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TAXATION

GENERAL PRINCIPLES OF TAXATION

TAXATION, IN GENERAL

1. State briefly and concisely the nature of taxation. Alternatively, define taxation.

SUGGESTED ANSWER: The inherent power of the sovereign exercised through the legislature to impose burdens upon
subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of
government.

2. What is the nature of the States power to tax ? Explain briefly.

SUGGESTED ANSWER: The nature of the states power to tax is two-fold. It is both an inherent power and a
legislative power. It is inherent in nature being an attribute of sovereignty. This is so, because without the
taxes, the states existence would be imperiled. There is thus, no need for a constitutional grant for the state to exercise
this power. It is a legislative power because it
involves the promulgation of rules. Taxation is a set of rules, how much is the tax to be paid, who pays the tax, to whom
it should be paid, and when the tax should be paid.

3. What is the underlying theory of taxation ? Explain briefly.

SUGGESTED ANSWER: Taxes are the lifeblood of the nation. Without revenue raised from taxation, the
government will not survive, resulting in detriment to society. Without taxes, the government would be paralyzed for
lack of motive power to activate and operate it. (Commissioner of Internal Revenue v. Algue, Inc. et al., 158 SCRA 8, 16-
17)

4. Marshall said that, the power to tax involves the power to destroy. On the other hand, Holmes stated that the
power to tax is not the power to destroy while the court sits.
Reconcile the statements. In the alternative, what are the implications that
flow from the above statements ? SUGGESTED ANSWERS: Marshalls view refers to a
valid tax while the Holmes view refers to an invalid tax. a. The imposition of a valid tax
could not be judicially restrained merely because it would prejudice taxpayers property. b. An illegal
tax could be judicially declared invalid and should not work to prejudice a taxpayers property.

5. Discuss briefly the basis/bases, or rationale of taxation.


SUGGESTED ANSWER: a. Reciprocal duties of protection and support between the state and its citizens and
residents. Also called symbiotic relation between the state and its citizens.

b. Jurisdiction by the state over persons and property within its territory.

6. Discuss briefly but comprehensively the objectives or purposes of taxation.

SUGGESTED ANSWER: The purposes or objectives of taxation are the following:


a. The primary purpose: 1) Revenue purpose.
b. The secondary purposes 1) Sumptuary or regulatory purpose.
2) Compensatory purpose. 3) To implement the power of eminent
domain.
7. Distinguish a tax from a license fee. SUGGESTED ANSWER: The following are the distinctions: a.
Purpose: Tax imposed for revenue while license fee for regulation. Tax for general public purposes while license fee for
regulatory purposes only. b. Basis: Tax imposed under power
of taxation while license fee under police power. c.
Amount: In taxation, no limit as to amount while license fee limited to cost of the license and the expenses of police
surveillance and regulation. d. Time of
payment: Taxes normally paid after commencement of business while license fee before. e.
Effect of payment: Failure to pay a tax does not make the business illegal while failure to pay license fee makes business
illegal. f. Surrender: Taxes, being the lifeblood of the state, cannot be surrendered except for lawful
consideration while a license fee may be surrendered with or without consideration. (Cooley on Taxation, pp. 1137-
1138; Pacific Commercial Company v. Romualdez, et al., 49 Phil. 924)

8. How may the power to tax be utilized to carry out the social justice program of our government ?
SUGGESTED ANSWER: The compensatory purpose of taxation is to implement the social justice provisions of the
constitution through the progressive system of taxation, which would result to equal distribution of wealth, etc.

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

In recent years, the increasing social challenges of the times expanded the scope of the state activity, and taxation
has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection
of local industries as well as public welfare and similar objectives. (Batangas Power Corporation v. Batangas City, et al.,
G. R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City of Cabanatuan, G. R. No.
149110, April 9, 2003)

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 in the joint exercise of the power of taxation and police power where
regulatory taxes are collected.

Taxation may be made the implement of the states police power. The motivation behind many taxation measures
is the implementation of police power goals. [Southern Cross Cement Corporation v. Cement Manufacturers Association
of the Philippines, et al., G. R. No. 158540, August 3, 2005) The reader should note that the August 3, 2005 Southern
Cross case is the decision on the motion for reconsideration of the July 8, 2004 Southern Cross decision.

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

10. Taxation distinguished from police power. Taxation is distinguishable from police power as to the means
employed to implement these public goals. Those doctrines that are unique to taxation arose from peculiar
considerations such as those especially punitive effects (Southern Cross Cement Corporation v. Cement Manufacturers
Association of the Philippines, et al., G. R. No. 158540, August 3, 2005) as the power to tax involves the power to destroy
and the belief that taxes are lifeblood of the state. (Ibid.) taxes being the lifeblood of the government, their prompt and
certain availability is of the essence.

These considerations necessitated the evolution of taxation as a distinct legal concept from police power. (Ibid.)
11. How the power of taxation may be used to implement power of eminent domain. Tax measures are but
enforced contributions exacted on pain of penal sanctions and clearly imposed for public purpose. In most recent
years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable
distribution of wealth. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16,
2005)

Establishments granting the 20% senior citizens discount may claim the discounts granted to senior citizens as tax
deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be
allowed as deduction from gross income for the same taxable year that the discount is granted. Provided, further, That
the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales
receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National 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 of 2003, Sec. 4 (a)]

12. What are the three basic principles of a sound tax system? Explain each briefly.
SUGGESTED ANSWER: The canons of a sound tax system, also known as the characteristics or, principles of a sound tax
system, are used as a criteria in order to determine whether a tax system is able to meet the purposes or objectives of
taxation. They are:

a. Fiscal adequacy.

b. Administrative feasibility.

c. Theoretical justice.

13. What are the elements or characteristics of a tax ? SUGGESTED ANSWER:


a. Enforced contribution.

b. Generally payable in money.

c. Proportionate in character.

d. Levied on persons, property or exercise of a right or privilege.

e. Levied by the state having jurisdiction.

f. Levied by the legislature.

g. Levied for a public purpose.

h. Paid at regular periods or intervals.

14. State the requisites of a valid tax. SUGGESTED ANSWER: a. A


valid tax should be within the jurisdiction of the taxing authority.

b. That the assessment and collection of certain kinds (The same as the inherent limitations of the power of
taxation) should be for a public purpose.

c. The rule of taxation should be uniform.


d. That either the person or property of taxes guarantees against injustice to individuals, especially by way
or notice and opportunity for hearing be provided.

e. The tax must not impinge on the inherent and Constitutional limitations on the power of taxation.

15. What are the classes or kinds of taxes according to the subject matter or object ?
SUGGESTED ANSWER: a. Personal, poll or capitalization imposed on all
residents, whether citizen or not. Example Community Tax.

b. Property - Imposed on property. Example Real property tax.


c. Excise imposed upon the performance of an act, the enjoyment of a privilege or the engaging in an
occupation. Example income tax, estate tax.

16. What are the kinds of taxes classified as to who bears the burden ? Explain each briefly.
SUGGESTED ANSWER: Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden of
taxation, taxes may be classified into:

a. Direct taxes. Those that are extracted from the very person who, it is intended or desired, should pay them
(Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G. R. No. 140230, December 15,
2005); they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in,
(Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, supra) which liability cannot be
shifted or transferred to another. Example income tax, estate tax, donors tax, etc.

b. Indirect taxes are those that are demanded in the first instance, from, or are paid by, one person in the
expectation and intention that he can shift the burden to (Commissioner of Internal Revenue v. Philippine Long Distance
Telephone Company, supra) to someone else not as a tax but as part of the purchase price. (Commissioner, of Internal
Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005 citing various cases
and authorities) Example value added tax (VAT), documentary stamp tax, excise tax, percentage tax, etc

17. Silkair (Singapore) PTE, Ltd., an international carrier, purchased aviation gas from Petron Corporation, which it uses
for its operations. It now claims for refund or tax credit for the excise taxes it paid claiming that it is exempt from the
payment of excise taxes under the provisions of Sec. 135 of the NIRC of 1997 which provides that petroleum products are
exempt from excise taxes when sold to Exempt entities or agencies covered by tax treaties, conventions, and other
international agreements for their use and consumption: Provided, however, That the country of said foreign
international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine
carriers, entities or agencies

Silkair further anchors its claim on Article 4(2) of the Air Transport Agreement between the Government of the
Republic of the Philippines and the Government of the Republic of Singapore (Air Transport Agreement between RP and
Singapore) which reads: Fuel, lubricants, spare parts, regular equipment and aircraft stores introduced into, or taken on
board aircraft in the territory of one Contracting party by, or on behalf of, a designated airline of the other Contracting
Party and intended solely for use in the operation of the agreed services shall, with the exception of charges
corresponding to the service performed, be exempt from the same customs duties, inspection fees and other duties or
taxes imposed in the territories of the first Contracting Party , even when these supplies are to be used on the parts of
the journey performed over the territory of the Contracting Party in which they are introduced into or taken on board.
The materials referred to above may be required to be kept under customs supervision and control.

Silkair likewise argues that it is exempt from indirect taxes because the Air Transport Agreement between RP and
Singapore grants exemption from the same customs duties, inspection fees and other duties or taxes imposed in the
territory of the first Contracting Party. It invokes Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA
771.which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC
is exempt even from the payment of indirect taxes.

Is Silkair entitled to the tax refund or credit it seeks ? Reason out your answer.

SUGGESTED ANSWER: Silkair is not entitled to tax refund or credit for the following reasons:

a. The excise tax on aviation fuel is an indirect tax. The proper party to question, or seek a refund of, an
indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he
shifts the burden thereof to another. (Philippine Geothermal, Inc. v. Commissioner of Internal Revenue, G.R. No. 154028,
July 29, 2005, 465 SCRA 308, 317-318) The NIRC provides that the excise tax should be paid by the manufacturer or
producer before removal of domestic products from place of production. Thus, Petron Corporation, not Silkair, is the
statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air
Transport Agreement between RP and Singapore.

Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is
not a tax but part of the price which Silkair had to pay as a purchaser. [Philippine Acetylene Co., Inc. v. Commissioner of
Internal Revenue, 127 Phil. 461, 470 (1967)]

b. Silkair could not seek refuge under Maceda v. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771.which
upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt
even from the payment of indirect taxes.

In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, G.R. No. 140230, December 15,
2005, 478 SCRA 61 the Supreme Court clarified the ruling in Maceda v. Macaraig, Jr., viz: It may be so that in Maceda vs.
Macaraig, Jr., the Court held that an exemption from all taxes granted to the National Power Corporation (NPC) under
its charter includes both direct and indirect taxes.

An exemption from all taxes excludes indirect taxes, unless the exempting statute, like NPCs charter, is so couched as
to include indirect tax from the exemption. The amendment under Republic Act No. 6395 enumerated the details
covered by NPCs exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of NPC to
cover, among others, both direct and indirect taxes on all petroleum products used in its operation. Presidential Decree
No. 938 [NPCs amended charter] amended the tax exemption by simplifying the same law in general terms. It succinctly
exempts NPC from all forms of taxes, duties, fees The use of the phrase all forms of taxes demonstrates the
intention of the law to give NPC all the tax exemptions it has been enjoying before.

The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement
between RP and Singapore cannot, without a clear showing of legislative intent, be construed as including indirect taxes.
Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the
taxing authority, and if an exemption is found to exist, it must not be enlarged by construction. (Silkair (Singapore) PTE,
Ltd., v. Commissioner of Internal Revenue, G.R. No. 173594, February 6, 2008)

18. What are the different kinds of taxes classified as to purpose ?


SUGGESTED ANSWER: a. General, fiscal or revenue imposed for the
purpose of raising public funds for the service of the government. b. Special or regulatory
imposed primarily for the regulation of useful or non-useful occupation or enterprises and secondarily only for the
raising of public funds.
LIMITATIONS OR RESTRICTIONS ON THE POWER

1. Purpose for the limitations on the power of taxation.

The inherent and constitutional limitations to the power of taxation are safeguards which would prevent abuse in the
exercise of this otherwise 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 or act in the exercise of the power to tax.

INHERENT LIMITATIONS

1. What are the inherent limitations on the power of taxation ?

SUGGESTED ANSWERS:

a. 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 other governmental body by the constitution or through a law which does not
violate any provision of the constitution.

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

d. Recognition of government exemptions; and

e. 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 of sovereign. Thus, the power should be imposed upon equals out
of respect.

Some authorities include no double taxation.

2. What are the principles to consider in the determination of whether tax revenues are devoted for a public
purpose ?

SUGGESTED ANSWER:

a. The tax revenues are for a public purpose if utilized for the benefit of the community in general. An
alternative meaning is that tax proceeds should be utilized only to attain the objectives of government.

b. Inequalities resulting from the singling out of one particular class for taxation or exemption infringe no
constitutional limitation.

REASON: It is inherent in the power to tax that the legislature is free to select the subjects of taxation.

BASIS: The lifeblood theory.

c. An individual taxpayer need not derive direct benefits from the tax.

REASON: The paramount consideration is the welfare of the greater portion of the population.

d. A tax may be imposed, not so much for revenue purposes, but under police power for the general
welfare of the community. This would still be for a public purpose.
e. Public purpose continually expanding. Areas formerly left to private initiative now lose their
boundaries and may be undertaken by the government if it is to meet the increasing social challenges of the times.

f. Tax revenue must not be used for purely private purposes or for the exclusive benefit of private
persons.

g. Private persons may be benefited but such benefit should be merely incidental as its main object is the
benefit of the community in general.

h. Determined at the time of enactment of tax law and not at the time of implementation.

i. There is a presumption of public purpose even if the tax law does not specifically provide for its purpose.
(Santos & Co., v. Municipality of Meycauayan, et al., 94 Phil. 1047)

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

3. A law was enacted imposing a tax on manufacturers of coconut oil, the proceeds of which are to be used exclusively
for the protection and promotion of the coconut industry, namely, to improve the working conditions in coconut mills
and to conduct research on the use of coconut oil for motor fuel. Some of the manufacturers of coconut oil challenge
the validity of the law, contending that the tax is to be used for a private purpose, and therefore, the law violates the rule
that public revenues shall not be appropriated for anything but a public purpose. Decide with reason.

SUGGESTED ANSWER: The levy is for a public purpose. It cannot be denied that the coconut industry is one of the
major industries supporting the national economy. It is, therefore, the states concern to make it a strong and secure
source not only of the livelihood of the significant segment of the population, but also of export earnings, the
sustained growth of which is one of the imperatives of economic growth. (Philippine Coconut Producers Federation, Inc.
(Cocofed v. Presidential Commission on Good Government, 178 SCRA 236, 252)

4. Requisites for taxpayers, concerned citizens, voters or legislators to have locus standi to sue.

a. In general, the case should involve constitutional issues. (David, et al., v. President Gloria Macapagal-
Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)

b. For taxpayers, there must be a showing:

1) That tax money is being extracted and spent in violation of specific constitutional protections
against abuses of legislative power. (Flast v. Cohen, 392 U.S. 83)

2) That public money is being deflected to any improper purpose (Pascual v. Secretary of
Public Works, 110 Phil. 33) or a claim of illegal disbursement of public funds or that the tax measure is
unconstitutional. (David, supra)

3) 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, or that there is a wastage of public funds
through the enforcement of an invalid or unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919, February
14, 2007; Garcia v. Enriquez, Jr. G.R. No. 112655 December 9, 1993, Minute Resolution)

A taxpayers suit is properly brought only when there is an exercise of the spending or taxing
power of Congress. (Automotive Industry Workers Alliance (AIWA),etc., et al., v. Romulo, etc. ,et al., G. R.
No. 157509, January 18, 2005 citing Gonzales v. Narvasa, G. R. No. 140835, August 14, 2000, 337
SCRA 733, 741)

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 Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)

5. Only those directly affected have locus standi to impugn the alleged encroachment by the executive department
into the legislative domain of Congress.

a. Only those who shall be directly affected by such executive encroachment, such as for example employees
who would find themselves subject to disciplinary powers that may be imposed under the questioned Executive Order as
they have a direct and specific interest in raising the substantive issue therein (Automotive Industry Workers Alliance
(AIWA),etc., et al., v. Romulo, etc. ,et al., G. R. No. 157509, January 18, 2005) or employees who are going to be
demoted, transferred or otherwise affected by any personnel action subject o the rule on exhaustion of administrative
remedies.

b. Moreover, and if at all, only Congress, can claim any injury from the alleged executive encroachment of the
legislative function to amend, modify and/or repeal laws. (Automotive Industry Workers Alliance (AIWA),etc., et al.,
supra, citing Gonzales v. Narvasa, G. R. No. 140835, August 14,2000, 337 SCRA 733, 741)

6. Locus standi being merely a matter of procedure, have been waived in certain instances where a party who is
not personally injured may be allowed to bring suit. The following are examples of instances where suits have been
brought by parties who have not have been personally injured by the operation of a law or any other government act but
by concerned citizens, taxpayers or voters who actually sue in the public interest:

a. Taxpayers suits to question contracts entered into by the national government or government-owned or
controlled corporations allegedly in contravention 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, or that there is a wastage of public funds through the enforcement of an
invalid or unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)

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

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

8. Instances of proper delegation: When taxing power could be delegated: Exceptions to the rule on non-delegation:

a. Delegation of tariff powers by Congress to the President under the flexible tariff clause, Section 28 (2), Article
VI of the Constitution.

b. Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution.

c. The delegation to the President of the Philippines to enter into executive agreements, and to ratify treaties
which may contain tax exemption provisions subject to the concurrence by the Senate in the ratification made by the
President.

d. Delegation to the people at large.

e. Delegation to administrative bodies [Abakada Guro Party List (Formerly AASJS), etc., v, Ermita, et al., G. R.
No.168056, September 1, 2005], which is referred to as subordinate legislation.

In this instance, there is a requirement that the law is complete in all aspects so what is delegated is merely the
implementation of the law or there exists sufficiently determinate standards to guide the delegate and prevent a total
transference of the taxing power.

9. Paradigm shift from exclusive Congressional power to direct grant of taxing power to local legislative bodies.
The power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to
levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution. (Batangas Power Corporation
v. Batangas City, et al. G. R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City of
Cabanatuan, G. R. No. 149110, April 9, 2003)

Local government legislation, is not regarded as a transfer of general legislative power, but rather as the grant of
authority to prescribe local regulations, according to immemorial practice, subject, of course, to the interposition of the
superior in cases of necessity. (People v. Vera, 65 Phil. 56)

10. Taxing power of the local government is limited. The taxing power of local governments is limited in the sense
that Congress can enact legislation granting tax exemptions.

While the system of local government taxation has changed with the onset of the 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 local legislative bodies, no longer merely by
virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the
Constitution, the basic 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-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008
citing City Government of 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)
11. Further amplification by Bernas of the local governments power to tax. What is the effect of Section 5 on the
fiscal position of municipal corporations? Section 5 does not change the doctrine that municipal corporations do not
possess inherent powers of taxation. What it does is to confer municipal corporations 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
the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose
limitations on municipal powers. Moreover, these limitations must be consistent with the basic policy of local
autonomy. The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against
municipal corporations. Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be
resolved in favor of municipal corporations. It is understood, however, that taxes imposed by local government must be
for a public purpose, uniform within a locality, must not be confiscatory, and must 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 City
Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169)

12. Reconciliation of the local governments authority to tax and the Congressional general taxing power. Congress
has the inherent power to tax, which includes the power to grant tax exemptions. On the other hand, the power of local
governments, such as provinces and cities for example Quezon City, to tax is prescribed by Section 151 in relation to
Section 137 of the LGC which expressly provides 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 137 of the LGC does not prohibit
grant of future exemptions.

The Supreme Court in a series of cases has sustained the power of Congress to grant tax exemptions over and
above the power of the local governments delegated power 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. Bayan
Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 16)

Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect
the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of
the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing
powers, doubts must be resolved in favor of municipal corporations. [Ibid., referring to Philippine Long Distance
Telephone Company, Inc. (PLDT) vs. City of Davao]

13. General principles of income taxation in the Philippines or the source rule of income taxation as provided in the
NIRC of 1997.

a. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the
Philippines;

b. A nonresident citizen is taxable only on income derived from sources within the Philippines;

c. An individual citizen of the Philippines who is working and deriving income abroad as an overseas contract worker
is taxable only on income from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines
and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged
exclusively in international trade shall be treated as an overseas contract worker;

d. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from
sources within the Philippines;

e. A domestic corporation is taxable on all income derived from sources within and without the Philippines; and
f. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income
derived from sources within the Philippines. (Sec. 23, NIRC of 1997, emphasis supplied)

14. Juliane a non-resident alien appointed as a commission agent by a domestic corporation with a sales commission
of 10% all sales actually concluded and collected through her efforts. The local company withheld the amount of
P107,000 from her sales commission and remitted the same to the BIR.

She filed a claim for refund alleging that her sales commission is not taxable because the same was a compensation
for her services rendered in Germany and therefore considered as income from sources outside the Philippines.

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 the contract for service is entered into, or the place of payment, but
the place where the services were actually performed.

Since the activity of securing the sales were in Germany, then the income did not originate from sources from
within the Philippines. (Commissioner of Internal Revenue v. Baier-Nickel, G. R. No. 153793, August 29, 2006)

15. Ensite, Ltd.. is a Canadian corporation not doing business in the Philippines. It holds 40% of the shares of Philippine
Stamping Plant, Inc.,., a Philippine company while the 60% is owned by Fred Corporation, a Filipino-owned Philippine
corporation. Ensite Co. also owns 100% of the shares of Susanto Co., an Indonesian company which has a duly licensed
Philippine branch. Due to worldwide restructuring of the Ensite Ltd.,. group, Ensite Ltd.,. decided to sell all its shares in
Philippine Stamping Plant, Inc. and Susanto Co. The negotiations for the buy-out and the signing of the Agreement of
Sale were all done in the Philippines. The Agreement provides that the purchase price will be paid to Ensite Ltds bank
account in the U.S. and that title to the Philippine Stamping Plant, Inc. and Susanto Co. shall be transferred to General
Co., in Toronto Canada where stock certificates will be delivered. General Co. seeks your advice as to whether or not it
will subject the payments of the purchase price to withholding tax. Explain your advice. SUGGESTED
ANSWER: The payments of the purchase price will be subject to withholding tax. Considering that all the activities (sales)
occurred within the Philippines, the income is considered as income from within, subject to Philippine income taxation.
Ensite, Ltd. being a foreign corporation is to be taxed on its income derived from sources within the Philippines.
16. Ensite, Ltd. is a Canadian corporation, which has a duly licensed Philippine branch engage in trading activities in
the Philippines. Ensite, Ltd.. also invested directly in 40% of the shares of stock of Philippine Stamping Plant, Inc.., a
Philippine corporation. These shares are booked in the Head Office of Ensite, Ltd.. and are not reflected as assets of the
Philippine branch. In 2009, Philippine Stamping Plant, Inc.. declared dividends to its stockholders. Before remitting the
dividends to Ensite Ltd.,., Philippine Stamping Plant, Inc. Co. seeks your advice as to whether it will subject the
remittance to withholding tax. There is no need to discuss WT rates, if applicable. Focus your discussion on what is the
issue. SUGGESTED ANSWER: Philippine Stamping Plant, Inc.. should subject the
remittance to withholding tax.. Since Philippine Stamping Plant. is a Philippine corporation, its shares of stock have
obtained a business situs in the Philippines, hence the dividends are considered as income from within. Ensite. Ltd.,
being a foreign corporation, should be subject to tax on its income from within.

17. Philippine Stamping Plant, Inc., a Philippine corporation, has an executive Larry who is a Filipino citizen. Philippine
Stamping Plant, Inc,. has a subsidiary in Malaysia (Kuala Lumpur Manufacturing, Inc.) and will assign Larry for an
indefinite period to work full time for Kuala Lumpur Manufacturing, Inc.. Larry will bring his family to reside in Malaysia
and will lease out his residence in the Philippines. The salary of Larry will be shouldered 50% by Philippine Stamping
Plant, Inc.. while the other 50% plus housing, cost of living and educational allowances of Larrys dependents will be
shouldered by Kuala Lumpur Manufacturing, Inc.. Philippine Stamping Plant, Inc.. will credit the 50% of Larrys salary to
his Philippine bank account. Larry will sign the contract of employment in the Philippines. He will also be receiving
rental income for the lease of his Philippine residence.
Are these salaries, allowances and rentals subject to Philippine income tax? Explain briefly.
SUGGESTED ANSWER: The salaries and allowances of Larry, being derived from labor or personal services rendered
outside of the Philippines is considered as income from without. Since Larry is an OCW, then he is to be taxed only on his
income derived from within the Philippines such as the rentals on his Philippine residence, and not on his income from
without.

18. Obama Airlines, Inc., a foreign airline company which does not maintain any flight to and from the Philippines sold
air tickets in the Philippines, through a general sales agent, relating to the carriage of passengers and cargo between two
points, both outside the Philippines.

a. Is Obama, Inc., subject to income taxes on the sale of the tickets ?

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

The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of
the source of payments is the Philippines. the flow of wealth 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]

Off-line air carriers having general sales agents in the Philippines are engaged in or doing business in the Philippines
and their income from sales of passage documents here is income from within the Philippines. Thus, the off-line air
carrier liable for the 32% (now 30%) tax on its taxable income. [South African Airways v. Commissioner of Internal
Revenue, G.R. No. 180356, February 16, 2010 citing Commissioner of Internal Revenue v. British Overseas Airways
Corporation (British Overseas Airways), No. L-65773-74, April 30, 1987, 149 SCRA 395]

b. Supposing that Obama, Inc., sells tickets outside of the Philippines for passengers it carry from Gold City,
South Africa to the Philippines but returns to South Africa without any cargo or passengers. Would it then be subject to
any Philippine tax on such sales ?

SUGGESTED ANSWER: It would not be subject to any tax. It is not subject to any income tax because the activity
which generated the income (the sale of the tickets) was performed outside of the Philippines.

It is not subject to the carriers tax based on gross Philippine billings because there were no lifts that originated from the
Philippines. Gross Philippine Billings refers to the amount of gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the
place of sale or issue and the place of payment of the ticket or passage document. [NIRC of 1997, Sec. 28(A)(3)(a)]

c. Would your answer be the same if Obama, Inc. sold tickets outside of the Philippines for travelers who are
going to picked up by Obama, Inc., planes from the Diosdado Macapagal Intl. Airport at Clark, Angeles, Pampanga, bound
for Nairobi, Kenya ? Reason out your answer.

SUGGESTED ANSWER: No more. This time Obama, Inc., would be subject to the carriers tax based on Gross
Philippine Billings. (GPB).

Gross Philippine Billings refers to the amount of gross revenue derived from carriage of persons, excess baggage,
cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale
or issue and the place of payment of the ticket or passage document. [NIRC of 1997, Sec. 28(A)(3)(a)]
The place of sale is irrelevant; as long as the uplifts of passengers and cargo occur from the Philippines, income is
included in GPB. (South African Airways v. Commissioner of Internal Revenue, G.R. No. 180356, February 16, 2010)

19. No improper delegation of legislative authority to tax. The power 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 grant must
be made by the immediate representatives of the people; and where the people have laid the power, there it must
remain and be exercised. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July
21, 2008)

CONSTITUTIONAL LIMITATIONS

1. Constitutional limitations on the power of taxation . The general or indirect constitutional limitations as well as
the specific or direct constitutional limitations.
2. The general or indirect constitutional limitations on the power of taxation are:

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 and remittal of fines and forfeiture after
conviction by final judgment.

3. The specific or direct constitutional limitation.

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 to which 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 Congress

2) through a law

3) subject to Congressional limits and restrictions

4) within the framework of national development program.

g. Tax exemption of charitable institutions, churches, parsonages and convents appurtenant thereto,
mosques, and all lands, buildings and improvements of all kinds actually, directly and exclusively used for religious,
charitable or educational purposes;
h. No tax exemption without the concurrence of majority vote of all members of Congress;

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

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

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

l. Authority of local government units to create their own sources of revenue, to levy taxes, fees and other
charges subject to guidelines and limitations imposed 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-profit educational institutions used actually,
directly and exclusively for educational purposes;

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

p. Tax exemption of grants, endowments, donations or contributions used actually, directly and exclusively
for educational purposes subject to conditions prescribed by law.

5. Equal protection of the law clause is subject to reasonable classification. If the groupings are characterized by
substantial distinctions that make real differences, one class may be treated and regulated differently from another. The
classification must also be germane to the purpose of the law and must apply to all those belonging to the same class.
(Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999)

6. Requisites for valid classification. All that is required of a valid classification is that it be reasonable, which means
that a. the classification should be based on substantial distinctions which make for real differences,

b. that it must be germane to the purpose of the law;

c. that it must not be limited to existing conditions only; and

d. that it must apply equally to each member of the class.

The standard is satisfied if the classification or distinction is based on a reasonable foundation or rational basis and
is not palpably arbitrary. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008]

7. Equal protection does not demand absolute equality. It merely requires that all persons shall be treated alike,
under like circumstances and conditions, both as to the privileges conferred and liabilities enforced. (Santos v. People, et
al, G. R. No. 173176, August 26, 2008)

It is imperative to duly establish that the one invoking equal protection and the person to which she is being
compared were indeed similarly situated, i.e., that they committed identical acts for which they were charged with the
violation of the same provisions of the NIRC; and that they presented similar arguments and evidence in their defense -
yet, they were treated differently. (Santos, supra)
8. Tests to determine validity of classification. The United States Supreme Court has established different tests to
determine the validity of a classification and compliance with the equal protection clause. The recognized tests are:

a. The traditional (or rational basis) test.

b. The strict scrutiny (or compelling interest) test.

c. The intermediate level of scrutiny (or quasi-suspect class) test.

9. The traditional (or rational basis) test used in order to determine the validity of classification. The classification is
valid if it is rationally related to a constitutionally permissible state interest.

The complainant must prove that the classification is invidous, wholly arbitrary, or capricious, otherwise the
classification is presumed to be valid. (Lindsley v. Natural Carboinic Gas Co., 220 U.S. 61; McGowan v. Maryland, 366
U.S. 420; United States Railroad Retirement Board v. Fritz, 449 U.S. 166)

10. The strict scrutiny (or compelling interest) test used in order to determine the validity of the classification.
Government regulation that intentionally discriminates against a suspect class such as racial or ethnic minorities, is
subject to strict scrutiny and considered to violate the equal protection clause unless found necessary to promote a
compelling state interest.

A classification is necessary when it is narrowly drawn so that no alternative, less burdensome means is available
to accomplish the state interest.

Thus, it was held that denial of free public education to the children of illegal aliens imposes an enormous and
lasting burden based on a status over which the children have no control is violative of equal protection because there is
no showing that such denial furthers a substantial state goal. (Plyler v. Doe, 457 U.S. 202)

11. The intermediate level of scrutiny (or quasi-suspect class) test used in order to determine the validity of he
classification. Classification based on gender or legitimacy are not suspect, but neither are they judged by the
traditional or rational basis test.

Intentional discriminations against members of a quasi-suspect class violate equal protection unless they are
substantially related to important government objectives. (Craig v. Boren, 429 U.S. 190)

Thus, a state law granting a property tax exemption to widows, but not widowers, has been held valid for it
furthers the state policy of cushioning the financial impact of spousal loss upon the sex for whom that loss usually
imposes a heavier burden. (Kahn v. Shevin, 416 U.S. 351)

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

13. 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 which result from a singling out of one particular class of taxation, or exemption,
infringe no constitutional limitation." (Commissioner of Internal Revenue, et al., v. Santos, et al., 277 SCRA 617)

9. Benjie 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 Soliman 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 tax payers and discriminates against prompt ones, Benjie demands
that he be refunded an amount equivalent to one-half of the real property taxes he paid. The municipal attorney
rendered an opinion that Benjie cannot be reimbursed because the ordinance did not provide for such reimbursement.
Benjie files suit to declare the ordinance void on the ground that it is a class legislation. Will his suit prosper ? Explain
your answer briefly.

SUGGESTED ANSWER: No. There is no class legislation because there is no violation of the equal protection suit.
There is a valid classification between those who already paid their taxes and those who have not. Furthermore, the
taxing authority has the prerogative to select the subjects and objects of taxation, including granting a 50% discount in
the payment of unpaid real estate taxes, and the condonation of all penalties on fines resulting from late payment.

10. The rewards law to tax collectors does not violate equal protection. The equal protection clause recognizes a
valid classification, that is, a classification that has a reasonable foundation or rational basis and not arbitrary. With
respect to RA 9335, its expressed public policy is the optimization of the revenue-generation capability and collection of
the BIR and the BOC. Since the subject of the law is the revenue- generation capability and collection of the BIR and the
BOC, the incentives and/or sanctions provided in the law should logically pertain to the said agencies. Moreover, the law
concerns only the BIR and the BOC because they have the common distinct primary function of generating revenues for
the national government through the collection of taxes, customs duties, fees and charges.

Indubitably, such substantial distinction is germane and intimately related to the purpose of the law. Hence, the
classification and treatment accorded to the BIR and the BOC under RA 9335 fully satisfy the demands of equal
protection. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008)

11. The prosecution of one guilty person while others equally guilty are not prosecuted, however, is not, by itself, a
denial of the equal protection of the laws. Where the official action purports to be in conformity to the statutory
classification, an erroneous or mistaken performance of the statutory duty, although a violation of the statute, is not
without more a denial of the equal protection of the laws.

The unlawful administration by officers of a statute fair on its face, 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
element of intentional or purposeful discrimination. This may appear on the face of the action taken with respect to a
particular class or person, or it may only be shown by extrinsic evidence showing a discriminatory design over another
not to be inferred from the action itself.

(Santos v. People, et al, G. R. No. 173176, August 26, 2008)

12. Equal protection should not be used to protect commission of crime. 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 of
crime. It would be unconscionable, for instance, to excuse a defendant guilty of murder because others have murdered
with impunity.

Likewise, if the failure of prosecutors to enforce the criminal laws as to some persons should be converted into a
defense for others charged with crime, the result would be that the trial of the district attorney for nonfeasance would
become an issue in the trial of many persons charged with heinous crimes and the enforcement of law would suffer a
complete breakdown. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)

13. Illustration of double taxation in local taxation. there is indeed double taxation if Coca-Cola is subjected to the
taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject
matter the privilege of doing business in the City of Manila; (2) for the same purpose to make persons conducting
business within the City of Manila contribute to city revenues; (3) by the same taxing authority City of Manila; (4)
within the same taxing jurisdiction within the territorial jurisdiction of the City of Manila; (5) for the same taxing
periods per calendar year; and (6) of the same kind or character a local business tax imposed on gross sales or
receipts of the business. (The City of Manila, et al., v. Coca-Cola Bottlers Philippines, Inc., G. R. No. 181845, August 4,
2009)

14. 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 meaning of the constitution. (Tolentino v. Secretary of Finance, et al., and companion cases,
235 SCRA 630)

15. The withdrawal of a tax exemption should not be construed as prohibiting future grants of exemption from all
taxes. (Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22,
2001)

16. Tax exemptions in franchises are always subject to withdrawal. A legislative franchise is granted with the express
condition that it is subject to amendment, alteration, or repeal. (1987 Constitution, Art. XII, Sec. 11)

It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment, fetter the
exercise of the taxing power of the State. For not only are existing laws read into contracts in order to fix obligations as
between parties, but the reservation of essential attributes of sovereign power is also read into contracts as a basic
postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a
government which retains adequate authority to secure the peace and good order of society. (Smart Communications,
Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008)

NOTES AND COMMENTS: Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No.
143867, August 22, 2001 made the observation that since Smarts franchise was granted after the effectivity of the Local
Government Code that its tax exemption privilege was reinstated. However, Smart Communications, Inc. v. The City of
Davao, etc., et al., G. R. No. 155491, September 16, 2008 is explicit in its holding that Smart is not entitled to a tax
exemption.

17. When withdrawal of a tax exemption impairs the obligation of contracts. The Contract Clause has never been
thought as a limitation on the exercise of the States power of taxation save only where a tax exemption has been
granted 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 of Finance, G. R. No. 115455, August 25, 1994, 235 SCRA 630, 685) The
author opines that since practically all franchises granted to telecommunications companies are similarly worded that
the above doctrine finds application to the others)

18. The primary reason for the withdrawal of tax exemption privileges granted to government owned and controlled
corporations and all other units of government was that such privilege resulted to serious tax base erosion and
distortions in the tax treatment of similarly situated enterprises, hence resulting in the need for these entities to share in
the requirements of development, fiscal or otherwise, by paying the taxes and other charges due them. (Philippine Ports
Authority v. City of Iloilo, G. R. No. 109791, July 14, 2003)

19. National Power Corporation (NPC) is of the insistence that it is not subject to the payment of franchises taxes
imposed by the Province of Isabela because all of its shares are owned by the Republic of the Philippines. It is thus, an
instrumentality of the National Government which is exempt from local taxation. As such it is not a private corporation
engaged in business enjoying franchise

Is such contention meritorious ?


SUGGESTED ANSWER: No. Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R.
No. 143867, August 22, 2001, upheld the authority of the City of Davao, a local government unit, to impose and collect a
local franchise tax because the Local Government Code has withdrawn all tax exemptions previously enjoyed by all
persons and authorized local government units to impose a tax on business enjoying a franchise tax notwithstanding the
grant of tax exemption to them.

20. In lieu of all taxes in the franchise of ABS-CBN does not exempt it from local franchise taxes. It does not
expressly provide what kind of taxes ABS-CBN is exempted from. It is not clear whether the exemption would include
both local, whether municipal, 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 reasonable doubt. Verily, the uncertainty in the in lieu of all taxes provision
should be construed against ABS-CBN. ABS-CBN has the burden to prove that it is in fact covered 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)

NOTES AND COMMENTS: This is practically the same holding in an earlier case involving another
telecommunications company 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 franchises granted to telecommunications companies are similarly
worded that the above doctrine finds application to the others.)

21. In lieu of all taxes refers to national internal revenue taxes and not to local taxes. The in lieu of all taxes clause
applies only to national internal revenue taxes and not to local taxes. As appropriately pointed out in the separate
opinion of Justice Antonio T. Carpio in a similar case involving a demand for exemption from local franchise taxes:

[T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other than income tax, imposed under
the National Internal Revenue Code. The "in lieu of all taxes" clause does not apply to local taxes. The proviso in the first
paragraph of Section 9 of Smart's franchise states that the grantee shall "continue to be liable for income taxes payable
under Title II of the National Internal Revenue Code." Also, the second paragraph of Section 9 speaks of tax returns filed
and taxes paid to the "Commissioner of Internal Revenue or his duly authorized representative in accordance with the
National Internal Revenue Code." Moreover, the same paragraph declares that the tax returns "shall be subject to audit
by the Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes. The clear intent is for the "in
lieu of all taxes" clause to apply only to taxes under the National Internal Revenue Code and not to local taxes. Even with
respect to national internal revenue taxes, 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 also apply to local taxes, Congress
would have expressly mentioned the exemption from municipal and provincial taxes. Congress could have used the
language in Section 9(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 or national, from which the grantee is hereby expressly exempted, x x x. (Emphasis
supplied).

However, Congress did not expressly exempt Smart from local taxes. Congress used the "in lieu of all taxes" clause
only in reference to national internal revenue taxes. 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 and not to local taxes.
[Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008 citing Philippine
Long Distance Telephone Company, Inc. v. City of Davao, 447 Phil. 571, 594 (2003)]
NOTES AND COMMENTS: The author opines that the above finds application to all telecommunications
companies.

22. The in lieu of all taxes clause in the franchise of ABS-CBN has become functus officio with the abolition of the
franchise tax on broadcasting 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. It cannot apply when what is paid is a tax other than a franchise tax.
Since the franchise tax on the broadcasting companies with yearly gross receipts exceeding ten million pesos has been
abolished, the in lieu of all taxes clause has now become functus officio, rendered inoperative. (Quezon City, et al., v.
ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008)

NOTES AND COMMENTS: This is practically the same holding in an earlier case involving another
telecommunications company. 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 franchises granted to telecommunications companies are similarly
worded that the above doctrine finds application to the others.)

23. Double taxation in its generic sense, this means taxing the same subject or object twice during the same taxable
period. In its particular sense, it may mean direct duplicate taxation, which is prohibited under the constitution because
it violates the concept of equal protection, uniformity and equitableness of taxation. Indirect duplicate taxation is not
anathematized by the above constitutional limitations.

24. Elements of direct duplicate taxation:

a. Same

1) Subject or object is taxed twice

2) by the same taxing authority

3) for the same taxing purpose

4) during the same taxable period

b. 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 same taxing authority, etc., there is no violation of the equal protection clause
because all subjects and objects that are similarly situated are subject to the same burdens and granted the same
privileges without any discrimination whatsoever,

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

25. Double taxation a valid defense against the legality of a tax measure if the double taxation is direct duplicate
taxation, because it would violate the equal protection clause of the constitution.

26. When an item of income is taxed in the Philippines and the same income is taxed in another country, this would
be known as international juridical double taxation which is the imposition of comparable taxes in two or more states on
the same taxpayer in respect of the same subject matter and for identical grounds. (Commissioner of Internal Revenue v.
S.C. Johnson and Son, Inc., et al., G.R. No. 127105, June 25, 1999)

27. Methods for avoiding double taxation (indirect duplicate taxation).

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.

28. Tax credit generally refers to an amount that is subtracted directly from ones total tax liability, an allowance
against the tax itself, or a deduction from what is owned.

A tax credit reduces the tax due, including whenever applicable the income tax that is determined after applying
the corresponding tax rates to taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.
R. No. 159647, April 15, 2005)29. A tax deduction is defined as a subtraction fro income for tax purposes, or an
amount that is allowed by law to reduce income prior to the application of the tax rate to compute the amount of tax
which is due.

A tax deduction reduces the income that is subject to tax in order to arrive at taxable income. (Commissioner of
Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005)

30. The petitioners allege that the R-VAT law is constitutional because the Bicameral Conference Committed has
exceeded its authority in including provisions which were never included in the versions of both the House and Senate
such as inserting the stand-by authority to the President to increase the VAT from 10% to 12%; deleting entirely the no
pass-on provisions found in both the House and Senate Bills; inserting the provision imposing a 70% limit on the amount
of input tax to be credited against the output tax; and including the amendments introduced only by Senate Bill No. 1950
regarding other kinds of taxes in addition to the value-added tax. Thus, there was a violation of the constitutional
mandate that revenue bills shall originate exclusively from the House of Representatives.

Are the contentions of such weight as to constitute grave abuse of discretion which may invalidate the law ?
Explain briefly.

SUGGESTED ANSWER: No. There was no grave abuse of discretion because all the changes and modifications
made by the Bicameral Conference Committee were germane to subjects of the provisions referred to it for
reconciliation.

The Bicameral Conference Committee merely exercised the judicially recognized long-standing legislative practice
of giving said conference committee ample latitude for compromising differences between the Senate and the House.
[Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases]

31. The VAT while regressive is NOT violative of the mandate to evolve a progressive system of taxation. Do you
agree ? The mandate to Congress is not to prescribe but to evolve a progressive system of taxation. Otherwise, sales
taxes which perhaps are the oldest form of indirect taxes, would have been prohibited with the proclamation of the
constitutional provision. Sales taxes are also regressive. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No.
168056, September 1, 2005 and companion cases citing Tolentino v. Secretary of Finance, et al., G. R. No. 115455, August
25, 1994, 235 SCRA 630]
32. All revenues and assets of non-stock, non-profit educational institutions that are actually, directly and
exclusively used for educational purposes shall be exempt from taxation.

33. Revenues and assets of proprietary educational institutions, including those which are cooperatively owned,
may be entitled to exemptions subject to limitations provided by law including restrictions on dividends and provisions
for reinvestments. There is no law at the present which grants exemptions, other the exemptions granted to
cooperatives.

OTHER CONCEPTS

1. Distinguish tax from debt.

TAX

DEBT

Basis

based on law

based on contract or judgment

Failure to Pay

may result in imprisonment

no imprisonment

Mode of Payment

generally payable in money

payable in money, property or service

Assignability

not assignable

assignable

Payment

unless it becomes a debt is not subject to compensation or set-off

may be a subject

Interest

does not draw interest unless delinquent

draws interest if stipulated or delayed


Authority

imposed by public authority

can be imposed by private individuals

Prescription

Prescriptive periods for tax under NIRC

debt under the Civil Code

WARNING: Do not use the above arrangement in answering Bar questions.

2. Compensation takes place by operation of law, where the local government and the taxpayer are in their own
right reciprocally debtors and creditors of each other, and that the debts are both due and demandable, in consequence
of Articles 1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8 SCRA 443)

3. May there be compensation or set-off between a national tax and a debt ? Reason out your answer.
SUGGESTED ANSWER: As a general rule, there could be no compensation or set-off between a tax and a debt for the
following reasons: a. Lifeblood theory.
b. Taxes are not contractual obligations but arise out of a duty to, and are the positive acts of government, to the
making and enforcing of which the personal consent of the individual taxpayer is not required. (Republic v. Mambulao
Lumber Co., 4 SCRA 622) c. Taxes cannot be the subject of compensation because
the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a
debt, demand, contract or judgment as is allowed to be set-off.

Thus, it is correct to say that the offsetting of a taxpayers tax refund with its alleged tax deficiency is unavailing under
Art. 1279 of the Civil Code. (South African Airways v. Commissioner of Internal Revenue, G.R. No. 180356, February 16,
2010 reiterating Caltex Philippines, Inc. v. Commission on Audit, which applied Francia v. Intermediate Appellate Court)

4. Exceptions: When set-off or compensation allowed for local taxes. a.


Where both claims already become overdue and demandable as well as fully liquidated. Compensation takes place by
operation of law under Art. 1200 in relation to Arts. 1279 and 1290 all of the Civil Code. (Domingo v. Garlitos, 8 SCRA
443) b. Compensation takes place by operation of law, where the government and the
taxpayer are in their own right reciprocally debtors and creditors of each other, and that the debts are both due and
demandable. This is in consequence of Article 1278 and 1279 of the Civil Code. (Domingo v. Garlitos, 8 SCRA 443)
c. ,The Supreme Court upheld the validity of a set-off between the taxpayer and the government. In both cases, the
claims of the taxpayers therein were certain and liquidated. The claims were certain since there were no doubts or
disputes as to their refundability. In fact, the government admitted the fact of over-payment. (Commissioner of
Internal Revenue v. Esso Standard Eastern, Inc., 172 SCRA 364) d. In case of a tax overpayment,
the BIRs obligation to refund or off-set arises from the moment the tax was paid. REASON: Solutio indebeti.
(Commissioner of Internal Revenue v. Esso Standard Eastern, Inc 172 SCRA 364)
e. While judgment should be rendered in favor of Republic for unpaid taxes, judgment ought at the same time to
issue for Sampaguita Pictures commanding payment to the latter by the Republic of the value of the backpay certificates
which the Republic received. (Republic v. Ericta, 172 SCRA 623)
5. Gilbert obtained a judgment for a sum of money against the municipality of Camiling. The judgment has become
final although execution has not issued. Upon receiving an assessment for municipal sales taxes from the Municipal
Treasurer, Gilbert executed a partial assignment of his judgment sufficient to cover the assessment in favor of the
Municipality. May the Municipal Treasurer validly accept the assignment? Why?

SUGGESTED ANSWER: Yes. The parties in this case are mutually debtors and creditors of each other, and since
both of the claims became overdue, demandable and fully liquidated, compensation takes place by operation of law.
Such was the holding in Domingo v. Garlitos, 8 SCRA 443, a case decided by the Supreme Court whose factual
antecedents are similar to the problem.
6. In case of doubt, tax laws must be construed strictly against the State and liberally in favor of the taxpayer
because taxes, as burdens which must be endured by the taxpayer, should not be presumed to go beyond what the law
expressly and clearly declares. (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA
92, 99)

7. Interpretation in the imposition of taxes, is not the similar doctrine as that applied to tax exemptions. The rule in
the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it does so clearly, expressly,
and unambiguously. A tax cannot be imposed without clear and express words for that purpose. Accordingly, the
general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by implication. In answering the question of who is subject to tax
statutes, it is basic that in case of doubt, such statutes are to be construed most strongly against the government and in
favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what
statutes expressly and clearly import. [Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos.
167274-75, July 21, 2008 citing CIR v. Court of Appeals, 338 Phil. 322, 330-331 (1997)] As burdens, taxes should not be
unduly exacted nor assumed beyond the plain meaning of the tax laws. (Ibid., citing CIR v. Philippine American Accident
Insurance Company, Inc., G.R. No. 141658, March 18, 2005, 453 SCRA 668)

8. Strict interpretation of tax exemption laws. Taxes are what civilized people pay for civilized society. They are the
lifeblood of the nation. Thus, statutes granting tax exemptions are construed stricissimi juris against the taxpayer and
liberally in favor of the taxing authority. A claim of tax exemption must be clearly shown and based on language in law
too plain to be mistaken. Otherwise stated, 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 Cebu International Airport Authority v.
Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680) The burden of proof rests upon the party claiming
the exemption to prove that it is in fact covered by the exemption so claimed. (Quezon City, supra citing Agpalo, R.E.,
Statutory Construction, 2003 ed., p. 301)

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

10. Why are tax exemptions are strictly construed against the taxpayer and liberally in favor of the State ?
SUGGESTED ANSWER: Taxes are necessary for the continued existence of the State.

11. In case of a tax overpayment, where the BIRs obligation to refund or set-off arises from the moment the tax was
paid under the principle of solutio indebeti. (Commissioner of Internal Revenue v. Esso Standard Eastern, Inc, 172 SRCA
364)

12. But note Nestle Phil. v. Court of Appeals, et al., G.R. No. 134114, July 6, 2001 which held that in order for the
rule on solutio indebeti to apply it is an essential condition that the petitioner must first show that its payment of the
customs duties was in excess of what was required by the law at the time the subject 16 importations of milk and milk
products were made. Unless shown otherwise, the disputable presumption of regularity of performance of duty lies in
favor of the Collector of Customs.

13. Strict interpretation of a tax refund that partakes of the nature of a tax does not apply to tax refund based on
erroneous payment or where there is no law that authorizes collection of the tax. There is parity between tax refund
and tax exemption only when the former is based either on a tax exemption statute or a tax refund statute.
(Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)

Tax refunds (or tax credits), on the other hand, are not founded principally on legislative grace but on the legal
principle which underlies all quasi-contracts abhorring a persons unjust enrichment at the expense of another.
[Commissioner, supra citing Ramie Textiles, Inc. v. Hon. Mathay, Sr., 178 Phil. 482 (1979); Puyat & Sons v. City of Manila,
et al., 117 Phil. 985 (1963)]

The dynamic of erroneous payment of tax fits to a tee the prototypic quasi-contract, solutio indebiti, which covers
not only mistake in fact but also mistake in law. (Commissioner, supra citing CIVIL CODE, Arts. 2142, 2154 and 2155)

The Government is not exempt from the application of solutio indebiti. (Commissioner, supra citing Commissioner of
Internal Revenue v. Firemans Fund Insurance Co., G.R. No. L-30644, 9 March 1987, 148 SCRA 315, 324-325; Ramie
Textiles, Inc. v. Mathay, supra; Gonzales Puyat & Sons v. City of Manila, supra)

Indeed, the taxpayer expects fair dealing from the Government, and the latter has the duty to refund without any
unreasonable delay what it has erroneously collected. (Commissioner, supra citing Commissioner of Internal Revenue v.
Tokyo Shipping Co., supra at 338) If the State expects its taxpayers to observe fairness and honesty in paying their taxes,
it must hold itself against the same standard in refunding excess (or erroneous) payments of such taxes. It should not
unjustly enrich itself at the expense of taxpayers. [Commissioner, supra citing AB Leasing and Finance Corporation v.
Commissioner of Internal Revenue, 453 Phil. 297 in turn citing BPI-Family Savings Bank, Inc. v. Court of Appeals, 330
SCRA 507, 510, 518 (2000)] And so, given its essence, a claim for tax refund necessitates only preponderance of evidence
for its approbation like in any other ordinary civil case. (Commissioner, supra)

14. Tax refunds premised upon a tax exemption strictly construed, Tax exemption is a result of legislative grace.
And he who claims an exemption from the burden of taxation must justify his claim by showing that the legislature
intended to exempt him by words too plain to be mistaken. [Commissioner of Internal Revenue v. Fortune Tobacco
Corporation, G. R. Nos. 167274-75, July 21, 2008 citing Surigao Consolidated Mining Co. Inc. v. Commissioner of Internal
Revenue and Court of Tax Appeals, 119 Phil. 33, 37 (1963)]

The rule is that tax exemptions must be strictly construed such that the exemption will not be held to be conferred
unless the terms under which it is granted clearly and distinctly show that such was the intention. [Commissioner, supra
citing Phil. Acetylene Co. v. Commission of Internal Revenue, et al., 127 Phil. 461, 472 (1967); Manila Electric Company
v. Vera, G.R. No. L-29987, 22 October 1975, 67 SCRA 351, 357-358; Surigao Consolidated Mining Co. Inc. v. Commissioner
of Internal Revenue, supra]
A claim for tax refund may be based on statutes granting tax exemption or tax refund. In such case, the rule of
strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, a
legislative grace, which cannot be allowed unless granted in the most explicit and categorical language. The taxpayer
must show that the legislature intended to exempt him from the tax by words too plain to be mistaken. [Commissioner,
supra with a note to see Surigao Consolidated Mining Co. Inc. v. CIR, supra at 732-733; Philex Mining Corp. v.
Commissioner of Internal Revenue, 365 Phil. 572, 579 (1999); Davao Gulf Lumber Corp. v. Commissioner of Internal
Revenue, 354 Phil. 891-892 (1998); . Commissioner of Internal Revenue v. Tokyo Shipping Co., Ltd., 314 Phil. 220, 228
(1995)]

15. Effect of a BIR reversal of a previous ruling interpreting a law as exempting a taxpayer. A reversal of a BIR ruling
favorable to a taxpayer would not necessarily create a perpetual exemption in his favor, for after all the government is
never estopped from collecting taxes because of mistakes or errors on the part of its agents. (Lincoln Philippine Life
Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)

16. A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties
on persons otherwise guilty of evasion or violation of a revenue or a tax law.

It partakes of an absolute waiver by the government of its right to collect what is 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. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer
and liberally in favor of the taxing authority. (Philippine Banking Corporation, etc., v. Commissioner of Internal Revenue,
G. R. No. 170574, January 30, 2009)

17. The purpose of tax amnesty is to

a. give tax evaders who wish to relent a chance to start a clean slate, and to

b. give the government a chance to collect uncollected tax from tax evaders without having to go
through the tedious process of a tax case. (Banas, Jr. v. Court of Appeals, et al., G.R. No. 102967, February 10, 2000)

18. Tax amnesty distinguished from tax exemption.

a. Tax amnesty is an immunity from all criminal, civil and administrative liabilities arising from nonpayment of
taxes (People v. Castaneda, G.R. No. L-46881, September 15, 1988) WHILE a tax exemption is an immunity from civil
liability only. It is an immunity or privilege, a freedom from a charge or burden to which others are subjected. (Florer v.
Sheridan, 137 Ind. 28, 36 NE 365)

b. Tax amnesty applies only to past tax periods, hence of retroactive application (Castaneda, supra) WHILE tax
exemption has prospective application.

19. Tax avoidance is the use of legally permissible means to reduce the tax while tax evasion is the use of illegal
means to escape the payment of taxes.

20. Tax evasion connotes the integration of three factors:

a. The end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the
non-payment of tax when it is shown that a tax is due;
b. an accompanying state of mind which is described as being evil on bad faith, willful, or deliberate
and not accidental; and

c. a course of action or failure of action which is unlawful. (Commissioner of Internal Revenue v. The Estate
of Benigno P. Toda, Jr., , etc., G. R. No. 147188, September 14, 2004)

21. Tax avoidance distinguished from tax evasion.

a. Tax avoidance is legal while tax evasion is illegal.

b. The objective of tax avoidance in most instances is merely to reduce the tax that is due while is tax evasion
the object is to entirely escape the payment of taxes.

c. Tax evasion warrants the imposition of civil, administrative and criminal penalties while tax avoidance does
not.

22. Tax sparing is a provision in some tax treaties which provides that the state of residence allows as credit the
amount that would have been paid, as if no reduction has been made. (Vogel, Klaus on Double Taxation Conventions,
Third Edition, p.1255 cited in Segarra, Venice H, Tax Treaties: Trick or treat ?, Philippine Daily Inquirer, December 6, 2002,
p. C5)

There may be instances where a particular income is exempt from taxation in order to encourage foreign
investments which may lead to economic development. If the tax credit method is used, there would be no more tax to
credit since there is no more tax to credit as a result of the tax exemption. Consequently, when the tax method credit
method is applied to these items of income, such incentives are siphoned off since, in effect, the tax benefits are
cancelled out. (Ibid.) Thus, the need for the tax sparing provision.

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