Tax 1 Basics

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1.

What is the nature of the power of taxation? (1996 Bar)

The power to tax is an attribute of sovereignty and is inherent in the State. It is a

power emanating from necessity because it imposes a necessary burden to preserve

the State’s sovereignty (Phil. Guaranty Co. vs Commissioner, GR no. L-22074, April 30,

1965). It is inherently legislative in nature and character in that the power of taxation

can only be exercised through an enactment of law.

2.

Why is the power to tax considered inherent in a sovereign state? (2003 Bar)

It is considered inherent in a sovereign state because it is a necessary attribute of

sovereignty. Without this power no sovereign State can exist or endure. The power to

tax proceeds upon the theory that the existence of a government is a necessity and

this power is an essential and inherent attribute of sovereignty, belonging as a matter

of right to every independent state or government. No sovereign state can continue to

exist without the means to pay its expenses; and that for those means; it has the right

to compel all citizens and property within its limits to contribute, hence, the

emergence of the power to tax. (51 Am. Jur., Taxation 40)

3.

May Congress under the 1987 Constitution, abolish the power to tax of local governments?

(2003 Bar)

4.

Discuss the meaning and implications of the following statement: “Taxes are the lifeblood of the

government and their prompt and certain availability is an imperious need.” (1991 Bar)

The above phrase expresses the underlying basis of taxation which is governmental

necessity, for indeed, without taxation, a government can neither exist nor endure.

Taxation is the indispensable and inevitable price for civilized society; without taxes,

the government would be paralyzed. This phrase has been used, for instance, to justify

the validity of the laws providing for summary remedies in the collection of taxes. As a

consequence of the above rule, an injunction against the assessment and collection of

taxes is generally withheld by the laws imposing such taxes. Even when it is not so,

under procedural laws such an injunction may not be obtained as held in the case of

Valley Trading Co vs CFI (GR no. 49529, March 31, 1989), where the Supreme Court

ruled that the damages that may be caused to the tax payer by being made to pay the

taxes cannot be said to be as irreparable as it would be against the government’s

inability to collect taxes.

5.

Justice Holmes once said: “The power to tax is not the power to destroy while this court (the

Supreme Court) sits.” Describe the power to tax and its limitations. (2000, 1996 Bar)

The power to tax is an inherent power of the sovereign which is exercised through its

legislature, to impose burdens upon subjects and objects within its jurisdiction for the

purpose of raising revenues to carry out the legitimate objects of the government. The

underlying basis for its exercise is governmental necessity for without it no

government can exist nor endure. Accordingly, it has the broadest scope of all the

powers of government because in the absence of limitations, it is considered as



unlimited, plenary, comprehensive and supreme. The two limitations on the power of

taxation are inherent and constitutional limitations which are intended to prevent

abuse on the exercise of the otherwise plenary and unlimited power. It is the Court’s

role to see to it that the exercise of the power does not transgress these limitations.

6.

Among the taxes imposed by the Bureau of Interal Revenue are income tax, estate and donor’s

tax, value added tax, excise tax, other percentage taxes, and documentary stamp tax. Classify

these taxes into direct and indirect taxes, and differentiate direct from indirect taxes. (2000 Bar)

Income tax, estate and donor’s tax are considered direct taxes. On the other hand,

value added tax, excise tax, other percentage taxes and documentary stamp tax are

indirect taxes.

Direct taxes are demanded from the very person who, as intended, should pay the tax

which he cannot shift to another; while an indirect tax is demanded in the first

instance from one person with the expectation that he can shift the burden to

someone else, not as a tax but as part of the purchase price.

7.

The House of Representatives introduced HB 7000 which envisioned to levy a tax on various

transactions. After the bill was approved by the House, the bill was sent to the Senate as so

required by the Constitution. In the upper house, instead of a deliberation on the House Bill, the

Senate introduced SB 8000 which was its own version of the same tax. The Senate deliberated

on this Senate bill and approved the same. The House Bll and the Senate Bill were then

consolidated in the Bicameral Committee. Eventually, the consolidated bull was approved and

sent to the President who signed the same. The private sectors affected by the new law

questioned the validity of the enactment on the ground that the constitutional provision

requiring that all revenue bills should originate from the House of Representatives has been

violated. Resolve the issue. (2010 Bar)

8.

True or False. A law that allows taxes to be paid either in cash or in kind is valid. (2009 Bar)

TRUE. There is no law that requires the payment of taxes in cash only. However, an

law allowing payment of taxes in kind, although valid, may pose problems of

valuation, hence, will violate the principle of administrative feasibility.

9.

True or False. The Doctrine of Equitable Recoupment allows a taxpayer whose claim for refund

has prescribed to offset tax liabilities with his claim of overpayment. (2009 Bar)

TRUE. The doctrine arose from common law allowing offsetting of a prescribed claim

for refund against a tax liability arising from the same transaction on which an

overpayment is made and underpayment is due. The doctrine finds no application to

cases where the taxes involved are totally unrelated, and although it seems equitable,

is not allowed in our jurisdiction. (CIR vs. UST, 104 Phil 1062 [1958])

10.

True or False. A law imposing a tax on income of religious institutions derived from sale of

religious articles is valid. (2009 Bar)



FALSE. Congress can pass a law taxing income of religious institutions from its

property or activities used for profit but not on their income from exercise of religious

activities. The imposition of a tax on income of a religious institution from sale of

religious articles is an infringement of religious freedom which is not allowed under

the fundamental law. (American Bible Society vs. City f Manila, 101 Phil 386 [1957])

11.

Enumerate the four (4) inherent limitations on taxation. Explain each item briefly. (2009 Bar)

The inherent limitations on the power to tax are:

1. Taxation is for a public purpose – The proceeds of the tax must be used (a) for the

support of the State, or (b) for some recognized objective of the government or to

directly promote the welfare of the community.

2.

Taxation is inherently legislative – Only the property, occupation or business is to

be taxed provided these are all within the State’s territorial jurisdiction. It can also

finally determine the amount or rate of tax, the kind of tax to be imposed and the

method of collection. (1 Cooley 174-184)

3. Taxation is territorial – Taxation may be exercised only within the territorial

jurisdiction of the taxing authority (61 Am. Jur. 88). Within the territorial

jurisdiction, the taxing authority may determine the “place of taxation” or “tax

situs”.

4. Taxation is subject to international comity – This is a limitation which is founded

on reciprocity designed to maintain a harmonious and productive relationships

among the various states. Under international comity, a state must recognize the

generally-accepted tenets of international law, among which are the principles of

sovereign equality among states and of their freedom from suit without their

consent, that limit the authority of a government to effectively impose taxes on a

sovereign state and its instrumentalities, as well as on its property held, and

activities undertaken in that capacity.

12.

Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980at a price of P1 million.

Said property has been leased to MAS Corporation, a domestic corporation engaged in

manufacturing of paper products, owned 99% by Maria Suerte. In October 2007,EIP

Corporation, a real estate developer, expressed its desire to buy the Makati property at its fair

market value of P300 million, payable as follows: (a) P60 million downpayment; and (b) balance,

payable equally in twenty-four (24) monthly consecutive installments. Upon the advice of a tax

lawyer, Maria Suerte exchanged her Makati property for shares of stock of MAS Corporation. A

BIR ruling, confirming the tax-free exchange of property for shares of stock, was secured from



the BIR National Office and a Certificate Authorizing Registration was issued by the Revenue

District Officer (RDO) where the property was located. Subsequently, she sold her entire

stockholdings in MAS Corporation to EIP Corporation for P300 million. In view of the tax advice,

Maria Suerte paid only the capital gains tax of P29,895,000 (100,000 x 55 plus P298,900,00 x

10%), instead of the corporate income tax of P104,650,000 (35% on P299 million gain from sale

of real property). After evaluating the capital gains tax payment, the RDO wrote a letter to Maria

Suerte, stating that she committed tax evasion. Is the contention of the RDO tenable? Or was it

tax avoidance that Maria Suerte had resorted to? Explain. (2008 Bar)

NO. The exchange of the real estate property for the shares of stocks is considered as

a legitimate tax avoidance scheme as provided by Sec. 40(C2b) of the NIRC. Under Sec.

24(c)of the NIRC, the sale of the shares of stocks of a domestic corporation, which is a

capital asset, is subject to a final tax of 5% on the first Php 100,000.00 and 10% on the

amount in excess of Php 100,000.00.

13.

What is the nature of the taxing power of the provinces, municipalities and cities? How will the

local government units be able to exercise their taxing powers? (2007 Bar)

The taxing power of the provinces, municipalities and cities is directly conferred by the

Constitution by giving them the authority to create their own sources of revenue. The

local government units do not exercise the power to tax as an inherent power or by a

valid delegation of the power of Congress, but pursuant to a direct authority

conferred by the Constitution. (Mactan Cebu Airport Authority vs. Marcos, 261 SCRA

667 [1996]; NPC vs City of Cabanatuan, 401 SCRA 259 [2003])

The local government units exercise the power to tax by levying taxes, fees and

charges consistent with the basic policy of local autonomy, and to assess and collect

all these taxes, fees and charges which will exclusively accrue to them. The local

government units are authorized to pass tax ordinances (levy) and to pursue actions

for the assessment and collection of the taxes imposed in said ordinances. (Sec. 129

and 132, LGC)

14.

Enumerate the three stages or aspects of taxation. Explain each. (2006 Bar)

The three stages or aspects of taxation are:

a. LEVY. This refers to the enactment of a law by Congress authorizing the imposition

of a tax.

b. ASSESSMENT and COLLECTION. This is the act of administration and

implementation of the tax law by the executive through its administrative

agencies.

c. PAYMENT. This is the act of compliance by the taxpayer, including such options,

schemes or remedies as may be legally available to him.

15.

Distinguish “direct taxes” from “indirect taxes”. Give examples. (2006 Bar)



Direct taxes are demanded from the very person who, as intended, should pay the tax

which he cannot shift to another; while an indirect tax is demanded in the first

instance from one person with the expectation that he can shift the burden to

someone else, not as tax, but as part of the purchase price. (Maceda vs. Macaraig, Jr.,

223 SCRA 217 [1993]). Examples of direct taxes are income tax, estate tax and donor’s

tax. Examples of indirect taxes are value added tax, percentage tax and excise tax on

excisable articles.

16.

The Constitution provides “charitable institutions, churches, parsonages or convents

appurtenant thereto, mosques, and non-profit cemeteries and all lands, buildings and

improvements actually, directly and exclusively used for religious, charitable or educational

purposes shall be exempt from taxation.” This provision exempts charitable institutions and

religious institutions from what kind of taxes? Choose the best answer. Explain.

a.

From all kinds of taxes, i.e., income, VAT, custom duties, local taxes and real

property tax

b.

From income tax only

c.

From value added tax only

d.

From real property tax only

e.

From capital gains tax only (2006 Bar)

17.

The Constitution provides “charitable institutions, churches, parsonages or convents

appurtenant thereto, mosques, and non-profit cemeteries and all lands, buildings and

improvements actually, directly and exclusively used for religious, charitable or educational

purposes shall be exempt from taxation.” This provision exempts charitable institutions and

religious institutions from what kind of taxes? Choose the best answer. Explain.

a.

From all kinds of taxes, i.e., income, VAT, custom duties, local taxes and real

property tax

b.

From income tax only

c.

From value added tax only

d.

From real property tax only

e.

From capital gains tax only (2006 Bar)

D, from real property tax only. This is the connotation of the phrase “and all lands,

buildings and improvements” thereby limiting the exemption to real property taxes

only. (CIR vs CA, 298 SCRA 83 [1996]; Lladoc vs. Commissioner, 14 SCRA 292 [1967];

Hodges vs. Municipal Board of Iloilo City, 19 SCRA 28 [1965]).

18.

Congress enacts a law imposing a 5% tax on the gross receipts of common carriers. The law does

not define the term “gross receipts”. Express Transport, Inc., a bus company plying the Manila-

Baguio route, has time deposits with ABC Bank. In 2005, Express Transport earned P1 million

interest, after deducting the 20% final withholding tax from its time deposits with the bank. The

BIR wants to collect a 5% gross receipts tax on the interest income of Express Transport without

deducting the 20% final withholding tax. Is the BIR Correct? (2006 Bar)



19.

The police power, power to tax and the power of eminent domain are inherent powers of

government. May a tax be validly imposed in the exercise of the police power and not of the

power to tax? If your answer is in the affirmative, give an example. (1991 Bar)

20.

If the taxpayer has a tax liability, and he has a claim against the government, can these be

subject to compensation? (1996 Bar rephrased)

21.

Is double taxation a valid defense against the legality of a tax measure? (1997 Bar)

NO. Double taxation standing alone and not being forbidden by our fundamental law

is not a valid defense against the legality of a tax measure (Pepsi Cola vs. Tanawan, 69

SCRA 460). However, if double taxation amounts to a direct duplicate taxation, in that

the same subject is taxed twice when it should be taxed once, in a fashion that both

taxes are imposed for the same purpose by the same taxing authority, within the

same jurisdiction or taxing district, for the same taxable period and for the same kind

or character of a tax, then it becomes legally objectionable for being oppressive and

inequitable.

22.

When an item of income is taxed in the Philippines and the same income is taxed in another

country, is there a case of double taxation? (1997 Bar)

Yes.

23.

What are the usual methods of avoiding the occurrence of double taxation? ( 1997 Bar)

24.

“X”, a lessor of a property, pays real estate tax on the premises, a real estate dealer’s tax based

on rental receipts and income tax on the rentals. “X” claims that this is double taxation. Decide.

(1996 Bar)

There is no double taxation, Double taxation means taxing for the same tax period the

same thing or activity twice, when it should be taxed but once, by the same taxing

authority for the same purpose and with the same kind or character of tax. The real

estate tax is a tax on property; the real estate dealer’s tax is a tax on the privilege to

engage in business; while the income tax is a tax on the privilege to earn income.

These taxes are imposed by different taxing authorities and are essentially of different

kind and character. (Villanueva vs City of Iloilo, 26 SCRA 578)

25.

Why is tax exemption strictly construed against the taxpayer? (1996 Bar)

Tax exemptions are strictly construed against the taxpayer because such provisions

are highly disfavored and may almost be said to be odious to the law. (Manila Electric

Company vs. Vera, 67 SCRA 351). The exception contained in the tax statutes must be

strictly construed against the one claiming the exemption because the law does not

look with favor on tax exemption they being contrary to the life-blood theory which is

the underlying basis for taxes.

26.

When may a taxpayer’s suit be allowed? (1996 Bar)



A taxpayer’s suit may only be allowed when an act complained of, which may include

a legislative enactment, directly involves the illegal disbursement of public funds

derived from taxation. (Pascual vs. Secretary of Public Works, 110 Phil 331)

27.

The President of the Philippines and the Prime Minister of Japan entered into an executive

agreement in respect of a loan facility to the Philippines from Japan whereby it was stipulated

that interest on loans granted by private Japanese financial institutions to private financial

institutions in the Philippines shall not be subject to Philippine income taxes. Is this tax

exemption valid? Explain. (1992 Bar)

YES. The tax exemption is valid because an executive agreement has the force and

effect of a treaty under the provision of the Revenue Code. Taxation is subject to

International Comity.

Alternative Answer:

a)

The act of tax exemption is an act of taxation which is inherently legislative.

Therefore, a mere executive agreement cannot provide a tax exemption.

b) NO. Under the NIRC, for interest on investment in the Philippines in loans to be

exempt from taxation, such investment must have been made by foreign

government-owned or controlled financing institutions or international financing

institutions established by governments. In the case at bar, the loans would be

granted by private Japanese financial institutions and therefore, the interest

thereon would not be exempt from taxation.

28.

An Executive Order was issued pursuant to law, granting tax and duty incentives only to

businesses and residents within the “secured area” of the Subic Economic Special Zone, and

denying said incentives to those who live within the Zone but outside such “secured area”. Is the

constitutional right to equal protection of the law violated by the Executive Order? Explain.

(2000 Bar)

NO. Equal protection of the law clause is subject to reasonable classification.

Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane to

the purpose of the law, (3) not be limited to existing conditions only, (4) apply equally

to all members of the same class.

There are substantial differences between big investors being enticed to the “secured

area” and the business operators outside that are in accord with the equal protection

clause that does not require territorial uniformity of laws. The classification applies

equally to all the resident individuals and businesses within the “secured area”. The

residents being in like circumstances to contributing directly to the achievement of the

end purpose of the law, are not categorized further. Instead, they are similarly



treated, both in privileges granted and obligations required. (Tiu et al. vs CA, GR no.

127410, January 20, 1999)

29.

The City of Makati, in order to solve the traffic problem in its business districts, decided to

impose a tax, to be paid by the driver, on all private cars entering the city during peak hours

from 8:00 am to 9:00 am from Mondays to Fridays, but exempts those cars carrying more than

two occupants, excluding the driver. Is the ordinance valid? Explain. (2003 Bar)

The ordinance is in violation of the Rule of Uniformity and Equality, which requires

that all subjects or objects of taxation, similarly situated must be treated alike in equal

footing and must not classify the subjects in an arbitrary manner. In the case at bar,

the ordinance exempts cars carrying more than two occupants from coverage of the

said ordinance. Furthermore, the ordinance only imposes the tax on private cars and

exempts public vehicles from the imposition of the tax, although both contribute to

the traffic problem. There exists no substantial standard used in the classification by

the City of Makati.

Another issue is the fact that the tax is imposed on the driver of the vehicle and not on

the registered owner of the same. The tax does not only violate the requirement of

uniformity, but the same is also unjust because it places the burden on someone who

has no control over the route of the vehicle.

The ordinance is, therefore, invalid for violating the rule of uniformity and equality as

well as being unjust.

30.

“X” Corporation was the recipient in 1990 of two tax exemptions both from congress, one law

exempting the company’s bond issues from taxes and the other exempting the company from

taxes in the operation of its public utilities. The two laws extending the tax exemptions were

revoked by Congress before their expiry dates. Were the revocations constitutional?

31.

Taxes are assessed for the purpose of generating revenue to be used for public needs. Taxation

itself is the power by which the state raises revenue to defray the expenses of government. A

jurist said that a tax is what we pay for civilization. In our jurisdiction, which of the following

statements may be erroneous:

a.

Taxes are pecuniary in nature.

b.

Taxes are enforced contributions

c.

Taxes are imposed on persons and property within the territorial jurisdiction of the

State.

d.

Taxes are levied by the executive branch of the government.

e.

Taxes are assessed according to a reasonable rule of apportionment. (2004 Bar)

D. Taxes are levied by the executive branch of the government.



This statement is erroneous because levy refers to the act of imposition by the

legislature which is done through the enactment of a tax law. Levy is an exercise

of the power to tax which is exclusively legislative in nature and character. Clearly,

taxes are not levied by the executive branch of government. (NPC vs. Albay, 186

SCRA 198 [1990])

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Tax 1 Basics