DOUBLE TAXATION AND TAX

EXEMPTION
DOUBLE TAXATION
Taxing the same property twice
when it should be taxed once.
Taxing the same person twice by
the same jurisdiction over the
same thing. (Victorias Milling
Co. v. Mun. of
Victorias)
Taxing the same person twice by
the same jurisdiction for the
same thing or purpose (US
Jurisprudence -- Harvey Coal
& Coke Co. v. Dillon).
NO PROHIBITION AGAINST
DOUBLE TAXATION
There is no Constitutional
prohibition against it.
(Villanueva v. City of
Iloilo)
Something not favored, BUT
nevertheless permissible.
it is not forbidden by our
fundamental law. (Pepsi-Cola
Bottling Co. of the
Philippines, Inc. v. City of
Butuan, et al.).
KINDS OF DOUBLE TAXATION
(D-I2-L)
Also known as duplicate
taxation, it may be:
1. Direct or
2. Indirect;
3. International Juridical Double
Taxation, and
4. Local Double Taxation.
DIRECT DUPLICATE TAXATION/
DOUBLE TAXATION

In the objectionable or prohibited

sense (also known as obnoxious),
means that the same property is
taxed twice when it should be
taxed only once; and that both
taxes are imposes

Elements
of
Direct
Duplicate
Taxation (K-P3AJ)
on the same PROPERTY or
subject matter
for the same PURPOSE,
by the same State, Government
or taxing AUTHORITY
within the same taxing
JURISDICTION
or taxing district
during the same taxing PERIOD
and covering the same KIND or
character OF TAX. (Villanueva v.
City of Iloilo)
Incidentally, if a real estate tax as
well as a tenement tax are
imposed on the same property,
THERE IS NO OBJECTIONABLE
DOUBLE TAXATION, because the
two are not of the same
kind/character of tax.
(ibid.)

INDIRECT DUPLICATE
TAXATION
Not legally objectionable;
Illustrated [or arises] in the
absence of the elements of direct
duplicate taxation [mentioned in
the Villanueva Case].
INTERNATIONAL JUDICIAL
TAXATION
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.
(Commissioner v. SC
Johnsons Case)
Usually takes place when a
person is a resident of the first
contracting state and both states
impose taxes on such income or
capital.
In order to eliminate double
taxation, a tax treaty is entered
into by the two contracting
states.
Only occurs when the state of
residence of the tax payer
imposes taxes on the income of
said taxpayer within and outside
their state.
No International Juridical Double
Taxation when the
citizens/nationals are only taxed
on their income from sources
within.
Reason: To encourage the free
flow of goods and services and
the movement of capital,
technology and persons between
countries, conditions deemed
vital in creating robust and
dynamic economies. (CIR v. SC
Johnsons Case)
LOCAL DOUBLE TAXATION
The imposition of taxes of similar
nature both by the national
government and the local
government unit where the
object of the tax is located.
No Local Double Taxation
if the tax is levied by the LGU
and another by the national
government.

the two are different taxing

authorities. (Pepsi v. Tanauan
Case)
METHODS EMPLOYED TO
AVOID DOUBLE TAXATION/
METHODS OF
REDUCING
THE RIGORS
OF
DOUBLE TAXATION (CD-RET)
These are schemes provided by
our system to avoid or minimize
the harsh or burdensome effects
of double taxation.
Sometimes embodied in tax
treaties or agreements with
foreign countries while others are
imbedded in statutory provisions
found under our existing laws.
They are the following:
1. Tax Credit
2. Tax Deductions
3. Reductions of the Philippine
Income Tax Rate
4. Tax Exemptions
5. Tax Treaties
TAX CREDIT
An amount subtracted from an
individuals (or entitys) tax
liability to arrive at the total tax
liability.
TAX DEDUCTIONS
The amount of tax is written off
or treated as a deduction from an
individual or entitys gross
income on which resulting
amount the tax liability is
calculated.
Reductions of the Philippine
Income Tax Rate. An example of
which is the Tax Sparing Rule.
Tax Sparing Rule
The dividend earned by a nonresident foreign corporation

(NRFC) within the Philippines is

reduced by imposing a lower rate
of 15% (in lieu of 30%), ON THE
CONDITION THAT the country to
which the NRFC is domiciled shall
allow a credit against the tax due
from the NRFC, which taxes are
deemed to have been paid in the
Philippines. (Sec. 28[B][5][b],
NIRC; CIR v. Procter
& Gamble)
TAX EXEMPTIONS
A grant of immunity to particular
persons or corporations from the
obligation to pay taxes.
TAX TREATIES
Agreement between two
countries specifying what items
of income will be taxed by the
authorities of the country where
the income is earned.
Under Tax Treaties, we have
methods used to eliminate
Double Taxation and they are
the following:
1.First Method An exclusive
right to tax is conferred in 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.
2.Second Method The state of
source is given a full or limited
right to tax together with the
state of residence. In this case,
the treaty makes it incumbent
upon the state of residence to
allow relief in order to avoid
double taxation.

There are Two Ways under

the Second Method:
1. Exemption Method The
income or capital which is
taxable in the state of source (or
situs) is EXEMPTED in the state of
residence, although in some
instances it may be taken into
account in determining the rate
of tax applicable to the
taxpayers remaining income or
capital. (this may be done using
the tax deduction method
allows foreign income taxes to be
deducted from gross income, in
effect exempting the payment
from being further taxed.
2. Credit Method Although the
income or capital which is taxed
in the state of source is still
taxable in the state of residence,
tax paid in the former (source) is
credited against the tax levied in
the latter (residence) (CIR v. SC
Johnsons).
Most Favored Nation Clause
in Tax
Treaties
Its purpose is to grant to the
contracting party treatment not
less favorable than that which
has been or may be granted to
the most favored among other
countries.
It is intended to establish the
principle of equality of
international treatment by
providing that the citizens or
subjects of the contracting
nations may enjoy the privileges
accorded by either party to those
of the most favored nation.
FORMS OF ESCAPE FROM

TAXATION (SC-TE2A)
1. Shifting,
2. Capitalization,
3. Transformation,
4. Tax Exemption,
5. Tax Avoidance and
6. Tax Evasion.
Shifting
The transfer of the burden of tax
by the original payer or the one
whom the tax was assessed.
Only INDIRECT Taxes may be
shifted. They are those that are
demanded in the first instance
from
one person in the
expectation and intention that he
can shift the burden to someone
else, NOT AS TAX, but as part of
the purchase price. Examples of
which are VAT, excise, other
percentage tax, documentary
stamp tax.
DIRECT TAXES cannot be shifted.
They are those that are exacted
from the very person who, it is
intended or desired, should pay
them.
There are three kinds of shifting
and they are as follows (FOB):
a. Forward the burden of tax is
transferred from a factor of
production through the factors of
distribution until it finally settles
on the ultimate purchaser or
consumer.
b. Backward when the burden is
transferred from the consumer
through the factors of distribution
to the factors of production.
c. Onward when the tax is shifted
two or more times either forward
or backward.
Capitalization

The reduction in the price of the

taxed object equal to the
capitalized value of future taxes
which the purchaser expects to
be called upon to pay. Example:
capital expenses incurred by
private educational institutions
for the expansion of school
facilities (Sec. 34[A][2], NIRC).
Transformation
The manufacturer or producer
upon whom the tax has been
imposed, fearing the loss of his
market if he should add the tax
to the price, PAYS THE TAX and
endeavors to recoup himself by
improving his process of
production, thereby producing his
units at a lower cost.
Tax Exemption
Grant of immunity, express or
implied (or contractual) to
particular persons or
corporations of a particular class
from a tax which persons or
corporations generally within the
same state or taxing district are
obliged to pay.
The inherent power of the state
to impose tax naturally carries
with it the power to grant tax
exemption.
Principle of Strictissimi Juris
Laws granting tax exemption are
construed in strictissimijuris
against the tax payer. The law
does not look with favor on tax
exemptions; he who would seek
to be thus privileged must justify
it by words too plain to be
mistaken and too categorical to
be misinterpreted (Land Service
v. Court of Appeals)

REASONS FOR APPLICATION

IF THIS THEORY/ PRINCIPLE
(LMR):
1. Lifeblood theory,
2. To minimize differential
treatment and to foster
impartiality, fairness and equality
among taxpayers (Maceda v.
Macaraig Case), and
3. taxation is a high prerogative of
sovereignty whose
relinquishment is never
presumed (Luzon
Stevedoring v. CA).
EXCEPTIONS TO THE
APPLICATION OF THIS
PRINCIPLE (RPG-S2E):
a. When the statute granting
exemption provided for liberal
construction thereof;
b. In cases of special taxes relating
to special cases and affecting
only special classes of persons;
c. If exemptions refer to public
property;
d. In cases of exemptions granted
to religious, charitable abd
educational institutions or their
property;
e. In cases of tax exemptions in
favor of the government, its
political subdivisions or
instrumentalities;
f. If there is an express mention or
if the taxpayer falls within the
purview of the exemption by
clear legislative intent (CIR v.
Amoldus Carpentry)
KINDS OF TAX EXEMPTION
(ICE)
They are as follows:
1. Express those that are
expressly granted by the
Constitution, statutes, treaties,

franchise, or similar legislative

acts.
2. Implied whenever particular
persons, properties or excise are
deemed exempt as they FALL
OUTSIDE the scope of the taxing
provision itself.
3. Contractual in consideration of
a contractual agreement with the
government.
Revocation of Tax Exemptions
Since the GENERAL RULE is
taxation (and the exception is
exemption), the exemption may
thus be withdrawn at the
pleasure of the taxing authority
(MIAA v. Marcos Case)
BUT if it is from a binding
contract for valuable
consideration, the government
cannot unilaterally revoke it.
Restrictions on Revocations
(NAS)
a. Non-Impairment Clause where
the tax exemption was granted
to private parties based on
material consideration of a
mutual nature, it then becomes
contractual and is covered by
this clause in the
Constitution.
b. Adherence to Form if the tax
exemption is granted by the
Constitution, its revocation can
be effected only by amending
the
Constitution.
c. Special Law where it is in the
form of special law, it cannot be
revoked by a general law.
Tax Refunds
In the nature of tax exemptions.

They are regarded as in

derogation of sovereign
authority and to be
construed in strictissimi juris
against the one claiming it.
Tax Amnesty
General or intentional
overlooking by the state of its
authority to impose penalties on
persons otherwise guilty of
evasion or violation of a
revenue or tax law;
Partakes of an absolute
forgiveness, or waiver of
government of its right to
collect;
To give tax evaders, who wish to
relent and willing to reform, a
chance to do so.
Rules on Tax Amnesty
a. Tax Amnesty
1. Like tax exemption, it is never
favored nor presumed;
2. Construed strictly against tax
payer.
b. The government is not estopped
from questioning the tax liability
even if amnesty tax payments
were already received.
There could be no tax amnesty
granted by the President,
because the same is in the
nature of tax exemption WHICH
COULD ONLY BE GRANTED by
Congress.
c. Defense of Tax Amnesty, like
insanity, is a personal defense.
It relates circumstances of a
particular accused.
Requisites of Tax Amnesty
1. Taxpayer must have voluntarily
disclosed his previously untaxed
income and

2. Must have paid the

corresponding tax thereon.
Constructions of Tax
Exemptions
Not presumed; when granted,
strictly construed against the
grantee.

Tax Avoidance
Also known as tax minimization;
It is the exploitation by the
taxpayer of the legally
permissible alternative tax rates
or methods of assessing taxable
property or income, in order to
avoid/reduce
tax liability;
Tax saving device within the
means sanctioned by law;
Should be used in good faith.
Tax Evasion
An illegal means of escaping
taxation;
It connotes fraud through the use
of pretenses and forbidden
devices to lessen or defeat taxes;
Hence, it subjects the taxpayer
to further civil or criminal
liabilities;
Also known as Tax Dodging;
Elements of Tax Evasion
(SEC):

1. The End to be achieved, i.e.

payment of less than that known
to the taxpayer to be legally due,
or paying no tax when it is shown
that tax is due;
2. Accompanying State of mind,
which is described as being evil,
in bad faith, willful, or deliberate
and not coincidental; and
3. A Course of action which is
unlawful.

Proof of Tax Evasion

1. Failure to declare for taxation
purposes true and actual income
derived from business for two (2)
consecutive years;
2. Substantial under declaration of
income in the tax returns of the
tax payer for four (4) consecutive
years coupled
with
overstated deductions.
CLASS RECITATION WITH
SUGGESTED ANSWERS
Q: What if properties in the
same territory have been
taxed twice, for the same
purpose, and the same year?
A: In order for double taxation to
become a valid defense against a
tax imposition of the
government, the same subject
must be taxed twice in such a
way that both taxes are
imposed for 1. the
same purpose
2. by the same taxing authority
3. within the same jurisdiction
4. for the same taxable period and
5. for the same kind and character
of tax
If the tax imposed is not of the
same kind or character, double
taxation will not be a defense.
Double taxation standing alone
and not being forbidden is not a
valid defense against the legality
of a tax measure. (Pepsi-Cola
Bottling Company vs.
Municipality
of Tanauan, Leyte)
Q: Is there a violation of the
Constitution in case of double
taxation?
A: Constitutional limitations
govern the right to tax and it

must be noted that these

Constitutional provisions only
limit the governments pervasive
power to impose tax. There is no
provision in the Constitution
specifically prohibiting double
taxation (Justice Isagani Cruz
Constitutional Law 2007 P.
91)
However despite the lack of a
specific prohibition double
taxation will not be allowed when
it violates the equal protection
clause. Case in point:
Punzalan v. Municipal Board of
Manila
The petitioners in the said case
averred that they are being
discriminated upon by being
subjected to an additional tax for
practicing their profession in
Manila when professionals
practicing elsewhere were not
subjected to the same
imposition. It was ruled that
there exists substantial
distinction between them and
those professionals practicing
outside Manila.
Q: Will there be a violation of
the due process clause in
case of double taxation?
A: The due process clause of our
Constitution serves as a
limitation on the governments
power to tax.
Applying this limitation on the
subject of double taxation, we
can argue that if the act of
imposing a second tax would be
of such nature that it is
confiscatory, then the second tax
will be invalid.

However, we must also note that

the power to tax may involve the
power to destroy. The
government may opt to resort to
tax measures (in this case taxing
the same subject twice or more)
in order to destroy the subject
which the government sees as
noxious.
Q: What if there is an
ordinance asking for taxes
for the third time?
A: Double taxation standing
alone and not being forbidden is
not a valid defense against the
legality of a tax measure.
(Pepsi-Cola Bottling Company
vs. Municipality of
Tanauan, Leyte)
Hence it follows that no matter
how many times the government
subjects a property to a tax, the
taxpayer may not impugn the
validity of a tax measure unless it
constitutes a Direct Duplicate
Taxation
Q: What are the different
kinds of tax exemptions?
1. Constitutional
2. Statutory
3. Express
4. Implied
Example of a Constitutional Tax
Exemption:
Tax exemption of properties for
religious, charitable, and
educational purposes
(Sec. 28 (3), Art. III, 1987
Constitution)
NOTES: We should always
remember that the property must
be; 1. Actually
2.Directly and

3.Exclusively
Used for religious, charitable,
or educational purposes.

Analysis of the exemption

The true test is USAGE.
Regardless of ownership,
if the property is not
being used for religious,
charitable, or
educational purposes;
the property shall not be
exempt
Exemption from this kind
of taxation does not
import the idea that the
subject property shall be
exempt from every kind
of tax.
Case in point: Lladoc vs
Commissioner
A gift tax being an excise
tax cannot be the tax
contemplated by Sec. 28
(3), Art. III, 1987
Consitution. A gift tax is
not a property tax,
rather it is an excise tax)
The word exclusive
means primarily. Case
in point: Hospital de San
Juan de Dios v. Pasay
City
The admission of pay
patients does not
detract from the
charitable character of a
hospital. As long as all of
its funds are devoted to
the maintenance of the
institution as a public
charity, the property

would still be exempt

from property tax.

Exemption extends to
facilities which are
incidental and
reasonably necessary for
the accomplishment of
its religious, charitable,
or educational purposes.
Q: What is tax evasion? What
is tax avoidance? Are they
the same?
A: Tax evasion and tax avoidance
are the two most common ways
by which a taxpayer
escapes/lessens his tax liabilities.
The important distinguishing
factor between the two is the
legality of the act. 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
arms length.
Tax evasion on the other hand is
a scheme used outside of the
lawful means and when availed
of it subjects the taxpayer to
further or additional civil or
criminal liabilities. Tax evasion
connotes the integration of three
factors;
1. The end to be achieved
2. An accompanying state of mind
described as being evil, in bad
faith, willful, or deliberate
3. A course of action or failure of a
course of action which is unlawful

Q: What are the other forms

of avoidance from taxation?
1. Shifting the transfer of the tax
burden by the original payer to
someone else. What is being
transferred is not the payment,
rather it is the burden of the tax.
2. Capitalization reduction in the
price of the taxed object equal to
the capitalized value of future
taxes
3. Transformation this is achieved
by improving the method of
production and cutting down on
other production cost
Note:
Another method allowed by law
to reduce a taxpayers liability is
the proof of tax exemption of the
taxpayer. However in order to
avail of this, the taxpayer must
point out to a specific law which
expressly grants him the
exemption from taxation.
Q: Why is tax exemption
highly disfavored?
A: It is to be noted that the power
to tax is an inherent right of
sovereignty.
Hence there is no need for any
legislative enactment for its
government to enforce tax
liabilities. In our jurisdiction, it
must be noted that the
Constitutional provisions
regarding the power to tax are
just mere limitations on the
power. There is no Constitutional
provision that expressly states
that the government is (hereby)
granted the power to enforce
payment from its citizens.

Therefore, since it can be said

that the power to tax is the rule,
the taxpayer must thereby point
to a specific law which limits the
pervasive power of the
government. Otherwise, he is
presumed to be liable to pay the
tax assessed against him.
Q: How do we construe a law
granting tax exemption?
A: Tax laws granting tax
exemption are to be construed
strictly against the taxpayer. The
taxpayer must point out a clear
and express provision of a
statute which grants him the
exemption from any kind of
taxation.
Case in point: Commissioner Of
Internal Revenue V. CA Issue:
whether containers and
packaging materials can be
credited against the millers tax
deficiency
Ruled: No. The law speaks only
strictly of raw material,
containers and packaging
materials are not raw materials.
Q: What are the exceptions to
the rule that statutes
granting tax exemption are
construed strictly against the
grantee?
1. When the law itself provides for a
liberal interpretation
2. In case of exemption granted
under special circumstances
3. Exemptions in favor of the
government, its political
subdivisions or
instrumentalities

4. Exemptions granted to
traditionally exempted taxpayers
5. When the exemption refers to a
public property
Q: Who signs tax treaties?
A: The power to sign negotiate
treaties with other states is
vested in the President of the
Philippines. However, pursuant
to the 1987 Constitution, in
order to be valid and effective
the treaty must be concurred by
at least two-thirds of all the
members of the Senate.
As head of the State, the
President is supposed to be the
spokesperson of the nation on
external affairs. In this capacity,
he may deal with foreign states
and governments, extend or
withhold recognition, maintain
diplomatic relations, enter into
treaties, and otherwise transact
business of foreign relations.
(Justice Isagani Cruz, Philippine
Political Law 2002 Edition p.
239)

claim. The terms of the BOT

provides that actual, direct, and
immediate ownership of the
machineries lies with BPPC while
that of NAPOCOR is only
contingent and not sufficient to
support its claim for exemption.
Hence, the machineries and
equipment are not tax exempt.