BAR 2021

TAXATION LAW

GENERAL PRINCIPLES
Handout No. 001
 TAXATION – GENERAL PRINCIPLES

I. General Principles
Reviewer on Taxation 1
In the case of Lutz v. Araneta (G.R. No. L-7859, December 22, 1955), the Supreme
Court upheld the validity of the Sugar Adjustment Act, which imposed a tax on milled
sugar since the purpose of the law was to strengthen an industry that is so undeniably
vital to the economy – the sugar industry (Aban, 2001).
Regulation of activities/industries – Taxes may also be imposed for a regulatory
purpose.

A. Concept and Purpose of Taxation

1. Definition

Q: How do can we define Taxation?

A: It is an enforced proportional contribution, imposed by the State by its sovereign
capacity, to support the government.
Three elements:
1. It is an enforced proportional contribution from persons and properties;
2.It is imposed by the State by virtue of its sovereignty; and
3.It is levied for the support of the government.

2. Purpose

Q: Does taxation has a purpose? If so, are there any distinction?

A: Yes, it has. We have primary and secondary purpose which are the following:
1. Primary or revenue purpose – to raise funds or property to enable the State
to promote the general welfare and protection of the people.
2. Secondary or non-revenue purposes[PR2EP]
a. Promotion of general welfare– taxation may be used as an implement of
police power to promote the general welfare of the people as, for instance,
in the rehabilitation and stabilization of a threatened industry which is
affected with public interest, like the oil industry (Caltex Philippines, Inc. v.
Commission on Audit, et al., G.R. No. 92585, May 8, 1992).

Taxation also has a regulatory purpose as in the case of taxes levied on

excises or privileges like those imposed on tobacco and alcoholic
products, or amusement places like night clubs, cabarets, cockpits, etc
(Aban, 2001).

b. Reduction of social inequality – a progressive system of taxation prevents

the undue concentration of wealth in the hands of few individuals.
Progressivity is based on the principle that those who are able to pay
more should shoulder the bigger portion of the tax burden.

c. Encourage economic growth – the grant of incentives or exemptions

encourage investment thereby stimulating economic activity.

d. Protectionism – Protective tariffs and customs duties are imposed as

taxes in order to protect important sectors of the economy or local
industries, as in the case of foreign importations.

TAXATION LAW General Principles [1]

Q: A criminal complaint was filed against Visitacion Tan (Tan) for false and
fraudulent income tax returns. Tan’s income tax return understated his
gross income. However, the court acquitted Tan since the prosecution was
not able to show proof beyond reasonable doubt that of Tan’s fraudulent
returns.

The Commissioner, then proceeded to serve a demand letter against Tan

for the understated gross income. Tan replied that his acquittal to the
criminal complaint absolved him of any civil liability since the
Commissioner did not make any reservation to file a separate action for the
civil liability. Hence, the Tan posits that the accused once acquitted is
exempt from both criminal and civil responsibility because when a criminal
action is instituted, civil action arising from the same offense.

Is Tan correct?
A: No, The two cases are circumscribed by factual premises which are diametrically
opposed to each either, and are founded on entirely different philosophies. Under
the Penal Code the civil liability is incurred by reason of the offender's criminal
act. Stated differently, the criminal liability gives birth to the civil obligation such
that generally, if one is not criminally liable under the Penal Code, he cannot
become civilly liable thereunder. The situation under the income tax law is the
exact opposite. Civil liability to pay taxes arises from the fact, for instance, that
one has engaged himself in business, and not because of any criminal act
committed by him. The criminal liability arises upon failure of the debtor to satisfy
his civil obligation. The incongruity of the factual premises and foundation
principles of the two cases is one of the reasons for not imposing civil indemnity
on the criminal infractor of the income tax law. (Republic of the Philippines v.
Pedro Patanao, G.R. No. L-22356, July 21, 1967)

3. Distinguish: tax and other forms of exactions

Q: Provide for the distinctions of tax and other forms of exactions. In table
form is possible.
A:
Taxes Penalty

Violation of tax laws may give rise to Any sanction imposed as a

imposition of penalty punishment for

violation of law or acts deemed

injurious
Primarily intended to raise revenue Designed to regulate conduct

May be imposed only by the May be imposed by the government

government or private individuals or entities

Cannot be a subject of set off or Can be a subject of set off or

compensation compensation

Taxes License and Regulatory Fee

Imposed under the taxing power of Levied under the police power of the
the state for purposes of revenue. state.

TAXATION LAW General Principles [2]

 Forced contributions for the purpose Exacted primarily to regulate
of maintaining government functions. certain businesses or
occupations
Generally unlimited as to amount Should not unreasonably exceed the
expenses of issuing the license and
of supervision.
Imposed on persons, property and Imposed only on the right to exercise
the right to exercise a privilege. a privilege

Failure to pay does not necessarily Failure to pay makes the act or
make the business

Taxes Tarrif
All embracing term to include A kind of tax imposed on articles
various kinds of enforced which are traded internationally
contributions upon persons for the
attainment of public purposes
Penalty for non-payment:
surcharges or imprisonment (except
poll tax)

Taxes Toll

Paid for the support of the Paid for the use of another’s property
government
Demand of sovereignty Demand of proprietorship

Generally, no limit on the amount Amount paid depends upon the cost
collected as long as it is not of construction or maintenance of the
excessive, unreasonable or public improvement used.
confiscatory
Imposed only by the government Imposed by the government or by
private individuals or entities.

Taxes Special Assessment

Levied not only on land Levied only on land

Imposed regardless of public Imposed because of an increase in

improvements value of land benefited by public
improvement
Contribution of a taxpayer for the Contribution of a person for the
support of the government construction of a public improvement

B. Distinguish: Power of Taxation, Police Power, and Eminent Domain

C. Theory and Basis of Taxation

1. Lifeblood Theory

TAXATION LAW General Principles [3]

Q: Why do we regard Taxes as Lifeblood?
A: Taxes are the lifeblood of the State, through which the government and its
agencies continue to operate and with which the State effects its functions for
the welfare of its constituents.
Beware of this! Consequences of the lifeblood theory:

1. The State is not estopped from collecting taxes by the mistakes or errors of its
agents (CIR v CTA, CA & City Trust Banking Corp.), save for cases of
agent’s extreme or gross negligence. (CBC v CIR)
2. Injunction generally does not lie against the collection of taxes (La Suerte
Cigar v CA)

3. Laws exempting subjects from taxation are strictly construed against the
taxpayer.
But even with the lifeblood theory, the power of taxation must still be exercised
reasonably and in accordance with the law and prescribed procedure. (Reyes v
Almanzor)

2. Necessity Theory

Q: Why is Taxation a necessity?

A: The power to tax is an attribute of sovereignty. It is a power emanating from
necessity. It is a necessary burden to preserve the State's sovereignty and a
means to give the citizenry:
a. an army to resist an aggression;
b. a navy to defend its shores from invasion;
c. a corps of civil servants to serve;
d. public improvement designed for the enjoyment of the citizenry and those
which come within the State's territory; and
e. facilities and protection which a government is supposed to provide. [Phil.
Guaranty v. CIR, G.R. No. L-22074 (1965)]

3. Benefits-received Theory

Q: Does Tax offer a symbiotic relationship? How so?

A: This principle serves as the basis of taxation and is founded on the reciprocal
duties of protection and support between the State and its inhabitants.
(Philippine Guaranty Co., Inc. v CIR)

---Case for Enlightenment!---

Despite the natural reluctance to surrender part of one's hard earned income to the
taxing authorities, every person who is able to, must contribute his share in the
running of the government. The government for its part is expected to respond in the
form of tangible and intangible benefits intended to improve the lives of the people
and enhance their moral and material values. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power. [CIR v. Algue]

TAXATION LAW General Principles [4]

D. Jurisdiction over Subject and Objects

Q: Quickly discuss jurisdiction over subject and objects.

A: The limited powers of sovereignty are confined to objects within the respective
spheres of governmental control. These objects are the proper subjects or
objects of taxation and none else.

1. Tax laws cannot operate beyond a State’s territorial limits.

2. The government cannot tax a particular object of taxation which is not within
its territorial jurisdiction.
3. Property outside the State’s jurisdiction does not receive any protection of the
State.
4. If a law is passed by Congress, it must see to it that the object or subject of
taxation is within the territorial jurisdiction of the taxing authority.

E. Principles of a Sound Tax System

1. Fiscal Adequacy

Q: What is meant by Fiscal Adequacy?

A: The sources of revenue should be adequate to meet government expenditures
and their variations.
Simply Stated: Revenues should be greater than expenses of the government.

2. Theoretical Justice

Q: How do we administer Theoretical justice?

A: The tax must be based upon the taxpayer’s ability to pay.

3. Administrative Feasibility

Q: Care to expound on Administrative Feasibility?

A: The tax system should be capable of being effectively administered and
enforced with the least inconvenience to the taxpayer.
But note that even if the imposition is burdensome to the taxpayer, the
imposition is not necessarily invalid unless some aspect of it is shown to violate
any law or the Constitution.

---Curiosity Checkpoint!---

Non-observance of administrative feasibility will not render the tax imposition

invalid, except to the extent that specific statutory or constitutional limitations are
impaired. Administrative feasibility is one of the canons of a sound tax system. It simply
means that the tax system should be capable of being effectively administered and
enforced with the least inconvenience to the taxpayer. Non-observance of the canon,
however, will not render a tax imposition invalid except to the extent that specific
constitutional or statutory limitations are impaired. Hence, the validity of the imposition
of VAT on toll fees was upheld in this case notwithstanding the fact that substantiation
requirements for claiming input VAT is impractical and incapable of implementation
since the name, address, TIN of the tollway user must be indicated in the invoice. (Diaz
v Secretary of Finance)

TAXATION LAW General Principles [5]

F. Inherent and Constitutional Limitation of Taxation

Q: Cite all the limitations of Taxation

A:
1. Inherent Limitations:

a. The tax must be imposed for a public purpose Case in point: Pascual v
Secretary of Public Works
Tax must be for public purpose; incidental public benefit will not cure the
defect; donation after. A law was passed appropriating fund for the
construction, reconstruction, repair, extension and improvement of Pasig
feeder road terminals located within the subdivision owned by then Senator
Zulueta. Although Zulueta offered to donate the feeder roads to the
municipality of Pasig, no deed of donation was executed before the money was
appropriated. The property remained private and therefore the appropriation
cannot be said to be for a public purpose. Incidental advantage to the state
resulting from the promotion of private interests and private enterprises as well
as the donation of the property to the government 5 months after the approval
of the law did not cure the defect.
b. The power to tax is inherently legislative in nature

General rule: The power to tax is purely legislative and cannot be delegated to
other branches of the government
Exceptions:
1. Delegation to local governments because LGUs are granted the
autonomous authority to create their own sources of revenue and levy taxes
2. Designation to the president (imposition of tariff rates)
3. Delegation to administrative authorities (such as authority to fix rates within
limits specified by law)

Case in point: Pepsi-Cola v Municipality of Tanauan

The SC upheld Section 2 of RA 2264 (Local Autonomy Act), which confers upon
chartered cities, municipalities, and municipal districts to impose municipal
license taxes and fees. The provision is not an undue delegation because while
taxation inherently belongs to the legislative, such powers, as an exception, may
be delegated to local governments in respect to matters of local concern.
Municipal corporations may be allowed to tax subject which for reasons of public
policy the State has not deemed wise to tax for more general purposes. This is
pursuant to the Constitutional mandate to ensure autonomy of the local
government.
c. Government entities, agencies, and instrumentalities are generally
exempt from taxation
There is no point in national and local government taxing each other, unless a
sound and compelling policy requires such transfer of public funds from one
government pocket to another. But GOCCs are not exempt from real property
taxes.

TAXATION LAW General Principles [6]

 Watchout: Since it is settled that MIAA is a government instrumentality, it
follows that it is exempt from paying the question real property taxes. (MIAA v
City of Parañaque)

d. International Comity

This means respecting tax treaties (usually for exemption) entered into by the
State with another sovereign.
The obligation to comply with a tax treaty must take precedence over an
administrative issuance. An administrative issuance should not operate to divest
entitlement to a relief granted by a tax treaty.
But still, tax exemptions based on international agreements are construed strictly
against the taxpayer.

e. Territorial jurisdiction

The power to tax is limited to the territorial jurisdiction of the State.

Case in point: Raegan v CIR

Military bases are PH territory. William Reagan sold a car in Clark Air Base, for
which BIR assessed him for the payment of income tax. He claims that he is
exempt because Clark Air Base is a base outside the PH. The Court held that
he is liable to pay income tax on the sale of his car because Clark Air Base is
within PH territorial jurisdiction to tax. The PH, being independent and
sovereign, its authority may be exercised over its entire domain. There is no
portion thereof beyond its power. And while it may allow another power to
participate in the exercise of jurisdictional right over certain portions of its
territory [such as the Military Bases Agreement], by doing so, it by no means
follows that such areas become impressed with an alien character. Such areas
retain their status as native soil.

2. Constitutional Limitations:

a. Due process (Art III, Sec 1)

b. Equal protection laws (Art III, sec 1)
c. Religious Freedom (Art III, sec 5)
d. Non-impairment of contracts (Art III, sec 10)
e. Prohibition against non-payment of poll tax (Art III, sec 20)
f. Uniformity and equality of taxation and progressive system of taxation
(Art VI, sec 28 par 1)
g. Delegated authority to the president to impose tariff rates (Art VI, sec 28
par 2)
h. Prohibition against taxation of real property of charitable institutions,
churches, parsonages or convents, mosques, and non-profit cemeteries
(Art VI, 28 par 3)
i. Prohibition against taxation of non-stock, non-profit educational
institutions (Art XIV, sec 4 no. 3)
j. Majority vote of congress for grants of tax exemptions (Art VI, 28 par 4)
k. Prohibition on use of tax levied for special purpose (Art VI, sec 29)
l. Tax bills should originate exclusively in the house of representatives
(Art VI, sec 24)
m. President’s veto power on appropriation, revenue, and tariff bills (Art VI,
sec 27)
n. Judicial power to review legality of tax (Art VIII, sec 5)
o. Grant of power to LGUs to create its own sources of revenue (Art X, sec
5)

TAXATION LAW General Principles [7]

Stages or Aspects of Taxation

Q: What are the aspects of Taxation? Describe a little.

A: Taxation has the following aspects or also known as stages:
1. Levy or imposition (tax legislation) – This refers to the enactment of a law by
Congress authorizing the imposition of tax. It further contemplates the
determination of the subject of taxation, purpose for which the tax shall be
levied, fixing the rate of taxation and the rules of taxation in general.
2. Assessment and collection (tax administration) – This is the act of
administration and implementation of the tax law by executive through its
administrative agencies.
3. Payment – The act of compliance by the taxpayer, including such options,
schemes or remedies as may be legally available.

H. Requisites of a Valid Tax

Q: What then are the requisites for a valid tax?

A: The requisite for a valid tax are the following:
1. It must be 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 inconsonance with the due process clause; and
5. The tax must not infringe on the inherent and constitutional limitations of the
power of taxation.

I. General Concepts in Taxation

1. Prospectivity of Tax laws

Q: State the rules on Prospectivity of Tax laws

A: Tax laws must be applied prospectively, except by express provision of law.
Consequently:

1. Exemption statutes are not retroactive.

2. Rulings of the CIR are non-retroactive if the revocation, modification or
reversal thereof will be prejudicial to the taxpayer, except in the following
cases:
a. Where the taxpayer deliberately misstates or omits material facts from his
return;
b. Where the facts subsequently gathered by the BIR are materially
different from the facts on which the ruling is based; or
c. Where the taxpayer acts in bad faith

3. But when the ruling, circular or rules and regulations was nullified by a court
(not by the CIR), then the non-retroactivity rule does not apply.

4. A general interpretative rule issued by the CIR may be relied upon by

taxpayers from the time the rule is issued from the time the rule is reversed by
the Commissioner or by the Court.

TAXATION LAW General Principles [8]

---Cases for Enlightenment!---

General rule; Circulars of the CIR do not have retroactive application if to

do so would be prejudicial to taxpayers. BIR issued a ruling wherein VAT is
excluded in the determination of the tax base for purposes of computing excise
tax. Later on, it issued a ruling that included back VAT to the tax base. It sought
to apply the ruling retroactively to Alhambra by charging it with deficiency ad
valorem tax. This was not allowed by the court as it would be prejudicial to the
taxpayer. (CIR v CA)

A vested right cannot spring from a wrong interpretation of the law. The DOF
Secretary issued a circular authorizing deduction from the income tax of unpaid
claims on war losses in the year the last installment relating to such claim was
received. The Secretary later on issued another circular that revoked the former
and allowed the deduction only in the year the losses were incurred, consistent
with Section 30 (d) of the NIRC. The second circular was applied retroactively
and therefore Hidaldo was no longer allowed to deduct his losses because they
were not incurred in the present year, notwithstanding the fact that he relied on
the earlier circular. SC said that a circular issued on a wrong construction of law
cannot give rise to a vested right that can be invoked by a taxpayer.

Non-retroactivity or rulings does not apply when nullity is declared by the

courts and not the CIR. In 1988, PBCom claimed a refund for taxes that it paid
in 1985. It relied on RMC No. 7-85, changing the prescriptive period for claiming
refunds from 2 years to years. The SC declared the RMC void for being contrary
to law and refused to grant the refund of PBCom for being filed beyond the
prescriptive period. The circular, having been issued on a wrong construction of
law, cannot give rise to a vested right. (PBCom v CIR)

Q: San Roque Inc., simultaneously filed an administrative claim for input tax
refund and a judicial claim for input tax refund due to the inaction of the
BIR. Note, that these actions were filed prior to the CIR v. Aichi 646 Phil.
710 ruling. What San Roque Inc., used as legal basis for his action is BIR
Ruling No. DA-489-03 which states that a taxpayer-claimant need not wait
for the lapse of 120-day period before it could seek judicial relief with the
CTA by way of Petition for Review.
Is BIR Ruling No. DA-489-03 a valid basis for the filing of the simultaneous
claim for refund?
A: Yes, general interpretative rule issued by the CIR pursuant to its power under
Section 4 of the NIRC, hence, applicable to all taxpayers. Thus, taxpayers can
rely on this ruling from the time of its issuance on 10 December 2003. The
conclusion is impelled by the principle of equitable estoppel enshrined in Section
246 of the NIRC which decrees that a BIR regulation or ruling cannot adversely
prejudice a taxpayer who in good faith relied on the BIR regulation or ruling prior
to its reversal. (San Roque Power Corporation v CIR, G.R. No. 203249, July 23,
2018)
The 120+ 30-day period is generally mandatory and jurisdictional from the
effectivity of the 1997 NIRC on 1 January 1998, up to the present. By way of an
exception, judicial claims filed during the window period from 10 December 2003
to 6 October 2010, need not wait for the exhaustion of the 120-day period. The
exception in San Roque has been applied consistently in numerous decisions of
this Court.
Note:
Under TRAIN Law, upon the successful establishment and implementation of an
enhanced VAT refund system, refunds of creditable input tax shall be granted
within 90 days from the filing of the VAT refund application with the Bureau.

TAXATION LAW General Principles [9]

2. Imprescribtibility

Q: Do taxes prescribe?
A: Unless otherwise provided by law, taxes are imprescriptible. [CIR v. Ayala
Securities Corporation G.R. No. L-29485 (1980)]
The law on prescription, being a remedial measure, should be liberally construed
in order to afford such protection. As a corollary, the exceptions to the law on
prescription should perforce be strictly construed. [Commissionerv. Standard
Chartered Bank, G.R. No. 192173 (2015)]
Summary of prescription on assessment and collection of National Internal
Revenue Taxes

3 Years Prescription of assessment AND collection

from:
(a)the prescribed last day of filing of
returns (even if the return was filed
earlier than the deadline); OR
(b)the day when the return was actually
filed if filed later than the last day of filing
[Sec. 203,NIRC], whichever comes later.

5 Years Prescription of assessment in cases of:

(a) false or fraudulent return with intent to

evade tax; OR (b) failure or omission to
file a return [Sec. 222, NIRC] Counted
from the discovery of the fraud, falsity, or
omission.
10 Years Prescription of collection of
tax if:
(1)assessed within the 3-year and 10-
year prescriptive periods;
(2)assessed within the extended period
agreed upon by the Commissioner and
taxpayer (waiver of the prescriptive
period); and
(3)Collected by distraint, levy, or by a
proceeding in court. [Sec. 222, NIRC]

3. Situs of Taxation

Q: When we speak of Situs what comes to mind?

A: Situs answers the question: Where did the income come from? Or literally means
place of taxation.

TAXATION LAW General Principles [10]

Q: Any factors to consider?
A: Yes, we have:
a. Nature of the tax;
b. Subject matter of the tax (person, property, act or activity)
c. Possible protection and benefit that may accrue both to the government and
the taxpayer;
d. Citizenship of the taxpayer;
e. Residence of the taxpayer;
f. Source of income.

Income within Income without

Resident Citizen √ √

Non-Resident √ x
Citizen
Overseas √ x
Contractual
Worker
Resident Alien √ x

Non-Resident Alien √ x

Domestic √ √
Corporation
Foreign Corporation √ x

4. Double Taxation

Q: What is double taxation in its strict or broad sense?

A: Yes. They are different as well.

In direct double taxation or in its strict sense, the kind of double taxation that
prohibited. In order to constitute direct double taxation, both taxes must be
imposed:
(1) On the same property or subject matter
(2) For the same purpose
(3) By the same taxing authority
(4) Within the same territorial jurisdiction
(5) On the same taxing period
(6) Of the same kind or character

On the other hand, there is double taxation in the broad sense or indirect
duplicate taxation if any of the elements for direct duplicate taxation is absent.

TAXATION LAW General Principles [11]

---Cases for Enlightenment!---
No double taxation if one is a penalty and the other is a tax. Republic Bank
was assessed a 1% monthly bank reserve deficiency tax under the Tax Code and
was required to pay 1/10 of 1% for violating the Banking Law. The SC held that
there was no double taxation because the payment of 1/10 of 1% for incurring
reserve deficiencies is a penalty as the primary purpose is regulation, while the
payment of 1% for the same violation is a tax for the generation of revenue.
(Republic Bank v CTA)
No double taxation is one is a license fee and the other is a tax. Both a license
fee and a tax may be imposed on the same business and occupation and such is
not a violation of the rule against double taxation. Hence, there is nothing wrong if
the LGU imposes license fees on wholesale and retail liquor dealer as well as sales
taxes for wholesale and retail dealer of

general merchandise because the impositions are of a different character. The first is
a license fee for the privilege in the sale of liquor in the exercise of police power
while the other is imposed for revenue purposes based on sales made. (Compania
General de Tabacos de Filipinas v City of Manila)

5. Escape from taxation

Q: What is this that we call shifting of tax burden?

A: The act of transferring the burden of a tax from the original payer or the one on
whom the tax was assessed or imposed to someone else. What is transferred is
not the payment of the tax but the burden of the tax. All indirect taxes may be
shifted; direct taxes cannot be shifted.

Q: Can you further explain about direct and indirect taxes?

A: Sure, but first we must know the difference between impact and incidence of
taxation.
Impact of taxation refers to the point where the tax is originally imposed or the
one on whom the tax is formally assessed. Whereas, Incidence of taxation refers
to the point on whom the tax burden finally rests.
In relation to the impact and incidence of taxation, taxes may be direct or indirect.

Direct taxes are exacted from the very person who is intended to pay them. The
impact and incidence of taxation belong to one person such as income tax,
estate tax, donor’s tax, residence tax.
Indirect taxes are demanded from, or are paid by, one person in the expectation
and intention that he can shift the burden to someone else. That is, the impact
and incidence may fall into different people or entities such as VAT, percentage
tax.
Summary: Claiming of exemptions when buyer is exempt from indirect taxes

1. The statutory taxpayer pays the tax (excise tax, for example) and shifts the
burden of payment of the tax by adding the tax to the selling price of the
goods.
2. Refund for the tax paid can later on be claimed if the products are sold to
exempt entities. But the person who may claim the refund depends on the
situation:

TAXATION LAW General Principles [12]

 a. Generally, the statutory taxpayer [seller] has the personality to claim the
refund. See CIR v Shell
b. But if the buyer is exempt from the payment of both direct and indirect
taxes, the buyer himself may claim the refund from the government. See
PAL v CIR

Q: Tax avoidance or Tax evasion, which is legal?

A: Tax avoidance is legal while tax evasion is not.

This involves saving on taxes using legal means. An example of which is estate
planning.

Whereas, Tax evasion involves the use of forbidden and illegal devices to
lessen and minimize tax.

---Case for Enlightenment!---

A taxpayer has a right to decrease the amount of what otherwise could be his taxes
or altogether avoid them within the means permitted by law. The Pachecos and
Delpher Trades Corporation executed a deed of exchange whereby the former
conveyed the real estate they owned in exchange for 2,500 no-par value shares of
stock of the latter. The SC held that there was nothing illegal or objectionable to the
estate planning scheme resorted to by the Pachecos. What they really did was to
invest their properties and change the nature of their ownership from
unincorporated to incorporated form by organizing Delpher Trades to take control
of their properties and at the same time save on inheritance taxes. (Delpher
Trades Corp v IAC)

6. Exemption from taxation

Q: What is the essence of Tax exemption?

A: The essence of tax exemption is the immunity or freedom from a charge or
burden to which others are subjected. It is a waiver of the government’s right to
collect what would have otherwise been collectible. (Secretary of Finance v
Lazatin)

Q: What then is the rule to follow? Can we easily avail of tax?

A: No, Tax exemption is an exception to the rule.
Case in Point: Manila Electric Corporation v Vera

Exemption strictly construed against taxpayer. Any claim for tax exemption
should be strictly construed against the taxpayer. He who clams an exemption
must be able to point to some positive and specific provision of law creating such
right; it cannot be allowed to exist upon a mere vague implication or inference.

TAXATION LAW General Principles [13]

7. Equitable recoupment

Q: Care to explain about this doctrine?

A: The doctrine does not application in our jurisdiction.
The doctrine of equitable recoupment allows a taxpayer whose claim for refund
has been barred by prescription to offset such claims against a current
assessment. The doctrine also allows the government to offset taxes that have
not been collected from the taxpayer against a current claim for refund, although
the government is time-barred from collecting the previous taxes.

8. Prohibition on compensation and set-off

Q: Why is compensation prohibited?

A: The reasons are as follows:
1. The government and the taxpayer are not creditors and debtors of each other.
Debts are due to the government in its corporate capacity while taxes in its
sovereign capacity.
2. Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance.
3. Taxes are not in the nature of contracts between the taxpayer and the
government. Taxes grow out of a duty to the government. Taxes are positive
acts of the government; the personal consent of individual taxpayers is not
required for the making and enforcement of taxes. (Republic v Mambulao
Lumber)

Q: Any exceptions?
A: Yes. We do have an exception which should abide the following conditions:
If the claims against the government have been recognized and an amount has
already been appropriated for that purpose. Where both claims have already
become: due, demandable and fully liquidated, compensation takes place by
operation of law under Art. 1200 in relation to Articles 1279 and 1290 of the
NCC, and both debts are extinguished to the concurrent amount. [Domingo v.
Garlitos, G.R. No. L-18994 (1963)]

9. Compromise

Q: Can we compromise in taxation?

A: Yes, requisites of a tax compromise are as follows:
a. The taxpayer must have a tax liability.
b. There must be an offer (by the taxpayer or Commissioner) of an amount to be
paid by the taxpayer.
c. There must be acceptance (by the Commissioner or the taxpayer, as the case
may be) of the offer in settlement of the original claim.

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10. Tax amnesty

Q: Can a taxpayer be granted amnesty? What are the effects of such grant?
A: Yes. A tax amnesty partakes of an absolute forgiveness or waiver by the
Government of its right to collect what otherwise would be due it, and in this
sense, prejudicial thereto, particularly to give tax evaders, who wish to relent and
are willing to reform a chance to doso and become a part of the new society with
a clean slate. [Republic v. IAC, G.R. No. L-69344 (1991)]

J. Construction and Interpretation of Tax Laws, Rules and Regulations

Q: How do we construe Tax Laws?

A: Tax statute is strictly construed against the government. A tax cannot be
imposed unless it is supported by the clear and express language of a statute.
Hence, it is the burden of the state to first prove that a taxpayer is in fact covered
by a tax statute. CIR v CA and Ateneo de Manila
Exemption is strictly construed against taxpayer. Any claim for tax exemption
should be strictly construed against the taxpayer. He who clams an exemption
must be able to point to some positive and specific provision of law creating such
right; it cannot be allowed to exist upon a mere vague implication or inference.
Manila Electric Corporation v Vera

II. National Taxation

A. Taxing Authority
1. Jurisdiction, power, and functions of the Commissioner of Internal Revenue

Q: What are the powers and Duties of the Bureau of Internal Revenue?
A: The powers and duties of the Bureau of Internal Revenue are:
1. To assess and collect national internal taxes, fees, and charges;
2. To enforce all forfeitures, penalties and fines connected therewith;
3. To execute judgment in all cases decided in its favor by the CTA and the
ordinary courts; and
4. To effect and administer the supervisory and police powers conferred upon it
by the Tax Code or other special laws.

Q: What are the general powers and duties of the BIR?

A: Section 2 of the NIRC provides for the following powers and duties of the BIR
in general:
1. Assess and collect national internal revenue taxes, fees, and charges;
2. Enforce all forfeitures, penalties, and fines connected with the assessment
and collection of taxes, fees, and charges;
3. Execute judgment in all cases decided in its favor by the CTA and the
ordinary courts; and
4. Effect and administer the supervisory and police powers conferred upon it by
the NIRC and other laws.

Q: Does the Commissioner has the power to Interpret Tax laws?

A: Yes. The power to interpret provisions of the NIRC and other tax laws shall be
under the exclusive and original jurisdiction of the CIR, subject to review by the
Secretary of Finance. [Sec. 4, NIRC]

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 A ruling by the CIR that interpret provisions of the NIRC and other tax laws
shall be presumed valid unless modified, reversed or superseded by the
Secretary of Finance. A taxpayer who receives an adverse ruling from the CIR
may, within thirty (30) days from the date of receipt of such ruling, seek its
review by the Secretary of Finance. The Secretary of Finance may also review
the rulings motu proprio. [DOF Order 7-02]

Q: Can the Commissioner decide tax cases?

A: Yes. The power to decide (1) disputed assessments, (2) refunds of internal
revenue taxes, fees, charges and penalties, or (3) other matters arising under
the NIRC or other laws administered by the BIR is vested in the CIR, subject to
the exclusive appellate jurisdiction of the CTA. [Sec. 4, NIRC]

Rule-making authority of the Secretary of Finance

Q: What is the rule-making authority of the Secretary of Finance?

A: The Secretary of Finance, upon recommendation of the CIR, shall promulgate
all needful rules and regulations for effective enforcement of the provisions of
the Code. (Sec 244, NIRC)

~o0o~

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