has never been thought as a limitation on theexercise of the States power of taxation save only where a tax exemption has beengranted for a valid consideration. Smart Communications, Inc. v. The City of Davao,etc., et al., G. R. No. 155491, September 16, 2008 citing Tolentino v. Secretary ofFinance, G. R. No. 115455, August 25, 1994, 235 SCRA 630, 685. The author opinesthat since practically all franchises granted to telecommunications companies aresimilarly worded that the above doctrine finds application to the others)

19. When Congress approved a provision that, Any advantage, favor,privilege, exemption, or immunity granted under existing franchises, or may hereafterbe granted, shall ipso facto become part of previously granted telecommunicationsfranchises and shall be accorded immediately and unconditionally to the grantees ofsuch franchises: Provided, however, That the foregoing shall neither apply to nor affectprovisions of telecommunications franchises concerning territory covered by thefranchise, the life span of the franchise, or the type of service authorized by thefranchise. (Underscoring supplied) there was no intention for it to operate as ablanket tax exemption to all telecommunications entities. Applying the rule ofstrict construction of laws granting tax exemptions and the rule that doubts should beresolved in favor of municipal corporations in interpreting statutory provisions onmunicipal taxation, it was held that said provisions cannot be considered as extendingits application to franchises such as that of PLDT. (Philippine Long Distance TelephoneCompany, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001)


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19-A. In lieu of all taxes in the franchise of ABS-CBN does not exemptit from local franchise taxes. The in lieu of all taxes provision in the franchiseof ABS-CBN does not expressly provide what kind of taxes ABS-CBN is exemptedfrom. It is not clear whether the exemption would include both local, whethermunicipal, city or provincial, and national tax. Whether the in lieu of all taxes

provision would include exemption from local tax is not unequivocal.The right to exemption from local franchise tax must be clearly established and

cannot be made out of inference or implications but must be laid beyond reasonabledoubt. Verily, the uncertainty in the in lieu of all taxes provision should beconstrued against ABS-CBN. ABS-CBN has the burden to prove that it is in factcovered by the exemption so claimed but has failed to do so. (Quezon City, et al., v.

ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008. This ispractically the same holding in an earlier case involving another telecommunicationscompany. Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No.155491, September 16, 2008. The author opines that since practically all franchisesgranted to telecommunications companies are similarly worded that the abovedoctrine finds application to the others.)

19-B. In lieu of all taxes refers to national internal revenue taxesand not to local taxes. The in lieu of all taxes clause applies only to nationalinternal revenue taxes and not to local taxes. As appropriately pointed out in theseparate opinion of Justice Antonio T. Carpio in a similar case involving a demand forexemption from local franchise taxes:

[T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, otherthan income tax, imposed under the National Internal Revenue Code. The "in lieu ofall taxes" clause does not apply to local taxes. The proviso in the first paragraph ofSection 9 of Smart's franchise states that the grantee shall "continue to be liable forincome taxes payable under Title II of the National Internal Revenue Code." Also, thesecond paragraph of Section 9 speaks of tax returns filed and taxes paid to the"Commissioner of Internal Revenue or his duly authorized representative inaccordance with the National Internal Revenue Code." Moreover, the same paragraphdeclares that the tax returns "shall be subject to audit by the Bureau of InternalRevenue." Nothing is mentioned in Section 9 about local taxes. The clear intent is forthe "in lieu of all taxes" clause to apply only to taxes under the National InternalRevenue Code and not to local taxes. Even with respect to national internal revenuetaxes, the "in lieu of all taxes" clause does not apply to income tax.

If Congress intended the "in lieu of all taxes" clause in Smart's franchise to alsoapply to local taxes, Congress would have expressly mentioned the exemption frommunicipal and provincial taxes. Congress could have used the language in Section9(b) of Clavecilla's old franchise, as follows:

x x x in lieu of any and all taxes of any kind, nature or description levied,established or collected by any authority whatsoever, municipal, provincial ornational, from which the grantee is hereby expressly exempted, x x x. (Emphasissupplied).

However, Congress did not expressly exempt Smart from local taxes. Congressused the "in lieu of all taxes" clause only in reference to national internal revenuetaxes. The only interpretation, under the rule on strict construction of tax exemptions,is that the "in lieu of all taxes" clause in Smart's franchise refers only to national andnot to local taxes. [Smart Communications, Inc. v. The City of Davao, etc., et al., G.


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R. No. 155491, September 16, 2008 citing Philippine Long Distance TelephoneCompany, Inc. v. City of Davao, 447 Phil. 571, 594 (2003)]

19-C. The in lieu of all taxes clause in the franchise of ABS-CBN hasbecome functus officio with the abolition of the franchise tax onbroadcasting companies with yearly gross receipts exceeding Ten Million

Pesos. The clause in lieu of all taxes does not pertain to VAT or any other tax. Itcannot apply when what is paid is a tax other than a franchise tax. Since thefranchise tax on the broadcasting companies with yearly gross receipts exceeding tenmillion pesos has been abolished, the in lieu of all taxes clause has now becomefunctus officio, rendered inoperative. (Quezon City, et al., v. ABS-CBN BroadcastingCorporation, G. R. No. 166408, October 6, 2008. This is practically the same holdingin an earlier case involving another telecommunications company. SmartCommunications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September16, 2008. The author opines that since practically all franchises granted totelecommunications companies are similarly worded that the above doctrine findsapplication to the others.)

19-D. Historical background on why ABS-CBN is subject to VAT and notto the franchise tax. At the time of the enactment of its franchise on May 3, 1995,ABS-CBN was subject to 3% franchise tax under Section 117(b) of the 1977 NationalInternal Revenue Code (NIRC), as amended.On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value Added

Tax Law, took effect and subjected to VAT those services rendered by radio and/orbroadcasting stations.Notably, under the same law, telephone and/or telegraph systems, broadcastingstations and other franchise grantees were omitted from the list of entities subjectto franchise tax. The impression was that these entities were subject to 10% VAT butnot to franchise tax. Subsequently, R.A. No. 8241 took effect on January 1, 1997containing more amendments to the NIRC. Radio and/or television companies whoseannual gross receipts do not exceed P10,000,000.00 were granted the option tochoose between paying 3% national franchise tax or 10% VAT

On the other hand, radio and/or television companies with yearly gross receiptsexceeding P10,000,000.00 were subject to 10% VAT, pursuant to Section 102 of theNIRC.

On January 1, 1998, R.A. No. 8424 was passed confirming the 10% VAT liabilityof radio and/or television companies with yearly gross receipts exceedingP10,000,000.00.R.A. No. 9337 was subsequently enacted and became effective on July 1, 2005. Thesaid law further amended the NIRC by increasing the rate of VAT to 12%. Theeffectivity of the imposition of the 12% VAT was later moved from January 1, 2006 toFebruary 1, 2006.In consonance with the above survey of pertinent laws on the matter, ABS-CBN issubject to the payment of VAT. It does not have the option to choose between thepayment of franchise tax or VAT since it is a broadcasting company with yearly grossreceipts exceeding Ten Million Pesos (P10,000,000.00). (Quezon City, et al., v.

ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008. The authoropines that since practically all franchises granted to telecommunications companiesare similarly worded that the above doctrine finds application to the others.)


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20. Double taxation in its generic sense, this means taxing the samesubject or object twice during the same taxable period.

In its particular sense, it may mean direct duplicate taxation, which is prohibitedunder the constitution because it violates the concept of equal protection, uniformityand equitableness of taxation. Indirect duplicate taxation is not anathematized by theabove constitutional limitations.

21. What are the elements of direct duplicate taxation ?SUGGESTED ANSWER:a. Same

1) Subject or object is taxed twice2) by the same taxing authority3) for the same taxing purpose4) during the same taxable periodb. Taxing all of the subjects or objects for the first time without taxing all of

them for the second time.If any of the elements are absent then there is indirect duplicate taxation which

is not prohibited by the constitution.NOTES AND COMMENTS:a. Presence of the 2nd element violates the equal protection clause.

If only the 1st element is present, taxing the same subject or object twice, by the sametaxing authority, etc., there is no violation of the equal protection clause because allsubjects and objects that are similarly situated are subject to the same burdens andgranted the same privileges without any discrimination whatsoever,

The presence of the 2nd element, taxing all of the subjects and objects for the firsttime, without taxing all for the second time, results to discrimination among subjectsand objects that are similarly situated, hence violative of the equal protection clause.

22. Double taxation a valid defense against the legality of a taxmeasure if the double taxation is direct duplicate taxation, because it wouldviolate the equal protection clause of the constitution.

23. When an item of income is taxed in the Philippines and the sameincome is taxed in another country, this would be known as international

juridical double taxation which is the imposition of comparable taxes in two or morestates on the same taxpayer in respect of the same subject matter and for identicalgrounds. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R.No. 127105, June 25, 1999)

24. What are the methods for avoiding double taxation (indirectduplicate taxation) ?

SUGGESTED ANSWER: The following are the methods of avoiding doubletaxation:a. Tax treaties which exempts foreign nationals from local taxation and local

nationals from foreign taxation under the principle of reciprocity.b. Tax credits where foreign taxes are allowed as deductions from local

taxes that are due to be paid.c. Allowing foreign taxes as a deduction from gross income.


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168056, September 1, 2005 and companion cases, citing Maceda v. Macaraig, Jr., G.R.No. 88291, June 8, 1993, 223 SCRA 217)

10. The main difference between direct taxes and indirect taxes is thatthe burden of direct taxes could not be shifted by the taxpayer to another while theburden of indirect taxes could be shifted to another person, such the burden value-

added taxes being shifted or transferred by the taxpayer, the seller, to the buyer.

11. Acesite is the owner and operator of restaurant which caters tothe patrons of a casino operated by PAGCOR within its premises. it billedPAGCOR for the cost of the food and beverages consumed by the PAGCORspatrons as well as the lease of the premises plus the VAT on these items.PAGCOR paid Acesite minus the VAT claiming exemption while Acesite, inorder to avoid legal implications, paid the P30 million tax and applied for arefund on the ground of solutio indebeti.

Acesite cites the tax exemption grant in PAGCORs franchise as follows:The exemptions herein granted for earnings derived from the operations conductedunder the franchise specifically from the payment of any tax, income, or otherwise, as

well as any form of charges, fees or levies, shall inure to the benefit of and extendto corporation(s), association (s), agency (cies), or individual(s) with whomthe Corporation or operator has any contractual relationship in connectionwith the operations of the casino (s) authorized to be conducted under thisFranchise and to those receiving compensation or other remuneration from theCorporation or operator as a result of essential facilities furnished and/or technicalservices rendered to the Corporation or operator. (emphasis supplied)

The BIR denied the claim on the ground that PAGCOR is exempt onlyfrom direct taxes and not from indirect taxes so Acesite may not avail of theexemption. Is this correct ?

SUGGESTED ANSWER: No. As the law is worded the exemption flows to Acesite.The law is clear that the exemption extends the exemption to entities or individualsdealing with PAGCOR. (Commissioner of Internal Revenue v. Acesite (Philippines) HotelCorporation, G. R. No. 147295, February 16, 2007)

NOTES AND COMMENTS:a. The above holding should be differentiated from Philippine Acetylene Co.

v. Commissioner of Internal Revenue, 20 SCRA 1056, where the tax exemption did notflow to private entities. (cited in Abaya v. Ebdane, G. R. No. 167919, February 14,2007), and in the following case ofSilkair (Singapore) PTE, Ltd., v. Commissioner ofInternal Revenue, G.R. No. 173594, February 6, 2008.

b. So also, the tax exemption of PAGCOR has already been withdrawn byRep. Act No. 9337.

12. Silkair (Singapore) PTE, Ltd., an international carrier,purchased aviation gas from Petron Corporation, which it uses for itsoperations. It now claims for refund or tax credit for the excise taxes it paidclaiming that it is exempt from the payment of excise taxes under theprovisions of Sec. 135 of the NIRC of 1997.

Silkair further anchors its claim on Article 4(2) of the Air TransportAgreement between the Government of the Republic of the Philippines andthe Government of the Republic of Singapore (Air Transport Agreementbetween RP and Singapore).


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Expatriate concessionsExpatriates are only taxable on Philippine-sourced income.Concession is by way of tax relief under a tax treaty, or preferentialtax rates for expatriates employed by certain entities.

Relief for foreign taxesA foreign national, whether resident or non-resident, is only subjectto income tax on Philippine sourced income. As such, no credit forincome taxes paid on such income to foreign countries is allowedagainst Philippine income tax payable.

Deductions against incomeForeign nationals subject to the graduated rates on compensationincome are entitled to deduct from gross income personalexemptions and health/hospitalisation premium payments. There areno other deductions allowable from compensation income. No such

deductions are allowed to foreign nationals subject to the 25% and15% tax.

Taxation is the act of levying the tax, i.e., the process or means bywhich the sovereign, through its law-making body, raises income todefray the necessary expenses of the government. It is merely a wayof apportioning the cost if the government among those who in somemeasures are privileged to enjoy its benefits and, therefore, mustbear its burdens. (71 Am Jur. 2nd 342; 1 Cooley 72-73).

Tax is defined as the lifeblood of the government. Major revenue of the governmentis sourced from taxation so that in the most pressing times of financial and economiccrisis, the agency authorized to administer taxes the Bureau of Internal Revenue(BIR) should always be on the front line. As a matter of fact, BIR nowadays arebecoming stricter in the implementation of the tax laws and are seeking ways tocollect much revenue from taxes. Lately the BIR has widened the coverage ofmandatory withholding of virtually all income payments certain taxpayers by theimplementation of the Top Twenty Thousand Corporations (TTC) from theprevious Top Ten ThousandCorporation list. Under the program, on top of thoseincome payments subjected to expanded withholding tax, these corporations arerequired to withhold 1% for payments to its suppliers of goods and 2% for regularsuppliers of services. Additionally, reportorial requirements are required to be

submitted to BIR to monitor and verify compliance through its computer systems.Currently, the BIR is coming up with a similar scheme for individual taxpayers,expectedly, under the same procedures of TTC above. A draft regulation is now inplace for comments at the BIR website.

By a simple definition, tax may be defined as an enforced proportional contributionlevied by the law making body of the state to raise revenue to support theindispensable and all the necessary expenses of the government.


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Under our tax system, compliance is initially voluntary on the part of the taxpayers.Nevertheless, the government through the administrative agency empowered toadminister the tax, the BIR , is clothed with such remedies, under proper procedures,to imposed correct amount of taxes due to the government upon finding that thecompliance based on the declarations in the return is insufficient. It can issuedeficiency assessment and impose such measures provided under the law within the

prescribed period to see to it that taxes are paid and that tax measures are compliedwith. This does not however follow that a taxpayer being assessed is doing an illegalbusiness because non-payment of the tax does not make the business illegal.

Scope of the taxing power

To give a more meaningful power, power of taxation is essentially unlimited andplenary. This means that the state can tax on anything, anytime, anywhere, and atany amount. Example is the issue on taxing short messaging (SMS or commonlyknown as text message through mobile phones). The author in on the humble viewthat there could be nothing wrong on taxing this item as it primarily belongs to thestate. What keeps them perhaps in the meantime is the impact to the poor andunderprivileged depending primarily on the medium to communicate their loved onesfrom other places.This follows however, that the limitations and guidelines for thesaid purpose had been properly observed.

II. NATIONAL INTERNAL REVENUE CODE

ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE

1. Rep. Act No. 1405, the Bank Deposits Secrecy Lawprohibits inquiry into bank deposits. As exceptions to

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