Pre-Week Taxation Law

General Principles
Q: Galaxia Telecommunications Company constructed a telecommunications tower for the purpose of
receiving and transmitting cellular communications. Meanwhile, the municipal authorities passed an
ordinance entitled “An ordinance Regulating the Establishment of Special Projects” which is imposed
fees to regulate activities particularly related to the construction and maintenance of various structures,
certain construction activities of the identified special projects which includes “cell sites” or
telecommunications towers. Is the imposition of the fee an exercise of the power of taxation?

A: No. The designation given by the municipal authorities does not decide whether the imposition is
properly a license tax or a license fee. The determining factors are the purpose and effect of the
imposition as may be apparent from the provisions of the ordinance. If the generating of the revenue is the
primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the
primary purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax.
(Gerochi v. Department of Energy, G.R. No. 159796, July 17, 2007)
The fees in the ordinance are not impositions on the building or structure itself; rather, they are
impositions on the activity subject of government regulation, such as the installation and construction of
the structures. It is primary regulatory in nature, and not primarily revenue-raising. While the fees may
contribute to the revenues of the municipality, this effect is merely incidental. Thus, the fees imposed in
the said ordinance are not taxes. (Smart Communications, Inc. v. Municipality of Malvar, Batangas, G.R.
No. 204429, February 18, 2014)

THE 20% SENIOR CITIZEN DISCOUNT IS AN EXERCISE OF POLICE POWER

The 20% discount is intended to improve the welfare of senior citizens who, at their age, are less likely to
be gainfully employed, more prone to illness and other disabilities, and, thus, in need of subsidy in
purchasing basic commodities. The 20% senior citizen discount may be properly viewed as belonging to
the category of price regulatory measures which affect the profitability of establishments subjected
thereto. Ergo, the subject regulation is police power measure. (Manila Memorial Park, Inc. v. DSWD
Secretary, 2013, Del Castillo, J.)

THE SOCIALIZED HOUSING TAX (SHT) IS LEVIEDIN THE EXERCISE OF THE POLICE
POWER OF THE STATE
The SHT is not a pure exercise of taxing power or merely to raise revenue; it is levied with a regulatory
purpose. The levy is primarily in the exercise of the police power for the general welfare of the entire city.
It is greatly imbued with public interest. Removing slum areas in Quezon City is not only beneficial to the
underprivileged and homeless constituents but advantageous to the real property owners as well. The
situation will improve the value of the their property investments, fully enjoying the same in view of an
orderly, secure, and safe community, and will enhance the quality of life of the poor. (Ferrer, Jr. v.
Bautista, 2015)

FLEXIBLE CLAUSE(Section 1608, RA 10863 [Customs Modernization and Tariff Act])

In the interest of the general welfare and national security, and, subject to the limitations prescribed under
this Act, the President, upon the recommendation of the NEDA, is hereby empowered to:
(1) Increase, reduce, or remove existing rates of import duty including any necessary change in
classification. The existing rates may be increased or decreased to any level, in one or several stages, but
in no case shall the increased rate of import duty be higher than a maximum of 100% ad valorem;
(2) Establish import quotas or ban imports of any commodity, as may be necessary; and
(3) Impose an additional duty on all imports not exceeding 10% ad valorem whenever necessary:
Provided, that upon periodic investigations by the Commission and recommendation of the NEDA, the
President may cause a gradual reduction of rates of import duty granted in Section 1611 of this Act,
including those subsequently granted pursuant to this section.

Tax refunds premised upon a tax exemption strictly construed,

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

The rule is that tax exemptions must be strictly construed such that the exemption will not be held to be
conferred unless the terms under which it is granted clearly and distinctly show that such was the
intention. [Commissioner, supra citing Phil. Acetylene Co. v. Commission of Internal Revenue, et al., 127
Phil. 461, 472 (1967); Manila Electric Company v. Vera, G.R. No. L-29987, 22 October 1975, 67 SCRA
351, 357-358; Surigao Consolidated Mining Co. Inc. v. Commissioner of Internal Revenue, supra]

A claim for tax refund may be based on statutes granting tax exemption or tax refund. In such case, the
rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature
of an exemption, a legislative grace, which cannot be allowed unless granted in the most explicit and
categorical language. The taxpayer must show that the legislature intended to exempt him from the tax
by words too plain to be mistaken. [Commissioner, supra with a note to see Surigao Consolidated
Mining Co. Inc. v. CIR, supra at 732-733; Philex Mining Corp. v. Commissioner of Internal Revenue,
365 Phil. 572, 579 (1999); Davao Gulf Lumber Corp. v. Commissioner of Internal Revenue, 354 Phil.
891-892 (1998); . Commissioner of Internal Revenue v. Tokyo Shipping Co., Ltd., 314 Phil. 220, 228
(1995)]

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

Q: What are special entities that are granted tax exemptions by the Constitution?
A: Under Article VI, Section 28, the following are exempt from real property taxes:
i) Charitable institutions
ii) Churches
iii) Parsonages or convents appurtenant thereto
iv) Mosques
v) Non-profit cemeteries; and
vi) All lands, buildings, and improvements, actually, directly and exclusively used for religious,
charitable or educational purposes.
The exemption provided for under Article VI, Section 28 pertains only to real property taxes
(LLADOC v. CIR 14 SCRA 292).
Under Article XIV, Section 4(3), all revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational purposes shallbe exempt from
taxes and duties.

Q: What is meant by actual, direct, and exclusive use?

A: What is meant by actual, direct, and exclusive use of the property for charitable institutions is the
direct and immediate and actual application of the property itself to the purpose for which the charitable
institution is organized (Lung Center of the Philippines v. Quezon city 433 SCRA 119).
Q: YMCA is a non-stock, non-profit institution with religious, charitable and educational objectives.
YMCA leased part of its premises to small canteen owners and charged parking fees on the lots beside its
building. Can the CIR tax YMCA for such income?

A: Yes. In CIR v. CA 298 SCRA 83, the Supreme Court ruled that the income from the lease and
parking fees were not exempt. The last paragraph of Section 27 of the NIRC clearly provides that
profits realized by exempt organizations (non-profit clubs) from real property from whatever source
and wherever used are taxable. The Court noted that while YMCA is exempt from real property
taxes; it is not exempt from income tax on the rentals from its property. Further, YMCA failed to
prove that it was a non-stock, non-profit educational institution under Article XIV, Section 4(3) of the
Constitution.

Controlling Ruling: A proprietary non-profit hospital is subject to 10% tax under Section 27(B) of the
Tax Code.

Q: St. Lukes Medical Center is a hospital organized as a non-stock and non-profit corporation. It admits
both paying and non-paying patients. The CIR claimed that St. Lukes was liable for income tax at 10% as
provided under Section 27(B) of the NIRC. St. Lukes argues that it is a non-stock, non-profit institution
for charitable and social welfare purposes exempt from income tax under Section 30(E) and (G) of the
NIRC. Is St. Lukes exempt from income tax?

A: No. St. Lukes cannot claim full tax exemption under Section 30 because it has paying patients and this
is notwithstanding the fact that it is a non-profit hospital. For Section 27(B) to apply, the hospital must be
non-profit which means that no net income or asset accrues to or benefits any member or specific
person and all the activities of the hospital are non-profit. On the other hand, Section 30(E) and (G), while
providing for an exemption is qualified by the last paragraph which, in turn, provides that activities
conducted for profit shall be taxable. Section 30(E) and (G) requires that an institution be operated
exclusively for charitable purposes to be completely exempt from income tax. In this case, however, St.
Lukes is not operated exclusively for charitable purposes insofar as its revenues from paying patients
are concerned. Such revenue is subject to income tax at 10% under Section 27(B).

Q: Is the existence of paying patients material to the real property tax exemption of the building, land and
improvements of St. Lukes?

A: No. The lands, buildings, and improvements of St. Lukes remain exempt from real property taxes
even if it admits paying patients. This is consistent with the ruling in Lung Center of the Philippines v.
Quezon City 433 SCRA 119 where the Supreme Court held that a charitable institution does not lose its
character as such and its exemption from real property taxes simply because it derives income from
paying patients

Q: If St. Lukes were to lease to private persons portions of its property for profit, is the property and
the profits exempt from taxes?

A: The property will not be exempt from real property taxes and also the profits will not be exempt from
income tax. Pursuant to the ruling in in Lung Center of the Philippines v. Quezon City 433 SCRA 119,
those portions of real property not actually used for charitable purposes shall not be exempt from real
property taxes. Consistent with the ruling in CIR v. CA 298 SCRA 83, profits realized from real property
by exempt institutions from whatever source or wherever used are taxable.

Q: Is PAGCOR exempt from paying corporate income tax with respect to its gaming operations?
A: Yes. Under PD 1869, as amended, PAGCOR is subject to income tax only with respect to its operation
of related services. Accordingly, the income tax exemption ordained under Section 27 I of RA 8424
clearly pertains only to PAGCOR’s income from operation of related services. Such income tax
exemption could not have been applicable to PAGCOR’s income from gaming operations as it is already
exempt therefrom under PD 1869, as amended.
Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or entity involved is
subject to tax. This is the most sound and logical interpretation because PAGCOR could not have been
exempted from paying taxes which it was not liable to pay in the first place. This is clear from the
wordings of PD 1869, as amended, imposing a franchise tax of five percent (5%) on its gross revenue or
earnings derived by PAGCOR from its operation under the Franchise in lieu of all taxes of any kind or
form, as well as fees, charges or levies of whatever nature, which necessarily include corporate income
tax.

GOCC’s v. Instrumentality of the Government

Mactan Cebu International Airport Authority vs City of Lapu-Lapu GR 181756 June 15 2015
Airfield, runway and taxiway and the lots on which the runway and taxiway are located, owned by the
State or by the Republic of the Philippines and are merely held in trust by the MCIAA, notwithstanding
that certificates of titles thereto may have been issued in the name of the MCIAA. MCIAA being an
instrumentality of the government, NOT A GOCC, is exempt from RPT, Special Education Fund,
penalty, and interest
If government instrumentality is organized as a stock or non-stock corporation considered as GOCC
which is not exempt from RPT.
If instrumentality is not organized as stock or non-stock corporation, it remains a government
instrumentality exercising not only governmental but also corporate powers, thus exempt from RPT;
Examples of government instrumentalities exempt from RPT: MIAA, GSIS, Philippine Fisheries
Development Authority, University of the Philippines, Bangko Sentral ng Pilipinas;
Only portions of the Airport Lands and Buildings leased to taxable persons like private parties are subject
to real estate tax;

Majority vote of Congress for grant of tax exemption

No law granting any tax exemption shall be passed without the concurrence of a majority of all the
Members of the Congress [Art. VI, Section 28(4) 1987 Constitution].
XCPTION to the strictissimi juris of Exemptions:
i) The rule of strict construction does not apply where the statute granting the exemption
expressly provides for a liberal interpretation;
ii) The rule of strict construction does not apply to special taxes relating to special cases and
affecting only special classes of persons;
iii) While in some cases it is held that the strict construction rule applies equally well to alleged
exemptions of municipal property, the better rule is that strict construction of exemption
statutes applies to exemptions of property held in private ownership but not to exemptions of
public property. In case of property owned by the state or the city or other public corporation,
an express exemption should not be construed with the same degree of strictness that applies
to exemptions contrary to the policy of the state, since as to such property "exemption is the
rule and taxation the exemption;" (2 Cooley Taxation, 1414-1415)
iv) Exemptions to traditional exemptees, such as those in favor of religious and charitable
institu- tions; (Ibid.)
v) Exemptions in favor of the government, its poli- tical subdivisions or instrumentalities. In
Maceda v. Macaraig, Jr., 197 SCRA 771, the Supreme Court held: "it is a recognized
principle that the rule on strict interpretation does not apply in the case of exemptions in favor
of a governmental political subdivision or instrumentality." The basis for applying the rule of
 strict construction granting exemptions or deductions, even more obvious than with reference
to the affirmative or levying provisions of tax statutes, is to minimize differential treatment
and foster impartiality, fairness, and equality of treatment among taxpayers. The reason for
the rule does not apply in the case of exemptions running to the benefit of the government
itself or its agencies. In such a case, the practical effect of an exemption is merely to reduce
the amount of money that has to be handled by government in the course of its operations;
vi) If the taxpayer falls within the purview of exemption by clear legislative intent. (CIR v.
Arnoldus Carpentry Shop, G.R. No. 71122, March 25, 1988).

New Rules on Non-stock non-profit private educational Institutions or NSNPEI (RMO 44-2016
dated 25 July 2016)
All organizations under Section 30 of NIRC (except NSNPEI) are required to revalidate their tax
exemption certificates. For NSNPEI, tax exemption rulings or certificates shall remain valid and effective
unless recalled for valid grounds. NSNPEI are not required to renew or revalidate the tax exemption
rulings previously issued to them; Tax exemption rulings shall be recalled if there are material changes in
the character, purpose, or method of operation which are inconsistent with the basis for its income tax
exemption;
Validity of Tax Exemption/Revalidated Exemption:
• 3 years from date of effectivity specified in the certificate/ruling;

REQUIREMENTS FOR EXEMPTION under Section 30:

a. non-stock corporation or association organized and operated exclusively for the purposes
mentioned in Section 30;
b. It should meet the ff tests: Organizational Test-corporation’s documents exclusively limit its
purposes to Section 30; Operational Test- regular activities of the corporation be exclusively
devoted to the accomplishment of the purposes in Section 30;
c. Net income or assets must be devoted to its purpose/s and no part of its net income or asset
accrues to or benefits any member or specific person;

Q: What are the elements of (direct) double taxation?

A: There is direct double taxation if the two taxes are imposed:

1. On the same subject matter

2. For the same purpose
3. By the same taxing authority
4. Within the same jurisdiction
5. During the same taxing period
6. The taxes must be of the same kind or character

Methods for avoiding double taxation (indirect duplicate taxation).

a. Tax treaties which exempts foreign nationals from local taxation and local nationals from foreign
taxation under the principle of reciprocity.
b. Tax credits where foreign taxes are allowed as deductions from local taxes that are due to be paid.
c. Allowing foreign taxes as a deduction from gross income

Tax Evasion as Distinguished from Tax Avoidance

Q: What is the difference between tax avoidance and tax evasion?
A: Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from
taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should
be used by the taxpayer in good faith and at arm’s length. Tax evasion, on the other hand, is a scheme
used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or
additional civil or criminal liabilities.

Compensation and Set-off

Q: Can taxes be the subject of compensation between the government and the taxpayer?
A: As a rule, taxes cannot be the subject to compensation because the government and the taxpayer are
not mutual creditors and debtors of each other. However, the Supreme Court allowed offsetting under
the following exceptional cases:

A. The Court allowed the offsetting of taxes in a tax refund case because there was an existing deficiency
income and business tax assessment against the taxpayer. The Court said that “ to award such refund
despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects”
and “to grant the refund without determination of the proper assessment and the tax due would inevitably
result in multiplicity of proceedings or suits.” (CIR v. CA, 234 SCRA 348)

The Court permitted the offsetting of taxes because the correctness of the return filed by the taxpayer
was put in issue. (South African Airways v. CIR, 612 SCRA 665)

The Court also allowed offsetting because there was a need for the court to determine if a taxpayer
claiming refund of erroneously paid taxes is more properly liable for taxes other than that paid. The Court
explained that the determination of the proper category of tax that should have been paid is not an
assessment but is an incidental issue that must be resolved in order to determine whether there should be a
refund. However, the Court clarified that while offsetting may be allowed, the BIR can no longer
assess the taxpayer for deficiency taxes in excess of the amount claimed for refund if prescription has
already set in. (SMI-ED Philippines Technology Inc. v. CIR, 739 SCRA 691)

In all these cases, the Supreme Court allowed offsetting of taxes only because the determination of the
taxpayer’s liability is intertwined with the resolution of the claim for tax refund of erroneously or illegally
collected taxes under Section 229 of the NIRC. (CIR v. Toledo Power Company, 775 SCRA 709)

TAXPAYER’S SUIT REQUIRES ILLEGAL USE OF PUBLIC MONEY

A taxpayer is deemed to have the standing to raise a constitutional issue when it is established that public
funds from taxation have been disbursed in alleged contravention of the law or the Constitution.
Petitioner claims that the issuance of Circular No. 89-299 has led to the dissipation of public funds
through numerous irregularities in government financial transactions. These transactions have allegedly
been left unchecked by the lifting of the pre-audit performed by COA, which, petitioner argues, is its
Constitutional duty. Thus, petitioner has standing to file this suit as a taxpayer, since he would be
adversely affected by the illegal use of public money. (Dela Llana v. COA Chairperson, 2012)

Q: What is the difference between a taxpayers suit and a citizen suit?

A: In taxpayer’s suit, the plaintiff is affected by the expenditure of public funds. In citizen’s suit, he is but
the instrument of the public concern. (Beauchamp v. Silk)