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TAXATION 1: General Principles and Income Tax
Atty. Prudence Angelita Kasala
Legend:
+ - Atty. Kasala’s comment
# - Author’s comment
GENERAL PRINCIPLES OF TAXATION
STATE POLICY ON TAXATION: TRAIN LAW
R.A. 10963, Section 2 – Declaration of State Policy
• Promoting sustainable growth and inclusive
economic growth by rationalization of the PH
internal revenue tax system
+ : to rationalize means to enact policies for the
betterment of the tax system that would greatly
benefit the government, and thus trickle down to the
constituents.
Sustainable growth is a testament to the economic
policy of liberalism during the Ramos’ admin.
# : The means and the end are both symbiotic.
Rationalization of the PH tax system must be
progressive and systematic in such a way that it
would lead to a realization of an inclusive economy,
one that not only limits growth and control for the
upper class but is shared and benefits the middle and
lower class, thus an increase in the collection of tax
and distribution of welfare and services.
Sustainable growth would only be possible if the
economy is inclusive since it is not manipulated by a
single class of peoples and thus opens many
opportunities for economic growth and financial
freedom.
• To provide equitable relief to improve levels of
disposable income and increase economic
activity
+ : WHAT IS DISPOSABLE INCOME?
Disposable income is synonymous with purchasing
power.
It is financial empowerment of the citizen wherein
their earnings are not burdened by taxes imposed by
the State which is counterproductive to the State
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
policy of promoting general welfare. The State must
aim to provide that the citizen be productive in order
to contribute more to the government.
• Provide social protection and all the needs under
its jurisdiction
+ : DIFFERENTIATE SOCIAL JUSTICE v.
SOCIAL PROTECTION
Social justice is neither anarchy, atomism, nor
communism but rather the equalization and
humanization of laws so that justice in its rational
and secular conception may at least be
approximated. (Calalang v. Williams)
Social protection is a new concept that has yet to be
defined by the Supreme Court.
# : We should not wait for the Supreme Court to
define what social protection should be in the state
since it is the primordial duty of the government to
provide for the basic needs of the people.
Social justice is the principle while social protection
is the manner and means of attaining such. It
consists of enacting policies that would reduce
poverty, promoting efficient labor markets, etc.
(United Nations Research Institute for Social Development)
Taxes – taxes are 1enforced proportional contributions
from 2persons and property, 3levied by the state by virtue
of its sovereignty for 4public purpose.
+ : Enforced proportional contributions - it is
enforced and created by law since if it would be in the
alternative, taxes would be only be optional and not
mandatory wherein one could only incur civil liability
instead of subjecting the subject of taxation with the full
force of the law.
+ : Peculiar obligation – failure to comply would
result to criminal liability
Taxation – inherent power of the sovereign, exercised
by the legislature, to impose burdens upon subjects and
objects within its jurisdiction for the purpose of raising
revenues for public purpose.

ELEMENTS OF TAXATION
I. Nature of the Taxing Power
• 1
Inherent – the taxing power is inherent in such
a way that it does not need any express mention
in the Constitution that would legitimize its use.
By mere birth and creation of the state, the
power of taxation is so concurrently existing.
The mere recognition of taxation in the
Constitution only aims to LIMIT and
RESTRICT on an otherwise absolute power.
(Churchill & Tait v. Concepcion)
+ : WHAT IS THE CONSEQUENCE OF TAX
BEING AN INHERENT POWER?
Being an inherent power of the state which necessarily
interferes with private rights, it must have as a
consequence, a form of compensation.
• 2Legislative – The general rule is that the taxing
power is vested SOLELY in the Legislature unless
the Constitution otherwise provides. (Art. VI, Sec.
28)
Solely within the wisdom and province of the
Congress to determine the purpose, subjects and
objects of taxation, amount, situs, and
manner/agencies as to how shall it be collected.
+ : EXCEPTIONS TO THE GENERAL RULE
E.g., delegation of the powers to tax to the
President, particularly with regard to tariff rates, but
it must first pass the completeness and sufficiency
test (Araneta v. Dinglasan)
Follows on the principle that taxes are grant of the
people and such grant must be made by the
immediate representative of the people.
II. 3Situs of Taxation (Territoriality) – the person or
property taxed must be within the jurisdiction of the
taxing authority. (CIR v. Robertson)
# : Does not make any distinctions as to whose persons,
hence it will cover natural and juridical persons.
As an attribute of sovereignty, the power of taxation
only covers the limits of the territorial jurisdiction of the
state.
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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III. 4Public Purpose – public purpose is not defined, it
is a classic concept that can be hammered to fit modern
standards. It should be given a broad interpretation. This
is the ends of the taxation power.
• Primary purpose – raise revenues in order for
the government to efficiently and effectively
administer its operations to provide public
services.
• Secondary purpose – revenue raising is not the
principal and teleological concern of the taxation
system.
Incidents of Public Purpose in Taxation:
o Reduction of social inequalities – attainment
thru enactment of a progressive system of
taxation. [CIR v. Central Luzon Drug Corporation]
o Encourage local industry – providing tax reliefs
and exemptions to growing industries to
promote economic growth. [Caltex v.
NAPOCOR]
o Protectionism – encourage fair trade
competition to promote and sustain local
trade.
o Regulatory – may be an exercise of police
power to regulate businesses and vices. [Tio v.
Videogram Regulatory Board]
o Construction of infrastructure – construction
of feeder roads [Pascual v. Sec. of Public Works]
o Rehabilitation of industries imbued with public
interest [Lutz v. Araneta]
o Socialized housing project
o Eradication of a deadly disease [Gomez v.
Palomar]
o Relief from unemployment
o Senior citizen discounts [Manila Memorial Park,
Inc. v. DSWD]
o Disbursements of salaries and benefits to
public office [Yap v. COA]
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+ : WHAT IS THE BASIS OF TAX MUST BE If the amount to be yielded is less than the
ENACTED FOR PUBLIC PURPOSE? resources to be exhausted by the government, it is
foregone until such time interest would accrue that
• Duty Test – mandate of the government under would necessitate its collection by the government or the
the Constitution. application of a tax amnesty by the subject of taxation.
• General Welfare Test – directly promote
welfare.
THEORY AND BASIS OF TAXATION
TAXATION v. POLICE POWER v. EMINENT
• Necessity Theory – primary concern of taxes is to
DOMAIN preserve the sovereignty of the state.
Tax Police Eminent Taxes provides the means to sustain an army, navy,
Power Domain and infrastructure to better protect the citizens
Purpose Raise Promote Common against aggression.
revenues general good
welfare
Benefits No direct No direct No direct • Benefits-Protection Theory – based on the theory
benefit benefit benefit of social contract wherein it is based on the
Persons Applies to Applies to Applies reciprocal duties of support and protection.
affected all persons all persons only to a
subject subject particular Taxes are paid for by the citizen in order to support
person/s the government in its undertaking that its
Superiority Recognizes Non- constituents should be able to enjoy a civilized
of contract recognition society. (CIR v. Algue)
Transfer Public Mere
funds restraint DOCTRINE OF SYMBIOTIC
RELATIONSHIP: Sourced from the above
theory. TAXES ARE WHAT WE PAY FOR A
PRINCIPLES OF A SOUND TAX SYSTEM CIVILIZED SOCIETY
• Fiscal Adequacy – consonant with the lifeblood IMPORTANCE OF TAXES
doctrine, sources of revenue must meet public needs.
Lifeblood Doctrine (PILMICO-MAURI Foods Corp. v.
+ : Existence of a fiscal or budget deficit means that our CIR) – taxes provide for the cost of the government in
system of taxation does not attain this policy. order that the citizens are privileged to live a civilized life
which are crucially important in the administration of the
• Theoretical Justice – taxes must be reasonable,
government and as such, “Taxes are the lifeblood of
just, fair, and conscionable, uniform, and equitable.
the government and their prompt and certain
availability is an imperious need.”
Violation of such principle of taxation would
necessarily render the tax law void and Manifestation of the Lifeblood Doctrine
unconstitutional.
• Imposition in the absence of constitutional grant
• Administrative Feasibility – tax laws must be • State’s right to select objects and subjects of
capable of effective and efficient enforcement which taxation
is consonance with the first policy of the primary tax • No injunction to enjoin collection of taxes
law, R.A. 10963. They must not obstruct business except for a period of sixty (60) days upon
and economic growth. application to CTA as incident of its appellate
jurisdiction
+ : A higher cost of compliance, meaning the liabilities
• Taxes could not be subject of compensation and
that would be incurred by a person in establishing a
set-off, subject to certain exceptions
business does not promote a robust environment for
business which attracts investment and taxation. • A valid tax may result in destruction of property
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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+ : FERDINAND MARCOS II v. CA expounds this enforceable and legally recognized in the Philippine legal
concept. system.
# : JURISPRUDENTIAL EXCEPTION TO By virtue of such principle, the Philippines thus
PILMICO CASE “LIFEBLOOD DOCTRINE” follows the principle of equality among states which
CIR v. Algue: While taxes are the lifeblood of the recognizes the sovereignty among states wherein one
government and they should be collected without state cannot impose its sovereignty and jurisdiction
hindrance, it must be in accordance with law and not over another.
arbitrary, as this will negate the reason for an organized
government. As taxation is an exercise of sovereignty, its use
must not trample and infringe upon the jurisdiction of
Whimsical imposition and collection of taxes is a another equal state or sovereign.
hallmark of a barbaric and despotic system, not a
civilized society.
MARSHALL HOLMES DICTUM 2. TERRITORIALITY (Art. 1, 1987 Constitution &
DICTUM [Panhandle Oil v. State of Magallona v. Ermita)
[McCulloch v. Maryland] Mississippi]
“The power to tax is the “The power to tax is not As the power of taxation is an exercise of
power to destroy.” the power to destroy sovereignty, and sovereignty is limited by the extents of
while this Court sits.” our territorial jurisdiction, such taxing power may not be
The taxing power is The power to tax is exercised beyond our bounds.
unlimited as it may limited by the
regulate or even destroy Constitution, and the + : EXCEPTION TO SUCH RULE:
a person or property. Court, as the last bastion EXTRATERRITORIALITY PRINCIPLE
of justice, is obligated to
The destruction referred strike out harsh tax laws. Taxation may be exercised when extraterritoriality is
to is the vigor or will of exhorted wherein a state has the legal ability to exercise
the legislature in enacting [spelled out in Holmes’ authority beyond its territorial jurisdiction such as naval
policies or laws to attain dissent in the case] vessels registered in the Philippines, aircraft, or
a needed objective for Philippine embassies which are an extension of the
the existence of the State’s territory.
State.
“The power to tax may be unlimited but it must not
be wielded arbitrarily that it infringes fundamental 3. NON-DELEGATION OF POWERS (Art. VI,
rights guaranteed by the Constitution.” 1987 Constitution)

The power to tax is vested solely in the Legislature,

LIMITATIONS OF THE TAXING POWER unless the Constitution so provides.
There are two classifications of limitations of the taxing
power, namely: inherent and constitutional limitations. XPNs:
INHERENT – limitations which refer to the nature of • FLEXIBLE POWER CLAUSE
the power of taxation itself and does not need any (Sec. 28, Art. VI, 1987 Constitution)
express constitutional provision so as to make it Presidential power to impose tariff rates, import
restrictive. and export quotas in accordance with the
national development program.

1. INTERNATIONAL COMITY (Sec 2, Art II, • LOCAL GOVERNMENT POWER

1987 Constitution) – the Philippine Constitution adopts (Sec. 5, Art. X, 1987 Constitution)
the incorporation principle which automatically makes LGU’s has the power to create own sources of
generally accepted principles of international law revenue subject to limitation set by Congress
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I

which is R.A. 7160 or the Local Government
Code.
NB: In order for a valid delegation to occur, there must
have been a prior law authorizing such delegation which
must conform to the sufficiency and completeness test.
4. PUBLIC PURPOSE – the taxation power exists
since it is borne from the need to provide for the
general welfare of the State. It shall be left to the
wisdom and province of the legislature as the
immediate representatives of the subjects of taxation.
Public purpose is a concept not defined which
can be hammered to fit modern standards.
TEST OF PUBLIC PURPOSE:
• Duty test – whether the thing to be furthered by
appropriation of public revenue is something
which is the duty of the State to provide.
• Promotion of general welfare test – whether
the proceeds of the tax will at some form or
another promote the welfare of the community
in equal measure.
# : “IT’S THE THOUGHT THAT COUNTS”
DOCTRINE (Lutz v. Araneta)
It is the purpose which determines the public
character of the tax law, not the number of persons
benefited. As long as the purpose favors the general
welfare, the appropriation is valid.
+ : INSTANCES OF PUBLIC PURPOSE:
As long as the police or taxing power enacts a
law that is more or less in pursuit of a lawful subject and
not tainted with grave abuse of discretion, it shall be
deemed constitutional.
Examples of lawful subjects are: relief from
unemployment, rehabilitation of an ailing industry
impressed with public interest, allotment of a fund for
eradication of a deadly disease, regulatory purposes,
senior citizens’ discounts.
# & + : Taking into account the factual considerations
of Lutz v. Araneta and Fertiphil Inc. v. PPI, would a tax law
be constitutional even if although considered a vital
industry for the economy, its enactment is tainted with
conflict of interest that caters to a specific person or
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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class? [Constitutionality of tax laws depend upon
factual considerations]
The tax law would still be valid in the
absence of grave abuse of discretion.
Notwithstanding that it caters to a specific class, the
rehabilitation of such industry or company even though
beneficial to the former is vital in such a way that its
existence permeates to different classes of society such
as laborers, traders, and consumers.
+ : CAN BEAUTY SCHOOLS FUNDED BY TAXES
BE CONTEMPLATED AS A PUBLIC PURPOSE IN
THE CONTEXT OF VENEZUELA?
No. It cannot be considered as a law deemed for
public purpose. “It is a bit of a stretch.” Cites the
two tests for public purpose.
# : If the sociopolitical conditions of the
community dictate that the aesthetics determine
the survival and basic needs of the citizens,
beauty schools are certainly within the ambit of
public purpose.
5. EXEMPTION FROM TAXATION OF
GOVERNMENT AGENCIES (RP v. City of
Paranaque)
Properties of the national and local government
are not subject to tax as this is absurd but as the
Constitution is silent regarding the power of the
Congress to impose tax on government. properties, it
may still be valid. (MCIAA v. Marcos)
TEST OF GOVERNMENTAL AGENCY
TAX IMMUNITY:
Whether or not the agency performing such task
is undertaking a governmental or proprietary function.
We deem something as governmental when it is
necessary function of the government in its objective to
preserve the sovereignty of the State and the same is
acting in its sovereign capacity.
GR: Agencies performing governmental functions are
tax-exempt.
XPN: Except when expressly stated by law.

We hold something as proprietary when the
function is merely ministerial in character and
thus not necessary with also the State acting in its
corporate capacity.
GR: Agencies performing proprietary functions are
taxable.
XPN: Except when stated by law. (R.A. 9337) e.g.,
GSIS, SSS, PHIC, PCSO
CONSTITUTIONAL – those limitations which are
spelled out in the Constitution which restricts the
absolute power of taxation not by virtue of the nature of
its sovereignty, but because of some positive law which
manifests in policies.
1. DUE PROCESS OF LAW (Sec. 1, Art. III)
“No person shall be deprived of life, liberty, or property
without due process of law…”
There is due process of law when the tests of procedural
and substantive due process are met.
Procedural Due Process – refers to the mode of
procedure which government agencies must follow in
the enforcement and application of the laws.
Not only must the subject and purpose of the law be
itself valid, but its enactment and execution must not be
arbitrary as it must follow the procedure set by law.
CIR v. CA & Fortune Tobacco
FACTS:
Fortune Tobacco is assessed a 20-45% ad valorem
tax based on the new law. Two days before the
effectivity however, the Commissioner reclassied the
company and subjecting it to a 55% ad valorem tax.
ISSUES:
WON it followed procedural due process (NO)
RULING:
When an administrative law is merely
interpretative, bare issuance is only necessary so as to
give effect to what has been mandated by law.
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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But if it increases the burden, it is imperative that
there must be an opportunity to be heard and be
informed.
Substantive due process – refers to its intrinsic validity
which has for its requisites: (Tanada v. Tuvera)
• The INTEREST OF THE PUBLIC in general
• MEANS employed are REASONABLY
NECESSARY
Carlos Superdrug v. DSWD
FACTS:
The business contends that the Senior Citizens
Act is unconstitutional since it is the deprivation of
property which is due to the loss of profit and capital.
ISSUE:
WON there is a violation of substantive due
process. (NO)
RULING:
As police power is the least limitable of all
powers, property rights must bow to police power since
it concerns general welfare.
Transgressions of the Due Process Clause:
• If tax amounts to confiscation of property
#: Although Gorospe opines that this is valid if
done by virtue of police power wherein the tax
subject must be necessarily justly compensated.
• Confiscation is outside the jurisdiction of the
taxing authority.
• If the purpose of the tax law is not for the public
interest.
• If the retroactive tax law is unjust and
oppressive.
2.EQUAL PROTECTION OF THE LAW (Sec. 1,
Art. III)
“…nor shall any person be denied the equal protection
of the law.”

Equal protection clause with regard to Taxation
EQUALITY UNIFORMITY
Tax falls equally and When the taxed subjects
impartially upon ALL are all alike in their
subjects regardless of classification.
classification.
The Constitution requires that there should be
uniformity in taxation in consonance with theoretical
justice.
What the law requires is that there must be equality
among equals wherein such classification is left to the
wisdom and province of the Legislature
Requisites for a valid classification (Mosqueda v.
PBGEO)
• Based upon substantial distinctions
• Germane to the purpose of the law
• Not limited to existing conditions
• Applied equally to all members of the same class
3.UNIFORMITY OF TAXATION (Sec. 28, Art. VI)
According to Black, there is uniformity in
taxation when the subject of taxation in the same class
are taxed at the same rate.
It is likewise uniform when it operates with the
same form and effect where it is found. Taxes
proportional to the value of the property is indicative of
uniformity in taxation.
A tax is uniform when it operates with the same form
and effect in every place where the subject of it is
found. (Patton v. Brady)
4. PROGRESSIVE TAXATION (Sec. 28 [1], Art. VI)
“Congress shall evolve a progressive system of
taxation.”
Progressive taxation – the upper class should
contribute more to the payment of taxes which
gradually diminishes as earnings and revenue decreases;
payment of taxes should be assessed according to the
revenues which the people enjoy under the protection
of the State. (Smith, Adam, Canons of Taxation)
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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+ : Evolve not prescribe
What the Constitution directs is to “evolve” and
not prescribe a progressive system of taxation which
acknowledges that a holistic effectiveness of the tax
system may also be found in instituting regressive taxes
and necessarily implying that an enactment of
progressive taxes only may eventually lead to a regressive
system of taxation.
Progressive Taxation with regard Taxation
According to legal authors, the provision should instead
be read in the alternative wherein “direct taxes are to
be preferred and indirect taxes, as much as possible,
should be minimized.” (E. Fernando)
Hence, the provision is not a justiciable and
enforceable right but a mere directive upon Congress to
minimize such enactment.
# : This is a peculiar Constitutional limitation since it
does not carry any weight or merit as compared to other
limitations which are justiciable and enforceable.
Progressive Taxation v. Tax Pyramiding
(People v. Sandiganbayan)
Tax pyramiding is the imposition of a tax on the tax
itself.
5. NON-IMPAIRMENT CLAUSE (Sec. 10, Art. III)
The stipulations and terms enclosed in the contract is
the law which governs the covenant between parties.
Any law which obviates or necessarily changes the
dictum of the contract is transgressive of such
Constitutional limitation.
The non-impairment clause only applies when the
contract is 1between the government and a private
individual wherein the clothe of sovereignty is shed off
and takes on the State takes on the mantle of corporate
entity or an 2agreement between two private parties
wherein an exercise of an inherent power of the State
substantially alters the nature and effects of the contract.
TAXATION IN RE: NON-IMPAIRMENT
CLAUSE; DOCTRINE OF CONSTITUTIONAL
SUPREMACY
An imposition of a tax subsequent to the
execution of a contract between parties is not a

transgression of the constitutional guarantee inasmuch as
the levying of a tax does not contemplate the
relationship between a debtor-creditor or obligor-obligee
but one of government-taxpayer.
Moreover, the tax could not be said as the main
consideration that would substantially impair and
prejudice the contract between the two parties as it is
presumed that the law is read into contracts, pursuant to
the doctrine of Constitutional Supremacy. Violation of
such is the exception to the general rule that the contract
is the law between the two parties.
Tax Exemptions (Casanovas v. Hord)
GR: Tax exemptions are revocable since they are
presumed to be an act of gratuity of the State.
XPN: When there is a valuable consideration which
makes the tax exemption take the form of a contract in
which the State therefore sheds its cloak of sovereignty.
CASANOVAS v. HORD
FACTS:
The Spanish government, thru a Royal Decree,
issued mining concessions to the Casanovas for a
payment. In the stipulation, the relinquishment of such
mining claims means that no more taxes be imposed.
Sometime thereafter, a tax law was passed
wherein the Commissioner imposed a tax upon the
mining claims of petitioner. Petitioner paid under protest
to recover claims.
ISSUES:
WON the imposition of such tax is an
impairment of obligation of contracts (YES)
RULING:
As the Royal Decree of the Spanish government
can be construed to be one of a contract, the plaintiff
should be protected from further imposition of tax as
such will violate the enshrined constitutional limitation
on the taxing power.
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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6. NON-IMPRISONMENT FOR NON-
PAYMENT OF POLL TAX (Sec. 20, Art. III)
Historical context: The poll tax is the cedula of the
Spanish regime which is a symbol of oppression.
7. TAX BILLS TO ORIGINATE FROM HOUSE
OF REPRESENTATIVE (Sec. 24, Art. III)
GR: Both houses may initiate bills.
XPN: Revenue bills or tax laws must originate
exclusively from the House of Representatives.
Case for elucidation:
TOLENTINO v. SECRETARY OF FINANCE
FACTS:
Petitioners opines that the VAT Law is
unconstitutional for violating the constitutional mandate
that tax bills should ORIGINATE EXCLUSIVELY in
the House of Representatives. That is, the proposal of
the HOR must be substantially the same without any
amendments made thereto by the Senate.
The VAT Law originated as a bill in the HOR
wherein it was passed on three readings and submitted
to the Senate. The Committee on Ways and Means then
proposed a draft in consideration of the bill proposed by
the HOR which was passed in the Senate.
The HOR Bill and the Senate bill was referred to
a conference committee which was duly approved and
then subsequently signed by the President.
ISSUE:
WON the term “originate exclusively” refers that
the bill proposed by the HOR must substantially be the
same and no further proposal or amendments may be
introduced by the Senate? (NO)
RULING:
NO. This unduly violates the principle of co-
equality of legislative power which makes the HOR
more powerful than the Senate since it denies the latter’s
ability not only to concur with amendments but to also
propose.
What the Constitution contemplates is that the
INITIATIVE of FILING revenue bills solely come
from the HOR seeing as they are the immediate
representatives of the taxing subject, they have the

wisdom as they are more sensitive to the local problems
where on the other hand, the Senate, in receiving the
proposed revenue bill, must approach it from a national
or wider perspective.
8. VETO POWER OF THE PRESIDENT (Sec.
27, Art. VI)
The President may veto any items in the tariff,
appropriations, or revenue bill which is then sent
back to the Lower House, since it is exclusively the
one where the bill must originate.
If upon voting of the 2/3 of the HOR, it shall be
submitted for voting to the Senate, wherein if it also
approved by 2/3, it shall operate to become a law.
KINDS OF PRESIDENTIAL VETO
• General Veto (Sec. 27 [1], Art. VI, 1987
Constitution)
The veto of the President of a bill passed by
Congress necessarily means the failure of the enactment
of the whole bill itself. It is then sent to the respective
House who proposed such, along with his objections.
For the Congress to override the veto of the
President, they should be able to vote 2/3 each on the
bill proposed.
• Item Veto (Sec. 27 [2], Art. VI, 1987 Constitution)
Applicable only to revenue, tariff, and appropriations
bills. The veto of the particular item or line does not
necessarily veto the whole bill and can be validly
enacted.
NEPTALI GONZALES v. HON. MACARAIG
FACTS:
Neptali Gonzales, along with twenty-two (22)
other Senators assails the constitutionality of the act of
President Aquino in striking out certain provisions and
not items in the General Appropriations Act in two
separate fiscal years.
The provisions in contention in this case which
was vetoed provides that the recommendations of the
President with regard to her executive budget that were
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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not allotted for by the Legislature could not be restored
or increased by way of augmentation in exercising veto.
Petitioners contend that the item veto exercised
by the President unnecessarily impairs the provision
itself which is not contemplated by law. They aver that
the veto of a provision, not item, in an appropriations
bill is a veto of the whole bill itself and that the striking
out of the conditions tramples upon the principle of
separation of powers, as such comprises an act of
legislation.
ISSUE:
WON the item veto done by the President is
valid. (YES)
RULING:
YES. An appropriation bill is distinct and
separate from all other bills legislated in the Congress
such that the terms and item and provision intertwines
in its operation. So as long as the veto of the item
operates within a specific or particular appropriation, its
veto shall remain valid in spite of the striking out of the
pertinent provision/s and does not affect the validity of
the entire bill.
9. FLEXIBLE POWER CLAUSE (Sec. 28, Art. VI)
The Constitution, in this regard, states the
obvious. Generally, the power to tax is solely within
the authority and jurisdiction of the Legislature.
It is thus however, authorized by the
Constitution that it can delegate to the President the
power to impose and control tariff rates and
customs tax, if it is empowered by valid law which
delegates the latter which in this case is Section
1608 of R.A. 10863 otherwise known as the
Customs Modernization and Tariff Act.
The President, however is limited in the
imposition of tariff rates as he must act with the
recommendations of the NEDA and Finance
Secretary.
Flexible Tariff Clause
Refers to the power of the President upon
recommendation of the National Economic and
Development Authority (NEDA) to:

• INCREASE, REDUCE, or REMOVE existing
protective tariff rates of import duty, which shall
not be higher than 100% ad valorem.
o A tariff is protective when the additional
imposition of duties or amount intends
to make the cost of a foreign import
higher and thus less competitive in the
market.
• ESTABLISH import quota or BAN importation
of any commodity
o E.g., rice importation to meet shortage of
supply, banning importation of kid’s toys
containing high amounts of lead
• IMPOSE additional duty on all import not
exceeding 10% ad valorem, whenever necessary
Limitations on the Flexible Power Clause
WHEN: Unless the delegated power is also withdrawn
or terminated by Congress, the President may only
exercise the Flexible Power when Congress is not in
session.
GR: The power of the President to impose an additional
duty not exceeding 10% ad valorem is an absolute
presidential prerogative and not subject to the
recommendation of the NEDA Director and which
should take effect immediately at his discretion.
XPN: As to all other powers enumerated in the Flexible
Power Clause, the NEDA must first conduct a hearing
before recommendation that seeks to give a reasonable
opportunity to any interested party or instrumentality of
the government.
Thirty (30) days after such public consultation, the
NEDA must submit its recommendation to the
President.
The decision to increase, reduce, or remove tariff or
impose import quotas or ban commodities shall take
effect only thirty (30) days thereafter.
The power to increase or decrease tariff rates shall
also include the modification in the form of duty. The
corresponding ad valorem or specific equivalents of the
duty with respect to the imports from the principal
competing foreign country for the most recent
representative period shall be used as basis.
# : Gorospe further elucidates the importance of this
delegation since the trade industry forms the backbone
of the state and is volatile that a bureaucratic process in
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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the Congress would only be counterproductive in
building a robust economy.
10. FREEDOM OF THE PRESS (Sec. 4, Art. III)
“No law shall be passed abridging the freedom of the
speech, of expression, or of the press…”
What is merely prohibited that would violate the
Constitutional provision is the imposition of a
discriminatory tax which would unduly place a prior
restraint on the freedom of speech.
We deem something as prior restraint when the
exercise of such right is curtailed or prohibited when the
law places either content-based or content-neutral
regulations for it to be freely done which may be done in
the case of payment of licenses, taxes, or censorship.
TYPES OF PRIOR RESTRAINT/REGULATION
• Content-based regulation – otherwise known as
censorship wherein the exercise is regulated and
based on the subject matter of the speech,
publication, etc.
For the valid exercise of content-based regulation,
the Court presumes that it is unconstitutional according
to the strict scrutiny test since the freedom of
expression is extolled as one of the most sacred rights in
a democracy.
To be held as constitutional and the presumption
of unconstitutionality overturned, the State must be able
to prove that the content-based regulation is based on
the clear and present danger rule which holds that the
speech may be restrained because there is a 1substantial
danger that is 2extremely serious, the 3degree of which is
imminently high, and that such 4evil must be prevented
by the government.
• Content-neutral regulation – merely based on
the incidents of speech such as time, place,
manner, and well defined standards (BAYAN v.
Ermita)
For the valid exercise of the State of prior
restraint on content-neutral regulations, it must
necessarily pass the intermediate review of the Court
wherein the Court does not presumptively hold that the
act is valid nor invalid.

It must pass the substantial interest test
wherein it must be able to prove that the governmental
regulation is 1within the constitutional limitations, if the
2
State has important or substantial interest, and such
3
interest is unrelated to the suppression of free
expression, and if 4the incidence of such restriction on
speech or expression is not greater than the interest of
the government. As an additional requirement, such
regulation must be well defined, as elucidated in
BAYAN v. Ermita.
TAXATION IN RE: FREEDOM OF
EXPRESSION
As long as the imposition of burden does not
have for its purposes the prior restraint on the exercise
of the freedom of expression, the act of the State is
valid.
The press as a business establishment is still liable
to pay for the obligations to the State pertinent to its
operation such as income tax wherein the imposition of
burden is separate and distinct since the payment of such
to the government has for its purpose the raising of
revenues while the levying of a tax based on prior
restraint is founded on regulatory purposes, an act
policing and necessarily curtailing the exercise of free
speech.
# : Academic discussion on content-based regulation
and prior restraint
Prior restraint and content-based regulation with
regard to taxation is usually hard to contemplate since
the factual circumstances usually precedes the regulation
based on content, thus the tax to be imposed takes the
shape of an inchoate censorship which can manifest due
to its chilling effect.
11. FREEDOM OF RELIGION (Sec. 5, Art. III)
“The free exercise of religion is espoused and no
discrimination nor preference should be allowed by the
State.”
Non-establishment clause – there is no State religion
and the State must not advance one religion over
another by the exercise of its inherent powers.
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
Angeles | Cimatu | Lagasca | Priolo | Tan | Tolentino – TAXATION I
Freedom of religion clause – free exercise of religion
is allowed subject of course to the laws which governs
civil relations.
In American Bible Society v. City of Manila, the Court
ruled that a municipal license tax is a violation of the
Constitution since it imposes a tax as a license in order
for the institution to proselytize which places it in an
undue disadvantage compare with other beliefs.
What is only permitted is the taxation of the income
which was derived from the sale for profit.
+ & # : SIMILARITIES IN FREEDOM OF
RELIGION AND FREEDOM OF EXPRESSION
The freedom of religion is similar with the freedom of
expression in such a way that the exercise of the inherent
power of the State, must not infringe the right
guaranteed to the people. That is, with regard to tax,
must not place a burden on the exercise or practice
thereof but may be placed on other incidents such as
income and sales tax.
While the freedom of expression extolls the values of
democracy, the guarantee of the Bill of Rights with
regard to the freedom of religion highlights the
importance of the principle of the separation between
Church and State wherein the imposition of a tax or
fee on the exercise of faith such as proselytization and
other practices necessarily destroys and burdens a
religious institution which would subsequently and
necessarily favor another ideology or religion, a
transgression of such principle that is manifested in the
non-establishment clause which prohibits the
advancement of another religion over another, and
mandates that all be taxed, without discrimination.
TOLENTINO v. SECRETARY OF FINANCE
FACTS:
Petitioner which advocates for the press and
religious institutions contends that the imposition of the
Congress of the value-added tax (VAT) to broaden the
tax base is violative of the constitutional guarantee of
freedom of expression and freedom of religion.
ISSUE:
WON the imposition of the VAT transgresses the
constitutional guarantee? (NO)

RULING:
NO. The imposition of the VAT is not for the
regulation that serves a condition for the press to
publish or circulate or the religious institution to
proselytize, but rather has for its purposes to the raising
of revenue by levying the sales transacted.
With regard to the imposition of a registration fee, the
same does not favor the petitioner since its purpose is
for the mere registration only which is made only once
and not a condition for the exercise of the
aforementioned rights.
12. EXEMPTION OF PROPERTIES
ACTUALLY, DIRECTLY, AND
EXCLUSIVELY USED FOR RELIGIOUS,
CHARITABLE, AND EDUCATIONAL
PURPOSES (Sec. 28 [3], Art. VI)
RATIO: These institutions perform services projects
that would otherwise be spent for by the taxpayer.
Instead of burdening these institutions toward nation-
building, the State endeavors to empower them.
NB: What is exempted is the property, not institution.
TESTS TO BE EMPLOYED IN EXEMPTION
FROM TAX:
As to institution:
• Charitable Institution – (Congressional Sunday School
and Publishing Society v. Board of Review) mandates that
to be qualified as a charitable institution it must:
o Must be an institution;
o Providing FREE goods and services;
o To the public;
o Which would otherwise fall to the
government.
As to purpose: (Abra Valley College, Inc v. Aquino)
WON the use of the property is in accordance with the
purposes mentioned in the Constitution. Hence, even if
the subject-property is owned by a religious institution, it
may be subjected to tax if not used for religious
purposes.
The exemption still applies even if the use is incidental.
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Actual – opposed to seemingly and pretentiousness, and
true in fact.
Directly – not secondary but by direct means
Exclusively – apart from all others
13. EXEMPTIONS GRANTED TO NON-
STOCK, NON-PROFIT EDUCATIONAL
INSTITUTIONS (Sec. 4[3], Art. XIV)
The law giving weight to this Constitutional mandate
is R.A. 6055 which granted tax exemptions to
educational institutions like the Angeles University
Foundation.
# : ELEMENTS:
• Non-stock (Corporation Code of the Philippines) –
no owners represented by shares of stock; no
income is distributable as dividends to members.
• Non-profit – an institution that operates not for
profit undertaking such as charity, education, etc.
• Income – the subject property that is tax-
exempted
• Exclusive Purpose – the subject property
derives it being immune from tax since it is used
for educational purposes, germane or direct.
ART. XIV, Sec. 4 (3) ART. VI, Sec. 28 (3)
Non-stock, non-profit Religious, educational,
educational charitable institutions
Income tax, Custom Property tax
duties, Property tax
Purpose of income must Property must be actually,
be devoted for education directly, exclusively used
for such purpose
Rule of thumb: As long as the income derived by the
non-stock, non-profit educational institution is being
exclusively devoted for educational purposes, whether it
be direct (tuition, matriculation) or incidental (canteen,
dormitory which must be located inside the premises
[DECS Order 137-87]) governs the rule on tax
exemption of non-stock and non-profit educational
institutions as the R.A. 8424* provision on the tax
liability of non-stock and non-profit educational
institutions is deemed unconstitutional by transgressing
the policy of the Constitution.
 Angeles | Cimatu | Lagasca | Priolo | Tan | Tolentino – TAXATION I
1. Generally, all revenues sourced by the school Grant of tax exemption (tax amnesty, tax credit, etc.)
could not be subject to tax.
2. When it comes to DIRECT SOURCES from House of Senate
revenues and assets such as tuition, Representatives (24)
matriculation, library, they shall be not liable to (250)
tax. Required 126 13
3. When it comes to INCIDENTAL SOURCES votes 50% = 125 + 1 50% = 12 + 1
such as canteens and dormitories, it must be: 1.) (majority of (majority of the
owned, 2.) operated, and 3.) located within the members of the members of the
school campus. Lower Upper
4. OTHER SOURCES of revenue such as bank House+1) House+1)
deposits, money market placements, and the like Quorum 126 13
are TAXABLE. Necessary consequence that the
5. Utilization of income must be used for the minimum number of votes for the
purposes the school was created: endowment passage of a tax exemption requires
for research, scholarship grants, establishment of that it shall be the same required
professorial chairs. for a quorum.
TOTAL # of
VOTES 139
14. GRANT OF TAX EXEMPTION
# : Source of authority: Sec. 28 [4[, Art. VI, 1987 Revocation/withdrawal of exemption, ordinary
Constitution, inherent power to tax as an exercise of enactment of bills
sovereignty House of Senate
GR: No exemption to taxes due to its absoluteness as an Representatives (24)
inherent power of the State. (250)
Required votes 64 7
XPN: Unless decreed by the Constitution itself by 50% of quorum 50% of quorum
provisions which are self-executing or granted by an act (126) = 63 + 1 (13) = 6 + 1
of Congress Quorum 126 13
50% of the total no. of members+1
to primarily avoid deadlocks and be
MECHANISM FOR GRANT AND reasonably fit with the above
REVOCATION OF TAX EXEMPTIONS required votes
Total # of
• Grant: Absolute majority vote of all the votes 77
members of Congress. (50% of all members of
Congress in their own separate Houses + 1)
• Revocation/Withdrawal: Relative majority + : INVALID PASSAGE or VOTATION
vote which means ordinary majority vote in a The House of Representatives and Senate could
quorum not vote as one quorum as it would violate the principle
• Quorum – required number in attendance in a of co-equality of each legislative body since the
legislative body for an official conduct of overwhelming majority of the Lower House would
business to take place and have binding effect. render nugatory the power of the Senate to make its own
independent decision.

B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I


CONSTRUCTION AND INTERPRETATION
OF TAX EXEMPTIONS
GR: Strict construction in favor of the State
XPN:
• When the statute itself provides for liberal
interpretation;
• When it refers to special taxes relating to special
cases affecting special classes of persons;
• If property to be taxed is one of public property;
• Traditional exemptees: educational, religious
institutions;
• In favor of the government;
• If the taxpayer falls within the ambit of
legislative intent.
15. NON-APPROPRIATION OF PUBLIC
MONEY
GR: Non-establishment Clause (Sec. 5, Art. III, 1987
Constitution)
“No law shall be made respecting an
establishment of religion, or prohibiting the free
exercise thereof…”
Ergo, any appropriation of a public fund for religious
purposes must be considered void for violating the
principle of separation between church and state and the
non-establishment clause
XPN: Public purpose exemption (Sec. 29 [2], Art. VI,
1987 Constitution)
“… except when such priest, minister, or dignitary is
assigned to the armed forces, or to any penal institution,
or government orphanage, or leprosarium.”
# Is the list of institutions in the Constitution exclusive?
NO. What is merely prohibited by the Constitution is
the allotment of a fund that will benefit one religion over
another, hence losing its characteristic as one of public
purpose.
ISLAMIC DA’WAH COUNCIL OF THE
PHILIPPINES v. EXECUTIVE SECRETARY
FACTS:
The Executive Secretary issued E.O. 465
establishing the Philippine Halal Certification Scheme
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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which designates the Office of Muslim Affairs (OMA)
the sole and exclusive authority to issue halal certificates
and other regulatory permits.
Petitioner-IDCP, is an NGO acting under the
DWSD which conducts seminars on the manufacturing
of halal food and as a consequence thereof issues
certifications to qualified manufacturers and distributors.
They contend that the EO necessarily violates
the non-establishment clause since the government
intrudes on a function that is solely vested for religious
institutions.
ISSUE:
WON EO 465 is unconstitutional for violating
the principle of separation between Church and State.
(YES)
RULING:
YES. Without a doubt, the classification of food
as halal is an exclusively religious function since it is
drawn from the Qu’ran and Islamic belief. As a
consequence thereof, it encroached upon the duty of
Islamic religious organizations the interpretation of what
is fit for consumption and has forced Muslims to accept
the State’s interpretation of the Qu’ran.
16. LOCAL GOVERNMENT (Sec. 5, Art. X, 1987
Constitution)
“Each LGU shall have the power to create its own
sources of revenues… subject to such guidelines
and limitations as the Congress may provide,
consistent with the basic policy of local
autonomy.”
GR: Taxation is an attribute of sovereignty and is
exclusively lodged within the Legislature. A
municipal corporation is not clothed with the said
inherent power as they are merely territorial and political
subdivisions of the State.
XPN: The Constitution however in Section 5, Art.
X, mandates the Congress to enact and delegate such
power to local government units. In the creation of a
political unit, by doctrine of necessary implication, the
power to tax is also vested in the municipal corporation.
In the delegation of such power, it must be construed
in strictissimi juris wherein it must fulfill the completeness
and sufficiency test. [Araneta v. Dinglasan]
 Angeles | Cimatu | Lagasca | Priolo | Tan | Tolentino – TAXATION I
Test of completeness: The setting forth of the PEPSI-COLA BOTTLING CO. v.
policy to be executed by the delegate. MUNICIPALITY OF TANAUAN, LEYTE
Test of sufficiency: Setting forth of standard and FACTS:
limitations to map out authority of the delegate.
The Municipality of Tanauan, Leyte enacted an
Ordinance that levied taxes denominated as municipal
production tax against soft drinks manufacturers by
DOCTRINE OF PREEMPTION IN LOCAL virtue of the R.A. 2264 or the Local Autonomy Act.
TAXATION (Victoria Milling v. Municipality of Victoria)
Pepsi protested against the imposition of tax by
An instance wherein the national government elects holding among others that there was an undue
to tax a particular area impliedly withholding from the delegation of taxing authority.
local government the delegated power to tax the same
field. It rests upon the intention of the Congress. ISSUE:
Preemption would not apply if Congress allows the WON there is undue delegation on local
municipal corporation to tax the field it already occupies. governments to tax? (NO)
RULING:
LIMITATIONS OF TAXING POWER OF LGUs NO. While the power of taxation is an inherent
attribute of sovereignty and thus is necessarily lodged
R.A. 7160 or the Local Government Code is the within the province of the Legislature, the same does not
governing law regarding delegation of the taxing power apply to municipal corporations which are created by the
and thus sets the limitation on local government units on Congress.
what should not be taxed except provided for by law.
By way of necessary implication, the creation of
Income tax Agricultural Taxes on local government units automatically confers the power
XPN: Banks products sold by premiums by to tax as a way to sustain the political unit and self-
and financial marginal way of government of the political unit.
institution farmers or reinsurance or
fishermen retrocession
Documentary Business tax Vehicle
17. SPECIAL FUND (Sec. 29, Art. VI, 1987
stamp tax registration and
Constitution)
permit issuance
Estate tax NIRC excise tax Export taxes
“All money collected on any tax levied for a special
on petroleum
purpose shall be treated as a special fund and paid
products
out for such purpose only. If the purpose for
Customs tax VAT on sales Cooperatives which a special fund was created has been fulfilled
duly registered or abandoned, the balance if any, shall be
under the law transferred to the general funds of the
AND government.”
Countryside and
Barangay
Business
JOHN OSMEŃA v. OSCAR ORBOS
Enterprises
Trade excise tax Transportation Taxes against FACTS:
tax the national
government. A special fund was created namely, Oil Price
Stabilization Fund (OPSF) to curb and alleviate the
fluctuating and volatile oil prices in the world market
wherein it imposes tax upon oil companies to contribute
to such fund.

B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I


The OPSF in this regard acts as a way to reimburse
companies for the costs not being earned due to the oil
crisis.
By virtue of E.O. 1024, the OPSF was released from
the National Treasury to the Department of Energy
which likewise authorized the same to invest the fund in
government securities and the earning thereof will accrue
to such special fund.
Petitioner-Senator contends that the EO violates the
Sec. 29, Art. VI of the Constitution which mandates that
special funds be only utilized and paid out for the
specific purpose to which it was instituted.
ISSUE:
WON the constitutional provision regarding special
fund is violated? (NO)
RULING:
NO. The constitutional provision regarding special
fund is not violated inasmuch as the taxation power is
not purely enacted for the raising of revenues of the
specific purpose and fund but for some other public
purpose which is coupled with police power of the State
to regulate and stabilize oil price to support of security
and economic survival of its constituents.
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GR: Congress may increase jurisdiction of lower
courts
Congress is empowered by the Constitution to set
jurisdiction of lower courts.
XPN: Decrease or affect appellate jurisdiction of the
Supreme Court
By virtue of Sec. 30, Art. VI of the Constitution, the
Congress could not increase or change the appellate
jurisdiction of the Supreme Court without its advice and
concurrence.
Hence, it cannot enact a law which states that the
decisions of the Court of Tax Appeals are final and
executory for it will necessarily transgress the mandate of
the Constitution regarding judicial review under Sec. 5 of
Art. VIII.
Rules of procedure on tax cases
R.A. 9282 known as the Expansion of Jurisdiction of
Court of Tax Appeals, the CTA has exclusive appellate
jurisdiction over decisions of the Commissioner of
Internal Revenue and Regional Trial Court in local tax
cases.
Appeal of the ruling of the CTA en banc may be filed
with the Supreme Court under Rule 45.

18. SUPREME COURT’S JURISDICTION

OVER TAX CASES (Secs. 2 & 5, Art. VIII, CLASSIFICATION AND DISTINCTION OF
1987, Constitution) TAXES
1. As to BURDEN/INCIDENCE
• Congressional Limits of Jurisdiction (Sec. 2,
Art. VIII, 1987 Constitution) DIRECT INDIRECT
“The Congress shall have the power to define, Persons liable Taxpayer Shifts the
prescribe, and apportion the jurisdiction of the primarily burden of
various courts but may not deprive the Supreme engaging in the paying its tax to
Court of its jurisdiction over cases enumerated in business or someone else
Section 5 thereof.” transaction. who is indirectly
liable.
• Judicial Powers of the Supreme Court in re: Persons paying Primarily liable In actuality:
Taxation (Sec. 5, Art. VIII, 1987 Constitution) taxpayer primarily liable
o Review on certiorari lower court decisions taxpayer/seller
o Review of constitutionality of tax, must bear the
imposition, assessment or toll, or obligation to
penalties. pay

In fiction of
law: the burden
of answering the
is shifted to
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
 Angeles | Cimatu | Lagasca | Priolo | Tan | Tolentino – TAXATION I
another party
which may be
the buyer. 3. According to PURPOSE
Examples Income tax, Value-added tax GENERAL SPECIAL
community tax, (VAT), customs Purpose Raising revenue Achieving a
withholding tax, tax for the particular
government legitimate object
In layman’s term: Even if the incidence and obligation of the
of payment of tax falls upon one person, the burden or government
payment of the indirect tax may fall or shifted upon him Examples Income tax, Sugar
and hence would necessarily excuse the payment of taxes estate tax, Stabilization
of the former party. business tax Fund
Example:
Seller and buyer made a sale of cigar. While A is liable
for sin tax, he may include the amount of tax to the In a sale of cigarettes, two purposes can be inferred
whole amount of the object so that buyer answers for it. wherein it is general since the VAT is revenue raising
and is specific since the sin tax finances the Universal
2. According to DETERMINATION OF Health Care program of the government.
AMOUNT OF TAXES
SPECIFIC AD
VALOREM 4. As to SCOPE or AUTHORITY IMPOSING
Basis or Imposed and based
Basis of THE TAX
benchmark on a physical unit of
imposition is NATIONAL LOCAL
measurement such
on: Authority Imposed by the Imposed by
as weight or volume
1. Selling national the local
capacity price; government, government
2. Other generally by the unit (LGU)
BASED ON specific Legislature
MEASUREMENT value of the Examples Income taxes Real estate tax,
goods; and revenue business tax
3. Fixed taxes
proportion
in relation
with the Example:
value of the
In the sale of such cigarettes, the authorities
property
regarding the taxing authority may be either national
or local.
BASED ON
VALUE It would be national if what is contemplated is the
Examples Luxury tax on spirits Real estate tax, sin tax since it is enacted by Congress and it inures
and tobacco, excise tax on to the benefit of the coffers of the National Treasury
petroleum products cars and the Department of Health.
It would be local tax if the seller pays business tax to
Example: exercise the right to conduct business of selling
cigarettes.
Buyer and seller made a sale for a pack of cigarettes
which imposes sin tax. The tax imposed on a pack of
cigarettes with regard to determination of amount is
specific as the law imposes a levy on the capacity or
number of cigarettes contained in a pack.

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5. As to SUBJECT MATTER/OBJECT A tax law is deemed progressive if the tax rate
increases along with the tax base in keeping with the
PERSONAL/POLL/ PROPERTY concept of social justice that seeks to promote the
CAPITATION welfare of those who have less in life by giving them
Subject/ Imposed upon Imposed relief from enforced contribution of their property to the
Object individuals, whether upon state.
citizens or not, residing property,
within a specified whether real In gradually increasing the rate of tax to those who
territory, WITHOUT or personal, in have more property that is reflected in the amount of tax
REGARD TO THEIR proportion to base, the law affords relief to those financially challenged
PROPERTY OR its value. to make them productive and seeks to implement
OCCUPATION OR services from the collected taxes of the well-off for the
BUSINESS economic survival of the poor, instead of imposing an
Examples: Community tax Real estate tax equal rate of tax on different economic strands of
society.
#: Another classification would be EXCISE TAX #: ADDITIONAL GRADUATION OF RATES OF
which is imposed upon the performance of an act, TAX
whether it is a right or privilege examples of which are
PROPORTIONAL DEGRESSIVE
income tax or value-added tax.
Concept Tax rate remains Tax rates only
Example: constant even if the allowable to
tax base changes increase up to a
In the sale of cigarettes, there is a liability on the part of certain extent
the seller to pay excise tax since he presumably runs a even if tax bases
business. continually
increases
Example VAT, real estate tax
6. As to GRADUATION OF RATES
PROGRESSIVE/ REGRESSIVE DOUBLE TAXATION
GRADUATED
Concept Rate of tax Rate of tax Double taxation – taxing the same property twice when
increases as the tax increases as the it should only be taxed once. Conversely speaking, taxing
base increases tax base the same person twice by the same jurisdiction for the
decreases same thing. (Cooley; Dimaampao)
Example Income tax Value-added tax Elements of Double Taxation (Nursery Care Corp. v.
Anthony Avecedo) :
• Tax base – corresponds to the base amount
or price. • Tax is imposed on the same subject matter;
• Tax rate – corresponds to the percentage rate • For the same purpose;
which would be applied on the base amount • By the same taxing authority;
(tax base) • Within the same taxing jurisdiction;
• Same taxing period;
Example: Income taxation • Same kind of character.
An income of 30,000 – 40, 000 php / month would
be subjected to a 5% income tax. Karl Zedong earns
35,000 per month.

In this case, the tax base would be 35,000 pesos while

the applicable tax rate is the 5% income tax.
#: PROGRESSIVE TAXATION SYSTEM AND
DISTRIBUTATIVE JUSTICE
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I

KINDS OF DOUBLE TAXATION
• DIRECT – prohibited under Philippine
jurisdiction. Elements of double taxation
aforementioned are all present in this kind of
taxation.
• INDIRECT – permissible double taxation.
Allowable if the nature or character of the tax to
be levied is different even though other elements
aforementioned above are present.
Example: tenement tax v. real estate tax
• DOMESTIC – taxes are imposed by the local
or national government (within the same state)
• INTERNATIONAL – refers to the imposition
of comparable taxes in two or more states on the
same taxpayer in respect of the same subject
matter and for identical periods.
Example: Taxpayer is a resident of the
contracting state and derives his income from
said state wherein the contracting state and the
other state levies taxes on income or capital.
MEANS EMPLOYED TO AVOID DOUBLE
TAXATION
Tax conventions are formulated to avoid international
juridical double taxation so as to increase trade and flow of
goods and services in order to revitalize the economy.
(CIR v. S.C. Johnson and Son, Inc.)
Foreign investments will only be induced in reasonable
and amicable business climate wherein one of the
primary foundation is the protection against double
taxation.
METHODS OF RELIEF UNDER TAX
TREATIES:
• EXEMPTION METHOD – income or capital
in the situs or source of taxation is exempted in
the place of residence.
• CREDIT METHOD – tax paid in the state of
source is credited against the tax levied in the
state of residence.
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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COMMISSIONER OF INTERNAL REVENUE v.
S.C. JOHNSON & SON, INC.,
FACTS:
Respondent-company is a domestic corporation
engaged in business in the Philippines which has a
license agreement with S.C. Johnson & Son (USA). As a
consequence thereof in their business, they must pay
royalties and taxes for the use of their license and
trademark.
The company filed for a refund of their taxes
paid wherein they aver that by virtue of the RP-US
treaty, the tax rate they shall be subjected to must be
10% instead of 25%.
CIR deferred on the petition which subsequently
led to the filing of a petition in the lower courts. It
likewise averred that the 10% tax rate would only be
applicable to US residents conducting business in the
Philippines which has similar circumstances in the RP –
West Germany treaty. Seeing as they are not similar
circumstances, respondent’s petition fails to be
meritorious notwithstanding that it is a petition for tax
exemption which must be strictly construed against.
ISSUE:
WON the respondent company may refund?
(NO)
RULING:
NO. The tax rates on royalties and the
circumstances of payment thereof are the same for all
the recipients of such royalties and there is no disparity
based on nationality in the circumstances of such
payment. On the other hand, a cursory reading of the
various tax treaties will show that there is no similarity in
the provisions on relief from or avoidance of double
taxation as this is a matter of negotiation between the
contracting parties.
This dissimilarity is true particularly in the treaties
between the Philippines and the United States and
between the Philippines and West Germany.
CHARACTERISTICS OF TAX
1. TAX & SPECIAL ASSESSMENT
Special assessment is a tax upon property levied
according to the benefits conferred on the property
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since it derives some special benefit from the 5. TAX & DEBT
improvement
TAX DEBT
TAX SPECIAL As to source of Imposition of Consensual act
ASSESSMENT obligation law of contracting
As to property Generally, all Only on land parties
As to liability Tax is a Cannot be made As to Not assignable May be assigned
personal liability a personal transmissibility to another
liability of the As to set-off GR: Not subject Subject to set-
person assessed to set-off off
As to reason Must be for Based wholly on
public purpose benefits XPN:
As to time and Charge on all Charge on 1. Multiplicity
locality property in a benefits the of suits
prescribed area property (CIR v. CA)
bestowed on the 2. Technical
owners issue (SAA
v. CIR)
3. Judicial
2. TAX & LICENSE discretion
TAX LICENSE (CIR v.
As to inherent Taxation Police power TOPOCO)
power As to accrual of Does not accrue Accrues interest
As to purpose Revenues Regulatory interest interest
As to amount Legislative Limited only to
discretion the expenses of Doctrine of Equitable Recoupment
issuance and
surveillance The present tax may be deduct or set off in favor of the
As to primacy Primary purpose Primary purpose taxpayer if and only if there is:
of purpose is revenue, is regulation,
• Tax illegally paid or erroneously collected
regulation incidental
merely revenues does • Barred by the statute of limitations under Art.
incidental not make it a tax 1140 wherein action to recover movable
property prescribes in eight (8) years.

3. TAX & TOLL XPN:

TAX TOLL The Court however held in the novel case of CIR v.
UST that the application of such doctrine does not exist
As to demand Demand of Demand of
sovereignty proprietorship in the Philippine jurisdiction.
It ratiocinated its decision based on public policy
that if such doctrine would be made to apply, it would
4. TAX & PENALTY
open the floodgates to abuse by the collecting agency
TAX PENALTY and evasion of obligation to pay taxes by the subject of
As to liability GR: Arises from Arises from taxation.
civil liability criminal liability The taxing agency may be tempted to delay and
neglect the collection of taxes within the prescribed
XPN: Default period set by law wherein it is confident that it may
or failure to pay collect the tax anytime by it having being recouped or set
taxes
off.

B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I


The taxpayer on the other hand is tempted to delay
the filing of a tax refund of an erroneously collected tax
since he may recover the same or part thereof by
refusing to pay a valid tax assessed against him and
compelling the Government to set off the same against
the tax payment he could no longer recover.
# : CIR v. UST case could not be found among the
records of the Supreme Court therefore the legal basis of
the tribunal in interpreting the doctrine is a peculiar
exercise of judicial legislation.
PHILEX MINING CORP. v. CIR
FACTS:
The Bureau of Internal Revenue sent a letter
asking Philex to settle its tax obligations amounting to
124 million pesos. Philex protested the assessed amount
since they have pending claims for VAT credit/refund
amounting to 120 million pesos. As such, the refund
should be credited against the tax assessed.
ISSUE:
WON legal compensation may take place (NO)
RULING:
NO. Government and taxpayer are not debtors
and creditors of each other.
There is a material distinction between tax and
debt. Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in its
sovereign capacity.
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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ASPECTS, PROCESS, PHASES OF TAXATION
1. LEVY/IMPOSITION
Means enactment of tax laws or statutes generally by the
Legislature
A. Scope of Legislative Power
1. Discretion as to purpose – must be for
public purpose
2. Discretion as to subject
3. Discretion as to amount or rate of tax
4. Discretion as to manner and means of
collecting taxes – there must have been a
valid delegation
2. ASSESSMENT & COLLECTION
Administrative character of taxation wherein it is
delegated by the Legislature to properly know the
amount and collection of taxes.
For there to be a valid assessment, there must have
been a valid delegation of powers which must comply
with the completeness and sufficiency test such that it
must authorize the agency or instrumentality making it
distinct from all others, and its concomitant duties to
serve as limitations and guidelines.
3. PAYMENT
Act of compliance by the taxpayer.

TAX ADMINISTRATION AND
ENFORCEMENT
A. FUNDAMENTAL PRINCIPLES OF A
SOUND TAX SYSTEM
• Fiscal Adequacy – consonant with the lifeblood
doctrine, sources of revenue must meet public needs.
+ : Existence of a fiscal or budget deficit means that our
system of taxation does not attain this policy.
• Theoretical Justice – taxes must be reasonable,
just, fair, and conscionable, uniform, and equitable.
Violation of such principle of taxation would
necessarily render the tax law void and
unconstitutional.
• Administrative Feasibility – tax laws must be
capable of effective and efficient enforcement which
is consonance with the first policy of the primary tax
law, R.A. 10963. They must not obstruct business
and economic growth.
+ : A higher cost of compliance, meaning the liabilities
that would be incurred by a person in establishing a
business does not promote a robust environment for
business which attracts investment and taxation.
If the amount to be yielded is less than the
resources to be exhausted by the government, it is
foregone until such time interest would accrue that
would necessitate its collection by the government or the
application of a tax amnesty by the subject of taxation.
B. AGENCIES INVOLVED IN TAX
ADMINISTRATION
• Bureau of Internal Revenue (BIR) –
Administration of tax collection, supervision, and
conferment of police power pursuant to vesting law
The power of the BIR is sourced from law,
particularly Section 2 of R.A. 8424, otherwise known as
the National Internal Revenue Act which states that
its “powers and duties comprehend the assessment and
collection of: 1taxes, 2fees, 3charges, and 4enforcement
of all forfeitures, penalties, and fines.
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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The law subsequently adds that it delegates the
administration of supervision of tax collection to the
BIR and confers it with police power in order that
such goals be attained.
• Bureau of Customs (BOC) – (Sec. 201, Title II,
R.A. 10863)
In re: taxation power, assessment and collection of
revenues from imports.
The power of the Bureau of Customs to lawfully
impose tax is sourced from the law, particularly
R.A. 10863, otherwise known as the Customs
Modernization and Tariff Act which states in
many of its provisions that it is empowered to
1
assess and collect custom revenues from
imported goods, and other dues, fees, charges, and
fines accruing from such law and to 2review
disputed assessments and other pertinent
matters.
• Treasurers of Local Government Units – (Sec.
170, R.A. 7160)
Treasurers as collector of taxes in LGU’s.
Under Sec. 170 of the Local Government Code,
it mandates that the taxes, fees, and charges shall
be collected by the treasurers of the LGU’s
concerned (provincial, city, municipal).
In this wise, such treasurer may designate the
barangay treasurer to collect local taxes, fees,
or charges wherein the latter must be covered by
bonds to be premiums for such bonds are paid
for by the former in addition to any other bonds
required imposed upon the barangay treasurer.
Powers of the BIR:
1.) Interpretation of tax laws (Sec. 4, R.A. 8424)
The power to interpret provisions of R.A. 8424 is
under the exclusive and original jurisdiction of the
Commissioner of Internal Revenue, subject to review by
the Secretary of Finance.

2.) Decision of tax cases (Sec. 4, R.A. 8424)
The power to decide disputed assessments,
refunds, fees, or other matters arising from R.A. 8424 is
vested in the Commissioner subject to the exclusive
appellate jurisdiction of the Court of Tax Appeals in
re: Rule 43 of the Rules of Court.
3.) Obtain information, Summon, Examine, and
Take testimony of persons (Sec. 5, R.A. 8424)
The Commissioner is authorized to have the
following powers:
o Examine (Par. A., Sec. 5, R.A. 8424) – the
power to examine any book, paper, record, or other
data which may be relevant or material.
o Obtain information on a regular basis (Par.
B., Sec. 5, R.A. 8424) – contemplates the obtaining of
information from any individual which includes
natural and juridical persons, both private and those
under the government as well, including the Bangko
Sentral ng Pilipinas and government-owned or
controlled corporations.
Also mandates a two-fold duty upon the
Cooperative Development Authority to:
1. Submit to the BIR a tax incentive report
which shall include the: 1income tax, 2value-
added tax, 3and other tax incentives availed of
by cooperatives registered and enjoying
privileges under R.A. 6938 otherwise known
as the Cooperative Code of the Philippines.
2. The information submitted shall also be
submitted to the Department of Finance
which shall be included in the database
pursuant to R.A. 10708 otherwise known as
the Tax Incentives Management and
Transparency Act (TIMTA)
o Summon persons liable (Par. C., Sec. 5, R.A.
8424) – the Commissioner has the power to
summon 1persons liable to file returns, 2the
employee of such person liable, 3persons having
possession or custody or care of the books of
accounts and other accounting records relating to
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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the person liable for tax, or 4any other person to
appear before the Commissioner or his
representative to produce such books or data,
and to give testimony.
o Take testimony (Par. D., Sec. 5, R.A. 8424) – the
power to take testimony of the person concerned,
under oath, as may be relevant or material to such
inquiry.
o Canvassing (Par. E., Sec. 5, R.A. 8424) – to cause
revenue officers and employees to canvass
periodically a district or region and ask all liable or
their representatives or those in the possession to
pay their respective taxes after such inquiry.
XPN: Non-applicability of the above powers to
inquire into bank deposits
XPN to XPN: Par. F, Sec. 6, R.A. 8424
• Determination of a gross estate by the decedent
• Any taxpayer who filed for compromise of his
tax liability due to financial incapacity to pay his
tax.
• Application of foreign tax authority pursuant to
international tax agreement.
o Supervisory and Police Powers/Authority to
Arrest – (Sec. 15, R.A. 8424)
The Commissioner and other officers shall have
the authority to make arrests and seizures for
violations of the Revised Penal Code and other
special law.
Agents and Deputies for Collection of National
Internal Revenue Taxes (Sec. 12, R.A. 8424)
The following are constituted agents of the
Commissioner of Internal Revenue under the National
Internal Revenue Code:
• Commissioner of Customs and subordinates
with respect to collection of internal revenue
taxes on imported goods
• Head of the appropriate government office and
subordinates with respect to energy tax
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• Duly accredited banks with respect to receipt
of payments of internal revenue taxes
authorized to be made thru banks

Enforcement of Penalties (Sec. 221, R.A. 8424)

Remedy for enforcement of statutory penalties
shall be by criminal or civil action, as the particular
situation may require, subject to the approval of the
Commissioner.

Confiscation and Forfeiture of the Proceeds of the

Instruments of the Crime (Sec. 279, R.A. 8424)
ABSOLUTE RULE: Objects outside of lawful
commerce shall be destroyed.
# : Destroyed and not merely confiscated. Consistent
with police power in re: taxation.
GR: Proceeds of the crime or value of the goods are to
be confiscated in favor of the Government.
Provided, that there must be a separate
proceeding if the goods confiscated belong or owned
by a third person wherein the confiscation is justified if
the third person lent, leased, or entrusted it to the
offender. If otherwise, confiscation is not proper.
XPN: Even if the thing confiscated does not belong to
the third person, if the thing lent by the borrower,
trustee, or charterer to the offender forms part of the
proceeds of the crime, confiscation is justified .
XPN to XPN: Properties of common carriers are
exempt from confiscation if: used in the ordinary
transaction of their business and they are not privy to
the illegal act. Otherwise, confiscation is justified.

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INCOME TAXATION consumers. The tax is in consideration for such
efforts done by the government.
NATURE
3. State Partnership Theory – (CIR v. Lednicky)
Income taxation is an excise tax based on the
privilege of the taxpayer to earn income from various The basis of the right to tax emanates from the
sources. partnership of the government in the production of
income by providing protection, resources,
PURPOSE
incentive, and proper climate for such production.
1. To provide large amounts of revenues
2. To offset regressive sales and consumption taxes
3. To mitigate the evils arising from the inequality INCOME
in the distribution of income and wealth which
are considered deterrents to social progress by a • Means all wealth that flows into the taxpayer other
progressive scheme of taxation (Madrigal v. than as a mere return OF capital.
Rafferty)
+ : Return of capital is different from return on
# : Distributive Justice investments since the latter contemplates
By taxing the ones equipped with capital, the increments of wealth flowing to the taxpayer due to
government is given the means to provide the the practice of investing capital while the former,
services to those less in life and make them not there has neither been a decrease or increase of the
subject to abuse and exploitation by capitalists. source of wealth.
CAPITAL INCOME
THEORIES AND BASES OF INCOME Constitutes the Any wealth which flows
TAXATION investment which is the into the taxpayer other
source of income than as a mere return of
STATE PARTNERSHIP THEORY = capital
PROTECTION THEORY + THEORY OF The wealth Service of wealth
FAVORABLE BUSINESS CLIMATE Metaphorical figure: Tree Metaphorical figure: Fruit
Fund Flow
The State Partnership Theory is the basis of the Return or recovery of Income is subject to
State’s power to tax on income which has borne two capital not subject to income tax
underlying principles regarding income taxation. income tax
1. Protection Theory – (CIR v. BOAC)
Sources of Income
The tax is in consideration of the protection
accorded by the Philippine government to the • Gain derived from 1capital, 2labor, or from a
income being earned within its territory. The tax is 3
combination of capital or labor, including the 4gain
therefore justified for the continuance of the support derived from sale or exchange of capital assets
of the government undertaking such duty. (Fisher v. Trinidad)
2. Favorable Business Climate Theory –
(CREBA v. Romulo) • An excise tax levied on the privilege to receive
income or profit.
Corporations owe their existence to do business
in the Philippines to the government. The
government likewise undertakes effort to improve
the financial market so that a viable business climate
is suited to better serve the corporations and the

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Determination of Existence of Income a. The taxpayer does not employ a method for
computing, or
1. Existence of Income
b. The taxpayer’s method for accounting does not
A primary consideration in income taxation is that there clearly reflect the income
must be income before there could be income taxation.
2. Realization of Income Cash Method Accrual Method
Revenue is generally recognized when both of the Income is earned only Income is recognized in
following conditions are met: upon actual or the period it is earned,
constructive receipt of regardless whether it is
a. The earning process is complete or virtually cash payments. received or not.
complete.
b. An exchange has taken place (Manila Income is earned when Expenses are accounted
Mandarin Hotels v. CIR) cash is collected, and on the period it is earned
expense is incurred when not the time it was paid.
3. Recognition of Income cash is disbursed,
When income considered received for Philippines
income tax purposes: Tests in Determining Whether Income is Earned
for Tax Purposes
a. If actually or physically received by taxpayer; or
b. If constructively received by taxpayer 1. Realization Test- there is no taxable income
unless income is deemed realized. Revenue is
There is receipt of income when:
generally recognized when both conditions are
• Income is credited to the account of the taxpayer met:
• At the taxpayer’s disposal without any a. The earning process is complete or virtually
restrictions, encumbrances, or conditions complete; and
b. An exchange has taken place (Manila
ACTUAL RECEIPT CONSTRUCTIVE Mandarin Hotels v. CIR)
RECEIPT
Income may be actual or Occurs when money
physical receipt consideration or its 2. Claim of Right Doctrine/Doctrine of
equivalent is placed at the Ownership, Command, or Control – a taxable
control of the person gain is conditioned upon the presence of a claim
who rendered the service of right to the alleged gain and the absence of a
without restriction by the definite unconditional obligation to return or
payor.
repay.

4. Methods of Accounting
3. Economic-Benefit/Doctrine of Propriety
Accounting methods for tax purposes comprise a set of
Interest – Taking into consideration the
rules for determining how to report income and
pertinent provisions of law, income realized is
deductions.
taxable only to the extent that the taxpayer is
As a general rule, the law does not provide for a economically benefited.
specific method of accounting to be employed by the
taxpayer. 4. Severance Test – Income is recognized when
there is separation of something which is of
As an exception, the law only authorizes the CIR to exchangeable value. (Eisner v. Macamber)
employ a particular method of accounting:
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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TAX SYSTEMS Different tax rates for
different categories of
1. Global Tax system – system employed where income
the tax system views indifferently the tax base Applied usually to
and generally treats in common all taxable individuals
income of the individual (Tan v. Del Rosario) Different categories of
incomes MUST NOT BE
• Otherwise stated, all different types of income ADDED together for
earned by the individual is classified only as they are subject to a
“taxable income”, and taxed as one tax rate different tax rate.
unless stated differently by law.
Single tax rate
Applies to corporations
The different categories
of income MUST BE
ADDED together for
they are subject to a
single and unified tax
rate.

• Incomes earned by the company may go KINDS OF TAXPAYERS

beyond the traditional sources of
denominated revenues such as sales, 1. INDIVIDUAL TAXPAYERS – comprises of
commissions, awards, fees, etc.. Hence the natural persons that has full legal capacity,
grossing up of these several types of incomes. namely the capacity to act and juridical capacity.

2. Schedular tax system – schedular system where • Resident Citizen (RC) – citizen of the
the income tax treatment varies and is made to Philippines residing inside the country.
depend on the kind or category of taxable Taxable from sources within and outside
income of the taxable income of the taxpayer. the Philippines.
(Tan v. Del Rosario) • Non-Resident Citizen (NRC) – citizen
of the Philippines, who are physically
• Stated differently, different types of sources present abroad for an uninterrupted
of income by the individual are taxed at period an entire taxable year, who
different rates. establishes to the CIR the fact of his
• Business income, professional income, illegal presence abroad and his definite
income intention to stay.
Taxable on sources derived in the
3. Semi-schedular or semi-global – All Philippines.
compensation income, business or professional • Resident Alien (RA) – non-citizens of
income, capital gain, passive income, and other the Philippines who reside in the
income not subject to final tax are added country, taking into consideration both
together to form part of the gross income. his length and intention to stay. Taxable
on sources derived in the Philippines.
Once added together, allowable deductions are • Non-Resident Alien (NRA)
made to arrive at the taxable income which is o Engaged in Trade or Business
then subjected to a tax rate. (NRA-ETB)
o Not Engaged in Trade or
Business (NRA-NETB)

2. CORPORATE TAXPAYERS – comprises of

SCHEDULAR GLOBAL entities either born by law or agreement which
Different categories of Classification is nugatory separate and distinct from natural person.
income since there is only a single
tax rate Includes not only corporations, partnerships,
joint stock companies, associations, etc.
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I

• Domestic Corporation (DC)
• Resident Foreign Corporation (RFC)
• Non-Resident Foreign Corporation
(NRFC)
# : Distinguishing the type of taxpayer is significant
since each taxpayer is subject to different treatment with
regard to tax base, tax rates, deductions, exemptions, etc.
APPLICATION OF INCOME TAXATION vis-à-
vis APPROPRIATE TAX RATE/S
Caveat Lector #: The author would like to beg
3. Compeut for the ALLOWABLE DEDUCTIONS
indulgence if the explanation in the application of
income taxation is unfathomable. This is merely his own
method which may be replete with mistakes. Use at your
own risk.
# : STEPS IN DETERMINING PROPER
APPLICATION OF TAX RATES (DACS)
1. Determine type of TAXPAYER being subjected
to tax
# : Determination of the person being subjected to
tax is crucial since each are treated differently under
the National Internal Revenue Code and thus
governed by different tax rates and may even be
exempted from the power of taxation.
Thus, the compensation income of a non-
resident citizen (individual) may never be taxed
since it is outside of the situs of taxation, wherein
the exercise of such power of the State is only
limited within its territorial jurisdiction.
By deducing the classification of the person
being taxed, one eliminates the certain types of taxes
being imposed. Therefore, a non-resident citizen
(individual) may never be subject to compensation
income under Section 24 of the NIRC.
He may only be taxed at his sources of income
within the Philippines such as those of Passive
Income, Prizes and Winnings, Royalties, etc.
2. Ascertain transaction or SOURCE OF
INCOME
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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# : A source of income has a corresponding
imposition of tax which that varies in rates and rules
regarding dis/allowance for deductions and
exclusions.
Therefore, a compensation income earner of a
person with employer-employee relationship is not
entitled to any deduction pursuant to Sec. 34 of the
NIRC while a person earning income from the
practice of profession or promotion of a business is
entitled to deduct from his gross income the
allowable deductions such as ordinary expenses
under the same provision.
and/or exclusions, IF ANY*
# : The law, pursuant to Sec. 34 of the National
Internal Revenue Code, allows for deductions to
various sources of income before the applicable tax
rate will be applied.
This especially applies to earnings or incomes
derived from the practice of profession and
promotion of businesses which necessarily comes
with expenses necessary for its continuance.
Therefore, the income earned by a dentist in
the practice of her profession in a year can be
lessened with the total amount of expenses incurred.
Ergo, an income of a million (1,000,000) pesos
can be deducted with expenses that are ordinary and
necessary to the trade or business amounting to two
hundred thousand(200,000) pesos which would result
to a difference of 800,000 pesos that would be subject
to tax.
4. Supply the APPLICABLE TAX RATE
# : As aforementioned, each type of income has
a corresponding tax rate imposed by law. If there are
no allowable deductions provided for by law, apply
the corresponding tax rate to the income being
subjected to tax.
Ex: “X” is a resident citizen 1working for Korap
Inc., with employer-employee relationship who earns
150k per year, 2a sole proprietor of her cosmetics
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shop, 3various investments in stock, and 4deposits in Tax Schedule for Income Tax
banks.
(Subsection A, Sec. 24, NIRC as amended by TRAIN Law)
1. X shall be subject to the schedular tax
January 2018 – December 2022
rate under Subsection A, Section 24 of the
National Internal Revenue Code, as amended by the (Sec. 5, R.A. 10963)
TRAIN Law which provides for no allowable
deductions. Seeing that X only earns an Tax Base Tax Rate + Portion
annual income of 150,000 pesos per year, his Not over 250,000 TAX EXEMPT
income is tax exempt under the governing
law. Over 250,000 but not over 20% of the excess over
400,000 250,000
2. The governing law regarding X’s Over 400,000 but not over 30,000 + 25% of the
800,000 excess over 400,000
cosmetics shop is Subsection A(2c) of Section 24
Over 800,000 but not over 130,000 + 30% of the
of the National Internal Revenue Code, as amended 2,000,000 excess over 800,000
by the TRAIN Law wherein if the income of Over 2,000,000 but not 490,000 + 32% of the
X’s business compensation income exceeds over 8,000,000 excess over 2,000,00
that of the VAT threshold of three (3) Over 8,000,000 2,410,000 + 35% of the
million pesos, she should be subjected to the excess over 8,000,000
schedular tax rate under Subsection A of the
same provision.
January 2023 – onwards
Tax Base Tax Rate + Portion
Otherwise, X’s business would be subject to
8% of the gross sales. Not over 250,000 TAX EXEMPT
Over 250,000 but not over 15% of the excess over
3. X’s passive incomes is governed by 400,000 250,000
Subsection B of Section 24 of the National Internal Over 400,000 but not over 22,500 + 20% of the
Revenue Code, as amended by the TRAIN Law 800,000 excess over 400,000
which imposes a FINAL TAX of 10% in her Over 800,000 but not over 102,500 + 25% of the
stock investments and generally 20% on her 2,000,000 excess over 800,000
bank deposits. Over 2,000,000 but not 402,500 + 30% of the
over 8,000,000 excess over 2,000,00
Over 8,000,000 2,202,500 + 35% of the
excess over 8,000,000

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INDIVIDUAL INCOME TAXATION The moment his income increases to more than
250,000 however, he has the option to avail of either the
Categories of Income
8% income tax or schedular rate.
• Compensation Income The better choice would obviously be the 8%
o Self-employed income tax on the gross income since the tax rate on the
o Professional/Business schedular rate is 20%-35% as the case may be.
o Mixed income earner
• Passive Income
o Interest income
• Purely Compensation Income Earner w/
o Royalties
Employer-Employee Relationship (Sec. 24 in
o Prizes and Other Winnings
relation to Sec. 34, NIRC) – This provision only
o Cash and/or Property Dividends
contemplates the applicability of income taxation to
• Gains from dealings in property persons who solely earns their income on an
o Capital gains from sale of shares of stock employment with employer-employee
not traded in the stock exchange relationship.
o From sales of shares of stock traded in
the exchange* Applicable income tax:
o Capital gains from sale of real property In this regard, the law imposes the tax schedule
provided for under Sec. 24 (A) of the NIRC as amended
DISCUSSION: by R.A. 10963, otherwise known as the TRAIN Law.
No other imposition of income tax shall apply.
A. COMPENSATION INCOME
• Purely Self-employed Minimum wage earners – those earning
Individuals/Professionals (Section 24, Subsection 250,000 pesos or less are exempt from income taxation.
A, 2b, NIRC) –
This provision only contemplates the Holiday pay, overtime pay, night shift
applicability of income taxation on self-employed differential, and hazard pay, which comprises part and
individuals and professionals which does not parcel of their income is exempt from income taxation.
contemplate the existence of an employer-
employee relationship under Sec. 22(CC), NIRC. # : EXAMPLE

Applicable income tax/es: Sponty, is an employee working for Jollibee

Self-employed individuals or professionals have two
options to avail of:
• 8% tax on gross sales or gross receipts in excess
of 250,000
• Schedular rate under Sec. 24, NIRC as amended
by TRAIN
# : EXAMPLE
If X, a purely self-employed professional
working as a tutor, earns 250,000 pesos, he is
automatically tax-exempt from income taxation.
which is her only source of income, in the absence of
practice of profession and/or business. Her annual
compensation income sums up to 590,000 pesos which
was earned on year 2020.
Application of the tax schedule under the
TRAIN Law:
Seeing as Sponty is not exempted from income
taxation as she is not a minimum wage earner, her
590,000 gross income must be applied in accordance
with the tax schedule under the TRAIN Law in order to
get the Income Tax Due, which is the taxable income
multiplied with the tax rate in accordance with the law,
to be further deducted with the appropriate withholding
tax, in order to ascertain the Income Tax Payable.

B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I


Therefore:
1. GET TAXABLE COMPENSATION
INCOME; DEDUCT GROSS INCOME
FROM TAX BASE
(590,000 = gross income) – (400,000 =
imposable tax deduction constant under TRAIN
Law) = 190,000
2. MULTIPLY WITH CORRESPONDING
TAX RATE
(190,000 =taxable compensation income) * (.25
= corresponding tax rate) = 47,500
3. DETERMINE INCOME TAX DUE; ADD
THE SUM W/ THE CORRESPONDING
TAX BASE CONSTANT UNDER THE
TRAIN LAW
(47,500 = final taxable compensation income) +
(30,000 = corresponding tax base constant) =
77,500
Ergo, Sponty’s Income Tax Due is 77,500
subject to deduction on withholding tax on
compensation earners.
• Mixed Income Earners (Sec. 24, Subsection A(2), C2)
– This provision contemplates the application of
income taxation to those whose compensation
income is derived from different sources such as
those coming from labor arising out of employer-
employee relationship AND practice of profession
and/or business.
Applicable income tax/es:
RULE : Tax rates for mixed income earners
depends on the source of income to be taxed. It is
material that there must be a determination of where
the income was derived before the application of the
proper income tax since the distinct types of income are
treated differently under the law, hence they must be
taxed separately.
For compensation earned due to employment
arising from employer-employee relationship, it shall
be subject to the schedular rate, taking into account the
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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exemption on minimum wage earners. (Section 24,
Subsection A(2), c(2), NIRC, as amended by R.A. 10963,
otherwise known as TRAIN Law)
For compensation earned due to the practice of
profession and/or business, if the income amounts to
3,000,000 million pesos or less which under the VAT
Threshold under Sec. 109 (BB) of the NIRC, it shall be
subject to 8% income tax on gross sales. Otherwise, if
it exceeds, the applicable income tax is the schedular
rate under Sec. 24, Subsection A(2), of the NIRC, as
amended by TRAIN.
Summary Rules on Mixed Income Earners
• Compensation income from employment
arising from employer-employee relationship
o Schedular rate (Sec. 24, Subsection A(2),
NIRC, as amended by TRAIN)
• Compensation income arising from practice
of profession or business
o If income is 3,000,000 or less
§ 8% income tax on gross sales
(Sec. 24, Subsection A(2), c(2),
NIRC, as amended by TRAIN)
o If income exceeds 3,000,000
§ Schedular rate provided for by
law (Sec. 24, Subsection A(2)(d))
# : EXAMPLE
Sponty earns about 590,000 pesos as her
compensation from employment as a rank and file
employee at Jollibee. During the weekends, she practices
her profession as a dentist and has earned about 100,000
pesos apart from her business of selling plants and
orchids which has already earned 100,000 pesos.
I. Separate the two distinct types of compensation
• Compensation income from employment =
590,000
• Compensation income from practice of
profession = 100,000
• Compensation income from business = 900,000
pesos
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II. Compute for the taxable compensation income Subsection A(2)(d) which imposes a schedular rate if
from employment the gross sales or income exceeds the VAT Threshold
of 3,000,000 million pesos.
1. GET TAXABLE COMPENSATION
As such, the 8% income tax on gross sales would
INCOME; DEDUCT GROSS INCOME
apply, wherein: 200,000 * .08 = 16,000
FROM TAX BASE
Ergo, Sponty’s Income Tax Payable under
(590,000 = gross income) – (400,000 = Compensation from Practice of Profession and/or
imposable tax deduction constant under TRAIN Business is 16,000 pesos.
Law) = 190,000

2. MULTIPLY WITH CORRESPONDING B. PASSIVE INCOME

TAX RATE
(190,000 =taxable compensation income) * (.25 • INTEREST INCOME – contemplates
= corresponding tax rate) = 47,500 investment of a capital, or income of a creditor
from a loan, and may be monetary or
3. DETERMINE INCOME TAX DUE; ADD compensatory interest.
THE SUM W/ THE CORRESPONDING
TAX BASE CONSTANT UNDER THE # : FOR AN INTEREST TO BE VALID,
TRAIN LAW IT MUST BE WRITTEN

(47,500 = final taxable compensation income) + GR: Interest incomes are subject to final tax such
(30,000 = corresponding tax base constant) = as:
77,500
o Currency bank deposit yield or other
Ergo, Sponty’s Income Tax Due from monetary benefit from deposit substitutes, trust
employment arising out of employer-employee funds, and other similar arrangements: 20%
relationship is 77,500 subject to deduction on # : EXAMPLE
withholding tax on compensation earners.
Sponty has various deposits with different banks
and has an accrued interest income of 20,000 in BDO,
III. Compute for the gross incomes derived from 30,000 pesos in BPI, and 50,000 in PNB.
the practice of profession and business The following are the Income Tax Due from
each banks:
1. ADD THE INCOMES FROM THE
BUSINESS AND PROFESSION* § BDO = (20,000 * .2) = 4,000
For purposes of brevity, the incomes being represented below have already
made the allowable deductions (which would further be discussed hereunder)
§ BPI = (30,000 * .2) = 6,000
and thus represents the taxable income § PNB = (50,000 * .2) = 10,000

(100,000 = income from practice of dentistry) + o Expanded foreign currency deposit system:
(100,000 = income from business of selling of 15% in case of residents
plants) = 200,000
o Pre-terminated long term deposits
2. APPLY THE CORRESPONDING INCOME § Four (4) to less than five (5) years –
TAX BASED ON THE RULES PROVIDED 5%
§ Three (3) to less than four (4) years
As Sponty’s total income derived from both
– 12%
business and profession merely amounts to a meager
200,000, it does not fall within the ambit of Sec. 24, § Less than three (3) years – 20%
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*the law makes a long-term deposit o Awardee was selected without any action
tax exempt for purposes of income on his part to enter the contest
taxation o Awardee was not required to render
substantial future services as a condition to
XPN: Interest on ORDINARY LOANS which is
receiving the prize or award
subject to ordinary income tax rates
• Sports competition

• ROYALTIES – the use of the right or privilege to

• CASH AND/OR STOCK DIVIDENDS – shares
use in the Philippines any copyright, patent, design, or
model or… right (Sec. 42(A)(4)(a), NIRC) as profits in the investment of capital in a corporation
and/or partnership (Sec. 24(B)(2), NIRC)
GR: Subject to final tax of 20% (Sec. 24(B)(1), NIRC)
Requisites and Applicability:
XPN: Books, other literary works, musical compositions
in the case of individuals • 10% final tax
• Such final tax is imposed on the dividend as
# : EXAMPLE income (meaning there must be a severance or
Sponty is an acclaimed writer who has won distribution of the particular (income) from the
various literary awards from esteemed academic bodies. general (wealth/capital)) (Eisner v. Macomber)
As a result of such accolades, there is an accrued income • Actually and constructively received
stemming from royalties in her best-selling law book in • The recipient of the dividend must be an
the amount of 10,000,000 pesos. individual
• From a joint stock company, insurance or
As there is merely one source of income
mutual fund companies, domestic corporation,
stemming from royalties in the amount of 10,000,000
or partnership except general professional
pesos, applying the final tax of 10% since it is a literary
partnership.
work would reveal that Sponty’s Income Tax Due is
one million (1,000,000) pesos. # : EXAMPLE
Sponty invested in ABC Corp. in the amount of
• PRIZES AND OTHER WINNINGS – (Sec.
24(B)(1), NIRC)
GR: 20% final tax, which includes even PCSO and
Lotto winnings
XPN: Subject to schedular rate if prize DOES NOT
EXCEED 10,000 pesos
XPN to XPN: Tax exempt if prize is sourced from
PCSO or Lotto winnings and is 10,000 or less
-related discussion-
Tax-Exempt Prizes and Other Winnings
(Sec. 32(A)(7)(c)/(d), NIRC)

• Recognition of religious, charitable, scientific,

educational, artistic, literary, or civic
achievement, wherein its requisites are:
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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TAXATION 1 – ATTY. PRUDENCE ANGELITA KASALA

**CAVEAT LECTOR**
Any suggested answers herein are marked as bold and as much as possible given suggested answers by the
authors which is indicated by the “at” (@) sign.

1 – 3. PRINCIPLES OF TAXATION (R.A. 8424)

It is the State Policy to promote sustainable economic growth through the [1.] (a) creation (b) rationalization
(c) organization (d) establishment - of the Philippine internal revenue tax system, including tax administration;
to provide, as much as possible, an (a) equitable (b) equal (c) uniform (d) utmost relief to a great number of
taxpayers
in order to improve the levels of (a) taxable (b) not taxable (c) disposable (d) gross income and increase
economic activity; and to create a robust environment for business and to enable turns to complete better in the

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regional as well as global market, at the same time that the State ensures the government in able to provide for the
needs of those under the jurisdiction and care.
@ : New Tax Law = New Tax Policy
R.A. 10963 which is the Tax Reform for Acceleration and Inclusion Act otherwise known as TRAIN Law
enacted under the Duterte administration has already repealed the R.A. 8424 and necessarily places a new State policy
regarding taxation, which is thus:

It is hereby declared that the policy of the State to enhance the progressivity of the tax system through the
rationalization of the Philippine internal revenue tax system, thereby promoting sustainable and inclusive economic
growth;
To provide as much possible, an equitable relief to a greater number of taxpayers and their families, in order
to improve levels of disposable income and increase economic activity; and
*innovation of the new tax law*
To ensure that the government is able to provide for the needs of those under its jurisdiction and care
through the provision of better infrastructure, health, education, jobs, and social protection for the people.

4. POWER OF TAXATION OF LOCAL GOVERNMENT UNITS

The local government’s power to tax is (a) inherent to local government pursuant to the Article on Fiscal
Autonomy of Local Government under the 1987 Constitution (b) granted by the provisions of the Local Government
Code (c) delegated by Congress through the Article of Self-governance under the 1987 Constitution (d) delegated by
the provisions of the Article on Local Government under the 1987 Constitution
@ : “D” is the best answer. TAXATION AS AN ATTRIBUTE OF SOVEREIGNTY
By the use of deduction, answers A & C are categorically wrong such that the former transgresses the
principle that the power of taxation as an attribute of sovereignty is inherently and solely lodged in the Congress, even
in the absence of the Constitution; the latter, on the other hand is incongruent with the foundation of law as the
Constitution is not sourced from the power and authority of the Congress, rather, the Congress sources its power and
authority from the basic law. As such, the Congress cannot instruct nor delegate the power of taxation through the
Constitution. Assuming arguendo that the authority is valid, the delegation of the power to tax must necessarily fail as
the test of a valid delegation will not prosper as the pertinent article fails to pass the tests of sufficiency and
completeness.
B is an acceptable answer wherein it supports the general principle that the power of taxation is purely within
the province of the Congress and that the power of the Congress to create municipal corporations carries with it by
necessary implication that it likewise confers the power to tax for self-governance as elucidated in Pepsi-Cola Bottling
Corp. v. City of Butuan. (as the Constitution and/or Local Autonomy Act is silent on the matter)
D is the best answer among the four as Constitution expressly mandates that the power of taxation, by way of
exception should also be exercised by the local government units, subject to the limits set by the Congress which is
manifested in R. A. 7160 otherwise known as the Local Government Code. There is a valid delegation provided by
the Constitution under Sec. 5, Art. X as it directs the Congress as the sole authority to set the scope and limitations of
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the power of taxation (test of sufficiency) and that such standards must be in compliance with the the basic policy of local
autonomy (test of completeness). As a consequence of such grant by the fundamental law, the Congress cannot abrogate
the conferred power the Constitution vests in the political subdivisions.

5. TAXPAYERS SUIT
A defendant may move to dismiss an apparent taxpayer’s suit on the ground of (a) person is non-suited (b)
lack of capacity to sue (c) non-compliance with condition precedent (d) lack of cause of action.
@ : D is the best answer; Direct injury test v. special character of taxpayers suit vis-à-vis public suits
While all choices generally complies as a requisite for locus standi, a taxpayer’s suit obtains a distinct
requirement due to its peculiar character as a constitutional issue.
The direct injury test is mandatory in cases of constitutional concern in an ordinary citizen’s suit to have a
right of appearance wherein one who is impugning the validity of the law must have a personal and substantial
interest in the case such that he will sustain direct injury as a result of the implementation of the statute, representing
the interests of the general public.
A taxpayer’s suit on the other hand is more concerned with the private interests of the taxpayer wherein he is
concerned with the illegal disbursement of public funds. Without the specific requisite that there is an illicit
expenditure, the suit loses its character as one concerning tax, and necessarily does not clothe the petitioner with legal
standing as a taxpayer.

6. CONSTITUTIONAL LIMIT OF DUE PROCESS

A tax may be said to be violative of due process when any of the following are present, except: (a) the tax law
is based on the whim or caprice of Congress (b) Congress does not comply with the procedure for the enactment of
the law (c) Congress does not conduct a hearing for the enactment of the law (d) tax law imposes confiscatory taxes
@ : TAXATION AS AN INSTRUMENT OF POLICE POWER
The direct purpose of taxation is to primarily raise revenues for public purpose. Incidents of taxation may also
be present in the exercise of police power which merely contemplates the enactment of a law that passes the
substantial and procedural due process test which and does not impose a limit or prohibition on confiscation of
properties.

7. CONSTITUTIONAL LIMITATION ON NON-IMPAIRMENT OF CONTRACTS

The prohibition on non-impairment of obligation contracts as regards tax laws applies only to (a) agreement
between private individual entities (b) public utility franchises (c) tax exemptions in charters of public corporations
(d) exemptions for a valuable consideration.
@ : BILL OF RIGHTS
The Bill of Rights operates as a safeguard of the private individual against the abuses of the State. As such it
contemplates a situation wherein the relationship of the agreement is between the State and the private individual.

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8. CONSTITUTIONAL LIMIT; UNIFORMITY OF TAXES
A tax is considered uniform in the following instances except (a) when all taxable property of the same class
are not-taxed at the same rate (b) when it operates with the same force and effect in every place where the subject
may be found (c) in local taxation, uniformity is limited within the territorial jurisdiction of the local government unit
(d) when different articles are taxed of different amount provided that the rate in uniform on the same class
everywhere.
@ : UNIFORMITY = SAME CLASS, SAME RATE
According to Black, there is uniformity in taxation when the subject of taxation in the same class are taxed at
the same rate. It is likewise uniform when it operates with the same form and effect where it is found. Taxes
proportional to the value of the property is indicative of uniformity in taxation.
9. SUBJECTS OF INCOME TAX
Under the National Internal Revenue Code, the following are general principles of Philippine income tax,
except:
a) A citizen of the Philippines who is working and deriving income from 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.
(b) An alien irrespective of the place of residence is taxable only on income derived from source without(?)
the Philippines
(c) A foreign corporation not engaged in trade of business in the Philippines is taxable only on Income
derived from sources within the Philippines
(d) A domestic corporation is taxable on all income derived from sources within and outside the Philippines.

10. SUBJECTS OF INCOME TAXATION

Worldwide Technology System is a corporation organized and existing under the laws of Cayman Islands
since 30 July 2003. Technology International Inc. was incorporated in the Philippines on 16 July 2004. Worldwide
Technology Systems owns 99.5% of the share of stock in Technology International Inc. Based on the foregoing,
Technology International Inc. is a (a) foreign corporation (b) resident foreign corporation (c) joint venture (d)
domestic corporation under the National Internal Revenue Code.

11. SUBJECTS OF INCOME TAXATION

A non-resident citizen is any of the following, except
(a) a citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein.
(b) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad either as an
immigrant or for employment on a permanent basis
(c) a citizen of the Philippines who works and derives income from abroad and (?) employment thereat
requires him to be physically present abroad for 4 months every year
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(d) a citizen who has been previously considered as a nonresident citizen and who arrives in the Philippines at
any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident
citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources
abroad until the date of his arrival in the Philippines.

12. SUBJECTS OF INCOME TAXATION

Abigail, a nonresident citizen, arrived in the Philippines in 01 August 2004 to retire in Manila permanently
after working in the United States of America for 25 years. Abigail qualifies as (a) resident alien (b) resident citizen (c)
non-resident citizen (d) both resident and non-resident taxpayer for the taxable year of 2004.

13. SYSTEM OF INCOME TAXATION

Under this system, the amount of income tax withheld by withholding agent is constituted as full and final
payment of the income tax due from the payee (a) global tax system (b) schedule tax system (c) final withholding tax
(d) creditable withholding tax.

14. MEANS TO AVOID DOUBLE TAXATION

Under the (a) tax reduction (b) income exemption (c) tax credit (d) foreign tax deduction, the income in the
state of source is included in the taxable income in the state of residence but the tax paid in the state of source may be
deducted from the tax due in the state of residence.

15. KINDS OF TAXES

The following is not excise tax: (a) income tax (b) value-added tax (c) estate tax (d) property tax
@ : EXCISE TAX IS A LEVY ON PRIVILEGE
As excise tax is a levy on the privilege, the other three necessarily fails to be an exception to the foregoing. An
income tax is levied due to the conduct of business, the estate tax is imposed due to the transmission of successional
rights over the property of the decedent, and property tax is assessed due to the privilege to enjoy and introduce
improvements over the subject.
Value-added tax on the other hand, is not based on the privilege or exercise of an act but levied on the
amount of the property involved in the transaction.

16. CLASSIFICATION OF TAX AS TO GRADUATION OF RATES

Value-added tax is an example of (a) graduated tax (b) progressive tax (c) proportional tax (d) regressive tax.
@ : REGRESSIVE TAXES
Tolentino v. Secretary of Finance ruled that VAT is a form of a regressive tax. Notwithstanding such declaration of the
Court, VAT is regressive since it does not take into consideration the buyer’s ability to pay. Tax is regressive when the
tax rate increases when the tax base decreases.

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17. EQUAL PROTECTION CLAUSE

The following are the requisites of valid classification, except (a) the classification must apply to both present
and future conditions (b) the classification must be germane to the purpose of the law (c) the classification must not
be unjust or oppressive (d) the classification must be based on substantial distinctions.
@ : REQUISITES OF EQUAL PROTECTION
The equal protection clause as enunciated by the Court in Mosqueda v. Philippine Banana Growers mandates that
for a classification to be valid it must be: based on substantial distinctions, the substantial distinctions is germane to
the purpose of the law, the substantial distinction must apply both to present and future conditions, and that it must
apply equally to all members of the same class.
The choice is not found within the requisites provided for by the law.

18. CONSEQUENCES OF THE INHERENT POWERS OF THE STATE

The following are similarities of the three inherent powers of the state, except: (a) Interferes with private
rights (b) exists independently of the Constitution (c) presupposes equivalent compensation (d) directly affect all
persons or the general public
@ : SIMILARITIES AND DISTINCTIONS
The inherent powers of the State does not directly affect all persons or the general public as the exercise of
each differs in nature and contemplates the ones who are affected. In the novel case of Gomez v. Palomar, the Court
held that while the payer is not directly benefited by the imposition of a tax on the stamps, the exercise of taxation is
held valid since it has for its purpose the eradication of a deadly disease which indirectly affects the welfare of the
persons or the general public.

19. ELEMENTS OF TAXATION

Which of the following is not necessarily an element of the power of taxation: (a) the State can impose
burdens on subjects and objects within its territorial jurisdiction (b) taxes are imposed for regulatory purposes (c)
taxation is an inherent power of the state (d) Taxation can be exercised only through the legislature
@ : REGULATORY PURPOSE IS MERELY SECONDARY PURPOSE
The suggested answer best fits the question since all other choices is an essential element of the power of
taxation while the regulatory purpose is a mere incident or secondary purpose of the exercise of the inherent power.
The direct and primary purpose of the power to tax is to raise revenues for public purpose which will best fit the
elements of taxation, not taxation as a regulatory means which is more fitting with the exercise of police power.

20. STATE POLICY ON TAXATION

(a) Ideal taxation (b) Fiscal Adequacy (c) Administrative Adequacy (d) Administrative Feasibility means that
the revenue raised from the taxes should be sufficient to finance the operations of the government.
@ : PRINCIPLES OF A SOUND TAX SYSTEM
B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I
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Fiscal Adequacy concerns itself with the capability of tax to meet public purpose and services. Administrative
Feasibility on the other hand contemplates that the phases of taxation, namely, imposition, assessment, and collection
are efficiently and effectively enforced.

21. TO TAX IS TO DESTROY; MARSHALL DICTUM

According to (a) Chief Justice Marshall (b) Chief Justice Oliver Holmes (c) Justice Wendell Holmes (d) Justice
Cooley, the power to tax involves the power to destroy.
@ : MC CULLOCH v. MARYLAND
Chief Justice Marshall, in his opinion, stated that, “the power to tax involves the power to destroy” but the
exercise thereof by the State of Virginia against the federal government is unconstitutional since it would necessarily
impair and prejudice the existence of the conferring power upon the State.

22. INCIDENTS OF TAXATION FOR PUBLIC PURPOSE

The following are purposes or objectives of taxation except (a) encourage economic growth (b) regulate
industries (c) uplift public morale (d) rehabilitate industries indispensable to national economy.
@ : INCIDENTS OF TAXES FOR PUBLIC PURPOSE
Although all fits within the realm and meaning of public purpose since it is encompassing, a novel idea that
can be hammered to fit modern standards in Planters Products v. Fertiphil Corp., the suggested answer is the best answer
among the rest as it is expressly mentioned by Atty. Kasala to be too far-fetched. Case in point: Funding of beauty
parlors to uplift public morale in Venezuela.

23. CONSEQUENCES OF THE MARSHALL DICTUM

The following statements support the maxim, “The power to tax involves the power to destroy” except:
(a) The power of taxation is used validly as an implement of police power in discouraging/ prohibiting/
restricting certain enterprises inimical to public welfare
(b) the maxim is an apt description of the vigor with which the taxing power may be employed in order to
raise revenue
(c) the maxim is pertinent when there is no power to tax a particular subject
(d) taxing power is subject to inherent and constitutional limitations.
@ : HOLMES DICTUM
Chief Justice Oliver Holmes in his dissent in Panhandle Oil v. State of Mississippi stated that, “the power to tax is
not the power to destroy while this Court sits”, meaning that the power to tax may be curtailed by the power of
judicial review of the Court which may only be based on inherent and constitutional limitations.

24. MANIFESTATION OF THE LIFEBLOOD DOCTRINE;

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Pursuant to the principle that (a) collection of taxes cannot be enjoined by the courts (b) taxes are of
extreme necessity to the existence of government (c) the power to tax is an attribute of sovereignty (d) taxation is
inherently legislative, taxes cannot be the subject of compensation of debts incurred by the government from the
taxpayer
@ : LIFEBLOOD DOCTRINE
It is held in the case of Francia v. Intermediate Appellate Court that taxes could not be the subject of set-off or
compensation as the relationship contemplated in taxation is not one of debtor and creditor but one of government
and taxpayer and the collection thereof could not be impaired since it is the existence of the sovereignty that is at
stake.

25. SOURCE OF TAX POLICY

The state policy on taxation can be found in the (a) Constitution (b) Tax Code as amended (c) Tax Reform
Act of 1997 (d) National Internal Revenue Code of 1997
@ : New tax law = new tax policies
R. A. 10963 otherwise known as the TRAIN Law repealed the existing answer above and put forth new
policies on taxation which is stated in the first item.

26. EXERCISE OF THE POWER OF TAXATION

Pursuant to the principle that (a) the power to tax is supreme and plenary (b) taxation is inherently legislative
(c) the power to tax is an attribute of sovereignty (d) the separation of powers of the legislative executive and judicial
departments, the court cannot inquire into the wisdom of the tax law
@ : B is the best answer with D also being acceptable
B is the best answer wherein it perfectly and reasonably fits as the premise of the assumption that qualifies the
statement which is that the determination of the wisdom of taxation is exclusively lodged in the Congress.
D qualifies as an acceptable answer since it is the exception to the rule that determination of the purpose of
taxation could be inquired by the courts if and only if there is grave abuse of discretion amounting lack or excess of
jurisdiction. But then again, it does not place the statement congruently.

27. BASIS OF TAXATION; THEORIES AND DOCTRINES

Under (a) necessity theory (b) lifeblood doctrine (c) equitable recoupment (d) doctrine of symbiotic
relationship, the power of the State to demand and receive taxes is based on the government’s reciprocal duty of
support and protection
@ : DOCTRINE OF SYMBIOTIC RELATIONSHIP IS SOURCED FROM THE THEORY OF
BENEFITS AND PROTECTION

B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I

 Angeles | Cimatu | Lagasca | Priolo | Tan | Tolentino – TAXATION I
The other three choices does not exactly fit with the statement as they are not based on the social contract
theory. The doctrine of symbiotic relationship sources its authority from the Benefits-Protection theory that
authorizes the collection of taxes from the citizens as illustrated in the case of CIR v. Algue.

28. PHASES OF TAXATION

The (a) assessment (b) imposition (c) collection (d) payment of taxes involves the enactment of tax laws by
Congress
@ : PARTIES & PHASES
The phases of taxation involves three parties which are distinct in their obligations and undertaking.
The first phase, imposition, involves the exercise of enacting tax laws by the legislative on what property
should be the subject matter of tax.
The second phase, aptly called assessment or levy, involves the appreciation of the different circumstances
that determines the amount of tax to be actually paid by the taxpayer which is primarily exercised by the executive
branch upon valid delegation of the Congress.
The final phase, payment, is borne by the obligation of the taxpayer to pay the imposed tax levied upon him
by the taxing authority to the appropriate agency or instrumentality of the government.

29. TAX EXEMPTIONS; LIMITATIONS ON CONGRESS

Except for the enactment of (a) withdrawal of tax privileges (b) tax amnesties (c) laws granting refunds (d) tax
holidays, the other items require the concurrence of at least the absolute majority of congress for its approval
@ : CONSTITUTIONAL LIMITATION RE: TAX EXEMPTIONS
The power of Congress to grant tax exemptions is found on Sec. 28 (4), Art. VI of the Constitution. The
discussion is pertinent in such a way that the grant of tax exemption which includes in its penumbra tax amnesties, tax
condonations, tax refunds, and tax holidays must be passed by a majority of the vote of ALL the members of
Congress, which is the totality of the Senate and House of Representative. This is the absolute majority rule.
Withdrawals of tax exemption meanwhile only contemplates the relative majority wherein enactment of the
law is done in the ordinary due process, which requires that each houses of Congress must pass in their own majority
the bill.

30. ASSESSMENT ON PROPERTY

The amount of (a) license tax (b) toll (c) special assessment (d) compromised penalty must be limited to the
cost and maintenance of the public improvement on the property

31. PENALTIES
In case of non-payment of taxes, the following must necessarily be paid by the taxpayer except (a) surcharges
(b) principal tax (c) compromise penalties (d) interest

B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I

 Angeles | Cimatu | Lagasca | Priolo | Tan | Tolentino – TAXATION I

SITUS OF TAX
32. The situs of (a) property tax (b) donor’s tax (c) income tax (d) excise tax depends on both the nationality or
residence of the taxpayer and location of the property involved

KINDS OF TAXATION
33. (a) Value Added tax (b) specific (c) ad valorem (d) proportional tax is a tax of fixed proportion with respect to
which the tax is assessed and requires the intervention of assessors or appraisers to estimate the value of such
property before the amount of tax due from each taxpayer can be determined

CLASSIFICATION OF TAXES
34. As to purpose, taxes may be classified into the following, except (a) specific (b) general (c) regulatory (d)
special

AUTHORITY TO LEVY TAX

35. As the following bodies have the power to tax except for (a) municipalities (b) national government (d) barangay
(d) barrios

ESSAY
1. The City of Makati in order to solve the traffic problem in its business districts, decided to impose a tax
imposable to drivers of all private vehicles entering the city during peak traffic hours on workdays, but
exempts those drivers of cars carrying more than 2 occupants excluding the driver. Is the ordinance valid?
Why or why not?

2. An income payor under certain circumstances is constituted as withholding agent of the government. Thus,
the income payor is obligated to withhold taxes on payments made to another and to remit the tax withheld to
the BIR. A taxpayer questions the validity of the withholding tax system on the ground that the same
constitutes (a) violation of the principle that taxes are personal liabilities and must be paid by the income
earner; and (b) undue deprivation of property because income taxes are due at the end of the year . Are the
taxpayer’s contention valid? Discuss each contention separately.

B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I

 Angeles | Cimatu | Lagasca | Priolo | Tan | Tolentino – TAXATION I
3. In order to raise revenue for the repair and maintenance of the newly constructed City Hall of Manila, the City
Council adopted an ordinance imposing and elevator tax equivalent to P1.00 on all persons who rides any of
the high-tech elevators in the city hall during office hours, is the elevator tax a valid imposition?

4. In a contract of sale of land, the parties stipulated that the seller shall not pass on the VAT to the buyer. The
buyer in turn, will absorb the burden of the withholding tax on the state of land. After the execution, both
parties contested that tax obligations under the contract. According to the seller, VAT, being an indirect tax
should be shifted to the buyer. On the otherhand, the buyer contends that he should not be liable for the
withholding tax because as a(?) withholding agent, he should only remit the tax withheld and should not be
made personally liable for the tax. Explain.

5. Distinguish tax amnesty from tax exemption.

6. A was newly elected as mayor of the city of Toledo , in his desire to beautify Toledo City and win in the next
election, A, for and on behalf of the City of Toledo, entered into an agreement with B for the prompt safe
and environmental friendly disposal of garbage in the city. Under the agreement, B will provide the necessary
services to rid the streets and other public areas in Toledo of any garbage. B will charge a service fee below its
usual rate provided that B will be exempt from all national and local taxes. A year after the effectivity of the
agreement, a law was passed subjecting garbage disposal services to VAT. Two years after the effectivity of
the agreement, B was assessed for nonpayment of income taxes and VAT. Should B pay the two taxes? Why
or Why not?

7. A. May the collection of taxes be barred by prescription?

B. May courts enjoin the collection of revenue taxes?
Explain your answer to both questions.

B. A. Y. A. G. Notes – Beginners And Young Amateurs Guide to Taxation I