GENERAL PRINCIPLES

Describe the power of taxation. May a legislative body enact laws to raise revenues in
the absence of a constitutional provision granting said body the power to tax? Explain.
The power of taxation is inherent in the State being an attribute of sovereignty.
As an incident of sovereignty, the power to tax has been described as unlimited in its
range, acknowledging in its very nature no limits, so that security against its abuse is to
be found only in the responsibility of the legislature which imposes the tax on the
constituents who are to pay it. Being an inherent power, the legislature can enact laws
to raise revenues even without the grant of said power in the Constitution. It must be
noted that Constitutional provisions relating to the power of taxation do not operate as
grants of the power of taxation to the Government, but instead merely constitute
limitations upon a power which would otherwise be practically without limit.

Briefly explain the lifeblood doctrine.

Taxes are the lifeblood of the government for without taxes, the government can
neither exist nor endure.

Power of taxation as distinguished from Police Power and Eminent Domain

The City of Manila passed an ordinance imposing an annual tax of 5,000 to be paid by
an operator of a massage clinic and an annual fee of 50 to be paid by every attendant
or helper in the said clinic. Is the imposition a tax or a license fee?
The imposition on the operator of the massage clinic is both a tax and a license
fee. The amount of 5,000 exceeds the cost of regulation, administration and control but
it is likewise imposed to regulate a non-useful business in order to protect the health,
safety and morals of the citizenry in general. The 50 impositions on the helpers or
attendants are license fees sufficient only for regulation, administration and control.

Inherent and constitutional limitations of taxation

Enumerate the four inherent limitations on taxation. Explain each item briefly.
The inherent limitations on the power to tax are:
1. Taxation is for a public purpose– The proceeds of the tax must be used (a) for the
support of the State or (b) for some recognized objective of the government or to
directly promote the welfare of the community.
2. Taxation is inherently legislative– Only the legislature has full discretion as to the
persons, property, occupation or business to be taxed provided these are all within the
State’s territorial jurisdiction. It can also finally determine the amount or rate of tax, the
kind of tax to be imposed and the method of collection.
3. Taxation is territorial– Taxation may be exercised only within the territorial jurisdiction
of the taxing authority. Within the territorial jurisdiction, the taxing authority may
determine the place of taxation” or “tax situs."
4. Taxation is subject to international comity– This is a limitation which is founded on
reciprocity designed to maintain a harmonious and productive relationships among the
various states. Under international comity, a state must recognize the generally-
accepted tenets of international law, among which are the principles of sovereign
equality among states and of their freedom from suit without their consent, that limit the
authority of a government to effectively impose taxes on a sovereign state and its
instrumentalities, as well as on its property held, and activities undertaken in that
capacity.

An ordinance of Quezon City on the operation of market stalls and the collection of
market stall fees created a market committee “to formulate, recommend and adopt
subject to the ratification of the Sangguniang Panglungsod regulations in the operations
of the market stalls.” It also entrusted the collection of the market stall fees to a private
corporation. Does the entrusting of the collection of the market stall fees destroy the
“public purpose” of the ordinance?
Yes, because a portion of the fees collected would be diverted as fees to private
corporation. It will also violate the limitation that local government units shall in no case
let to any private person the collection of local taxes, fees, charges and other
impositions. As a result, portion of it will be utilized for a private purpose, which is to pay
the private corporation for its services.

RC is a law-abiding citizen who pays his real estate taxes promptly. Due to a series of
typhoons and adverse economic conditions, an ordinance is passed by MM City
granting a 50% discount for payment of unpaid real estate taxes for the preceding year
and the condonation of all penalties on fines resulting from the late payment. Arguing
that the ordinance rewards delinquent taxpayers and discriminates against prompt
ones, RC demands that he be refunded an amount equivalent to one-half of the real
taxes he paid. The municipal attorney rendered an opinion that RC cannot be
reimbursed because the ordinance did not provide for such reimbursement. RC files suit
to declare the ordinance void on the ground that it is a class legislation. Will his suit
prosper? Explain your answer briefly.
The suit will not prosper. The remission or condonation of taxes due and
payable to the exclusion of taxes already collected does not constitute unfair
discrimination. Each set of taxes is a class by itself and the law would be open to attack
as class legislation only if all taxpayers belonging to one class were not treated alike.

A law was passed granting tax exemption to certain industries and investments for a
period of five years. But three years later, the law was repealed. With the repeal, the
exemptions were considered revoked by the BIR, which assessed the investing
companies for unpaid taxes effective on the date of the repeal of the law. NPC and KTR
companies questioned the assessments on the ground that, having made their
investments in full reliance with the period of exemption granted by the law, its repeal
violated their constitutional right against the impairment of the obligations and contracts.
Is the contention of the companies tenable or not? Reason briefly.
The contention is not tenable. The exemption granted is in the nature of a
unilateral tax exemption. Since the exemption given is spontaneous on the part of the
legislature and no service or duty or other remunerative conditions have been imposed
on the taxpayers receiving the exemption, it may be revoked at will by the legislature.

Requisites of a valid tax PRJDI

(1) For a public purpose
(2) Rule of taxation should be uniform
(3) The person or property taxed is within the jurisdiction of the taxing authority
(4) Assessment and collection is in consonance with the due process clause
(5) The tax must not infringe on the inherent and constitutional limitations of the power
of taxation.

Tax as distinguished from other forms of exactions

Kinds of taxes
Distinguish “direct taxes” from “indirect taxes". Give examples.
Direct taxes are demanded from the very person who, as intended, should pay
the tax which he cannot shift to another; while an indirect tax is demanded in the first
instance from one person with the expectation that he can shift the burden to someone
else, not as a tax, but as part of the purchase price. Examples of direct taxes are
income tax, estate tax and donor’s tax. Examples of indirect taxes are value-added tax,
percentage tax and excise tax on excisable articles.

Doctrines in taxation
Construction and interpretation of tax laws, rules, and regulations
Why are tax exemptions strictly construed against the taxpayer?
Tax exemptions are strictly construed against the taxpayer because such
provisions are highly disfavored and may almost be said to be odious to the law. The
exception contained in the tax statutes must be strictly construed against the one
claiming the exemption because the law does not look with favor on tax exemptions,
they being contrary to the life- blood theory which is the underlying basis for taxes.

An alien employee of the Asian Development Bank (ADB) who is retiring soon has
offered to sell his car to you which he imported tax-free for his personal use. The
privilege of exemption from tax is granted to qualified personal use under the ADB
Charter which is recognized by the tax authorities. If you decide to purchase the car, is
the sale subject to tax? Explain.
Yes. The sale is subject to tax. The Tax Code provides that in the case of tax-
free importation of goods into the Philippines by persons, entities or agencies exempt
from tax where such goods are subsequently sold transferred or exchanged in the
Philippines to non-exempt persons or entities, the purchasers, transferees or recipients
shall be considered the importer thereof, who shall be liable for any internal revenue tax
on such importation. Tax exemptions are to be construed strictly and are not considered
transferable in character.

Prospectivity of tax laws

As a general rule, tax laws are prospective in operation, unless the legislative
intent that statute should operate retrospectively is distinctly expressed or necessarily
implied. Where a statute amending a tax law is silent as to whether it operates
retroactively, the amendment will not be given a retroactive effect so as to subject to tax
past transactions not subject to tax under the original act. Every case of doubt must be
resolved against its retroactive effect.

Imprescriptibility of taxes
 Considering that taxes are the lifeblood of the government, it may be stated that
the assessment and collection of taxes are imprescriptible unless otherwise provided by
the tax law itself. Thus, if the tax law itself is silent on prescription, the right of the
government to assess and collect taxes will not prescribe.

Double taxation
Differentiate between double taxation in the strict sense and in a broad sense and give
an example of each.
Double taxation in the strict sense pertains to the direct double taxation. This
means that the taxpayer is taxed twice by the same taxing authority, within the same
taxing jurisdiction, for the same property and same purpose. Example: Imposition of
final withholding tax on cash dividend and requiring the taxpayer to declare this tax-paid
income in his income tax returns.
On the other hand, double taxation in the broad sense pertains to indirect double
taxation. This extends to all cases in which there is a burden of two or more impositions.
It is the double taxation other than those covered by direct double taxation. Example:
Subjecting the interest income of banks on their deposits with other banks to the 5%
gross receipts tax (GRT) despite of the same income having been subjected to 20%
final withholding tax (FWT), is only a case of indirect double taxation. The GRT is a tax
on the privilege of engaging in business while the FWT is a tax on the privilege of
earning income.

What are the kinds of indirect duplicate taxation?

There are two kinds of indirect duplicate taxation, namely:
(1) Domestic double taxation. - This arises when the same taxes are imposed by the
local or national government within the same State.
Double taxation may not be invoked where one tax is imposed by the national
government and the other by a local government, being widely recognized that there is
nothing inherently obnoxious in the requirement that licenses or taxes be exacted with
respect to the same occupation, calling or activity by both the state and its political
subdivision. Thus, double taxation does not exist when a corporation is assessed with
local business tax as a manufacturer, and at the same time, VAT as a person selling
goods in the course of trade or business.
(2) International juridical double taxation – It refers to the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same subject matter
and for identical periods.
When an item of income is taxed in the Philippines and the same income is taxed in
another country, there is a case of double taxation but it is only a case of indirect
duplicate taxation, which is called “international juridical double taxation,” which is not
legally prohibited because the taxes are imposed by different taxing authorities.

Is double taxation allowed in our Constitution?

The Supreme Court held that there is no constitutional prohibition against double
taxation in the Philippines. Therefore, it is not a valid defense against the validity of a
tax measure. However, it is not favored but the same is permissible, provided some
other constitutional requirements are not thereby violated. For example, double taxation
becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same
governmental entity or by the same jurisdiction for the same purpose, but not in a case
where one tax is imposed by the State and the other by a province, city or municipality.

Is double taxation a valid defense against the legality of a tax measure?

No. Double taxation standing alone and not being forbidden by our fundamental
law is not a valid defense against the legality of a tax measure. However, if double
taxation amounts to a direct duplicate taxation, that the same subject is taxed twice
when it should be taxed but once, in a fashion that both taxes are imposed for the same
purpose by the same taxing authority, within the same jurisdiction or taxing district, for
the same taxable period and for the same kind or character of a tax, then it becomes
legally objectionable for being oppressive and inequitable.

Is there double taxation where a lessor of a property pays real estate tax on the
premises being leased, a real estate dealer’s tax based on rental receipts and income
tax on the rentals?
No. There is no double taxation here in the prohibited sense. Double taxation in
the prohibited sense means (1) taxing for the same tax period, (2) the same thing or
activity twice, (3) when it should be taxed but once, (4) by the same taxing authority, (5)
for the same purpose, and (6) with the same kind or character of tax. The real estate
tax is a property tax. On the other hand, the real estate dealer's tax is a tax on the
privilege to engage in business of real estate dealership. While the income tax is a tax
on the privilege to earn an income. These taxes are imposed by different taxing
authorities and are essentially of different kinds and character.

Is there double taxation when the interest income of a bank derived from its bank
deposits in another bank is subjected to tax and it will again be subjected to the 5%
gross receipts tax on its interest income from its loan transactions?
No. There is no double taxation when the interest income of a bank from its bank
deposits in another bank had been subjected to the 20% final withholding tax (which is a
passive income and a direct tax), and at the same time, its interest income on loan
transactions to its debtors-customers is subjected to the 5% gross receipts tax (which is
considered as active income and indirect tax) because the first tax is income tax, while
the second tax is business tax.

Can a municipal mayor refuse to sign an ordinance which requires that all
establishments selling liquor should pay a fixed annual fee and at the same time
imposing a sales tax equivalent to 5% of the amount paid for the purchase or
consumption of liquor in the said establishments on the ground that it would constitute
double taxation?
No. The refusal of the mayor is not justified. The impositions are of different
nature and character. The fixed annual fee is in the nature of a license fee imposed
through the exercise of police power while the 5% tax on purchase or consumption is a
local tax imposed through the exercise of taxing powers. Both a license fee and a tax
may be imposed on the same business or occupation, or for selling the same article and
this is not in violation of the rule against double taxation.
Is there double taxation in the imposition of local business tax based on gross revenue
in the case of a taxpayer whose method of accounting is on the accrual basis?
Yes. In petitioner's case, its audited financial statements reflect income or
revenue which accrued to it during the taxable period although not yet actually
constructively received or paid. This is because petitioner uses the accrual method of
accounting, where income is reportable when all the events have occurred that fix the
taxpayer's right to receive the income, and the amount can be determined with
reasonable accuracy; the right to receive income, and not the actual receipt, determines
when to include the amount in gross income. The imposition of local business tax
based on petitioner's gross revenue will inevitably result in the constitutionally
proscribed double taxation taxing of the same person twice by the same jurisdiction for
the same thing inasmuch as petitioner's revenue or income for a taxable year will
definitely include its gross receipts already reported during the previous year and for
which local business tax has already been paid. Thus, respondent committed a
palpable error when it assessed petitioner's local business tax based on its gross
revenue as reported in its audited financial statements, as Sec. 143 of the LGC and
Sec. 22(e) of the Pasig Revenue Code clearly provide that the tax should be computed
based on gross receipts.

What are the modes of avoiding/eliminating double taxation?

The usual methods of avoiding the occurrence of double taxation are:
(a) Entering into tax treaties with other states. - Double or multiple taxation is
avoided by means of allowing reciprocal exemptions, which may be done either by
statute or by treaty.
(b) Application of the principle of reciprocity - Exemption from taxation by treaty
are generally granted on grounds of reciprocity and to lessen the rigors of international
double or multiple taxation.
(c ) Allowance of deduction/tax credit for foreign taxes paid - The rigors of
international double taxation may also be lessened by the allowance of deduction or tax
credit taxes paid to foreign countries. Example: A resident Filipino citizen has the
option to either claim the amount of income tax withheld abroad as a deduction from his
gross income in the Philippines or to claim it as a tax credit provided that he includes
the subject income in the computation of his worldwide gross income considering that
he is a resident Filipino citizen. A resident Filipino citizen is subject to tax on his income
derived from within and without the Philippines or his worldwide income.
(d) Using the Tax Sparing Rule – A non-resident foreign corporation (NRFC) who
earned cash and/or property intercorporate dividends from a domestic corporation is
taxed on a reduced rate of 15% tax on dividends (in lieu of the 30% corporate income
tax), which represents the difference between the regular income tax of 30% and the
15% tax on dividends on the condition that the country of residence of the NRFC shall
allow a credit against the tax due from the NRFC, taxes deemed to have been paid in
the Philippines.
The apparent rationale for doing away with double taxation is to encourage the
free flow of goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic economies.
X, a lessor of a property, pays real estate tax on the premises, a real estate dealer’s tax
based on rental receipts and income tax on the rentals. X claims that this is double
taxation.
There is no double taxation. Double taxation means taxing for the same tax
period the same thing or activity twice, when it should be taxed but once, by the same
taxing authority for the same purpose and with the same kind or character of tax. The
real estate tax is a tax on property; the real estate dealer’s tax is a tax on the privilege to
engage in business; while the income tax is a tax on the privilege to earn an income.
These taxes are imposed by different taxing authorities and are essentially of different
kind and character.

Escape from taxation

Shifting of Tax Burden
“Shifting of tax burden” simply means that the imposition of tax is transferred from the
statutory taxpayer, or the person who is required by law to pay the tax, to another
person who shall bear the burden of the tax without violating the law. Only the payment
of indirect taxes may be shifted to another taxpayer, but not direct taxes. Example:
Under the VAT system, the seller can shift the burden of the VAT to the buyer, the said
tax (VAT) being an indirect tax.

What are the ways of shifting the burden of tax to another taxpayer?
The ways of shifting the burden of tax to another taxpayer are as follows:
(1) Forward shifting – refers to the transfer of tax burden from the producer to
distributor until it finally reaches the ultimate purchasers or end consumers. Example:
The producer shifts its VAT to the distributor, and the distributor shifts its VAT to the
final consumer.
(2) Backward shifting – refers to the reverse of forward shifting, meaning, the burden of
the tax is transferred from the end consumer through the factors of distribution to the
factor of production. Example: The end consumer may shift the tax imposed on him to
the distributor by buying the goods only after the price of the goods is reduced by the
amount of the tax, and lastly, the manufacturer agrees to buy the distributor’s products
only if the price is also reduced by the amount of tax.
(3) Onward shifting – the tax burden is shifted twice or more either forward or
backward.

What are the taxes which can be shifted to another taxpayer?

Under the National Internal Revenue Code, the national taxes which can be shifted to
another taxpayers are the indirect taxes, such as the VAT, Other percentage taxes,
excise tax on excisable articles and documentary stamp taxes.
In the case of VAT, the seller, who is the statutory taxpayer, is given the right by law to
shift the burden of tax to the buyer, which tax shall become part of the cost of the goods
or services sold if the buyer is the end consumer.

What are the taxes which cannot be shifted to another taxpayer?

Under the National Internal Revenue Code, all taxes which are the direct tax liabilities of
the taxpayers are the taxes which cannot be shifted to another taxpayer, such as
income tax, estate tax and donor’s tax.

Why does the law allow the shifting of the burden of tax to another person?
When the law allows that the burden of tax may be shifted to another person, this is one
form of escape from taxation which does not result to any loss on the part of the
Government, hence, not objectionable.

What is the meaning of “impact” and “incidence” of taxation?

The term "impact of taxation" refers to the point on which the tax is originally imposed
or the person/taxpayer who is required by law to pay the tax or the taxpayer on whom
the tax can be formally assessed. Example: VAT is originally assessed against the
VAT-registered SELLER who is required to pay the said tax. (This is the so-called
"impact of taxation.")
On the other hand, "incidence of taxation" refers to the point on which the tax burden
finally rests or settles down. It takes place when shifting has been effected from the
statutory taxpayer to another. Hence, VAT, being an indirect tax, the burden of paying
the tax is actually shifted or passed on to the BUYER. (This is the so-called "incidence
of taxation.")

What is the relationship between Impact, Shifting, and Incidence of a tax?

The ”impact of taxation,” which is the imposition of the tax to the statutory taxpayer, is
the initial phenomenon; the “shifting of the tax,” which is the passing on of the tax to the
buyer, is the intermediate event, while the “incidence of the tax” which is the final point
of the transaction makes the end consumer finally shouldering or bearing the burden of
the tax, which is the resultant effect.

Tax avoidance
"Tax avoidance" is the other term for "tax minimization." It is a legal tax saving device
within the means sanctioned by law the object of which is merely to minimize the
payment of taxes. This method should be used by the taxpayer in good faith and at
arm's length.
A taxpayer has the legal right to decrease the amount of what otherwise would be his
taxes or altogether avoid them by means which the law permits. A taxpayer may
therefore perform an act that he honestly believes to be sufficient to decrease his tax
liability or to exempt him from taxes. He does not incur fraud thereby even if the act is
thereafter found to be insufficient.

Tax evasion
"Tax evasion" is the other term for “tax dodging.” It is the use of the taxpayer of illegal
means to avoid or defeat the payment of the tax. It is a scheme used outside of those
lawful means and when availed of is punishable by law because its main purpose is to
entirely escape the payment of taxes thru illegal means. It usually subjects the taxpayer
to further or additional civil or criminal liabilities.
Tax evasion connotes fraud through the use of pretenses and forbidden devices to
lessen or defeat the payment of correct taxes. Mere understatement of tax in itself does
not prove fraud. Fraud is never imputed and courts never sustain findings of fraud upon
circumstances which create only suspicion; it must be willful and intentional .

Distinguish tax evasion from tax avoidance.

“Tax avoidance” is a tax saving device wherein the taxpayer uses legal means to
reduce tax liability within the means sanctioned by law, hence legal. “Tax evasion” is the
use of illegal means to avoid or defeat the payment of the tax. The former is used by the
taxpayer in good faith and at arm's length. The latter is connotes fraud through the use
of pretenses and forbidden devices to lessen or defeat the payment of correct taxes. In
the former, taxpayer is not subjected to civil or criminal liabilities because it is a legal tax
saving device. In the latter, When availed of, it usually subjects the taxpayer to
additional civil or criminal liabilities. The former is It is “tax minimization”. The latter is
“tax dodging”.

What are the factors that constitute “tax evasion”?

To constitute "tax evasion," there must be an integration of three factors, namely:
(1) The end to be achieved, i.e., payment of an amount of tax less than what is known
by the taxpayer to be legally due;
(2) An accompanying state of mind which is described as being evil, in bad faith, willful
or deliberate and not merely accidental; and
(3) A course of action or failure of action which is unlawful.
The second and third factors are not present in tax avoidance, hence there can be no
tax evasion if what was committed is just tax avoidance.
Example: When a tax consultant advised the taxpayer to execute two deeds of sale
with the intent to evade the payment of the correct tax, both the tax consultant and the
taxpayer shall be criminally liable for tax evasion considering that the above-stated
three requisite factors to constitute tax evasion are present.

When is tax evasion deemed complete?

The Supreme Court ruled that tax evasion is deemed complete when the violator has
knowingly and willfully filed a fraudulent return with intent to evade and defeat a part or
all of the tax.

Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980 at a price of P1
million. Said property has been leased to MAS Corporation, a domestic corporation
engaged in manufacturing paper products, owned 99% by Maria Suerte. In October
2007, EIP Corporation, a real estate developer, expressed its desire to buy the Makati
property at its fair market value of 300 million, payable as follows: (a) 60 million down
payment; and (b) balance, payable equally in twenty four monthly consecutive
installments. Upon the advice of a tax lawyer, Maria Suerte exchanged her Makati
property for shares of stock of MAS Corporation. A BIR ruling, confirming the tax-free
exchange of property for shares of stock, was secured from the BIR National Office and
a Certificate Authorizing Registration was issued by the Revenue District Officer (RDO)
where the property was located. Subsequently, she sold her entire stockholdings in
MAS Corporation to EIP Corporation for 300 million. In view of the tax advice, Maria
Suerte paid only the capital gains tax of (29,895,000 x 100,000 x 5% plus 298,900,000 x
10%), instead of the corporate income tax of 104,650,000 (35% on 299 million gain from
sale of real property). After evaluating the capital gains tax payment, the RDO wrote a
letter to Maria Suerte, stating that she committed tax evasion. Is the contention of the
RDO tenable? Or was it tax avoidance that Maria Suerte had resorted to? Explain.
The contention of the RDO is not tenable. Maria Suerte resorted to tax avoidance
and not tax evasion. Tax avoidance is the use of legal means to reduce tax liability and
it is the legal right of a taxpayer to decrease the amount of what otherwise would be his
taxes by means which the law permits. There is nothing illegal about transferring first
the property to a corporation in a tax free exchange and later selling the shares
obtained in the exchange at a lower tax than what could have been imposed if the
property was sold directly.

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 80 million. One month after,
Rainier sold the lot and building to Healthy Smoke Company (HSC) for 200 million,
Lucky filed its annual return and declared its gain from the sale of the lot and building in
the amount of 750,000. An investigation conducted by the BIR revealed that two months
prior to the sale of the properties to Rainier, Lucky received 40 million from HSC and not
from Rainier. Said amount of 40 million was debited by HSC and reflected in its trial
balance as “other inv. – Lucky Bldg.” The BIR concluded that there is tax evasion since
the real buyer of the properties of Lucky is HSC and not Rainier. It issued an
assessment for deficiency income tax in the amount of 79 million against Lucky. Lucky
argues that it resorted to tax avoidance or a tax saving device, which is allowed by the
NIRC and BIR rules since it paid the correct taxes based on the sale to Rainier. On the
other hand, Rainier and HSC also paid the prescribed taxes arising from the sale by
Rainier to HSC. Is the BIR correct in assessing taxes on Lucky? Explain.
Yes. The BIR is correct in assessing the taxes on Lucky. There was no tax
avoidance, instead there was tax evasion on the part of Lucky because of the simulated
sale to Rainier which had its apparent purpose to reduce the income tax to be paid by
Lucky on the sale to HSC. The sale to Rainier was simulated as evidenced by the fact
that two months prior to the sale of the properties to Rainier, Lucky received 40 million
from HSC and not from Rainier. The intermediary transaction (the simulated sale to
Rainier), was prompted more on the mitigation of tax liabilities than for legitimate
business purpose constitutes one of tax evasion.

Exemption from taxation

Tax exemption is an immunity or privilege from a charge or burden to which
others are subject. It is the grant of immunity, express or implied, to particular persons
or corporations of a particular class, from the obligation to pay taxes generally within the
same state or taxing district to which others are obliged to pay.

What is the nature of tax exemption? SLEPSSJ

(a) The tax exemptions provided in the Constitution are self-executing and need no
legislation to enforce them.
(b) The grant of tax exemption is a matter of legislative policy that is within the
exclusive prerogative of Congress.
(c) Exemption from taxes is personal in nature and covers only taxes for which the
taxpayer-grantee is directly liable. In any case, it cannot be transferred or assigned by
the person to whom it is given without the consent of the State. He who claims tax
exemption should prove by convincing proof that he is exempted. Therefore, an
exemption granted to a corporation does not apply to its stockholders.
(d) Tax exemptions are not presumed, but when public property is involved, tax
exemption is the rule, and taxation, the exception.
(e) There can be no simultaneous tax exemptions under two laws, one partial and the
other total.
(f) It is an ancient rule that exemptions from taxation are construed in strictissimi juris
against the taxpayer and liberally in favor of the taxing authority. Tax exemptions are
looked upon with disfavor and may almost be said to be odious to the law.
(g) He who claims that he is exempted from tax must be able to justify his claim by the
clearest grant of organic or statute law by words to plain to be mistaken. If ambiguous,
there is no tax exemption.

What are the kinds of tax exemption?

The kinds of tax exemptions are as follows:
(1) Express tax exemption (or affirmative exemption) – This is the tax exemption
which expressly and affirmatively exempts from taxation certain persons, properties or
transactions, either entirely or in part. It may be created by express provisions of the
Constitution, statute, treaty or ordinance.
(2) Implied tax exemption (or exemption by omission) – This is the tax exemption
which may be either accidental or intentional, as where the tax is laid on certain classes
of persons, properties or transactions without mentioning other classes. All subjects for
which taxation is not provided are exempted, and the subjects selected are alone
taxable. Tax exemptions are not presumed, but when public property is involved,
exemption is the rule, and taxation, the exception
(3) Contractual tax exemption - Contractual tax exemption, in the real sense of the term
and where the non-impairment clause of the Constitution can rightly be invoked, is one
which is agreed to by the taxing authority in contracts, such as the one contained in
government bonds or debentures, lawfully entered into under enabling laws in which the
government, acting in its private capacity, sheds its cloak of authority and waives its
governmental immunity. This exemption must not be confused with the tax exemption
granted under a franchise, which is not a contract within the context of non-impairment
clause of the Constitution.
In general, tax exemptions granted by contract are not assignable. However, Congress
may authorize a transfer of the tax exemption either by the original act or by a
subsequent statute. A contractual tax exemption may also be transferred where the
original grant includes the successors and assigns of the grantee.
Statutory exemptions are generally granted on the basis of contract and on grounds of
public policy.

What is the rationale for the grant of tax exemption?

The rationale for the grant of tax exemption is some kind of public benefit or interest
which the law-making body considers sufficient to offset the monetary loss entailed in
the grant of tax exemptions.

What are the grounds for tax exemption?

(1) The power of the Legislature to exempt taxpayers from taxation, although of wide
scope, is not unlimited. Exemptions from taxation, when properly made, must be
determined in the legislative discretion, which must not, however, be arbitrary; there
must underlie in its exercise some principles of public policy that can support a
presumption that the public interest will be subserved by the exemption allowed.
(2) The purpose of the grant is some public benefit or interest which the law-making
body considers sufficient to offset the monetary loss entailed in the grant of tax
exemptions.
(3) Tax exemptions in tax treaties are created on grounds of reciprocity or to lessen
the rigors of the international double or multiple taxation.

May tax exemption be granted on the ground of equity?

No. Tax exemption cannot be recognized on grounds of equity. The long range
objective of all tax measures is the accomplishment of social order. Although the
variant forms of taxation may sometimes produce individual hardships, a too stilted
interpretation of tax laws for the benefit of one particular taxpayer may result in the loss
of revenue at the expense of the government and operate to the disadvantage of the
others contributing to its support. A tax exemption claimed merely on the ground that
another person similarly situated has not paid similar taxes is unjustifiable and should
be ignored.

May tax exemptions be revoked?

Yes. As a general rule, grants of tax exemption are revocable. The Congressional
power to grant an exemption necessarily carries with it the consequent power to revoke
the same. In the case of franchises to operate public utilities, the Constitution provides
that no franchise shall be granted unless subject to the condition that it shall be subject
to repeal or amendment. Therefore, any exemption granted under a franchise may be
revoked by Congress.
Exception: On the other hand, there is a recognized exception as regards contractual
exemptions, on the theory that revocation without the consent of the grantee would
impair the obligation of contract. There is no vested right in a tax exemption, more so
when the latest expression of legislative intent renders its continuance doubtful. Being
a mere statutory privilege, a tax exemption may be modified or withdrawn at will by the
granting authority. To state otherwise is to limit the taxing power of the State, which is
unlimited, plenary, comprehensive and supreme. The power to impose taxes is one so
unlimited in force and so searching in extent, it is subject only to restrictions which rest
on the discretion of the authority exercising it.

The President of the Philippines and the Prime Minister of Japan entered into an
executive agreement in respect of a loan facility to the Philippines from Japan whereby
it was stipulated that interest on loans granted by private Japanese financial institutions
to private financial Institutions in the Philippines shall not be subject to Philippine
income taxes. Is this tax exemption valid? Explain.
Yes. The tax exemption is valid because an executive agreement has the force
and effect of a treaty under the provision of the Revenue Code. Taxation is subject to
International Comity.

Equitable recoupment
The doctrine of “equitable recoupment” arose from common law origin allowing the
offsetting of a prescribed claim for refund against a tax liability arising from the same
transaction on which an overpayment is made on one hand and underpayment is due
on the other hand. In other words, when the refund of a tax supposedly due to the
taxpayer has already been barred by prescription, and the same taxpayer is assessed
with a tax at present, the two taxes may be set-off with each other. It allows a taxpayer
whose claim for refund has prescribed to offset tax liabilities with his claim of
overpayment.
But this doctrine of equitable recoupment is allowed only in common law countries, but
NOT in the Philippines. It finds no application to cases where the taxes involved are
totally unrelated, and although it seems equitable, IT IS NOT ALLOWED IN OUR
JURISDICTION because of the doctrine of no set-off or compromise.

Prohibition on compensation and set-off

May taxes be the subject of set-off or compensation? Explain.
No. Taxes cannot be the subject of set-off or compensation for the following
reasons: TAP (1) taxes are of distinct kind, essence and nature, and these impositions
cannot be classed in merely the same category as ordinary obligations; (2) the
applicable laws and principles governing each are peculiar, not necessarily common, to
each; and (3) public policy is better subserved if the integrity and independence of taxes
are maintained. However, if the obligation to pay taxes and the taxpayer’s claim against
the government are both overdue, demandable, as well as fully liquidated,
compensation takes place by operation of law and both obligations are extinguished to
their concurrent amounts.

A debt is liquidated when its existence and amount are determined. A debt is
considered liquidated, not only when it is expressed already in definite figures which do
not require verification, but also when the determination of the exact amount depends
only on a simple arithmetical operation.

Can an assessment for a local tax be the subject of set- off or compensation against a
final judgment for a sum of money obtained by the taxpayer against the local
government that made the assessment? Explain.
No. Taxes and debts are of different nature and character; hence, no set-off or
compensation between these two different classes of obligations is allowed. The taxes
assessed are the obligations of the taxpayer arising from law, while the money
judgment against the government is an obligation arising from contract, whether
express or implied. Inasmuch that taxes are not debts, it follows that the two obligations
are not susceptible to set-off or legal compensation. It is only when the local tax
assessment and the final judgment are both overdue, demandable, as well fully
liquidated may set-off or compensation be allowed.

Compromise and tax amnesty

A compromise agreement is a contract whereby the parties, by making reciprocal
concessions, avoid a litigation or put an end to one already commenced. It involves a
reduction of a person’s tax liability. Accordingly, a compromise is either judicial, if the
objective is to put an end to a pending litigation, or extrajudicial, if the objective is to
avoid a litigation.
Its validity is dependent upon the fulfillment of the requisites and principles of contracts
dictated by law; and its terms and conditions must not be contrary to law, morals, good
customs, public policy, and public order.
When given judicial approval, a compromise agreement becomes more than a contract
binding upon the parties. Having been sanctioned by the court, it is entered as a
determination of a controversy and has the force and effect of a judgment. It is
immediately executory and not appealable, except for vices of consent or forgery. The
nonfulfillment of its terms and conditions justifies the issuance of a writ of execution; in
such an instance, execution becomes a ministerial duty of the court.
A compromise is generally allowed and enforceable under the law when the subject
matter thereof is not prohibited from being compromised and the person entering such
compromise is duly authorized to do so.

“Tax amnesty” is a general grant of pardon or the intentional overlooking by the State of
its authority to impose penalties on persons otherwise guilty of violation of a tax law. It
partakes of an absolute waiver by the government of its right to collect what otherwise
would be due it and to give tax evaders who wish to relent a chance to start with a clean
slate. A tax amnesty, much like a tax exemption, is never favored nor presumed in law
and if granted by statute, the terms of the amnesty like that of a tax exemption must be
construed strictly against the taxpayer and liberally in favor of the taxing authority. It
also gives the government a chance to collect uncollected tax from tax evaders without
having to go through the tedious process of a tax case.
“Tax amnesty” refers to the articulation of the absolute waiver by a sovereign of its right
to collect taxes and power to impose penalties on persons or entities guilty of violating a
tax law. Tax amnesty aims to grant a general reprieve to tax evaders who wish to come
clean by giving them an opportunity to straighten out their records.

Distinguish "tax amnesty" from "tax exemption."

Tax amnesty is an immunity from all criminal, civil and administrative liabilities arising
from non-payment of taxes. It is a general pardon given to all taxpayers. Tax
exemption is an immunity from the civil liability only. It is an immunity or privilege, a
freedom from a charge or burden to which others are subjected. The former applies only
to past tax periods, hence of retroactive application. The latter is generally prospective
in application.
In a tax amnesty, however, there will be a revenue loss since there was actually taxes
due but the collection was just waived by the Government. In tax exemption, there is no
revenue loss because there was no actual taxes due as the person or transaction is
protected by tax exemption.

How should tax amnesty be construed?

While tax amnesty, similar to a tax exemption, must be construed strictly against the
taxpayer and liberally in favor of the taxing authority, it is also a well-settled doctrine that
the rule-making power of administrative agencies cannot be extended to amend or
expand statutory requirements or to embrace matters not originally encompassed by the
law. Administrative regulations should always be in accord with the provisions of the
statute they seek to carry into effect, and any resulting inconsistency shall be resolved
in favor of the basic law.

May the creditable withholding taxes be the subject of tax amnesty?

No. Just like in the compromise settlement of tax liability of a taxpayer, withholding
taxes cannot fall within the coverage of tax amnesty because the same is not one of the
taxes for which a taxpayer is directly liable. Withholding tax is just a mode of collecting
the tax and the tax that is being withheld is treated as a trust fund which should be
remitted to the government because it is not a personal tax liability of the withholding
agent, but that of the payor, which should have been remitted to the government when
the same was withheld from the taxpayer.