TAXATION

- a mode by which governments make exactions for revenue in order to support their existence and carryout
their legitimate objectives

BASIS: governmental necessity, without it, government can neither exist not endure

TAXES
- the enforced proportional contributions from persons and property levied by the lawmaking body of the State
by virtue of its sovereignty for the support of government and for all public needs (1 Cooley 62)

- lifeblood of the government and their prompt and certain availability are an imperious need

- government would be paralyzed without tax

1. Taxes vs. Set Off/Legal Compensation

as a general rule, taxes cannot be the subject of a set-off or compensation because of the lifeblood doctrine;
they are not contractual obligations but arise out of duty to the government; and the government and the
taxpayer are not mutually debtors and creditors of each other. (Francia vs. IAC No. L-67649; June 28, 1988)

- Taxes are of a distinct kind, essence and nature, and these impositions cannot be classed in merely the
same category as ordinary obligations; the applicable laws and principles governing each are peculiar, not
necessary common, to each; and public policy is better subserved if the integrity and independence of taxes
are maintained. (Republic vs. Mambulao Lumber Co.)

- A person cannot refuse to pay tax on the basis that the government owes him an amount equal to or greater
than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the
government. (Philex Mining Corp. v. Commissioner)

2. Doctrine of Equitable Recoupment (NOT ALLOWED IN THE PH)

A tax presently being assessed against a taxpayer which has prescribed may not be recouped or set-off
against an overpaid tax the refund of which is also barred by prescription. It is against public policy since both
parties are guilty of negligence.

Theories and Basis of Taxation

3. Lifeblood Doctrine

Lifeblood Theory Taxes are what we pay for civilized society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to
surrender part of one's hard-earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government. (CIR v. Algue, Inc.)

4. Necessity Theory

Necessity Theory The power to tax is an attribute of sovereignty emanating from necessity. It is a necessary
burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a
navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for
the enjoyment of the citizenry and those which come within the State's territory, and facilities and protection
which a government is supposed to provide. (Phil. Guaranty Co., Inc. v. CIR)

5. Benefits-Protection Theory

Taxation is described as a symbiotic relationship whereby in exchange of the benefits and protection that the
citizens get from the Government, taxes are paid. (CIR v. Algue, Inc.)

6. Jurisdiction over Subject and Objects

 The limited powers of sovereignty are confined to objects within the respective spheres of governmental
control. These objects are the proper subjects or objects of taxation and none else.
a. Tax laws cannot operate beyond a State’s territorial limits
b. The government cannot tax a particular object of taxation which is not within its territorial jurisdiction
c. Property outside the State’s jurisdiction does not receive any protection of the State
d. If a law is passed by Congress, it must see to

7. Power to Tax involves the Power to Destroy

1. “Power to tax is the power to destroy” (Marshall Dictum) – refers to the unlimitedness and the degree or
vigor with which the taxing power may be employed to raise revenue. - the financial needs of the State may
outrun any human calculation, so the power to meet those needs by taxation must not be limited even though
taxes become burdensome or confiscatory.

2. “Power to tax is not the power to destroy while the Supreme Court sits” (Holmes Dictum) – the power to tax
knows no limit except those expressly stated in the Constitution. Marshall and Holmes Dictum Reconciled
Although the power to tax is almost unlimited, it must not be exercised in an arbitrary manner. If the abuse is
so great so as to destroy the natural and fundamental rights of people, it is the duty of the judiciary to hold
such an act unconstitutional.

8. Kinds of Double Taxation

Q: What are the types of double taxation?

A: The two types of double taxation are: (1) Direct Double Taxation [Strict Sense], and (2) Indirect Double Taxation
[Broad Sense].

Q: What is direct double taxation (in a strict sense)?

A: Double taxation means taxing the same property twice when it should be taxed only once; that is, “taxing the same
person twice by the same jurisdiction for the same thing.” It is obnoxious when the taxpayer is taxed twice, when it
should be but once. Otherwise described as “direct duplicate taxation,” the two taxes must be imposed on the same
subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same
taxing period; and the taxes must be of the same kind or character. (Nursery Care Corporation vs. Anthony Acevedo,
G.R. No. 180651, July 30, 2014)
For double taxation to be deemed as such in the strictest sense, all the aforementioned elements must be present.

Q: What is indirect double taxation (in a broad sense)?

A: Indirect double taxation usually takes place when a person is resident of a contracting state and derives income
from, or owns capital in, the other contracting state and both states impose tax on that income or capital. (Cargill
Philippines, Inc. vs. Commissioner of Internal Revenue, G.R. No. 203346, September 9, 2020)

Indirect double taxation occurs when certain elements of direct double taxation are missing. Put simply, indirect
double taxation (in a broader context) is considered permissible double taxation.

9. Kinds of Tax Exemptions

i) Express

(ii) Implied

(iii) Contractual

10. Principles/Interpretations/Construction on Tax Laws and Tax Exemptions

Doctrines in Taxation

11. Prospectivity of tax laws

 This principle states that “a tax bill must only be applicable and operative after becoming a law”. Thus
the effectivity of the tax law commences upon its approval and its scope would only cover the present and
future transactions.

Revenue Regulations (non-retroactivity)

BIR Rulings or Administrative Rulings

NON-RETROACTIVITY OF BIR RULINGS

General Rule: Rulings are not retroactive if they are prejudicial to the taxpayer. (Sec. 246, NIRC)

Exceptions:

- Where the taxpayer deliberately misstates or omits material facts from his return or any document
required of him by the BIR.
- Where the facts subsequently gathered by the BIR is materially different from the facts on which the ruling
is based.
- Where the taxpayer acted in bad faith.

1. Prescriptability / Imprescriptability of Taxes

As a rule, taxes are imprescriptible as they are the lifeblood of the government. However, tax statutes may
provide for statute of limitations.

a.) National Internal Revenue Code

The statute of limitation for assessment of tax if a return is filed is within three (3) years from the last day
prescribed by law for the filling of the return or if filed after the last day, within three years from date of actual
filling. If no return is filed or the return filed is false or fraudulent, the period to assess is within ten years from
discovery of the omission, fraud or falsity. The period to collect tax is within three years from date of
assessment. In the case, however, of omission to file or if the return filed is false or fraudulent, the period to
collect is within ten years from discovery without need of an assessment.

b.) Tariff and customs code

It does not express any general statute of limitation; it provided, however, that ̳‘ when articles have entered
and passed free of duty or final adjustment of duties made, with subsequent delivery, such entry and passage
free of duty or settlement of duties will, after the expiration of one (1) year, from the date of the final payment
of duties, in the absence of fraud or protest, be final and conclusive upon all parties, unless the liquidation of
import entry was merely tentative.” (Sec 1603,TCC)

c.) Local Government Code

Local Taxes, fees, or charges shall be assessed within five (5) years from the date they became due. In case of
fraud or intent to evade the payment of taxes, fees or charges the same may be assessed within ten (10)
years from discovery of the fraud or intent to evade payment. They shall also be collected either by
administrative or judicial action within five (5) years from date of assessment (Sec. 194. LGC)

2. Principle of Exhaustion of Administrative remedies in taxation

The doctrine of exhaustion of administrative remedies calls for resort first to the appropriate administrative
authorities in the resolution of a controversy falling under their jurisdiction before the same may be elevated
to the courts of justice for review.

3. Double taxation

Double taxation occurs when the same subject or object of taxation is taxed twice when it should be taxed but
once. Double taxation is prohibited when it is an imposition of taxes on the same subject matter, for the same
purpose, by the same taxing authority within the same jurisdiction, during the same taxing period, with the
same kind or character of a tax (84 C.J.S.131-132). It is permissible if taxes are of different nature or character,
or the two taxes are imposed by different taxing authorities (Villanueva v. City of Iloilo, G.R. No. L-26521,
December 28,1968, 26 SCRA 578).
 Double taxation is one of direct duplicate taxations wherein two (2) taxes must be imposed on the same
subject matter, by the same taxing authority, within the same jurisdiction, during the same period, with the
same kind of character of tax, even if the purposes of imposing the same are different.

4. Direct Double Taxation

Double taxation in the strict sense pertains to the direct double taxation. This means that the taxpayer is taxed
twice by the same taxing authority, within the same taxing jurisdiction, for the same property and same
purpose.

5. Indirect Double Taxation

Double taxation in broad sense pertains to indirect double taxation. This extends to all cases in which there is
a burden of two or more impositions. It is the double taxation other than those covered by direct double
taxation.

6. Tax Pyramiding

Tax pyramiding occurs when the same final good or service is taxed multiple times along the production
process.

Modes of Eliminating Double Taxation

1. Tax exemption - a grant of immunity to particular persons or corporations from the obligation to pay taxes.

KINDS OF TAX EXEMPTION

A. Express - expressly granted by organic or statute law

B. Implied or by Inference - when particular persons, property or excises are deemed exempt as they fall
outside the scope of the taxing provision itself.
C. Contractual - agreed to by the taxing authority in contracts lawfully entered into by them under
enabling laws

1. Tax credit

an amount subtracted from an individual’s or entity’s tax liability (tax due) to arrive at the tax liability
still due. A deduction differs from a tax credit, in that a deduction reduces taxable income while a credit
reduces tax liability.

2. Tax deduction

an amount subtracted from the gross income to arrive at taxable income.

3. Tax discount
4. Tax treaties

a tax treaty sets out the respective rights to tax of the state of source (situs) and the state of residence
with regard to certain cases, an exclusive right to tax is conferred on one of the contracting states;
however, for other items of income or capital, both states are given the right to tax, although the
amount of tax that may be imposed by the state of source is limited.

5. Principle of Reciprocity
Taxation is described as a symbiotic relationship whereby in exchange of the benefits and protection
that the citizens get from the Government, taxes are paid. (CIR v. Algue, Inc.)

Escape from Taxation

1. Shifting of Tax Burden

SHIFTING – the process by which the tax burden is transferred from the statutory taxpayer (impact of taxation)
to another (incident of taxation) without violating the law.

2. Tax Avoidance

TAX AVOIDANCE – the exploitation by the taxpayer of legally permissible alternative tax rates or methods of
assessing taxable property or income, in order to avoid or reduce tax liability. Example: ―estate planning‖
(conveyance of property to a family corporation for shares) (Delpher Trades Corp. vs. IAC, 157 SCRA 349)

3. Tax Evasion

TAX EVASION – use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of the tax.

1. Difference between Tax Evasion vs. Tax Avoidance

TAX AVOIDANCE TAX EVASION
VALIDITY Legal and not subject to Illegal and subject to
criminal penalty criminal penalty

EFFECT Minimization of taxes Almost always results in

absence of tax payments

1. Tax amnesty

refers to the articulation of the absolute waiver by a sovereign of its right to collect taxes and power to impose
penalties on persons or entities guilty of violating a tax law. Tax amnesty aims to grant a general reprieve to
tax evaders who wish to come clean by giving them an opportunity to straighten out their records.
(Metropolitan Bank and Trust Co. v. Commissioner of Internal Revenue, G.R. No. 178797, 4 August 2009)

Immunity from all criminal, civil and administrative liabilities arising from noN-payment of taxes. Applies only
to past tax periods, hence retroactive application

2. Compromise vs. abatement

Compromise involves a reduction of the taxpayer‘s liability, while abatement means that the entire tax liability
of the taxpayer is cancelled.

ABATEMENT OCCURS WHEN:

a. The tax or any portion thereof appears to be unjustly or excessively assessed;

b. The administration and collection costs involved do not justify the collection of the amount due

3. Taxpayer’s Suit
A case where the act complained of directly involves the illegal disbursement of public funds derive
from taxation (Justice Melo, dissenting in Kilosbayan, Inc vs Guingona, Jr.)

4. Nature of Taxation

a. It is an inherent attribute of Sovereignty

b. It is legislative in character
5. It is inherently legislative
6. It is for a public purpose
7. It is territorial in application
8. It is subject to international comity
9. It is an exaction payable in money
10. It is subject to limitations and restrictions