The Taxing Power and Its Limitations

Constitutional and Statutory Coverage

Constitution. 1987 Constitution, Article II, Section 2; Article III, Sections 1, 4, 5, 10 and 20; Article VI, Sections 24, 25(2), 25(5), 28(1)–(4) and 29(1)–(3); Article VIII, Section 5(2)(b); Article X, Sections 5 and 6; Article XII, Section 11; Article XIV, Sections 4(3) and 4(4).

Statutes. National Internal Revenue Code of 1997, as amended (Tax Code), Sections 4 to 7, 13, 22, 23, 27(B) and (C), 30, 42, 104, 148, 228, and 244 to 246. Republic Act No. 7160 (Local Government Code of 1991), Sections 5, 130, 133, 186, 187, 232, 234 and 284. Republic Act No. 1125, as amended by Republic Act No. 9282 and Republic Act No. 9503. Republic Act No. 10863 (Customs Modernization and Tariff Act).

Principal amending statutes. Republic Act No. 10963 (TRAIN); Republic Act No. 11534 (CREATE); Republic Act No. 11976 (Ease of Paying Taxes Act); Republic Act No. 12023 (VAT on Digital Services); Republic Act No. 12066 (CREATE MORE); Republic Act No. 12214 (Capital Markets Efficiency Promotion Act); Republic Act No. 12001 (Real Property Valuation and Assessment Reform Act); Republic Act No. 12253 (Enhanced Fiscal Regime for Large-Scale Metallic Mining); Republic Act No. 12316 (presidential authority to suspend or reduce the excise tax on petroleum products).

Principal implementing issuances. Revenue Regulations Nos. 3-2024 to 8-2024; Revenue Regulations No. 9-2025, as amended by Revenue Regulations No. 1-2026; Revenue Memorandum Circular Nos. 5-2024 and 38-2024, as clarified by Revenue Memorandum Circular No. 24-2026; Executive Order No. 114 (2026).

Congress enacts a statute imposing a levy of two pesos on every kilogram of processed meat manufactured in the Philippines. Eighty percent of what is collected is appropriated to a supplemental feeding program in public elementary schools. The remaining twenty percent is directed to be remitted to a named private industry association, which will spend it on an export marketing campaign for the processed meat sector. The whole levy is paid into a special account in the general fund, and both disbursements are made from that account. A manufacturer who has paid the levy for two years wants it back. What is his ground, and does it reach the whole levy or only part of it?

Nothing in that problem is answered by a rate, a deduction, or a return. It is answered by asking what a tax is for — whether the State may take a man’s money and hand it to somebody else’s advertising budget — and that is a question about the nature and the limits of a power. This chapter is about that power. Everything that follows in this book, the income tax and the transfer taxes, the value-added tax and the excise taxes, the whole apparatus by which the Bureau of Internal Revenue determines what is owed and compels its payment, is an exercise of a single sovereign authority whose existence the Constitution presupposes and whose boundaries the Constitution, the Congress and the courts have spent more than a century mapping.

The lawyer who does not master those boundaries will litigate tax cases badly, because most Philippine tax controversies are not decided on the arithmetic of the deficiency. They are decided on whether the revenue officer who examined the books held a valid Letter of Authority — the written authorization, issued in the Commissioner’s name, that empowers a named officer to examine a named taxpayer for a named period; on whether the assessment notice stated the facts and the law it rested on; on whether the imposition was a tax at all or a regulatory fee; on whether a regulation added a condition the statute did not impose; on whether an exemption was established by proof of actual use rather than by the language of a charter. Every one of those is a general-principles question, and each of them is a question about a limit.

Two propositions organize the chapter. The first is that the taxing power is at once inherent and bounded. It is inherent because it is an attribute of sovereignty that would exist even if the Constitution said nothing about it; the constitutional provisions on taxation are therefore restrictions upon a power already possessed, not grants of a power that would otherwise be absent. It is bounded because the same Constitution subjects that power to due process and equal protection, to uniformity and equity, to a mandate of progressivity, to specific immunities for religious, charitable and educational institutions, and to structural constraints on how revenue bills originate and how exemptions are granted. The consequence for advocacy is exact and should be internalized now: the taxpayer who challenges an imposition must identify the specific inherent or constitutional restriction transgressed, because the presumption runs in favor of validity; but once he identifies a restriction and proves the transgression, no appeal to fiscal necessity will save the exaction.

The second is that the general principles are not abstractions floating above the Tax Code. They are the source of concrete, operative, litigable rules — of the rule that a levy for a private purpose is void whatever its label, of the rule that an exempt hospital pays real property tax on the floor it rents to a coffee shop, of the rule that a regional director cannot issue a ruling of first impression, of the rule that a fee bearing no reasonable relation to the cost of the regulation it funds is a tax and must answer as one.

The order of treatment is architectural before theoretical, because a beginner needs the shape of the system before its justification. Sections 1.01 to 1.03 establish what the power is and where it comes from. Section 1.04 separates it from the two powers with which it is constantly confused. Sections 1.05 to 1.07 supply the theory, the canons and the anatomy — what a tax is, how taxes are classified, and what a tax is not. Section 1.08 sets out the stages of taxation and who performs each. Sections 1.09 to 1.12 are the heart of the chapter: the five inherent limitations, the constitutional limitations general and specific, and the line of cases on actual, direct and exclusive use. Section 1.13 collects the doctrinal requisites of a valid tax — synthesized from statute and jurisprudence rather than promulgated as a single canonical test — into the checklist a lawyer walks in a validity problem. The chapter closes with the cross-disciplinary connections, a short remedial hook, and the resolution of the processed-meat levy.

1.01 What “taxation” names

The word carries three senses in Philippine legal writing, and the third does the doctrinal work.

As a power, taxation is the inherent authority of the sovereign, exercised through the legislature, to impose burdens upon persons, property, rights or transactions within its jurisdiction for the support of government. As a process, it is the sequence of acts by which that authority is rendered concrete: levy by Congress — the enactment of the law that identifies the subject, fixes the rate and defines the coverage; assessment by the executive — the determination of the correct amount due from a particular taxpayer; collection; payment; and refund where the exaction was erroneous or illegal. As a means, it is the mechanism by which the cost of government is apportioned among those who enjoy its protection. The apportionment is worked out in law upon designated taxpayers; where the economic burden finally comes to rest may be a different question, and the two are kept apart throughout this book under the names impact and incidence (§ 1.08[A]).

The third sense explains the juridical character of the obligation, and the explanation generates a family of rules that recur throughout the book. A tax is not the price of a service purchased. The taxpayer who pays income tax acquires no proportionate entitlement to roads, courts or police protection, and cannot demand a refund on the ground that what he received was worth less than what he paid. The obligation arises ex lege, from the law, and not ex contractu. From that single proposition follow the rules that the taxpayer’s consent is irrelevant to his liability; that the doctrine of mutuality has no application; that legal compensation under Article 1279 of the Civil Code does not ordinarily operate between a tax and a claim against the government; that a tax liability is not assignable; and that a tax may not be reduced by agreement except through the mechanisms the Tax Code itself supplies. Each of those is developed in Chapter 2.

BLACK LETTER RULE

A tax liability may be extinguished or reduced only through a mode authorized by law. The principal modes are payment; the operation of a statutory exclusion, deduction or exemption; a compromise or abatement validly effected under Section 204 of the Tax Code; the availment of a statutory amnesty or condonation; and the lapse of the prescriptive period fixed by Sections 203 and 222. The enumeration is an organizing one, not a catalog of every statutory mechanism; particular reliefs are treated in Chapter 2 and in Part IV. It may not be extinguished by novation, by agreement with a revenue officer, by set-off against a claim upon the government except in the narrow circumstances treated in Chapter 2, or by an administrative issuance that purports to forgive it.

1.02 The Constitution presupposes rather than confers the taxing power

The 1987 Constitution contains a substantial body of text on taxation, and none of it is a grant. Article VI, Section 28 prescribes that the rule of taxation shall be uniform and equitable and that Congress shall evolve a progressive system of taxation; it withholds from Congress the power to grant an exemption except by an absolute majority; it authorizes Congress to delegate tariff powers to the President within limits. Article III protects the taxpayer against deprivation of property without due process and against denial of the equal protection of the laws. Article XIV confers specific immunities on educational institutions. Every one of those provisions operates upon a power assumed to exist.

BLACK LETTER RULE

The power of taxation is an incident of sovereignty. It exists apart from any constitutional conferment and is co-extensive with sovereignty itself. Constitutional provisions relating to the power of taxation do not operate as grants of the power to the government; they constitute limitations upon a power which would otherwise be practically without limit. It follows that the absence of a constitutional provision authorizing a particular kind of tax is no argument against its validity, and that the burden of demonstrating the invalidity of a tax measure rests upon the party assailing it.

1.02[A] The allocation of the burden of proof

Sison, Jr. v. Ancheta, G.R. No. L-59431, 25 July 1984, is the standing authority. Rejecting a challenge to the schedular treatment of compensation income introduced by Batas Pambansa Blg. 135, the Court held that the presumption of constitutionality attaches to a taxing statute with particular force, and that a taxpayer who assails a revenue measure must show a clear and unequivocal breach of the Constitution rather than a doubtful or argumentative one.

The practical consequence is a filter on pleadings. A litigant who argues only that a rate is high, that a classification strikes him as unfair, or that the statute is unwise, has not stated a justiciable objection and will be dismissed without reaching the merits. A litigant who demonstrates that the exaction is confiscatory, that the classification rests on no substantial distinction, or that the notice given was constitutionally inadequate, has stated one. Counsel’s first task in a validity case is therefore not to explain why the tax is bad but to name the limitation it breaches and plead the facts that establish the breach.

1.02[B] The one qualification: local government units

A province, a city, a municipality and a barangay are not sovereign, and the proposition that the taxing power is inherent does not describe them. Historically their taxing authority was a pure legislative delegation, revocable at will and strictly construed against them. Article X, Section 5 of the 1987 Constitution altered the source of that authority without removing its limits.

STATUTORY TEXT

“Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments.”

— 1987 Constitution, Article X, Section 5.

The grant is direct, and two consequences follow. First, because the power is now conferred by the Constitution itself, the older rule that a local taxing ordinance is construed strictly against the local government has been substantially relaxed: a doubt as to the existence of the power is resolved in favor of the local unit, though any exemption or exception written into the ordinance is still construed strictly against the party claiming it. Section 5(a) of the Local Government Code enacts precisely that asymmetry. Second, because the grant is expressly subject to such guidelines and limitations as Congress may provide, the Local Government Code supplies the operative constraints, and an ordinance that exceeds them is void. Section 133 enumerates the common limitations on local taxing power, including the prohibition against taxing the National Government, its agencies and instrumentalities, and other local government units.

The distinction between the source of local taxing power and its scope was tested in Mandanas v. Ochoa, Jr., G.R. Nos. 199802 and 208488, 3 July 2018, where the Court held unconstitutional the qualifying phrase “internal revenue” in Section 284 of the Local Government Code, because Article X, Section 6 entitles local government units to a just share in the national taxes, not merely in the internal revenue taxes collected by the Bureau of Internal Revenue. The share was accordingly recomputed to include the collections of the Bureau of Customs. Mandanas is not a case about the power to levy. It is a case about the constitutional entitlement to the proceeds, and it shows that fiscal autonomy has both a levying dimension and a sharing dimension.

BAR EXAMINATION NOTE

Examinees routinely write that local government units possess an inherent power of taxation. They do not. The taxing power is inherent in the State and is exercised by Congress; a local government unit exercises a directly conferred but statutorily bounded power under Article X, Section 5, subject to the guidelines in the Local Government Code. An answer that says “inherent” loses the point even where the conclusion happens to be right.

1.03 Comprehensive, plenary, unlimited and supreme — and not absolute

The classical description of the taxing power is that it is comprehensive, plenary, unlimited and supreme, and each adjective carries a distinct meaning. It is comprehensive in that it reaches persons, property, rights, privileges, occupations and transactions. It is plenary in that the Tax Code arms the government with a complete armory of assessment and collection remedies, administrative and judicial. It is unlimited in the sense that the legislature’s selection of the objects of taxation and its fixing of rates are not subject to judicial revision on grounds of wisdom. It is supreme in the sense that, among the three inherent powers of the State, taxation reaches the widest range of subjects.

None of this makes the power absolute, and the aphorism that the power to tax involves the power to destroy must be handled with care. Its correct Philippine statement was given in Roxas v. Court of Tax Appeals, G.R. No. L-25043, 26 April 1968: the power to tax is the power to destroy, and it should therefore be exercised with caution to minimize injury to the proprietary rights of the taxpayer; it must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg. Roxas is not authority for the proposition that a court may strike down a tax it considers excessive. It is authority for the proposition that where the Bureau has stretched a statutory concept beyond its terms — there, treating an isolated, government-induced disposition of an inherited hacienda as an ordinary sale of real property held for sale to customers in the ordinary course of business — the stretch will not be sustained.

DOCTRINE

Judicial review of a revenue measure does not extend to its wisdom, necessity, expediency or rate, which are legislative questions. It does extend to whether the measure exceeds the statutory authority conferred upon the body that adopted it, and to whether it transgresses an inherent, constitutional or procedural limitation. The first of these grounds is the one most often overlooked: a great many revenue measures fail not because they offend the Constitution but because the issuing authority had no power to adopt them, and that is a question of statutory vires rather than of constitutional law.

Substantive due process is nevertheless a real limitation, and it is not exhausted by the confiscatoriness inquiry. Sison itself identifies several distinct constitutional defects that will support review: that the tax is arbitrary; that it is confiscatory, destroying the very property, business or activity upon which it operates; that it oversteps the territorial jurisdiction of the taxing authority; and that it is not for a public purpose. To these substantive grounds must be added procedural due process in assessment and collection, which is treated at § 1.11 and developed in Part IV. Confiscatoriness is therefore one head of due process review and not its threshold.

The Philippine reports contain few successful confiscatoriness challenges, and the student should understand why: the claim requires evidence rather than adjectives. Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, G.R. No. 160756, 9 March 2010, illustrates the failure mode. The petitioner attacked the minimum corporate income tax as confiscatory because it is imposed on gross income regardless of loss. The Court sustained the tax, reasoning that it is not imposed on capital, since gross income as the statute defines it is already net of the cost of goods sold and of direct expenses; that it applies only from the fourth taxable year; and that the Secretary of Finance is empowered to suspend it in cases of prolonged labor dispute, force majeure or legitimate business reverses. The case is a useful template in both directions: a confiscatoriness argument fails where the statute itself contains calibrating mechanisms, and counsel who intends to run one must be prepared to prove, with financial statements and industry data, that the measure leaves no reasonable return.

1.04 Taxation, police power and eminent domain

The State possesses three inherent powers. All three are legislative in nature, exist independently of constitutional grant, are exercised for the public good, and necessarily interfere with private rights. Because they overlap in practice, characterizing a measure is frequently the first analytical step in a controversy — and the characterization determines the standard of review.

1.04[A] The comparison

1.04[B] Tax or regulatory fee: the characterization that decides cases

The distinction that produces the most litigation concerns the amount that may lawfully be exacted. If an imposition is an exercise of the taxing power, its amount is not constitutionally capped and the payer cannot complain of disproportion. If it is an exercise of the police power — a regulatory or license fee — the amount must bear a reasonable relation to the cost of issuing the license and of the inspection and surveillance the regulation entails. A local government that labels an imposition a “fee” may nonetheless have imposed a tax. The question is not answered by the level of the exaction alone. Where the primary purpose of the imposition is the raising of revenue and regulation is merely incidental, the imposition is treated as a tax; where regulation is the primary purpose and revenue merely incidental, it is treated as a regulatory fee. The amount exacted, and in particular its relation to the cost of regulation, is evidence of primary purpose and often the strongest evidence available — but it is evidence, and the inquiry is the multifactor one stated below. An imposition found to be a tax must then satisfy every requirement applicable to taxes, including the common limitations in Section 133 of the Local Government Code and the public hearing requirement of Section 186 and the publication requirement of Section 188. Section 187 supplies the procedure for challenging the constitutionality or legality of a tax ordinance, including the appeal to the Secretary of Justice within thirty days from effectivity, and itself carries a mandatory public hearing requirement; Section 188 is the provision entitled “Publication of Tax Ordinances and Revenue Measures.” The three provisions should not be run together.

DOCTRINE

The label chosen by the enacting body is not controlling. Whether an imposition is a tax or a regulatory fee is determined by its primary purpose, ascertained from the terms of the measure as a whole, the nature of the activity regulated, the relation between the amount exacted and the cost of regulation, and the disposition of the proceeds. Where revenue is the primary purpose and regulation merely incidental, the imposition is a tax. Where regulation is the primary purpose and revenue merely incidental, it is a license fee.

Progressive Development Corporation v. Quezon City, G.R. No. L-36081, 24 April 1989 (En Banc), supplies the method. A Quezon City ordinance imposed a supervision fee on privately owned public markets, computed as a percentage of the gross receipts from stall rentals, and the operator assailed it as an income tax on rentals beyond the city’s delegated authority. The Court sustained the imposition as a license fee, reasoning that the use of gross receipts as the measure of an exaction does not convert a regulatory fee into an income tax, because the measure of an exaction is not the same thing as its object; that public markets are affected with a public interest requiring continuous inspection for sanitation, weights and measures, and fire safety; and that the amount collected was not shown to be disproportionate to the cost of that regulation. The case supplies an analytical method, not a safe harbor: where the record shows that collections grossly exceed the demonstrable cost of regulation, the same method yields the opposite conclusion. The method has been consistently applied, most prominently in Angeles University Foundation v. City of Angeles, G.R. No. 189999, 27 June 2012, which held a building permit fee under the National Building Code to be a regulatory imposition and therefore outside the tax exemption of a non-stock, non-profit educational institution.

PRACTICE NOTE

A characterization challenge is won or lost on the record, not on the ordinance. Counsel attacking a “fee” should obtain, by request or by subpoena, the enacting body’s cost study if one exists, the budget of the regulating office, the number of establishments covered, and the accounting treatment of the collections — whether they are earmarked for the regulatory program or swept into the general fund. A ratio of collections to demonstrable regulatory cost, supported by the treasurer’s own records, is the single most persuasive item in the case. Counsel defending a fee should ensure that the cost study exists before enactment; one prepared for litigation is worth little.

1.04[C] Taxation as an implement of the police power

The three powers are not mutually exclusive, and Philippine jurisprudence has long recognized that the taxing power may be employed as an implement of the police power. Lutz v. Araneta, G.R. No. L-7859, 22 December 1955, upheld a levy on sugar imposed to stabilize and rehabilitate the sugar industry, reasoning that the industry was one on which the national economy substantially depended and that the legislature could deploy the taxing power to protect it. Tio v. Videogram Regulatory Board, G.R. No. L-75697, 18 June 1987, upheld a tax on video rentals as simultaneously a revenue measure and a regulation of an activity affected with public interest, notwithstanding that the levy was plainly designed to make videogram piracy uneconomic. The excise taxes on alcohol, tobacco products and sweetened beverages, and the sumptuary architecture of the sin tax laws, rest squarely on this line: they are calibrated to discourage consumption while raising revenue, and their validity does not depend on the revenue purpose predominating.

The converse proposition is equally settled, and it is the ground on which a taxpayer wins. Where the direct object of the levy or of the expenditure it funds is a private benefit, the measure is void for want of public purpose, whatever its label. The test is the direct object, not the presence of a private recipient: a genuine public program is not invalidated because private parties benefit from it incidentally, which is why Lutz stands alongside Fertiphil. That is the subject of Section 1.09[A], where Fertiphil is treated.

1.05 Theory, basis and objectives

1.05[A] The theory: necessity

The theory of taxation answers why the State may tax at all. The Philippine answer is necessity. The existence of government is a necessity; government cannot continue without the means to pay its expenses; and it has the right to compel all who are protected by it to contribute to those expenses. From necessity flows the description of taxes as the lifeblood of the government, which Chapter 2 shows to have generated an entire family of operative rules — no set-off, no injunction, summary remedies, strict construction of exemptions, non-estoppel of the government, and the rest.

1.05[B] The basis: benefits received, and ability to pay

The basis of taxation answers a different question: why is it just that a particular person be compelled to pay? The principal traditional explanations are two — the benefits-received principle and the ability-to-pay principle — and different taxes draw on them in different degrees. The first has its classic Philippine formulation in Commissioner of Internal Revenue v. Algue, Inc., G.R. No. L-28896, 17 February 1988. Taxes are what we pay for civilized society; the relation between the State and the taxpayer is symbiotic, the taxpayer contributing and the government responding with tangible and intangible benefits designed to improve the lives of the people.

The benefit need not be direct, personal, measurable or proportionate. A taxpayer may not refuse payment because the road in his barangay is unrepaired, because he sends no children to public school, or because what he pays exceeds the value of the public services he consumes. Alongside the benefits-received principle stands the ability-to-pay principle, which holds that contributions should be apportioned according to capacity to bear the burden. The two are not arranged in a hierarchy in which one gives way to the other. They are complementary justifications, and different taxes draw on them in different measure: a benefit assessment or a regulatory fee rests principally on the first, the graduated income tax and the estate tax principally on the second. Ability to pay has a horizontal dimension, requiring that taxpayers in like economic circumstances bear like burdens, and a vertical dimension, requiring that those in different circumstances bear appropriately different burdens. The graduated rate structure for individuals, the exemption of a floor of taxable income, and the constitutional directive that Congress evolve a progressive system of taxation are all expressions of the principle.

Algue is also, and more importantly for the litigator, the authority for the limit of the lifeblood metaphor. Having declared that taxes are the lifeblood of the government and should be collected without unnecessary hindrance, the Court immediately added that such collection should be made in accordance with law, since any arbitrariness will negate the very reason for government itself. That sentence is the doctrinal hinge on which most modern taxpayer victories turn, and Chapter 2 is built around it.

1.05[C] Objectives: revenue and non-revenue

Revenue is the classical fiscal function of taxation, and for most taxes it is the dominant one. But taxation may also serve regulatory, redistributive, protective and other legitimate public objectives, and these are not, as a matter of law, subordinate: a measure whose regulatory purpose predominates is not for that reason invalid, and the non-revenue objectives supply the constitutional justification for measures that would otherwise be vulnerable. Taxation is used to promote the general welfare, as when it implements the police power; to regulate conduct, as in the excise taxes on alcohol, tobacco products and sweetened beverages; to reduce social inequality, through graduated rates and transfer taxes; to encourage investment and economic growth, through the income tax holiday, the special corporate income tax and the enhanced deductions available to registered business enterprises; and to protect domestic industry, through tariffs and duties under the Customs Modernization and Tariff Act.

CURRENT LAW NOTE

Republic Act No. 12066, the CREATE MORE Act, was approved on 8 November 2024; its joint implementing rules were signed on 17 February 2025 and took effect on 20 February 2025. It amended, among others, Sections 27, 28, 32, 34, 57, 106, 108, 109, 112, 135, 237-A, 269 and 292 to 311 of the Tax Code and inserted new Sections 135-A, 295-A, 296-A and 297-A. For this chapter its significance is that the incentive regime is now the principal modern illustration of taxation deployed for a non-revenue objective: it expanded and restructured the enhanced deductions and other incentive regimes, retaining the special corporate income tax framework established under CREATE while adding the separate twenty percent rate for registered activities under the enhanced deductions regime, clarified the reach of value-added tax zero-rating on local purchases of registered business enterprises, and restructured the governance of incentives as between the investment promotion agencies and the Fiscal Incentives Review Board. Every proposition about incentives found in pre-2025 materials requires verification against Republic Act No. 12066 and its implementing rules, and against the continuing regulations, including Revenue Regulations No. 9-2025 as amended by Revenue Regulations No. 1-2026 dated 16 February 2026. The incentive regime itself belongs to Part II; it appears here only as an objective of taxation.

1.06 The canons of a sound tax system, and their unequal legal consequences

A tax system is conventionally evaluated against three canons. Fiscal adequacy requires that the sources of revenue be sufficient to meet the expanding expenditures of government regardless of business conditions. Administrative feasibility requires that the law be capable of convenient, just and effective administration and enforcement at a reasonable cost to both government and taxpayer. Theoretical justice or equity requires that the burden be proportionate to ability to pay and that the tax not be oppressive or confiscatory.

Students learn the three canons easily. What examiners test, and what practitioners must know, is that the three have radically unequal legal consequences when violated. Fiscal adequacy and administrative feasibility address the wisdom of a measure, and wisdom is committed to Congress. Standing alone, a failure to satisfy either does not invalidate a tax. They may nonetheless become constitutionally relevant where the defect makes the measure arbitrary, oppressive or otherwise violative of due process — which is a due process question, not a question about the canon.

Diaz v. Secretary of Finance, G.R. No. 193007, 19 July 2011 (En Banc), is the standard citation. Petitioners assailed the imposition of value-added tax on tollway operations, arguing among other things that the tax would be impracticable to administer because operators would have to issue invoices at toll booths, and that a toll fee is itself a user’s tax so that taxing it would be double taxation. The Court sustained the imposition, holding that non-observance of the canon of administrative feasibility does not render a tax law invalid unless the difficulty rises to the level of making the law arbitrary or oppressive in the due process sense; and holding, on the second point, that a toll is not a tax at all but a charge for the use of an improvement, so that no question of double taxation arose. Abakada Guro Party List v. Ermita, G.R. No. 168056, 1 September 2005, is to the same effect on fiscal adequacy, sustaining the reformed value-added tax law against a battery of challenges on the ground that the wisdom of the measure was for Congress.

BLACK LETTER RULE

The violation of the canon of theoretical justice may invalidate a tax law, but not because equity is itself a constitutional command. It invalidates because a tax so inequitable as to be oppressive or confiscatory offends the due process clause, and a tax that treats similarly situated taxpayers differently without a substantial basis offends the equal protection clause and the requirement of uniformity and equity in Article VI, Section 28(1). The correct pleading therefore does not allege “violation of theoretical justice”; it alleges violation of due process, of equal protection, or of the uniformity clause, and pleads the facts that establish it.

1.07 The anatomy of a tax

1.07[A] Essential characteristics

A tax is an enforced proportional contribution from persons and property, levied by the law-making body of the State by virtue of its sovereignty, for the support of the government and all public needs. The definition unpacks into seven characteristics, each of which does analytical work. A tax is an enforced contribution, its imposition being independent of the will of the person taxed. It is generally payable in money, though the Tax Code permits payment in kind in limited situations and the Local Government Code and the Customs Modernization and Tariff Act contain their own rules. It is proportionate in character, being apportioned according to a statutory measure of the tax base. Proportionality is a traditional element of the definition; it is not a requirement that every tax be proportionate to ability to pay. Many are not, and the Constitution directs Congress to evolve a progressive system, which is a different thing from a mandate that each tax be progressive. It is levied on persons, property, rights, acts, privileges or transactions. It is levied by the State having jurisdiction over the person or the object. It is levied by the law-making body. And it is levied for a public purpose.

1.07[B] Classification along six axes

The classifications are not ornamental. Each determines a rule of law.

(a) As to subject matter. A personal, poll or capitation tax is imposed on persons residing within a specified territory without regard to property or occupation, the community tax being the Philippine example. A property tax is imposed on property in proportion to value or some other reasonable method of apportionment, the real property tax being the example. An excise or privilege tax is imposed on the performance of an act, the enjoyment of a privilege or the engaging in an occupation. In this broad classification the income tax, the estate tax, the donor’s tax, the value-added tax and the statutory excise taxes are all taxes on acts, privileges, transactions or activities rather than taxes on property. The word excise is here used in its older and wider sense. It must not be confused with the excise tax of Title VI of the Tax Code, which is a specific statutory levy on particular goods and services; the income tax is an excise in the broad classificatory sense and is not an excise tax under the Code. The classification matters because of Article III, Section 20, which provides that “no person shall be imprisoned for debt or non-payment of a poll tax.” The provision contains two protections, and the second — the poll tax immunity — attaches to a class of tax and so depends on the classification.

(b) As to incidence of burden. A direct tax is one the law imposes upon the person ultimately intended to bear it; an indirect tax is imposed upon one person with the legal or economic burden capable of being shifted to another, the liability to the government remaining with the statutory taxpayer. The distinction concerns legal incidence and the ordinary capacity for shifting, not an absolute factual proposition: the economic burden of a direct tax may in fact be passed on in price or wage bargaining without altering its character, which is why impact and incidence are treated separately at § 1.08[A].

The consequence is decisive in refund litigation, treated in Section 1.07[C] and in Part IV. As a general rule the statutory taxpayer, and not the person who bore the economic burden, is the proper claimant for the refund of an indirect tax — unless the law clearly grants the party bearing the economic burden an exemption from both direct and indirect taxes, or otherwise provides a refund mechanism in his favor, in which case that party may recover. The exception is not an afterthought: it is the ground of decision in Chevron Philippines, Inc. v. Commissioner of Internal Revenue, G.R. No. 210836, 1 September 2015, and it is regularly missed by examinees who memorize the general rule alone.

(c) As to determination of amount. A specific tax is of a fixed amount by unit of measurement; an ad valorem tax is imposed by reference to the value of the subject or tax base, that value being determined under the valuation rules applicable to the particular tax. Those rules differ: the real property tax proceeds upon an assessment by the local assessor, customs duties upon dutiable value determined under the Customs Modernization and Tariff Act, and the transfer taxes upon the valuation rules of the Tax Code as affected by Republic Act No. 12001. That Act, the Real Property Valuation and Assessment Reform Act, is itself an illustration of how a valuation regime may be restructured: it establishes Schedules of Market Values, prepared locally and approved by the Secretary of Finance, as a single valuation base for real property, and so brings the national zonal values and the local assessment rolls onto one footing. An assessor is a feature of some ad valorem taxes, not a defining element of the class. The distinction governs the interpretation of tariff and excise provisions and the operation of indexation clauses.

(d) As to purpose. A general, fiscal or revenue tax is imposed for the general purposes of government; a special-purpose or earmarked tax is imposed for a particular purpose and its proceeds dedicated to it. The older usage “special or regulatory tax” is avoided here: a regulatory fee is an exaction under the police power, treated at § 1.04[B] and § 1.07[C], and is a different thing from a tax whose proceeds are earmarked. A tax remains a tax however its proceeds are dedicated. The distinction connects to Article VI, Section 29(3), but the connection requires care. That provision governs a tax levied for a special purpose, and requires that the money collected on it be treated as a special fund and paid out for that purpose only. It does not follow that every statutory earmarking clause invokes the constitutional special-fund rule. Congress frequently dedicates the proceeds of an ordinary revenue tax to a program by statute; that is a statutory earmark, enforceable as such, and it may be amended or repealed by a later statute in the ordinary way. The constitutional clause bites where the levy itself is one for a special purpose. Pimentel III is instructive precisely because both operated there — the constitutional special-fund principle and the statutory earmarks in the Universal Health Care Act and the sin tax laws — and the Court kept them distinct (Section 1.09[A]).

(e) As to scope or authority imposing. A national tax is imposed by the national government under the Tax Code or the Customs Modernization and Tariff Act; a local or municipal tax is imposed by a local government unit under the Local Government Code. The distinction determines the assessing authority, the administrative remedies, the prescriptive periods and the court of first resort.

(f) As to graduation. A proportional tax is a fixed percentage of the base; a progressive tax has a rate that increases as the base increases; a regressive tax has a rate that decreases as the base increases. The Constitution directs Congress to evolve a progressive system of taxation; it does not follow that no Philippine tax has regressive incidence, and indirect taxes commonly do. The Constitution does not prohibit indirect taxes merely because their incidence is regressive in effect: Article VI, Section 28(1) directs Congress to evolve a progressive system of taxation, which Tolentino v. Secretary of Finance, G.R. No. 115455, 25 August 1994; Resolution, 30 October 1995, construed as a directive to the legislature rather than a justiciable prohibition of indirect taxes.

1.07[C] Taxes distinguished from other exactions

Government collects many things that are not taxes, and misclassification has consequences. A license fee that is in truth a tax must satisfy the limitations applicable to taxes. A special levy — commonly called a special assessment, though special levy is the term the Local Government Code uses — is a special local real property exaction on lands specially benefited by a public works project or improvement funded by the local government unit, and it is not a tax on ownership. It is easy — and wrong — to infer from that distinction that it may be imposed on land exempt from real property tax. Section 240 of the Local Government Code provides the contrary in terms: the special levy “shall not apply to lands exempt from basic real property tax.” The exemption from the basic tax carries the land out of the special levy as well. The classification therefore determines the governing rules, and here the governing rule is a statutory exclusion. Note also where the levy sits: it is distinct from the basic real property tax, but it is not outside the tax system, being governed by the special levy provisions of Title II, Book II of the Local Government Code, Sections 240 to 245. An amount that is a penalty rather than a tax is not deductible under Section 34 of the Tax Code, which disallows fines and penalties arising from a violation of law.

1.08 The stages of taxation and the allocation of function

Taxation proceeds in stages, and the stages are performed by different branches. Confusing them is the source of a surprising number of errors, because a remedy available at one stage is unavailable at another.

The first stage is levy or imposition: the enactment of the law identifying the subject, fixing the rate and defining the coverage. This is purely legislative.

The second is assessment: the administrative determination of the amount due from a particular taxpayer. The third is collection: the enforcement and receipt of what is due. Both are executive, and together they are what is meant by tax administration; but they are distinct functions with distinct remedies, and the distinction is worth holding from the outset, because a taxpayer’s remedy against an assessment is not his remedy against collection.

Payment is the taxpayer’s discharge of the tax assessed or otherwise due. It is made by the taxpayer — the statutory taxpayer, in the language of § 1.08[A] — in accordance with the law. It is not necessarily made by the person on whom the economic burden ultimately settles: in an indirect tax the two are different persons, and confusing them is the source of the refund errors treated below.

Refund is a subsequent remedial mechanism, arising where a tax has been erroneously or illegally assessed or collected and the taxpayer recovers it under Sections 204(C) and 229 of the Tax Code. The mechanics of assessment, collection and refund are owned by Part IV and are not restated here.

1.08[A] Impact and incidence

DOCTRINE

The impact of a tax is the point at which the law originally imposes it — the statutory taxpayer. The incidence is the point at which the economic burden finally rests. In an indirect tax such as the value-added tax, the impact is on the seller, who remains liable to the government whether or not he succeeds in passing the tax on; the incidence is on the buyer, to whom the tax is shifted. It follows that the buyer, though he bears the burden, is generally not the proper party to claim a refund of the tax.

The refund consequence was settled in Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal Revenue, G.R. No. 173594, 6 February 2008, where an international air carrier claiming exemption under its charter and under an air transport agreement sought the refund of excise taxes on aviation fuel that its supplier had paid and passed on. The Court denied the claim: the proper party to seek the refund of an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid it, even though the burden was shifted. Contex Corporation v. Commissioner of Internal Revenue, G.R. No. 151135, 2 July 2004, applied the same rule to a zone enterprise billed value-added tax by its domestic suppliers. The rule is not absolute: where the law itself confers the exemption on the buyer and provides a refund mechanism in his favor, or where the exemption would otherwise be rendered nugatory, the Court has permitted recovery by the entity that bore the burden, as in Chevron, with respect to petroleum products sold to a tax-exempt entity.

1.08[B] Congress

As to national taxation, Congress holds the primary and plenary legislative taxing authority. It may, for national taxation, create a tax, increase or reduce a rate, repeal a tax, define tax offenses and prescribe their penalties, grant or withdraw exemptions, and prescribe the machinery of collection and the remedies of both government and taxpayer. The qualification matters: local taxing authority is exercised by local government units under Article X, Section 5 and the Local Government Code, and it is those units, not Congress, that enact local revenue measures and prescribe much of the machinery for their collection — within the limits Congress and the Constitution set, as § 1.02[B] explains. Four provisions constrain how Congress acts.

Under Article VI, Section 24, all appropriation, revenue or tariff bills, bills authorizing an increase of the public debt, bills of local application, and private bills must originate exclusively in the House of Representatives, although the Senate may propose or concur with amendments. Tolentino v. Secretary of Finance construed the clause narrowly and definitively: it is the bill, not the resulting law, that must originate in the House, and the Senate’s power to propose amendments includes the power to propose a complete substitute measure, provided a House bill initiated the legislative process. A challenge founded on the mere fact that the enacted text is substantially the Senate version will therefore fail.

Under Article VI, Section 28(4), no law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of Congress. The requirement is an absolute majority of the entire membership of Congress, and not a majority of a quorum. The constitutional text is that “no law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of Congress,” and it is the words all the Members that carry the absolute-majority requirement. Note what the provision does and does not say. It expressly imposes the absolute-majority requirement on a law granting a tax exemption; it prescribes no corresponding supermajority for the ordinary legislative withdrawal of a statutory exemption. The asymmetry is worth remembering, though it should not be over-read: an exemption may also arise from the Constitution itself, or from a contract or franchise, and the withdrawal of such an exemption raises separate questions — of constitutional amendment in the first case, and of the non-impairment clause in the second — that are treated at § 1.10[E].

Under Article VI, Section 29(1), no money shall be paid out of the Treasury except in pursuance of an appropriation made by law. Under Article VI, Section 29(3), money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only, and if the purpose has been fulfilled or abandoned the balance shall be transferred to the general funds of the Government. That provision, long treated as a museum piece, became the center of a major constitutional controversy in 2025 and is treated at Section 1.09[A].

1.08[C] The executive: the Secretary of Finance and the Commissioner

The Bureau of Internal Revenue is an agency attached to the Department of Finance, and the Secretary exercises supervision and control over it. His two principal functions in taxation are rule-making and review. Under Sections 244 and 245 of the Tax Code the Secretary, on the recommendation of the Commissioner, promulgates all needful rules and regulations for the effective enforcement of the Code; this is the source of Revenue Regulations. Under Section 4, the Commissioner’s power to interpret the Tax Code is expressly made subject to review by the Secretary, so that a taxpayer aggrieved by an adverse ruling has an administrative avenue before resorting to the courts.

The Commissioner heads the Bureau, which is charged with the assessment and collection of all national internal revenue taxes, fees and charges and with the enforcement of the forfeitures, penalties and fines connected with them. His statutory powers are found principally in Sections 4 to 7 and 204, and they are developed at length in Part IV. What general principles requires of the reader here is only the proposition that follows from the legislative character of the taxing power.

BLACK LETTER RULE

The legislative determination of a tax and its essential elements — the subject of the tax, its purpose, the amount or rate, and the coverage — may not be delegated to an administrative officer. The rules of situs and the machinery of collection are likewise fixed by statute, but this does not mean that no function touching them may be delegated: Congress may commit to the executive the ascertainment of facts on which a statutory consequence depends, and the administration and collection machinery is routinely delegated by law. An administrative issuance that increases a rate, extends a tax to a transaction the statute does not reach, adds a substantive condition, limitation or disqualification not found in the statute, or confers an exemption the statute does not grant, is void to that extent. The vice is the addition of substance. An issuance that prescribes evidentiary, documentary and procedural requirements for establishing or claiming a statutory right is a proper exercise of the rule-making power, and the line between the two is the line the litigation is usually about. Matters that are merely administrative and implementary — the ascertainment of facts on which the operation of a statute depends, the prescription of forms, the mechanics of filing and payment — may validly be committed to the executive where the enabling law is complete in itself and lays down a sufficient standard.

No administrative issuance may prevail over the Tax Code, and none may create or increase a tax, or create or enlarge a tax exemption beyond what the statute grants. The prohibition is on creating and enlarging. An issuance that administers or implements an exemption the statute has already granted — prescribing the evidence, the forms and the procedure for claiming it — is a proper exercise of the rule-making power, and much of the Bureau’s work consists in exactly that. A BIR ruling binds the Bureau only as to the taxpayer who sought it and only upon the facts represented. It is not a source of law and it does not bind the courts. Its effect, including the conditions and prospectivity of its revocation or modification and the reliance a taxpayer may place upon it, is governed by the Tax Code and the applicable Bureau rules, and is treated in Chapter 2. An interpretation embodied in a ruling or circular is entitled to respect only to the extent of its intrinsic persuasiveness and its consistency with the statute.

The illustrations are collected in Chapter 2, which owns the doctrine on the validity of administrative issuances; three are worth naming here because they are the canonical demonstrations that a regulation is read against the statute and not alongside it. Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G.R. Nos. 167274-75, 21 July 2008, invalidated the portion of a revenue regulation that imposed a floor on excise tax rates the statute did not contain. Fort Bonifacio Development Corporation v. Commissioner of Internal Revenue, G.R. No. 173425, 4 September 2012, struck down a regulation that reduced the transitional input tax credit the statute granted. Commissioner of Internal Revenue v. Filinvest Development Corporation, G.R. No. 163653, 19 July 2011, rejected the Bureau’s attempt to impute theoretical interest on interest-free intercompany advances, holding that the power to allocate income and deductions does not include the power to impute income never earned.

BAR EXAMINATION NOTE

The four powers the Commissioner may not delegate under Section 7 of the Tax Code are examined almost every cycle, usually as a problem in which a Regional Director purports to issue a ruling of first impression or a Revenue District Officer purports to approve a compromise. They are: the power to recommend the promulgation of rules and regulations to the Secretary of Finance; the power to issue rulings of first impression or to reverse, revoke or modify an existing ruling of the Bureau; the power to compromise or abate a tax liability, subject to the limited authority of the Regional Evaluation Boards over small assessments and minor criminal violations; and the power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept. The correct answer identifies the act as void for want of authority, cites Section 7, and — this is the part examinees omit — states the consequence: an act performed by an officer without delegated authority produces no legal effect and cannot be validated by the taxpayer’s acquiescence, because the government is not estopped and the taxpayer is not bound by an ultra vires act of a revenue officer.

1.09 The inherent limitations

The limitations on the taxing power divide into two classes. Inherent limitations arise from the nature of the power itself and would restrain it even in the absence of a written constitution. Constitutional limitations are express or necessarily implied restrictions found in the fundamental law. The classification is analytically useful but not watertight: public purpose is an inherent limitation that has also been read into the due process clause, and the non-delegation rule is inherent but qualified by express constitutional exceptions. What matters in practice is that a validity challenge must identify a specific limitation and plead the facts that establish its breach.

There are five inherent limitations, conveniently retained by the mnemonic SPINE: situs or territoriality, public purpose, international comity, non-delegation of the legislative taxing power, and the exemption of government entities. A mnemonic, however, is a filing system rather than an argument, and each limitation must be capable of being stated as a rule with its authority.

1.09[A] Public purpose

BLACK LETTER RULE

A tax may be levied only for a public purpose. The proceeds must be devoted to the support of government, to any of its recognized objects, or to the promotion of the welfare of the community. Two tests are applied: the duty test, which asks whether the object of the expenditure is something it is the duty of the State to provide; and the promotion of general welfare test, which asks whether the expenditure directly promotes the welfare of the community, or of a substantial and identifiable portion of it. Every individual need not benefit, and need not benefit equally. Public purpose is determined as of the time of enactment, and its determination is primarily legislative, with which the courts will not interfere unless it is clearly and palpably erroneous.

Three refinements decide most cases. First, public purpose is fixed at enactment: a defect at that moment is not cured by the subsequent honest application of the proceeds, and conversely a valid purpose is not defeated by later misuse, though the misuse may be separately actionable. Pascual v. Secretary of Public Works, G.R. No. L-10405, 29 December 1960, is the foundational Philippine authority on the first half of that proposition. An appropriation for the construction of feeder roads on land privately owned by a sitting senator at the time of the appropriation was held void for want of public purpose, and the subsequent donation of the land to the government did not cure the defect, because validity was determined as of the time the appropriation was made. Second, the purpose need not benefit every individual; it suffices that the benefit accrues to the community as a whole or to a substantial and identifiable part of it, and incidental enrichment of private parties does not invalidate the levy. Third, and conversely, a levy whose direct object is a private benefit is void even though the public gains incidentally.

CASE — Planters Products, Inc. v. Fertiphil Corporation G.R. No. 166006, 14 March 2008 (Third Division)

Material facts. Letter of Instruction No. 1465 imposed a capital recovery component of ten pesos on every bag of fertilizer sold domestically. The proceeds were remitted to the Fertilizer and Pesticide Authority and thereafter to Planters Products, Inc., a private corporation, until its accumulated deficits were fully paid. Fertiphil, a competitor which had paid the levy, sued to recover it after the change of government.

Issue. Whether the levy was an exercise of the taxing power for a public purpose, or of the police power, and whether it was valid.

Ruling. The levy was an exercise of the taxing power, was imposed for a private purpose, and was therefore void; Fertiphil was entitled to recover what it paid.

Reasoning. The levy’s dominant purpose was revenue, since the proceeds were not devoted to any regulatory scheme but were simply turned over to a private corporation to retire its debts. Even assuming an exercise of the police power, the measure failed because the means were not reasonably necessary to any legitimate public end and were unduly oppressive. The Court reiterated that public purpose is determined by the ultimate destination of the proceeds, and that the incidental benefit to the public from a healthy fertilizer industry could not cure a levy whose direct object was the rehabilitation of one private firm.

Doctrine. An exaction whose direct object is the benefit of a private person is void for want of public purpose, notwithstanding an incidental public advantage. Public purpose is tested by the direct object of the expenditure, not by remote or consequential benefits.

Significance and limits. Fertiphil is the modern anchor of the public purpose limitation and supplies the ground on which the processed-meat levy is resolved in the synthesis. Two things it does not decide. It does not hold that a levy which principally serves a public end is invalidated because private parties incidentally benefit — which is why Lutz survives it. And it does not decide the position of a levy remitted to a government corporation charged by law with a stabilization function, which is a different case requiring the duty test to be applied to that corporation’s mandate.

Status. Controlling and frequently cited.

DISTINGUISH — Lutz and Fertiphil

These are the two poles of the public purpose inquiry, and Bar problems are built on the space between them. In Lutz the proceeds funded research, price stabilization and industry-wide rehabilitation of a sector on which the national economy depended; individual planters benefited, but the benefit was diffused across the class and flowed from a public program. In Fertiphil the proceeds were remitted to one named private corporation to extinguish its own deficits; the industry’s health was a hoped-for consequence, not the object of the disbursement. The operative question is therefore not “does a private party benefit?” but “is the direct object of the expenditure a public program or a private balance sheet?”

Public purpose has a further dimension that until recently was more often recited than litigated. Where the Constitution or a statute has dedicated the proceeds of a levy to a particular purpose, the validity of the levy does not exhaust constitutional scrutiny: the disposition of the earmarked proceeds remains subject to the constitutional and statutory restrictions governing those funds. The proposition should be stated with that precision. It is not a general rule that every subsequent expenditure of validly collected revenue is independently reviewable under the public purpose limitation; it is a rule about earmarked funds.

CASE — Pimentel III v. House of Representatives (the PhilHealth funds cases) G.R. Nos. 274778, 275405 and 276233, 3 December 2025 (En Banc, Lazaro-Javier, J.)

Special Provision No. 1(d), Chapter XLIII of the 2024 General Appropriations Act authorized government-owned or controlled corporations to remit their fund balances or excess reserves to the National Treasury to finance unprogrammed appropriations. Implementing it, the Department of Finance issued Circular No. 003-2024 directing the Philippine Health Insurance Corporation to remit approximately PHP 89.9 billion; sixty billion pesos were remitted in three tranches before the Court restrained the final tranche. The Court unanimously ordered the return of the PHP 60 billion through the 2026 General Appropriations Act and permanently prohibited the transfer of the balance; by majority vote it declared the special provision and the circular void for grave abuse of discretion. It held, first, that the special provision was a rider, the Constitution requiring every provision of a general appropriations act to be germane to its purpose, and a provision introducing the undefined concept of a “fund balance” and altering the substantive law on reserve funds being neither unambiguous nor appropriate; second, that the provision effected an implied repeal of Section 11 of the Universal Health Care Act and of the earmarking provisions of the sin tax laws, whereas an appropriations act may only appropriate consistently with existing law; and third, that funds legally dedicated to the expansion of benefits, the reduction of member contributions and the maintenance of financial stability are not idle discretionary fiscal resources. Doctrine: revenues that a statute has dedicated to a specific purpose cannot be re-channeled to general purposes by a provision of a general appropriations act or by an implementing circular. The special-fund principle and statutory earmarking operate together as a substantive limitation on the disposition of the proceeds of those levies.

The test of germaneness. The Court applied the test stated in Atitiw v. Zamora: a provision of a general appropriations bill is germane if it is particular, unambiguous and appropriate. It is particular if it relates specifically to a distinct item of appropriation and does not refer generally to the entire bill. It is unambiguous when its application is apparent on the face of the bill and does not require reference to sources outside it. It is appropriate when its subject matter does not have to be treated in separate legislation. Special Provision 1(d) was held particular, because it related to the unprogrammed appropriations, but ambiguous, because it introduced the concept of a “fund balance” which the 2024 General Appropriations Act nowhere defined and whose composition and “reasonable levels” could not be determined from the Act itself.

The Court also identified three classes of provision that must be struck down as inappropriate under Article VI, Section 25(2): those that do not relate specifically to some particular appropriation; those that relate to one but nonetheless violate the Constitution; and those that intend to amend or repeal, or have the effect of amending or repealing, existing laws — the last being the vice found here, the special provision having amended Section 11 of the Universal Health Care Act and the sin tax laws.

The constitutional provisions and their separate functions. The case is frequently and loosely described as a “public purpose” case. It is more accurately taught as a case on earmarking, appropriation, riders and the separation of powers, in which four distinct provisions did four distinct kinds of work:

Limits: the Court sustained the certification of urgency of the 2024 General Appropriations Act and found no bad faith on the part of the implementing officials. The reader should not extract from the case a free-standing doctrine that the courts will superintend the expenditure of tax revenue generally. Status: controlling; the Office of the Solicitor General announced in December 2025 that it would not seek reconsideration.

CURRENT LAW NOTE

Pimentel III was promulgated on 3 December 2025. It is current law, it is the leading modern authority on Article VI, Section 29(3), and it governs every controversy to which it applies.

1.09[B] Territoriality and situs

The taxing power reaches only persons, property and transactions within the territorial jurisdiction of the State. Two reasons are given: tax laws do not operate beyond a country’s borders, and, under the benefits-received principle, the State can afford protection only within them.

Situs is the place of taxation — the jurisdiction competent to impose a particular tax. Its determination depends on the kind of tax and the nature of the subject. For the community tax, situs is the residence of the taxpayer. For real property, situs is the location of the property under the maxim lex rei sitae (the law of the place where the thing is situated), irrespective of the citizenship or residence of the owner. For tangible personal property, situs is where the property is physically located and used. For intangible personal property the general rule is mobilia sequuntur personam (movables follow the person), so that situs is the domicile of the owner, subject to two exceptions: where the law provides otherwise, and where the intangible has acquired a business situs elsewhere. Section 104 of the Tax Code enumerates intangibles deemed situated in the Philippines, including franchises exercised here, shares issued by domestic corporations, shares of a foreign corporation eighty-five percent of whose business is located here, and shares that have acquired a business situs here. For income, situs depends on the source of the income and on the citizenship and residence of the taxpayer under Sections 23 and 42, which Part II develops. For business and occupation taxes, situs is the place where the business is conducted; for transfer taxes, the residence or citizenship of the transferor or the location of the property.

The most consequential recent development in the law of situs concerns services with a cross-border element, and it arose from satellite communications.

CASE — Aces Philippines Cellular Satellite Corporation v. Commissioner of Internal Revenue G.R. No. 226680, 30 August 2022

Material facts. Aces Philippines contracted with Aces Bermuda, a non-resident foreign corporation, for satellite air time. The satellite was in geostationary orbit outside Philippine territory. Aces Philippines was assessed final withholding tax on its payments to Aces Bermuda on the theory that the income was from Philippine sources. It argued that the income-producing activity — the routing of calls by the satellite — occurred entirely outside the Philippines.

Issue. Whether satellite air time fees paid to a non-resident foreign corporation constitute income from sources within the Philippines.

Ruling. They do. The petition was dismissed and the assessment sustained, the Court of Tax Appeals En Banc being affirmed with modification only as to the computation of interest.

Reasoning. The Court proceeded in two steps: it identified first the source of the income and then the situs of that source.

Identifying the source. The Court held that “the income-generating activity takes place not during the act of transmission but only upon the gateway’s receipt of the call as routed by the satellite.” It identified the gateway’s receipt of the routed call as the income source because that event coincides with two things: it marks the completion or delivery of the service, Aces Bermuda’s undertaking requiring both that the satellite transmit or route the call and that a gateway receive it; and it marks the inflow of economic benefits, the air time fees accruing only upon delivery and utilization, satellite utilization time for call set-up, unanswered calls and incomplete calls being expressly excluded from the billable units.

Identifying the situs. Two grounds established the Philippine situs. First, the income-generating activity is directly associated with the gateways located within Philippine territory; although Aces Philippines legally owned the gateways, Aces Bermuda had sufficient economic or beneficial interest in them because its Philippine operations depended on those local facilities. Second, the provision of satellite communication services in the Philippines is a government-regulated industry, so that a foreign satellite provider serving Philippine subscribers “necessarily invokes Philippine sovereignty and government intervention/protection.” The Court invoked the benefits-received principle in support.

The Court also rejected the taxpayer’s reliance on a BIR ruling issued to another taxpayer, on United States legislation and case law, and on the OECD Commentaries, none of which has the force of law here.

Doctrine. For purposes of the source rules under Section 42 of the Tax Code, the situs of income from services is where the income-producing activity is performed; and where a service is delivered through infrastructure located in the Philippines and is not complete until it reaches that infrastructure, the income is from Philippine sources.

Significance and limits. The case should be stated with care. The governing rule remains that of Section 42(A)(3): the source of service income turns on the place where the income-producing activity is performed. Aces applied that rule to a satellite service in which the Philippine gateway was an indispensable component of the service and the point at which the service became commercially useful and billable. The Court did not announce a general “indispensable node” test, and the reader should not convert the case into one. What the decision does not decide is the case of a service performed and completed wholly abroad with no indispensable Philippine physical node; and it does not by its terms adopt a place-of-consumption rule.

Status. Controlling; an En Banc decision. Counsel advising on cross-border service arrangements must read the case together with the current circulars rather than with pre-2022 rulings. Note that Senior Associate Justice Leonen wrote separately and Justice Dimaampao wrote separately, concurring and dissenting; propositions taken from those opinions are not the holding of the Court.

CURRENT LAW NOTE

The Bureau applied Aces through Revenue Memorandum Circular No. 5-2024, supplemented by Revenue Memorandum Circular No. 38-2024, which listed categories of cross-border services — consulting, information technology outsourcing, financial services, telecommunications, engineering and construction, education and training, tourism and hospitality — as akin to the service in Aces. Assessments followed, and practitioners objected that the circulars had been read as taxing services by reason of their classification. On 30 March 2026 the Bureau issued Revenue Memorandum Circular No. 24-2026, which clarifies that cross-border services are not automatically subject to Philippine income tax by reason of their classification; that the general rule remains that service income is sourced to the place of performance; and that a revenue officer invoking Aces must establish, on a holistic reading of the entire service agreement rather than an isolated activity, that the parties are a Philippine payor and a non-resident service provider, that the Philippine activity is integral to the completion or delivery of the non-resident’s service and resulted in payment or accrual constituting economic benefit to him, that the situs of the income-producing activity is within the Philippines, and that no treaty or domestic exemption applies.

Three exclusions are written into the circular and are easily missed. The income to which the elements apply does not include (a) passive income, (b) income from the sale of goods, or (c) pass-through payments in favor of another non-resident for services rendered outside the Philippines. Counsel meeting an assessment founded on the circular should begin by asking whether the income falls within one of the three.

The circular also enumerates nine categories of document by which a taxpayer may establish foreign source: a sworn statement describing the parties and the services; the service contracts, master service agreements, statements of work, purchase orders, billing statements, invoices or correspondence; a tax residency certificate from the provider’s jurisdiction; a Securities and Exchange Commission certification of non-registration of the non-resident foreign corporation; proof of its organization or registration abroad; proof of outward remittance; any BIR ruling confirming foreign source; any BIR certificate of entitlement to treaty benefit; and any other relevant proof. Under Revenue Memorandum Order No. 1-2026 photocopies may be submitted if certified by the taxpayer as true reproductions, foreign documents being authenticated or apostilled, and the Bureau may require the originals for verification within the authorized scope of the audit. The circular confirms that a confirmatory ruling is not a condition precedent to the correct treatment, and that the absence of one does not by itself prejudice the taxpayer.

UNSETTLED

The reach of Aces beyond services with an indispensable Philippine physical node is not settled. On one reading the decision is a straightforward application of Section 42(A)(3), the gateway being where the income-producing activity was completed; on another, its language about the place where the benefit is received states a broader consumption-based sourcing rule that would materially alter the settled understanding of Section 42(A)(3). Revenue Memorandum Circular No. 24-2026 records the Bureau’s own view that Aces “expands” the situs rule by admitting the place where the benefit is received, while simultaneously restraining its application — a position that is itself in tension. Until the Supreme Court decides a case involving a service without an indispensable Philippine node, counsel should plead the place-of-performance rule as the primary position and distinguish Aces on its facts.

A note on the burden of proof. The allocation must be stated precisely, and its source correctly identified. It does not rest on the circular. It rests on the decided cases: in Aces itself the Court held that “the rule is that the taxpayer bears the burden of proving that the income was from sources outside the Philippines and exempt from the application of our income tax law,” citing Commissioner of Internal Revenue v. Baier-Nickel, G.R. No. 153793, 29 August 2006. Revenue Memorandum Circular No. 24-2026 itself rests the allocation there, recording that “in Aces Philippines, the Supreme Court emphasized that the burden of proof lies with the taxpayer to establish that the income was derived from sources outside the Philippines.” The proposition is therefore sound; what is unsound is to source it in the circular rather than in the decided cases. The Court applied that rule against Aces Philippines, holding that it had not presented sufficient evidence that the fees were generated from sources without the Philippines.

Four allocations should nevertheless be kept apart. First, a taxpayer claiming an exemption or a deduction bears the burden of establishing his entitlement. Second, a taxpayer asserting that income is foreign-sourced bears the burden of proving it — the Aces and Baier-Nickel rule. Third, an assessment enjoys a presumption of correctness, but the Bureau must have a factual basis for it, and an assessment without one may be set aside. Fourth, and separately, Revenue Memorandum Circular No. 24-2026 directs revenue officers themselves to establish the enumerated elements before invoking Aces — which, so far from shifting a burden onto the taxpayer, imposes a discipline on the examiner. An administrative circular cannot in any event reallocate an allocation fixed by law and jurisprudence. What follows practically is that the documentary record supporting the place of performance should be assembled before audit rather than after.

CURRENT LAW NOTE

Revenue Memorandum Circular No. 24-2026, dated 30 March 2026, is current law and governs every live assessment. It is the Bureau’s administrative interpretation of the source rule; the rule itself is that of Section 42 as construed in Aces.

1.09[C] International comity

Par in parem non habet imperium — an equal has no power over an equal. Out of the mutual respect owed among sovereigns, and by force of Article II, Section 2 of the Constitution, which adopts the generally accepted principles of international law as part of the law of the land, the Philippines does not tax the property, income or transactions of another sovereign State, its embassies and consulates, its diplomatic officers, or international organizations to which immunity has been extended by treaty or executive agreement.

The doctrinal question that recurs is whether the failure to observe a treaty-prescribed administrative formality forfeits a treaty benefit. Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue, G.R. No. 188550, 19 August 2013, answered it. The Bureau had denied a treaty preferential rate because the taxpayer failed to file a tax treaty relief application at least fifteen days before the transaction, as a revenue memorandum order required. The Court held that the obligation to comply with a treaty in good faith — pacta sunt servanda — requires that the State not impose additional conditions that would nullify the relief the treaty grants, and that non-compliance with an administrative issuance should not divest a taxpayer of a benefit conferred by treaty. The case is the standard citation for the proposition that a revenue issuance cannot amend, and much less defeat, a treaty.

The boundary lies between the substantive conditions of a treaty, which must be satisfied, and administrative conditions imposed by issuance, which may not defeat it. Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., G.R. No. 127105, 25 June 1999, marks the other side of that line, denying a most-favored-nation claim to a lower royalty rate because the clause requires not merely similarity of rates in the comparator treaty but similarity in the circumstances of payment, including the mechanism by which each State grants relief. Treaty relief procedure is developed in Part II.

1.09[D] Non-delegation of the legislative taxing power

Potestas delegata non delegari potest — what has been delegated cannot be further delegated. Because the taxing power is legislative, Congress may not surrender it to the executive or judicial departments or to a private body. Only the legislative aspects are non-delegable; the administrative aspects may be, and routinely are, delegated. Three exceptions are recognized.

(a) To local government units under Article X, Section 5, implemented by the Local Government Code. Strictly this is now a direct constitutional grant rather than a delegation, but it is conventionally treated as an exception because the local unit exercises a power it does not inherently possess.

(b) To the President under Article VI, Section 28(2), which authorizes Congress by law to allow the President to fix, within specified limits and subject to such limitations and restrictions as Congress may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program. This is the flexible tariff clause. Garcia v. Executive Secretary, G.R. No. 101273, 3 July 1992, sustained executive orders imposing additional duties on crude oil and oil products under this clause, holding the delegation valid because the enabling statute fixed the limits and supplied the standard.

(c) To administrative agencies of matters merely administrative and implementary. The delegation is valid where the enabling law is complete in itself, setting forth the policy to be executed, and lays down a sufficient standard to guide the delegate and confine his discretion. Abakada Guro Party List v. Ermita applied the completeness and sufficient-standard tests to sustain the provision of the reformed value-added tax law authorizing the President, on the recommendation of the Secretary of Finance, to raise the rate upon the occurrence of stated fiscal conditions, holding that what was delegated was not the power to tax but the ascertainment of the factual contingency upon which the statutory rate increase would operate.

That distinction — between delegating the power to tax, which is forbidden, and delegating the ascertainment of a fact upon which a statutory consequence depends, which is permitted — is the analytical key to the recent Philippine development represented by Republic Act No. 12316, which reaches an internal revenue tax rather than a tariff or customs imposition.

CURRENT LAW NOTE

Republic Act No. 12316, approved on 25 March 2026, amended Section 148 of the Tax Code to authorize the President to suspend or reduce the excise tax on petroleum products. The authority is conditioned as follows. It is exercisable only upon the recommendation of the Development Budget Coordination Committee and in coordination with the Secretary of Energy. It may be exercised only when the average Dubai crude oil price, based on the Mean of Platts Singapore, reaches or exceeds eighty United States dollars per barrel for the one month immediately preceding the issuance of the order. It may be applied to specific petroleum products and may take the form of a full suspension or a partial reduction, as may be warranted by prevailing conditions. Any suspension or reduction is effective for not more than three months at a time, and the aggregate may not exceed one year within a calendar year. Rates revert automatically, without need of further issuance, one week after the one-month average price falls below the threshold as certified by the Department of Energy, or upon the lapse of the period, whichever comes first. The President must report to both Houses within fifteen days of implementation, stating the factual basis and policy goals, the estimated foregone revenues, the distributional and inflationary effects, a cost analysis, and a recommendation whether the measure should be maintained, modified or lifted. The authority is exercisable only until 31 December 2028. It was first exercised in Executive Order No. 114, series of 2026, signed 16 April 2026 and implemented by Revenue Regulations No. 3-2026 and circularized by Revenue Memorandum Circular No. 31-2026, both of 17 April 2026. That exercise was a temporary one: the suspension ran for three months from 17 April 2026 and, subject to any extension the Development Budget Coordination Committee may have recommended on monthly review, had run its course by the date at which the law is here stated. It is treated at length not because the suspension is still in force but because the statute conferring the power is, and the Order is the first and so far only illustration of how the power is exercised. The suspension reached liquefied petroleum gas, except when used as raw material for petrochemical products or for motive power, and kerosene, except when used as aviation fuel; it applies only to covered products removed from the place of production or from customs custody after the Order took effect. The Order suspending the excise tax on liquefied petroleum gas and kerosene for three months, the Department of Energy having certified an average price of USD 93.71 per barrel.

Republic Act No. 12316 is doctrinally significant out of all proportion to its subject matter. It is a notable recent instance, and one for which no modern Philippine precedent has been identified, of Congress conferring on the President an authority to alter an internal revenue excise tax, as distinguished from the tariff and customs impositions covered by the flexible tariff clause. The formulation is deliberate: it describes the state of the research rather than asserting a historical superlative, and a reader who knows of an earlier comparable delegation should treat the statement accordingly. Its validity therefore cannot rest on Article VI, Section 28(2), which by its terms is confined to tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts. It must rest instead on the general doctrine of permissible delegation, and the analysis proceeds in the manner of Abakada Guro.

ANALYTICAL FRAMEWORK

No decision has yet tested Republic Act No. 12316, and what follows is therefore not a black-letter rule specific to it. It is the general doctrine of permissible delegation, stated in the form in which the statute must be tested. Under that doctrine a delegation of administrative or factual implementation may be sustained where the statute is complete in itself and lays down a sufficient standard. Applied to a statute conferring upon the President the authority to suspend or reduce an internal revenue tax, the inquiry is whether (a) the statute is complete in itself, in that the tax, its objects and its rates are fixed by the legislature and the President is empowered only to suspend or reduce rates already legislated; (b) the statute lays down a sufficient standard, in that it specifies the triggering contingency, the source of its verification, the permissible forms and magnitudes of executive action, the maximum duration and the mechanism of automatic reversion; and (c) the executive act consists in the ascertainment of the contingency rather than in the exercise of legislative judgment.

Measured against that formulation, Republic Act No. 12316 is a strong candidate for validity: the rates are legislated; the executive may only reduce or suspend, never increase; the contingency is objectively defined by reference to an external price benchmark and certified by a technical agency; the duration is capped both per exercise and in the aggregate; reversion is automatic; and the whole authority self-destructs at the end of 2028.

UNSETTLED

Whether the discretion conferred by Republic Act No. 12316 to select among petroleum products and to fix the magnitude of a partial reduction is guided by a sufficient standard is an open question, and no decision has yet tested the statute. The government would argue that the phrase “as may be warranted by prevailing conditions,” read with the reporting and recommendation obligations and the role of the Development Budget Coordination Committee, supplies the standard, and that the legislative purpose — to cushion the effect of a defined external price shock — is discernible from the statute as a whole; it would invoke Abakada Guro and Garcia. A taxpayer or legislator-petitioner would argue that the phrase is precisely the kind of standardless conferral the non-delegation doctrine exists to condemn; that the analogy to the flexible tariff clause fails because Article VI, Section 28(2) is a specific exception which by negative implication excludes internal revenue taxes; and that a power to suspend a tax is functionally a power to grant an exemption, which under Article VI, Section 28(4) requires the concurrence of a majority of all the Members of Congress — a requirement, on this argument, that cannot be satisfied prospectively by a single enabling statute. Whether a temporary suspension of a legislated rate constitutes the grant of an exemption for purposes of Section 28(4) has never been squarely decided. The student should be able to construct both sides; Bar Problem 6 requires it.

CURRENT LAW NOTE

Republic Act No. 12316 (25 March 2026) and Executive Order No. 114 (16 April 2026) are current law and are treated here at full depth, the statute being the best contemporary vehicle for the non-delegation doctrine.

1.09[E] Exemption of government entities

As a rule the government does not tax itself, since to do so would move funds from one pocket of the State to another while multiplying administrative cost. The rule is heavily qualified. Agencies and instrumentalities performing governmental or sovereign functions are exempt unless a law expressly taxes them. Government-owned or controlled corporations performing proprietary functions are taxable, being organized as ordinary corporations and competing with private enterprise; Section 27(C) of the Tax Code subjects them to the corporate income tax while enumerating a short list of exempt entities — the Government Service Insurance System, the Social Security System, the Philippine Health Insurance Corporation and the Home Development Mutual Fund, the last added and the Philippine Charity Sweepstakes Office removed by the CREATE Act. The list is exclusive, and a government-owned or controlled corporation not on it is taxable however public its function. Under Section 133(o) of the Local Government Code, local government units may not levy taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, or other local government units; but Section 234 withdrew the real property tax exemptions previously enjoyed by government-owned or controlled corporations.

The two leading cases appear to conflict, and the apparent conflict dissolves once the classification of the entity is understood.

CASE — Manila International Airport Authority v. Court of Appeals G.R. No. 155650, 20 July 2006 (En Banc)

Material facts. The City of Parañaque assessed the Manila International Airport Authority for real property tax on the Ninoy Aquino International Airport complex and threatened to sell the airport at public auction. The Authority claimed exemption. The City relied on Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, 11 September 1996, which had held the Mactan airport authority liable on the ground that Section 234 of the Local Government Code withdrew the exemptions of government-owned or controlled corporations.

Issue. Whether the Authority is a government-owned or controlled corporation whose exemption was withdrawn, or a government instrumentality vested with corporate powers.

Ruling. The Authority is a government instrumentality, not a government-owned or controlled corporation, and its airport properties are exempt from real property tax, except portions leased to private taxable persons.

Reasoning. A government-owned or controlled corporation must be organized either as a stock corporation, with capital stock divided into shares, or as a non-stock corporation with members. The Authority is neither: it has no capital stock divided into shares and no members. It is therefore an instrumentality of the national government vested with corporate powers, and Section 133(o) of the Local Government Code forbids local units to tax it. Independently, the airport lands and buildings are properties of public dominion owned by the Republic and devoted to public use; property of public dominion is outside the commerce of man and cannot be sold at public auction. Where portions are leased to private taxable persons, the beneficial user is liable under Section 234(a).

Doctrine. The exemption of a government entity from local taxation turns on two variables: the juridical classification of the entity as an instrumentality or as a government-owned or controlled corporation, and the beneficial use of the property. Property of public dominion owned by the Republic is exempt and is not subject to execution or auction; the exemption is lost pro tanto as to portions whose beneficial use has been granted to a taxable person.

Significance and limits. MIAA did not overrule Mactan; it distinguished it by reclassifying the entity. Mactan remains authority for the proposition that Section 234 withdrew the exemptions of genuine government-owned or controlled corporations. Counsel must therefore begin with the charter of the entity, not with the outcome of the nearest analogous case. The decision also does not decide the entity’s income tax position, which is governed by Section 27(C).

Status. Controlling. The framework has been applied and refined in a line of subsequent decisions, and the reader should follow the chain rather than reason directly from MIAA to a new entity. Among the decisions applying it are Manila International Airport Authority v. City of Pasay, G.R. No. 163072, 2 April 2009, which declared the Ninoy Aquino International Airport properties in Pasay exempt except as to the portions leased to private parties; and Metropolitan Waterworks and Sewerage System v. Local Government of Quezon City, G.R. No. 194388, 7 November 2018, which held that a government instrumentality exercising corporate powers is not liable for real property tax unless the beneficial use of its property has been extended to a taxable person. The same framework has been applied to the Government Service Insurance System in Government Service Insurance System v. City Treasurer and City Assessor of the City of Manila, G.R. No. 186242, 23 December 2009, 623 Phil. 964, where the Court held the System to be an instrumentality and not a government-owned or controlled corporation and its properties owned by the Republic, but held the leased Katigbak property taxable under the beneficial-use rule with the liability devolving on the lessee as beneficial user, while the property itself remained immune from levy and auction under Section 39 of Republic Act No. 8291. That case repays reading for the proposition that exemption, beneficial-use liability and immunity from levy are three separate questions, and that an entity may lose the second while keeping the third. It was applied to the Philippine Fisheries Development Authority in Philippine Fisheries Development Authority v. Court of Appeals, G.R. No. 169836, 31 July 2007, and again in Philippine Fisheries Development Authority v. Court of Appeals, G.R. No. 150301, 2 October 2007, 534 SCRA 490; and to the Philippine Reclamation Authority in Republic of the Philippines, represented by the Philippine Reclamation Authority v. City of Parañaque, G.R. No. 191109, 18 July 2012, 691 Phil. 476, where the Authority was held to be “a government instrumentality vested with corporate powers and performing an essential public service,” neither organized as a stock or non-stock corporation nor created to compete in the private market, and where the reclaimed lands were held to be property of public dominion exempt under Section 234(a) in relation to Section 133(o), there being “no proof that PRA granted the beneficial use of the subject reclaimed lands to a taxable entity.” The assessments, the auction sale and the certificates of sale were all declared void, properties of public dominion not being subject to execution or foreclosure sale. The reader should follow the chain rather than reason directly from MIAA to a new entity.

A caution on City of Pasay: it was decided En Banc and it was not unanimous. Justices Ynares-Santiago and Tinga dissented and Justice Nachura wrote separately, each urging that Mactan Cebu supplies the better framework and that the inquiry should be simply whether the property is owned by the Republic, without dichotomizing between an instrumentality and a government-owned or controlled corporation. The majority’s framework governs, but the reader should know that the characterization was contested within the Court.

CURRENT LAW NOTE — TWO 2026 DECISIONS

Two decisions handed down in 2026 bear directly on this chapter. Both are current law and both have been read in full. A separate Bar Note at the end of this passage records their position in relation to the 2026 examination’s coverage.

Commissioner of Internal Revenue and Perfecto L. Aranas v. Elric Auxiliary Services Corporation/Sacred Heart Gas Station, G.R. No. 226945, 19 February 2026 (Third Division, Dimaampao, J.). After a ten-day surveillance of a gas station, the Bureau issued a 48-hour notice and then a 5-day value-added tax compliance notice under Section 115 of the Tax Code, as implemented by Revenue Memorandum Order No. 3-2009, each demanding payment of PHP 1,196,583.13 in deficiency value-added tax. The Court affirmed the Court of Tax Appeals in declaring both notices void, and held two things of general importance.

On jurisdiction. The “other matters arising under the National Internal Revenue Code or other laws administered by the Bureau” clause of Section 7(a)(1) of Republic Act No. 1125 is “broad and residual in character” and covers cases arising under the Code “even if they do not directly involve a disputed assessment or a claim of refund.” The Court did not need to decide whether the notices were a decision of the Commissioner, because their issuance already fell within the clause. The holding continues the line of Philippine Journalists, Hambrecht & Quist, Lancaster, St. Mary’s Academy of Caloocan City and Manila Medical Services.

On due process. “Sections 115 and 228 of the Tax Code swirl around different matters.” Section 115 empowers the Commissioner to suspend business operations; Section 228 governs assessment. Because the 5-day notice carried a demand for payment, and the only practical way to avoid closure was to pay, the Bureau’s act “constituted an attempt to collect deficiency taxes without a valid assessment.” The Court held that it “cannot bypass the requirements of a valid assessment by invoking Section 115 to surreptitiously collect taxes from a taxpayer,” and that “after the 5-day VAT compliance notice had served its purpose, the CIR should have issued a letter of authority to Elric Auxiliary and followed the assessment procedures under Section 228 before holding it liable for any deficiency VAT.” The notices, “when used as substitutes for a valid assessment, are void.” The notices were separately void for want of factual basis, the Bureau having failed to describe how the surveillance was conducted or the method by which the estimates were reached; an assessment based on estimates is prima facie valid only where it is not arrived at arbitrarily.

Commissioner of Internal Revenue v. Semirara Mining and Power Corporation, G.R. No. 255900, 20 January 2026 (Third Division). The taxpayer, a coal operator under a Coal Operating Contract, imported diesel for its own use and was assessed value-added tax under Revenue Regulations No. 2-2012, which it paid under protest before claiming a refund of PHP 27,341,714.00. The Commissioner argued that Section 16 of Presidential Decree No. 972 had been repealed by Section 534(e) of the Local Government Code, and that Section 193 of that Code had withdrawn all prior exemptions.

The Court rejected both arguments and the holding belongs with the treatment of exemptions. Section 534(e) repeals or amends the listed provisions “insofar as they are inconsistent” with the Code, and repeal and amendment are distinct: the Code therefore “did not repeal, but merely amended, Section 16 of Presidential Decree No. 972, withdrawing only the exemption from local taxes.” As to Section 193, although its language speaks of “tax exemptions or incentives” without qualification, the provision sits in Book II, Title I on Local Government Taxation, whose scope under Section 128 is the exercise by local government units of their taxing powers, and it is immediately preceded by Section 192 authorizing local units to grant exemptions. Read with the whole statute, “the withdrawal of tax exemption privileges under Section 193 of the LGC pertains to exemptions from local taxes, intended to broaden the tax base of LGUs.” The taxpayer’s exemption from national taxes therefore survived. The Court applied the whole-statute rule of Taganito Mining Corporation v. Commissioner of Internal Revenue, 900 Phil. 157 (2021), and the statement of legislative intent in Manila Electric Company v. The City Assessor of Lucena City, 765 Phil. 605 (2015).

BAR EXAMINATION NOTE

The beneficial user rule is the most frequently missed half of this doctrine. Where exempt property is leased to a taxable person, the exemption is lost as to the leased portion and the liability attaches to the beneficial user rather than to the exempt owner. Examinees who conclude that the entire property is exempt because the owner is exempt, and examinees who conclude that the entire property is taxable because part of it is leased, both lose the point. The correct answer apportions and names the party liable.

1.10 Constitutional limitations from the Bill of Rights

1.10[A] Due process — Article III, Section 1

Due process has a substantive and a procedural dimension in taxation. Substantively, the tax must be imposed by a valid law, for a public purpose, by an authority with jurisdiction over the subject, and must not be arbitrary, oppressive or confiscatory. Procedurally, the taxpayer must be notified and afforded a real opportunity to be heard before an assessment attains finality.

BLACK LETTER RULE

Three propositions must be kept separate, because they rest on different authorities.

First, an assessment must state in writing the facts, the law, the rules and regulations, or the jurisprudence on which it is based; otherwise it is void. Section 228 of the Tax Code so requires, and Fitness by Design so holds.

Second, and independently, a revenue officer may examine a taxpayer’s books only pursuant to a Letter of Authority naming him and covering the period assessed. An assessment resulting from an examination conducted without the Letter of Authority required by law, or beyond the authority the Letter of Authority confers, is void: Sony, Medicard and Robinsons. The vice is in the audit action that lacked authority, not in every conceivable irregularity touching a Letter of Authority.

Third, the consequences of that nullity are not uniform and should be stated only so far as the particular authority supports them. That a void assessment cannot attain finality follows from its nullity. That it cannot support summary collection, and may justify suspension of collection and even dispensation with the bond under Section 11 of Republic Act No. 1125, is what Robinsons decided. Whether, and on what terms, such an assessment may bear interest or be compromised is governed by the provisions treated in Part IV, and no general rule should be extracted from the nullity itself.

Commissioner of Internal Revenue v. Fitness by Design, Inc., G.R. No. 215957, 9 November 2016, is the modern anchor on the first branch. The Court voided a final assessment notice that stated only the amount claimed and a bare reference to fraud, without disclosing the factual bases or the legal provisions relied upon, and which reserved the right to modify the amount — a reservation inconsistent with the definiteness an assessment must possess. The requirement is not a formality: it is the mechanism by which the taxpayer is enabled to make an intelligent protest, and it is therefore due process itself.

The second branch runs back into the audit. Commissioner of Internal Revenue v. Sony Philippines, Inc., G.R. No. 178697, 17 November 2010, voided an assessment for deficiency value-added tax covering periods not embraced by the Letter of Authority. Medicard Philippines, Inc. v. Commissioner of Internal Revenue, G.R. No. 222743, 5 April 2017, voided an assessment founded on an examination conducted under a mere Letter Notice, holding that a Letter Notice is not a substitute for a Letter of Authority. Commissioner of Internal Revenue v. Robinsons Convenience Stores, Inc., G.R. No. 259968, 27 August 2025, treated assessments produced by officers who lacked authority as not merely voidable but patently illegal. The Court, Third Division, per Inting, J., Justice Dimaampao concurring separately, found no grave abuse of discretion on the part of the Court of Tax Appeals Division in quashing the warrant, enjoining collection of PHP 3,583,693,014.79 and dispensing with the bond required by Section 11 of Republic Act No. 1125. The assessments had been canceled in the tax court’s main decision both on prescription and on the revenue officers’ lack of authority to conduct the audit examination, and those findings, the Court held, “render the assessment patently illegal.”

The case is important for three further propositions. First, it states a definitive two-instance test: the bond under Section 11 may be dispensed with (a) when the assessment or the method of collection is “patently illegal” or “not sanctioned by law,” and (b) when the amount of the bond would itself deny the taxpayer a meaningful opportunity to contest the assessment — the second drawn from Tridharma Marketing Corp. v. Court of Tax Appeals and the first from Collector of Internal Revenue v. Reyes and Spouses Pacquiao v. Court of Tax Appeals. To require a bond on a void assessment, the Court reasoned, “would implicitly treat the void assessment as a valid tax liability that still requires security.” Second, a suspension order issued independently of the decision on the assessment is interlocutory and unappealable, so certiorari is the proper remedy; where the suspension forms part of the decision canceling the assessment, it is appealable and certiorari will not lie. Third, and independently, the right to collect had prescribed: where a waiver extends the assessment period, Section 222(d) in relation to Section 222(b) allows five years from the release or mailing of the assessment to collect by distraint or levy, and the warrant here issued more than a year after that period lapsed. The remainder belongs to Part IV.

The mechanics of the assessment sequence — the Notice of Discrepancy, the Preliminary Assessment Notice, the Formal Letter of Demand, the protest, the periods and their computation — are owned by Part IV and are not developed here. What belongs to general principles is the proposition that each of two distinct defects produces a nullity rather than a merely defective assessment — and that they are distinct.

An assessment issued without the factual and legal bases required by Section 228 is void. That defect implicates both the statutory command of Section 228 and the constitutional requirement of procedural due process, and it is the constitutional dimension that makes the consequence a nullity rather than an irregularity curable in the ordinary way.

An assessment produced by an examination conducted by an officer acting without the authority required by law is also void. That defect is principally one of statutory authority and ultra vires action: the officer had no power to do what he did, and an act done without power is void whether or not any constitutional guarantee is engaged. It is the same species of objection the chapter identifies at § 1.03 as the ground most often overlooked in judicial review.

The distinction matters in practice. The first is met by examining what the notice says; the second by examining what authorized the examination in the first place. They are pleaded differently, proved differently, and may exist independently of each other.

PRACTICE NOTE

In practice the first document counsel should demand in any deficiency case is the Letter of Authority, and the first comparison counsel should make is between the officers named in it and the officers who in fact conducted the examination, and between the taxable period it covers and the period assessed. A defect in either respect is frequently dispositive and may be raised even for the first time on appeal, because it goes to the authority to issue the assessment and therefore to the existence of the liability itself. Counsel should also examine whether a revalidation or a memorandum of assignment was used to substitute officers, since the Bureau’s own issuances do not permit an assignment memorandum to enlarge the authority conferred by a Letter of Authority.

1.10[B] Equal protection — Article III, Section 1

Equal protection requires that taxpayers similarly situated be treated alike. It does not forbid classification; it forbids unreasonable classification. A classification is valid where it rests on substantial distinctions, is germane to the purpose of the law, is not limited to existing conditions only, and applies equally to all members of the same class.

Sison, Jr. v. Ancheta sustained a schedular system that taxed compensation income differently from business and professional income, observing that compensation earners incur no deductible business expenses and that their income is subject to withholding at source — substantial distinctions germane to the statute’s purpose. Ferrer, Jr. v. Bautista, G.R. No. 210551, 30 June 2015, illustrates the failure mode: a Quezon City socialized housing tax was sustained as a valid classification of real property owners, but the accompanying garbage collection fee was struck down because it classified households by the floor area and type of dwelling without any showing that the classification bore a rational relation to the volume of garbage generated, and because it imposed different rates on occupants of condominiums and of socialized housing without substantial distinction.

1.10[C] Religious freedom — Article III, Section 5

A tax may not operate as a prior restraint upon the free exercise of religion. American Bible Society v. City of Manila, G.R. No. L-9637, 30 April 1957, held void as applied a municipal license fee imposed on the distribution and sale of religious literature by a non-profit missionary society, because payment of the fee was a condition precedent to the exercise of a constitutional right. The limiting principle is equally settled: an income tax is not a condition precedent to anything, and income derived from the sale of religious articles for profit, or from activities unrelated to religious purposes, is taxable. The distinction is between a license to exercise the right and a tax on the fruits of its exercise.

1.10[D] Freedom of speech and of the press — Article III, Section 4

A tax that singles out the press, or that operates as a license to publish, is void; a generally applicable tax is not. Tolentino v. Secretary of Finance sustained the imposition of value-added tax on the sale and distribution of newspapers precisely because the value-added tax applies generally to all sales of goods and services and is not a license tax, and because the withdrawal of a pre-existing exemption is not the imposition of a censorial burden.

1.10[E] Non-impairment of the obligation of contracts — Article III, Section 10

The clause protects an exemption granted by the government for a valuable consideration and embodied in a contract; such an exemption is a vested contractual right and cannot be unilaterally revoked. Casanovas v. Hord, 8 Phil. 125 (1907), is the classical illustration. An exemption that is a mere legislative grace enjoys no such protection, and neither does an exemption embodied in a franchise, because Article XII, Section 11 makes every franchise subject to amendment, alteration or repeal by Congress when the common good so requires. Manila Electric Company v. Province of Laguna, G.R. No. 131359, 5 May 1999, applied that qualification to sustain the withdrawal, by the Local Government Code, of a franchise-based exemption from the local franchise tax.

1.10[F] Non-imprisonment for debt or for non-payment of a poll tax — Article III, Section 20

The provision states two protections: “No person shall be imprisoned for debt or non-payment of a poll tax.” Only the second is a tax immunity in the strict sense, and it is narrow and regularly overstated. It protects only the basic community tax, the poll tax being a tax of a fixed amount imposed on persons residing within a specified territory without regard to property or occupation.

The immunity does not reach the additional community tax, nor any other tax. But it does not follow that mere non-payment of those taxes authorizes imprisonment. Imprisonment for non-payment requires an applicable penal provision and proof of its elements — typically a wilful failure to pay under Section 255 of the Tax Code, or the corresponding provision of the Local Government Code — and the offense is the wilful failure, not the non-payment simpliciter. What Section 20 does is remove the poll tax from the reach of any such provision altogether. A taxpayer may also be separately prosecuted for falsification in connection with a community tax certificate, an offense that has nothing to do with non-payment.

1.11 Limitations addressed specifically to taxation

DISTINGUISH — Article VI, Section 28(3) and Article XIV, Section 4(3)

These are examined together almost every cycle and must be kept distinct. Section 28(3) covers charitable institutions, churches and their appurtenances, mosques, non-profit cemeteries, and lands, buildings and improvements; the exemption it confers is from property taxation only; the entities covered include charitable and religious institutions as well as educational ones; and the operative test is the actual, direct and exclusive use of the property. Article XIV, Section 4(3) covers only non-stock, non-profit educational institutions; the exemption extends to all revenues and assets and therefore reaches income taxation; and the operative test is the actual, direct and exclusive use of the revenues or assets for educational purposes. An institution may qualify under one and not the other. The position of a proprietary educational institution must be stated with care, and it is commonly stated too broadly.

As to Article XIV, Section 4(3). A proprietary educational institution does not qualify. That provision is expressly confined to non-stock, non-profit educational institutions.

As to Article VI, Section 28(3). The provision is not so confined. It exempts “charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used for religious, charitable or educational purposes.” Note the structure: the enumeration lists certain institutions, and then, as a separate limb, property put to certain uses. There is no category of “educational institutions” in the enumeration at all. A claim founded on educational use is therefore necessarily a claim under the property limb, and that limb is governed by use.

Lung Center of the Philippines v. Quezon City, G.R. No. 144104, 29 June 2004, 477 Phil. 141 (En Banc, Callejo, Sr., J.), settles the point. The exemption “covers property taxes only,” and, quoting Chief Justice Davide’s explanation in the Constitutional Commission, “what is exempted is not the institution itself…; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes.” The provision is implemented by Section 234(b) of the Local Government Code in the same terms.

Four consequences follow, and each is worth carrying.

(a) The exemption attaches to property, not to owners. The real property of a proprietary school is therefore not excluded from Article VI, Section 28(3) by reason of its ownership; it must satisfy the actual-use test, item by item, like any other claimant. Counsel should not concede the point, and an examinee should not reject such a claim out of hand.

(b) The test is applied portion by portion. In Lung Center the parts leased to private individuals for clinics and a canteen were taxable, while “the portions of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt” — and this although the institution charged paying patients.

(c) The standard is strict, and it is stricter than students commonly suppose. “Exclusive” means “possessed and enjoyed to the exclusion of others”; “if real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation”; and “the words ‘dominant use’ or ‘principal use’ cannot be substituted for the words ‘used exclusively’ without doing violence to the Constitutions and the law.” “Solely is synonymous with exclusively.” The incidental-use qualification recognized in Abra Valley College, Inc. v. Aquino, G.R. No. L-39086, 15 June 1988, must be read within these limits: it tolerates use that is genuinely necessary to the exempt purpose, not use that is merely predominant.

(d) It is the use of the property, not of the income it yields, that governs. “What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes.” This is the sharpest line between the two exemptions: Article XIV, Section 4(3) looks to the use of revenues and assets; Article VI, Section 28(3) looks to the use of the thing itself. An institution that ploughs rental income back into its educational work has said nothing to the point under Section 28(3).

One historical caution. Under the 1935 Constitution the property need only have been used “exclusively”; the 1973 and 1987 Constitutions added “actually” and “directly.” Lung Center, following Province of Abra v. Hernando, holds that decisions under the older text — Herrera v. Quezon City Board of Assessment Appeals (1961) among them — cannot be relied on: “the change should not be ignored.”

Where the claimant asserts status as a charitable institution, it bears a two-part burden: to prove “by clear and unequivocal proof” both “(a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.” A claim resting on educational use engages only the second.

And a caution on procedure. The claim is made in the first instance to the assessor, not to a court. In Systems Plus Computer College of Caloocan City v. Local Government of Caloocan City, G.R. No. 146382, 7 August 2003, 455 Phil. 956, a school sought mandamus to compel the city to extend the exemption to land it leased from sister companies. The Court dismissed the petition. The claimant, it held, “is taking an unwarranted shortcut,” because the argument “gratuitously presumes the existence of the fact which it must first prove by competent and sufficient evidence before the City Assessor.” The authority to receive that evidence is vested in the assessor, appealable to the Local Board of Assessment Appeals and then the Central Board; a claimant may not bypass them “even on the pretext of raising a supposedly pure question of law without violating the doctrine of exhaustion of administrative remedies.” Mandamus does not lie, the assessor’s duty to assess being ministerial but its exercise discretionary. The actual-use exemption is thus a matter to be proved, in an administrative forum, before it is ever argued in court.

As to income tax. A proprietary educational institution does not fall within Article XIV, Section 4(3); its income tax treatment is governed by the Tax Code, principally Section 27(B), which is treated at § 1.11[A].

1.11[A] Section 27(B) and the preferential rate: a note for completeness

The income tax position of educational institutions is owned by Part II and is set out here only so far as is needed to prevent the constitutional discussion above from being misread.

Section 27 governs the income taxation of domestic corporations, and for those within it subsection (B) fixes a preferential rate of ten percent on the taxable income of the institutions it covers, subject to a predominance test. Where a proprietary educational institution is organized in some other form — a sole proprietorship, or a resident foreign corporation — the governing provision is Section 24, 25 or 28 as the case may be, and the full taxonomy belongs to Part II. The predominance test operates thus: if gross income from unrelated trade, business or other activity exceeds fifty percent of total gross income from all sources, the ordinary corporate rate applies to the entire taxable income. The section defines a proprietary educational institution as “any private school maintained and administered by private individuals or groups with an issued permit to operate” from the Department of Education, the Commission on Higher Education or the Technical Education and Skills Development Authority. That is the statutory definition of the term for purposes of the section, and it turns on private administration and a permit to operate rather than on profit motive. It should not be read as a judicial holding that profit motive is irrelevant to every tax consequence; it fixes the meaning of one statutory term, no more.

CASE — De La Salle Lipa, Inc. v. Commissioner of Internal Revenue G.R. Nos. 233924-25 and 236822, 1 December 2025 (Third Division, Caguioa, J.)

Material facts. A non-stock, non-profit educational institution was assessed deficiency income tax and value-added tax on rentals from its canteen and other facilities for taxable years 2004 and 2005. It claimed exemption under Article XIV, Section 4(3) and Section 30(H) of the Tax Code and, alternatively, the preferential rate under Section 27(B).

Ruling. The exemption claim failed on proof. The alternative claim was available in principle but failed on proof as well.

Doctrine. Extending St. Luke’s from hospitals to schools, the Court held that a non-stock, non-profit educational institution “which fails to comply with the requirements for tax exemption under Section 30(H), but remains a proprietary non-profit educational institution, may still avail of the preferential tax rate under Section 27(B), as long as the conditions set forth in the latter are satisfied.” The consequence is a shift in the object of inquiry: “the lens by which the income is examined shifts from the usage of the income [for complete tax exemption under Section 30(H)] to its source under Section 27(B).” Under Section 30(H) the question is how the revenue was used; under Section 27(B) it is where the revenue came from, and whether unrelated income exceeded half of total gross income.

Burden. It is “incumbent upon the taxpayer, as the one claiming preferential tax rate, to prove by competent evidence that its income from unrelated trade, business, or activity does not exceed 50% of the total gross income.” The institution here submitted audited financial statements but no books of account or source documents to validate the figures, and so failed. The regular rate was applied.

Limits. The taxpayer was a non-stock, non-profit institution. The case therefore does not decide the position of a proprietary stock school, and it says nothing about Article VI, Section 28(3). It also applied the pre-2021 text of Section 27(B), the taxable years being 2004 and 2005.

Interest. The Court applied Aces Philippines: deficiency and delinquency interest run simultaneously only until 31 December 2017, and from 1 January 2018 only interest at the prevailing legal rate of twelve percent accrues.

CURRENT LAW NOTE — SECTION 27(B) AS AMENDED IN 2021

Republic Act No. 11534 (CREATE) amended Section 27(B), and Republic Act No. 11635 subsequently amended it again, materially changing the effect of the non-profit qualifier.

The text applied in De La Salle Lipa read: “Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent.” On that text St. Luke’s held the section to cover “(1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals.” The qualifier reached both.

The text in force is that of Republic Act No. 11635, approved 10 December 2021, which re-ordered the opening words: “Hospitals which are nonprofit and proprietary educational institutions shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof.” The non-profit qualifier now attaches to hospitals. The same Act updated the definition, which now reads “‘Proprietary educational institution’ means any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education (DepEd), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA)” — the reference to the former Department of Education, Culture and Sports having been replaced.

The implementing regulation is Revenue Regulations No. 3-2022, dated 7 April 2022. Section 3 enumerates three classes covered by the ten percent rate: “(1) Proprietary Educational Institutions; (2) Hospitals which are non-profit; and (3) Non-Stock, Non-Profit Educational Institutions whose net income or assets accrue/inure to or benefit any member or specific person.” The first class carries no non-profit qualifier. Section 2(D) confirms the point from the other direction: it defines “non-profit” expressly “as used in the definition of Proprietary Hospitals and Non-Stock, Non-Profit Educational Institutions” — and not in the definition of proprietary educational institutions. Section 2(A) puts the matter beyond argument by contemplating that a proprietary educational institution may be a stock corporation, “characterized as organized for profit to be enjoyed by stockholders,” whose “profits are declared and they are distributed to stockholders.”

It follows that a proprietary educational institution need not be non-profit to come within Section 27(B) as it now stands. That is a change from the position St. Luke’s stated on the earlier text, and De La Salle Lipa is not authority against it, that case having applied the pre-2021 provision to taxable years 2004 and 2005.

The rates. Republic Act No. 11534 (CREATE) reduced the rate to one percent from 1 July 2020 until 30 June 2023; Section 3 of the regulation confirms that “after June 30, 2023, the rate shall revert to the preferential corporate income tax rate of 10%.” Where the predominance test is failed, what is imposed on the entire taxable income is the regular corporate income tax prescribed by Section 27(A), at the rate applicable to the taxpayer — currently twenty-five percent generally, or twenty percent where the conditions in Section 27(A) for the reduced rate are satisfied. It is not invariably twenty-five percent, and it is no longer the thirty-two percent applied to the older taxable years in De La Salle Lipa.

The reduced rate has a history worth stating correctly, because two different twenty percent regimes now sit in the same subsection. Section 6 of Republic Act No. 11534 (CREATE) introduced both the twenty-five percent general rate and a twenty percent rate for corporations “with net taxable income not exceeding Five million pesos and with total assets not exceeding One hundred million pesos (P100,000,000.00), excluding land on which the particular business entity’s office, plant, and equipment are situated during the taxable year for which the tax is imposed.” Section 1 of Republic Act No. 12066 (CREATE MORE), approved 8 November 2024, retained that rate and added a separate twenty percent rate for “registered business enterprises under the enhanced deductions regime as provided in Section 294(C) of this Code… on their taxable income derived from registered projects or activities during each taxable year.” The two are distinct: the first turns on size, the second on registration status. Section 2 of the same Act carried the registered-enterprise rate into Section 28(A)(1) for resident foreign corporations. They differ in effectivity as well: Revenue Regulations No. 7-2025 dates the size-based rate from 1 July 2020 and the registered-enterprise rate from 28 November 2024, and provides that the latter “shall only cover the taxable income derived from registered projects or activities,” income from non-registered projects remaining subject to the regular rate. Republic Act No. 12066 amended Section 27 but did not alter the substantive rule in Section 27(B). The conditions governing each rate belong to Part II, which should keep them apart.

A drafting defect in the enrolled text. The asset threshold in Section 27(A) as amended by Republic Act No. 12066 is internally inconsistent. It reads: “total assets not exceeding One hundred million pesos (P1,000,000,000).” The words say one hundred million; the figure in parentheses is one billion. The corresponding provision in Section 6 of Republic Act No. 11534 was consistent, reading “One hundred million pesos (P100,000,000.00),” and nothing in Republic Act No. 12066 suggests a legislative intent to raise the threshold tenfold — the object of the amendment being the enhanced deductions regime, not the size test.

The chapter does not silently resolve the discrepancy, and neither should the reader. There is a general canon of construction, familiar from other fields, that where words and figures conflict the words prevail; whether it governs the construction of this provision is a question no Philippine decision has yet addressed, and it is not asserted here as settled Philippine authority. What can be stated is the administrative position, and the Bureau has settled that on the face of its own issuance. Revenue Regulations No. 7-2025, dated 27 February 2025 and promulgated to implement the amendments made by Republic Act No. 12066 to Sections 27, 28 and 34, sets out the rates in a table whose second entry reads: “Domestic corporations with net taxable income not exceeding Five Million Pesos (P5,000,000.00) and with total assets not exceeding One Hundred Million Pesos (P100,000,000.00), excluding land on which the particular business entity’s office, plant and equipment are situated, during the taxable year for which tax is imposed — 20% — July 1, 2020.” The words and the figure agree, and the one-hundred-million-peso figure used in the regulation is the one that agrees with the words of the enacted provision. The parenthetical numeral in the enrolled text is of course part of that text; the point is that the two components of a single phrase disagree, and that the Bureau has implemented the one the canon prefers. For current administrative purposes the operative threshold is one hundred million pesos, as the regulation reflects. Two qualifications should be kept in view. A revenue regulation settles the Bureau’s treatment; it is not a judicial construction of the enrolled statute and does not bind a court called upon to construe it. And the discrepancy should be disclosed as a drafting defect rather than silently corrected. Subject to those qualifications the reader should not suppose that two competing thresholds are presently in contention.

The discrepancy is noted here as a matter of draftsmanship rather than of doubt, and it repays a moment because it illustrates something this chapter has been at pains to establish: that the primary source must be read. A practitioner working from a secondary summary would never see the discrepancy at all, and would be unable to explain to a client whose total assets fall between one hundred million and one billion pesos why the parenthetical figure in the statute does not avail him. The fuller treatment belongs to Part II.

A further refinement in Section 4 of the regulation is easily missed: a non-stock, non-profit educational institution that does not fall within Section 3 is subject to the regular rate — twenty-five percent in the regulation as issued in 2022 — “on the portion of its revenues or assets not used actually, directly, and exclusively for educational purposes.” The apportionment principle of Article XIV, Section 4(3) is thus carried into the Tax Code treatment.

1.12 The “actually, directly and exclusively used” line

No phrase in Philippine tax law has generated more litigation, and no area is more frequently mishandled by advisers to schools, hospitals and foundations. Four decisions define the landscape, and they must be read as a sequence rather than as a list. The sequence has a direction: from asking who owns to asking what is used, and how.

Abra Valley began the shift. Applying use-based reasoning to an educational institution, the Court held that the second floor of the school building used as the residence of the director was exempt because incidental to educational purposes, while the ground floor leased to a commercial establishment was taxable. The case is the origin of the incidental-use qualification: facilities reasonably necessary to the exempt purpose share the exemption.

CASE — Lung Center of the Philippines v. Quezon City G.R. No. 144104, 29 June 2004 (En Banc)

Material facts. The Lung Center, a charitable institution created by presidential decree, owned a large parcel in Quezon City. A substantial portion of the ground floor of the hospital building was leased to private commercial establishments, and a large part of the vacant land was leased to a commercial company. The Center also admitted paying patients alongside charity patients. The City assessed the entire property for real property tax.

Issue. Whether the Center remained a charitable institution notwithstanding the admission of paying patients, and whether the entire property was exempt under Article VI, Section 28(3).

Ruling. The Center remained a charitable institution, but only those portions of its property actually, directly and exclusively used for charitable purposes were exempt; the leased portions were taxable.

Reasoning. On the first question, the admission of paying patients does not destroy the charitable character of an institution where the income derived is devoted to its charitable objects, since charity is not determined by the source of the funds but by their application. On the second, Article VI, Section 28(3) exempts property, and does so only to the extent of actual, direct and exclusive use. The Court was emphatic that the standard is not one of predominance: “the words ‘dominant use’ or ‘principal use’ cannot be substituted for the words ‘used exclusively’ without doing violence to the Constitutions and the law,” and “solely is synonymous with exclusively.” A portion leased to a commercial tenant is therefore not used for the exempt purpose, and the exemption is apportioned by use.

Doctrine. Under Article VI, Section 28(3) the exemption attaches to property by reason of its actual use and not by reason of the character of its owner. An institution may be charitable and its property nonetheless partly taxable. The test is applied portion by portion.

Significance and limits. Lung Center supplies the apportionment rule and the strict reading of “exclusively,” which forecloses any substitution of dominant or principal use. It does not decide the income tax position of a charitable institution, which is governed by Section 30 of the Tax Code and by St. Luke’s; and it does not decide the position of a non-stock, non-profit educational institution, whose exemption rests on a different constitutional provision.

Status. Controlling.

Commissioner of Internal Revenue v. St. Luke’s Medical Center, Inc. was decided twice, and the two must be kept apart. The decision of 26 September 2012 in G.R. Nos. 195909 and 195960 supplies the doctrine. The resolution of 13 February 2017 in G.R. No. 203514 applied it to later taxable years under stare decisis, holding the hospital “subject to 10% income tax insofar as its revenues from paying patients are concerned,” and stated the rule in its clearest form: “for an institution to be completely exempt from income tax, Section 30(E) and (G) of the 1997 NIRC requires said institution to operate exclusively for charitable or social welfare purpose. But in case an exempt institution under Section 30(E) or (G) of the said Code earns income from its for-profit activities, it will not lose its tax exemption. However, its income from for-profit activities will be subject to income tax at the preferential 10% rate pursuant to Section 27(B) thereof.” In both, surcharges and interest were deleted on the ground of good faith, and in the 2017 resolution the compromise penalty was also disallowed. Together they carried the use analysis into income taxation for charitable institutions. A non-stock, non-profit hospital deriving substantial revenues from paying patients was held not to have ceased to be charitable, but its income from activities conducted for profit was held taxable at the preferential rate for proprietary non-profit hospitals under Section 27(B) rather than the regular corporate rate. The Court read Section 30(E) together with the last paragraph of Section 30, which subjects to tax income of whatever kind from any of the properties of an exempt organization, or from any activity conducted for profit, regardless of the disposition of that income. “Exclusively” in Section 30(E) qualifies the operation of the institution; the last paragraph qualifies the source of the income. St. Luke’s is therefore the decisive answer to the perennial argument that income should be exempt because it was ploughed back into the charitable work — an argument that fails for a charitable institution under Section 30. Whether it fails for a non-stock, non-profit educational institution is a different question, and the answer is different.

CASE — Commissioner of Internal Revenue v. De La Salle University, Inc. G.R. Nos. 196596, 198841 and 198941, 9 November 2016

Material facts. The Bureau assessed a non-stock, non-profit university for income tax on rentals from commercial spaces within its campus and on other income, invoking Section 30 of the Tax Code and the last paragraph thereof as applied in St. Luke’s. The university proved that the rental income had been used for educational purposes.

Issue. Whether the last paragraph of Section 30 may be applied to withdraw the exemption conferred on non-stock, non-profit educational institutions by Article XIV, Section 4(3) of the Constitution.

Ruling. It may not. Revenues and assets of such an institution proved to have been used actually, directly and exclusively for educational purposes are exempt from income tax, whatever their source.

Reasoning. The constitutional exemption in Article XIV, Section 4(3) is conditioned on the use of the revenues, not on their source. A statute cannot narrow a constitutional grant, and the last paragraph of Section 30 cannot be read to impose a source-based condition the Constitution does not contain. The burden nonetheless remains on the institution to prove, by adequate evidence, the actual use of each item of revenue for educational purposes; unproved items are taxable.

Doctrine. For non-stock, non-profit educational institutions the constitutional test is the use of the revenue, not its source. Proof of actual, direct and exclusive use for educational purposes is an evidentiary burden borne by the institution, item by item.

Significance and limits. De La Salle and St. Luke’s are reconciled by the difference in their bases: the educational institution’s exemption is constitutional and use-based; the charitable institution’s exemption is statutory and is expressly subject to the last paragraph of Section 30. What De La Salle does not decide is the position of a proprietary educational institution, whose income is governed by Section 27(B) and whose real property stands or falls on the actual-use test of Article VI, Section 28(3); nor does it relieve a claimant of the item-by-item burden — the university itself failed to the extent it could not trace particular receipts to particular educational uses.

Status. Controlling.

PRACTICE NOTE

The recurring failure in this area is not legal but evidentiary. An institution that keeps a single cash book, without cost centers, without segregation of exempt and non-exempt activity, and without documentation tracing particular receipts to particular expenditures, cannot discharge the burden De La Salle imposes, however impeccable its charitable or educational credentials. Counsel advising such an institution should insist on separate revenue accounts by activity; a fund accounting structure identifying restricted and unrestricted funds; board resolutions and disbursement vouchers tying specific receipts to specific exempt uses; floor-area schedules supporting the apportionment of property under Lung Center; and contemporaneous rather than reconstructed documentation. This is legal advice, not bookkeeping advice, because the records are the evidence on which the exemption will stand or fall.

1.13 The requisites of a valid tax

Drawing the inherent and constitutional limitations together yields a checklist. It is an organizing framework of the author’s, not a six-element test laid down by the Supreme Court, and it should be used as a sequence of inquiries rather than recited as black letter law. Validity may be tested through six principal inquiries: whether it is levied for a public purpose; it is uniform and equitable, so that the tax operates with the same force and effect upon all persons or property similarly situated, subject to constitutionally permissible classification; the person or property taxed is within the territorial jurisdiction of the taxing authority; the assessment and collection observe due process; the measure complies with the applicable inherent and constitutional limitations — due process, equal protection, uniformity and equity, public purpose, territoriality, and the rule against a confiscatory exaction; and it is imposed by the legislature or other taxing authority legally empowered to impose it, within the scope of the authority conferred by the Constitution and by statute. For a national tax that authority is Congress; for a local tax it is the local legislative body under Article X, Section 5 and the Local Government Code; and validly delegated implementation does not offend the requisite. The fifth inquiry is a list to be walked, not a single test: confiscation is one head of it and not the whole of it.

BAR EXAMINATION NOTE

When a problem asks whether a tax measure is valid, walk the six requisites in order rather than reaching for the first doctrine that comes to mind. The disciplined sequence catches the issue the problem was actually testing and produces an answer with visible structure. Where the problem concerns a local ordinance, add two steps peculiar to local taxation: whether the ordinance falls within the powers granted by the Local Government Code and outside the common limitations of Section 133; and whether the public hearing requirement of Section 186, and the publication requirement of Section 188, were observed, since failure to observe them is a distinct ground of nullity.

1.14 Cross-disciplinary integration

Taxation is not self-contained, and a lawyer who compartmentalizes will miss issues that decide cases.

Constitutional law. The connection is structural rather than incidental. Every limitation in Sections 1.09 to 1.12 is a constitutional doctrine applied to a fiscal subject: due process and equal protection from the Bill of Rights; the germaneness requirement for provisions of a general appropriations act; the non-delegation doctrine and its completeness and sufficient-standard tests; the origination clause; the special-fund principle; the direct grant of local taxing power and the just-share entitlement. Pimentel III demonstrates that a tax question may be, at bottom, a separation-of-powers question about what Congress may do in an appropriations act.

Administrative law. The distinction between legislative and interpretative rules; the requirement of publication; the exhaustion of administrative remedies and its exceptions; primary jurisdiction; the standard of review of an agency’s construction of its own enabling statute; and grave abuse of discretion as the ground for certiorari all enter tax practice unchanged from administrative law. Chapter 2 develops their application to revenue issuances.

Civil law. The law on obligations supplies the framework within which the rule against set-off is stated and within which a compromise under Section 204 is analyzed as a contract. The law on property, and specifically the concept of property of public dominion, is the second and independent ground of MIAA — a point counsel should not overlook, because it survives even where the entity is reclassified.

Corporate law. The distinction between a stock corporation, a non-stock corporation and a government instrumentality, drawn from the Revised Corporation Code and the Administrative Code, is dispositive of the exemption question in MIAA. Counsel asked whether a government body is taxable should read its charter for capital stock and membership before reading any case.

Criminal and remedial law. Penal provisions of tax statutes are construed strictly against the State, and the elements of the offenses in Title X are analyzed by ordinary criminal law method. The presumption of correctness of an assessment, its rebuttal, and the effect of a void assessment on the existence of a cause of action are evidentiary questions. Part IV owns both subjects.

1.15 Remedial hook

A dispute arising out of this chapter’s material is a validity dispute, and validity disputes travel one of three tracks.

Where the challenge is to a national tax measure as applied to the taxpayer — the imposition is confiscatory, the classification offends equal protection, the property is exempt by actual use, the assessment states no bases — the defense is pleaded in the protest and carried into a petition for review in the Court of Tax Appeals, whose jurisdiction over the constitutionality or validity of tax laws, rules and regulations is established in Banco de Oro v. Republic, G.R. No. 198756, Resolution of 16 August 2016 (En Banc, Leonen, J.).

The Resolution establishes two propositions, and they are distinct. First, the Court of Tax Appeals “has undoubted jurisdiction to pass upon the constitutionality or validity of a tax law or regulation when raised by the taxpayer as a defense in disputing or contesting an assessment or claiming a refund” — a power incidental to its ordinary appellate function under Section 7 of Republic Act No. 1125. Second, and this is the innovation, the Court “declares that the Court of Tax Appeals may likewise take cognizance of cases directly challenging the constitutionality or validity of a tax law or regulation or administrative issuance (revenue orders, revenue memorandum circulars, rulings).” Republic Act No. 9282, being a special and later law than Batas Pambansa Blg. 129, “provides an exception to the original jurisdiction of the Regional Trial Courts over actions questioning the constitutionality or validity of tax laws or regulations,” so that, except for local tax cases, such actions “may be filed directly before the Court of Tax Appeals.” Petitions for certiorari against the acts and omissions of the revenue quasi-judicial agencies likewise go there. The animating principle is that “within the judicial system, the law intends the Court of Tax Appeals to have exclusive jurisdiction to resolve all tax problems.”

A petition for declaratory relief in a Regional Trial Court is therefore not the route, and filing there commonly costs the client the remedy through the lapse of a jurisdictional period. Note the local tax exception, which is treated immediately below.

Where the challenge is to a local tax ordinance, the Banco de Oro route is not available, and the point is easily missed because the Resolution is often stated without its exception. Local tax cases are expressly carved out: an action directly challenging the validity of a local revenue measure does not go to the Court of Tax Appeals in the first instance. The route is an appeal to the Secretary of Justice within thirty days of the ordinance’s effectivity under Section 187 of the Local Government Code, or, where an assessment has issued, a protest to the local treasurer under Section 195. From there the matter proceeds to the Regional Trial Court, and reaches the Court of Tax Appeals only in the exercise of its appellate jurisdiction. The thirty-day period under Section 187 is fatal if missed. Part V owns the sequence.

Where the challenge is to the disposition of collected revenues, as in Pimentel III, the vehicle is a petition invoking the Court’s expanded certiorari jurisdiction, and the standing question is governed by the doctrine of the taxpayer’s suit, which Chapter 2 owns.

The burden in this chapter’s characteristic dispute sits on the party asserting the exception. The taxpayer assailing a measure must identify the limitation transgressed and prove the transgression (Sison). The claimant of an exemption must prove actual, direct and exclusive use, item by item and portion by portion (Lung Center; De La Salle). The one reversal is that where the taxpayer shows that the assessment states no factual and legal bases or that the examining officers held no Letter of Authority, the presumption of correctness does not attach at all, because a void assessment is no assessment.

CURRENT LAW NOTE

Two 2025 decisions materially affect the availability of relief against collection while such a dispute is pending, and they should be distinguished from each other.

Commissioner of Internal Revenue v. Robinsons Convenience Stores, Inc., G.R. No. 259968, 27 August 2025, is the case on dispensation with the bond, and it states the two-instance test set out above.

Commissioner of Internal Revenue and LT Collection Enforcement Agency v. Second Division of the Court of Tax Appeals and American Wire & Cable Co., Inc., G.R. No. 280165, 4 August 2025, is not a bond dispensation case and is frequently misdescribed as one. There the taxpayer’s prayer to dispense with the bond was deemed withdrawn; the Court of Tax Appeals required a bond, which the taxpayer posted, the Court observing that this showed “the government’s interest in this assessment case continues to be protected, despite the suspension order.” The case decides three other things. First, the Commissioner may not come to the Supreme Court without the imprimatur of the Office of the Solicitor General; a petition filed without it is defective and dismissible on that ground alone. Second, certiorari and prohibition correct errors of jurisdiction, not errors of law, and the tax court’s misinterpretation of a revenue regulation is not grave abuse of discretion. Third, no grave abuse was found where the tax court suspended collection because the Bureau issued a warrant of distraint and levy before the thirty-day period to appeal the Final Decision on Disputed Assessment had lapsed, a premature collection that “jeopardized the interests of both the government and taxpayer.”

To these must be added Commissioner of Internal Revenue v. Nippon Express Philippines Corporation and the Court of Tax Appeals Third Division, G.R. No. 280580, 16 April 2026, which belongs with Robinsons rather than with American Wire. The Bureau there issued a Final Decision on Disputed Assessment directing payment on or before 31 December 2023, and then issued a warrant of distraint and levy on 15 October 2023 and a warrant of garnishment on 18 October 2023 — before the period it had itself given had lapsed. The Court of Tax Appeals suspended collection, lifted the warrants and dispensed with the bond, and the Supreme Court affirmed, holding that the collection measures were premature and not sanctioned by law. The case also reiterates two propositions the reader has met already: that the Commissioner may not come to the Supreme Court without the participation of the Office of the Solicitor General as lead counsel, and that disagreement with the tax court’s interpretation of the revenue laws, absent grave abuse of discretion, is not a ground for certiorari or prohibition.

Nippon Express accordingly supplies a second illustration of the first limb of the Robinsons test — collection “not sanctioned by law” — and the illustration is a common one in practice: enforcement begun before the taxpayer’s own time to pay has run.

All are current law and are treated in Chapter 2 and in Part IV.

AUTHOR’S PRE-PRESS CHECKLIST — DELETE BEFORE TYPESETTING

This block records research status as at 24 August 2026. Items are removed as they close; nothing below is a statement of law.

OPEN — none. Every authority, statute and administrative issuance relied on in this chapter has been read in full against source.

One note for the proofreader. Revenue Regulations No. 7-2025 is dated 27 February 2025 throughout, on the authority of the Bureau’s official issuance. A transcribed copy in circulation bears “25 February 2025” on its face. If a discrepancy is raised at proof stage, 27 February is the date to keep.

TRAPS — carry these to every other chapter.

5. De La Salle University: the proposition that a Letter of Authority covering “unverified prior years” is void in its entirety belongs to Justice Leonen’s dissent, not to the Court.

6. American Wire & Cable is not a bond-dispensation case; the bond was required and posted. Robinsons is the bond case. Check Chapter 2 and Part IV.

7. De La Salle Lipa applied the pre-2021 text of Section 27(B), and is therefore not authority for that section as amended by Republic Act No. 11635 (10 December 2021).

8. Systems Plus Computer College is not authority applying Article VI, Section 28(3) substantively to a proprietary school’s property. It is a procedural case: the claimant was a non-stock, non-profit school, the land was leased from sister companies, and the petition was dismissed for failure to exhaust administrative remedies. Cite it for the evidentiary and exhaustion points, not for the substantive scope of the exemption.

9. Two different twenty percent rates now sit in Section 27(A). The small-corporation rate (net taxable income not over PHP 5 million, total assets not over PHP 100 million, excluding business-use land) came from Section 6 of Republic Act No. 11534; the registered-business-enterprise rate under the enhanced deductions regime was added by Section 1 of Republic Act No. 12066, which retained the first and carried the registered-enterprise rate into Section 28(A)(1) as well. Part II must not conflate them. And note the drafting defect: the enrolled text of Republic Act No. 12066 reads “One hundred million pesos (P1,000,000,000),” the words and the figure disagreeing by a factor of ten. Part II must quote it accurately and explain the construction, not silently correct it.

10. G.R. No. 177874 (29 Sept. 2008) is Ang v. Court of Appeals, a warranty case, not Manila Electric Co. v. City Assessor of Lucena City; the latter is 765 Phil. 605 (2015). There are three different Taganito decisions: G.R. No. 216656, 26 Apr. 2021 (amortization of input VAT on capital goods); 900 Phil. 157 (2021) (whole-statute rule, relied on in Semirara); and 748 Phil. 774 (2014). Do not blur them in the VAT chapters.

CLOSED — read in full against the reports. Lung Center of the Philippines v. Quezon City, G.R. No. 144104, 29 June 2004, 477 Phil. 141 (En Banc). Banco de Oro v. Republic, G.R. No. 198756, Resolution of 16 Aug. 2016 (En Banc, Leonen, J.). CIR v. St. Luke’s Medical Center, G.R. Nos. 195909 & 195960, 26 Sept. 2012, and G.R. No. 203514, 13 Feb. 2017 (Del Castillo, J.). Systems Plus Computer College of Caloocan City v. Local Government of Caloocan City, G.R. No. 146382, 7 Aug. 2003, 455 Phil. 956. Aces, G.R. No. 226680, 30 Aug. 2022 (En Banc, Inting, J.). Pimentel III, G.R. Nos. 274778, 275405 & 276233, 3 Dec. 2025 (En Banc, Lazaro-Javier, J.). Robinsons Convenience Stores, G.R. No. 259968, 27 Aug. 2025 (Third Division, Inting, J.; Dimaampao, J., concurring). American Wire & Cable, G.R. No. 280165, 4 Aug. 2025 (Third Division, Inting, J.). CIR v. Nippon Express Philippines Corp., G.R. No. 280580, 16 Apr. 2026. Elric Auxiliary Services, G.R. No. 226945, 19 Feb. 2026 (Third Division, Dimaampao, J.). Semirara Mining and Power, G.R. No. 255900, 20 Jan. 2026 (Third Division). De La Salle Lipa, G.R. Nos. 233924-25 & 236822, 1 Dec. 2025 (Third Division, Caguioa, J.). MIAA v. Court of Appeals, 528 Phil. 181 (2006). MIAA v. City of Pasay, 602 Phil. 160 (2009). GSIS v. City Treasurer of Manila, 623 Phil. 964 (2009, Velasco, Jr., J.). Republic (PRA) v. City of Parañaque, 691 Phil. 476 (2012, Mendoza, J.). MWSS v. Quezon City, 842 Phil. 864 (2018). Figuerres, G.R. No. 119172, 25 Mar. 1999. Republic Act No. 11976. Republic Act No. 11534, § 6, and Republic Act No. 12066, §§ 1 and 2 (approved 8 Nov. 2024), on Sections 27(A) and 28(A)(1). Republic Act No. 11635 (10 Dec. 2021). Revenue Regulations No. 3-2022 (7 Apr. 2022) and Revenue Regulations No. 7-2025 (27 Feb. 2025). Revenue Memorandum Circular No. 24-2026. The MIAA chain is complete.

CARRIED TO OTHER CHAPTERS BY DECISION OF THE AUTHOR. The Title I and Title II distinction in City of Batangas v. Tolentino, G.R. No. 228489, 5 May 2021, goes to the local taxation chapters. The Ease of Paying Taxes Act concessions for micro and small taxpayers (Section 45) and the repeal of Section 34(K) (Section 5) go to Chapters 12, 17 and 25.

1.16 Current law and transitional application

This book states the law as it stands. It adopts no examination coverage date, and the reader should not look here for one. The question that matters — to a taxpayer, to counsel advising him, and to a student who will practice — is which rule governs the period or the transaction in question. That is a question of transitional application.

The governing principle. A rule applies to the periods and transactions for which it was in force. A rule since amended or repealed still governs what it covered, and those matters remain live until prescription runs. “Repealed” is not a synonym for “irrelevant”; it is a statement about which periods a rule governs. The pre-2018 interest regime, the pre-EOPT protest architecture, and the amnesties that lapsed in 2025 and 2026 are all superseded, and every one of them is still capable of deciding a case now before the courts.

Dates that mark boundaries in this chapter. Republic Act No. 12316 (25 March 2026) and Executive Order No. 114 (16 April 2026), with Revenue Regulations No. 3-2026 and Revenue Memorandum Circular No. 31-2026 (both 17 April 2026); Revenue Memorandum Circular No. 24-2026 (30 March 2026); the decisions in Pimentel III (3 December 2025), Robinsons Convenience Stores (27 August 2025), American Wire & Cable (4 August 2025), Semirara Mining and Power (20 January 2026), Elric Auxiliary Services (19 February 2026) and Nippon Express (16 April 2026). Each is current law and is stated here as such. Where a date determines which of two rules applies, the chapter says so at the point the rule is stated.

Where a rule is unsettled, this chapter says that too, and marks the question rather than resolving it by assertion. A reader is better served by an accurate account of an open question than by a confident account of a closed one that is not.

Common Doctrinal Errors and Misconceptions

Chapter Synthesis

Taxation is the inherent power of the sovereign State, exercised through the legislature, to impose compulsory burdens on persons, property, rights and transactions within its jurisdiction for public purposes — revenue, regulatory, redistributive and other legitimate governmental objectives alike. The power exists independently of the Constitution, which limits rather than confers it, save in the case of local government units, whose taxing power is a direct but bounded constitutional grant under Article X, Section 5. Because the power is inherent and presumed valid, the party assailing a tax measure bears the burden of identifying and proving the transgression of a specific inherent or constitutional limitation; and because the power is bounded, once he does so no appeal to fiscal necessity will save the exaction.

The principal traditional justifications for taxation are necessity, benefits received and ability to pay, and different taxes draw on those principles in different degrees: government is a necessity; the relation between the State and the taxpayer is symbiotic, the one contributing and the other protecting; and burdens are commonly, though not invariably, apportioned by capacity to bear them. Revenue is the classical fiscal function, but taxation also serves regulatory, redistributive and protective objectives, and these are not legally secondary. A sound tax system is fiscally adequate, administratively feasible and theoretically just. The canons are not themselves constitutional clauses, and none of them invalidates a statute of its own force. Theoretical justice operates through due process, equal protection and the uniformity clause, and it is by that route that it does most of its legal work; administrative infeasibility becomes constitutionally relevant only where what is complained of rises to arbitrariness or oppression, which is a due process question. Section 1.06 states the distinction, and the reader should carry that formulation rather than the shorter proposition that only theoretical justice can invalidate a statute. Taxes are classified along six axes, each carrying a legal consequence, and must be distinguished from license fees, tolls, special assessments, penalties, debts, duties and subsidies, the characterization turning on primary purpose rather than on label. Taxation proceeds in stages performed by different branches: Congress levies, the Secretary of Finance issues regulations and reviews rulings, and the Commissioner assesses, collects, interprets and decides, subject to four powers he may not delegate and to the rule that no issuance may enlarge the statute.

The chapter organizes the principal inherent limitations under the mnemonic SPINE — situs or territoriality, public purpose, international comity, non-delegation, and the exemption of government entities. The mnemonic is an organizing device, not an exhaustive constitutional taxonomy of uniform doctrinal status: public purpose is also read into due process, and non-delegation carries its own constitutional qualifications. The power is bounded by these and by constitutional limitations both general and specific. The most litigated are due process in its substantive and procedural dimensions, equal protection, uniformity, and the exemptions resting on the phrase actually, directly and exclusively used, whose modern law is a two-track rule: use of property under Article VI, Section 28(3), and use of revenues under Article XIV, Section 4(3), with the evidentiary burden on the claimant in both. Two of the limitations have been renewed by very recent authority. Where the Constitution or a statute has dedicated tax proceeds to a particular purpose, the subsequent disposition of those proceeds remains subject to the constitutional and statutory restrictions governing the earmarked funds; that is a rule about earmarked funds and not a general rule that every expenditure of validly collected revenue is independently reviewable under the public purpose limitation. Republic Act No. 12316 presents a recent test of non-delegation outside the customs field, permitting the President to suspend an internal revenue excise tax, and the answer will turn on whether the ascertainment of a price contingency is all that has been handed over.

The processed-meat levy with which the chapter opened is now answerable, and the answer is a partial one. The eighty percent devoted to a supplemental feeding program in public elementary schools satisfies both the duty test and the promotion of general welfare test: the nutrition of public school children is an object the State has assumed a duty to provide, and the benefit accrues to the community as a class rather than to identified individuals. The twenty percent fails. Its direct object is the remittance of public money to a named private association to fund advertising that will raise the sales of its own members, and the fact that the processed meat sector — and through it the national economy — may benefit is precisely the incidental advantage Fertiphil held insufficient. That the recipient is an industry group rather than a single corporation does not save it, because Fertiphil turned on the private character of the recipient and the absence of a public program, not on the number of beneficiaries. The special account is not a cure either: Article VI, Section 29(3) constrains disposition and cannot validate a disbursement that was never for a public purpose in the first place. The two portions are fixed by distinct percentages devoted to distinct disbursements and are therefore separable, so the invalidity of one does not carry the other, and the manufacturer recovers twenty percent of what he paid. Bar Problem 1 tracks the same facts with one variable moved.

For the lawyer, the practical yield of this chapter is a habit of sequence. Characterize the imposition. Identify the taxing authority and its competence. Test the measure against the six requisites of a valid tax. Locate the taxpayer’s procedural position and the periods running against both parties. Determine the forum. Only then argue the merits. Cases are lost by counsel who begin at the last step.

Chapter 2 takes up the doctrines that govern the exercise of the power so bounded: the lifeblood doctrine and its consequences and limits, the rules of construction that decide ambiguous cases, double taxation and the instruments of relief, the line between lawful avoidance and criminal evasion, the five mechanisms of relief from a burden — exemption, amnesty, condonation, compromise and abatement — and the taxpayer’s suit.

Table of Authorities

A. Constitution

1987 Constitution, Article II, Section 2; Article III, Sections 1, 4, 5, 10 and 20; Article VI, Sections 24, 25(2), 25(5), 28(1)–(4) and 29(1)–(3); Article VIII, Section 5(2)(b); Article X, Sections 5 and 6; Article XII, Section 11; Article XIV, Sections 4(3) and (4).

B. Statutes

• Republic Act No. 8424, the National Internal Revenue Code of 1997, as amended — Sections 4 to 7, 13, 22, 23, 27(B) and (C), 30, 34, 42, 104, 148, 204, 228, 229 and 244 to 246.

• Republic Act No. 1125 (1954), as amended by Republic Act No. 9282 (2004) and Republic Act No. 9503 (2008).

• Republic Act No. 7160 (1991), the Local Government Code — Sections 5, 130, 133, 186, 187, 195, 232, 234, 240–245 and 284.

• Republic Act No. 10863 (2016), the Customs Modernization and Tariff Act.

• Republic Act No. 10963 (2017), TRAIN, effective 1 January 2018.

• Republic Act No. 11223 (2019), the Universal Health Care Act, Section 11.

• Republic Act No. 11534 (2021), CREATE.

• Republic Act No. 11635 (2021), amending Section 27(B), approved 10 December 2021.

• Republic Act No. 11976 (2024), the Ease of Paying Taxes Act, effective 22 January 2024.

• Republic Act No. 12001 (2024), the Real Property Valuation and Assessment Reform Act.

• Republic Act No. 12023 (2024), imposing value-added tax on digital services.

• Republic Act No. 12066 (2024), CREATE MORE, approved 8 November 2024; joint implementing rules effective 20 February 2025.

• Republic Act No. 12214 (2025), the Capital Markets Efficiency Promotion Act.

• Republic Act No. 12253 (2025), the Enhanced Fiscal Regime for Large-Scale Metallic Mining Act.

• Republic Act No. 12316 (2026), authorizing the President to suspend or reduce the excise tax on petroleum products, approved 25 March

• Civil Code of the Philippines, Article 1279.

C. Administrative issuances and executive acts

• Revenue Regulations No. 3-2022 (7 April 2022), implementing Republic Act No. 11635 on the income taxation of proprietary educational institutions and non-profit hospitals.

• Revenue Regulations No. 7-2025 (27 February 2025), implementing the amendments made by Republic Act No. 12066 to Sections 27, 28 and 34.

• Revenue Regulations No. 3-2026 (17 April 2026) and Revenue Memorandum Circular No. 31-2026 (17 April 2026), implementing and circularizing Executive Order No. 114, series of 2026.

• Revenue Regulations No. 12-99, as amended by Revenue Regulations No. 18-2013 (due process in deficiency assessments) — cross-reference Part IV.

• Revenue Regulations Nos. 3-2024 to 8-2024 (Ease of Paying Taxes Act, including taxpayer classification).

• Revenue Regulations No. 9-2025, as amended by Revenue Regulations No. 1-2026 dated 16 February 2026 (VAT on local sales of registered business enterprises under R.A. No. 12066).

• Revenue Memorandum Circular Nos. 5-2024 and 38-2024, as clarified by Revenue Memorandum Circular No. 24-2026 dated 30 March 2026 (tax treatment of cross-border services in light of Aces Philippines).

• Department of Finance Circular No. 003-2024 (declared void in Pimentel III).

• Executive Order No. 114, series of 2026 (16 April 2026), temporarily suspending the excise tax on liquefied petroleum gas and kerosene pursuant to Republic Act No. 12316.

D. Jurisprudence

Foreign authorities: none relied upon in this chapter.

Assessment

Part A tests the capacity to state and distinguish doctrine. Part B tests the capacity to extract the ratio of a decided case, identify its limits, and apply it to varied facts. Part C consists of Bar-type essay problems. Suggested answers appear in the full book.

A. Doctrinal Questions

1. Explain why it is said that the Constitution limits rather than confers the power of taxation, and state precisely what consequence this has for the allocation of the burden of proof in a challenge to a tax measure. Would the analysis differ if the measure were a municipal ordinance rather than a statute?

2. Distinguish the theory of taxation from its basis. Identify one operative rule traceable to each, and explain the derivation.

3. The canons of a sound tax system are three, but they do not have equal legal consequences. Explain, with authority, why a failure of administrative feasibility does not of itself invalidate a tax, and identify the circumstances in which such a failure may nonetheless become constitutionally relevant. Identify also the constitutional provisions through which theoretical justice operates.

4. A municipal ordinance imposes an annual charge on every operator of a specified business, describing it as an inspection fee. State the analytical method by which the imposition is characterized, identify the evidence you would gather to support each characterization, and explain what turns on the answer.

5. Explain the difference between the impact and the incidence of a tax and state the two legal consequences that follow. Identify the exception recognized in Chevron.

6. Explain, with authority, why Lutz and Fertiphil are consistent. Formulate in one sentence the question a court actually asks in a public purpose case.

7. Public purpose is determined at the time of enactment. Reconcile that proposition with the holding in Pimentel III that statutorily earmarked collected revenues may not be diverted. Are the two propositions about the same limitation?

8. Trace the development of the doctrine on the phrase “actually, directly and exclusively used” through Abra Valley College, Lung Center, St. Luke’s and De La Salle. Explain how the last two are reconciled and state the evidentiary consequence for a claimant.

9. Compare Article VI, Section 28(3) with Article XIV, Section 4(3) as to entities covered, taxes covered, the test applied and the party bearing the burden. Give one factual situation in which an institution qualifies under one and not the other.

10. State the general rule on non-delegation of the taxing power and its three exceptions. Explain why Republic Act No. 12316 cannot rest on Article VI, Section 28(2), and identify the doctrine on which its validity must instead depend.

11. Enumerate the four powers of the Commissioner that may not be delegated under Section 7 of the Tax Code, and state the legal consequence of an act performed by a subordinate without authority. Why does the taxpayer’s acquiescence not cure it?

12. Explain the distinction between the classification of a government entity and the beneficial use of its property in determining exemption from real property tax. Why does MIAA not overrule Mactan?

B. Case Analysis Questions

1. Planters Products, Inc. v. Fertiphil Corporation. (a) State the doctrine in one sentence. (b) Identify the two alternative characterizations the Court considered and explain why the measure failed under both. (c) Reconcile the case with Lutz. (d) Assume the same levy, but the proceeds are paid to a government corporation created by law to stabilize fertilizer supply, which uses them to buy buffer stocks. Would the result change? Explain.

2. Manila International Airport Authority v. Court of Appeals. (a) Identify the two independent grounds of the decision. (b) Explain why the case does not overrule Mactan. (c) Assume the authority leases twenty percent of its terminal floor area to lounges, concessionaires and a hotel. State the tax consequence and identify the party liable. (d) Assume instead that the entity has capital stock divided into shares held by the National Government. How does the analysis change, and does the second ground of the decision survive?

3. Lung Center of the Philippines v. Quezon City. (a) State the two distinct holdings. (b) State the reading the Court gave to “exclusively,” and explain why “dominant use” and “principal use” will not serve. Reconcile that reading with the incidental-use qualification in Abra Valley. (c) Assume the vacant land is leased to a company that uses it to park ambulances serving the hospital under a service contract. Analyze. (d) Explain what Lung Center does not decide about the institution’s income tax position.

4. Commissioner of Internal Revenue v. De La Salle University, Inc. (a) State the doctrine. (b) Explain why the last paragraph of Section 30 of the Tax Code could not be applied. (c) Identify the evidence the university had to produce and explain why part of its claim nevertheless failed. (d) Assume the institution is a proprietary stock educational institution. Analyze its position under the Constitution and under Section 27(B).

5. Aces Philippines Cellular Satellite Corporation v. CIR. (a) State the doctrine. (b) Identify the fact the Court treated as decisive. (c) Explain the role played by the benefits-received principle in the reasoning, and say what the case does not decide. (d) Assume a foreign company performs data-processing entirely abroad on data transmitted to it electronically by a Philippine client, returning the output electronically and using no equipment in the Philippines. Analyze, identifying the argument each side would make and the authority each would invoke, including Revenue Memorandum Circular No. 24-2026.

6. Pimentel III v. House of Representatives. (a) State the three grounds on which the assailed special provision was invalidated. (b) Explain the relationship between the ruling and Article VI, Section 29(3). (c) Explain what the Court expressly sustained. (d) Assume a future general appropriations act contains a clearly worded and internally defined provision authorizing the transfer of a specified government corporation’s unrestricted surplus, the corporation’s charter containing no earmark or reserve requirement. Would the result be the same? Explain.

C. Bar-Type Essay Problems

Problem 1. Congress enacts a statute imposing a levy of five pesos per liter on all bottled water manufactured in the Philippines. Section 4 directs that seventy percent of collections be deposited in a special account and used exclusively for the construction of potable water systems in unserved barangays, and that thirty percent be remitted to the Philippine Bottled Water Manufacturers Association, a private non-stock corporation, to fund an industry-wide advertising campaign promoting bottled water consumption. Hydro Corporation, a manufacturer, pays the levy for two years under protest and sues to recover the entire amount, contending that the whole statute is void. Is Hydro Corporation entitled to recover the entire amount it paid? Decide with reasons.

Problem 2. The Sangguniang Panlungsod of the City of Sampaguita enacts an ordinance requiring every operator of a warehouse within the city to pay an annual “fire safety and structural inspection fee” of eight hundred thousand pesos. The city fire marshal testifies that his office employs three inspectors, that the total annual cost of inspecting all twelve warehouses in the city, including salaries, equipment and transportation, is approximately one million two hundred thousand pesos, and that collections are deposited in the city general fund. Northport Logistics, Inc. refuses to pay and assails the ordinance. Rule on the validity of the imposition. Explain.

Problem 3. Bright Horizons Foundation, Inc. is a non-stock, non-profit educational institution operating a college. It owns a six-storey building. Floors one to four are used for classrooms, laboratories and the library. The fifth floor is occupied rent-free by the college president as his residence. The sixth floor is leased to a bank and a coffee shop at commercial rates. The Foundation deposited all rental income in a scholarship fund and disbursed it as tuition grants, supported by board resolutions, disbursement vouchers and a schedule tracing each disbursement to a named scholar. The city assessor assessed the entire building for real property tax. The Bureau of Internal Revenue separately assessed the Foundation for income tax on the rental income. Rule on both assessments. Explain.

Problem 4. The Philippine Aviation Authority is created by statute as a body corporate with the power to sue and be sued, to acquire and dispose of property, and to fix and collect fees. Its charter provides for no capital stock and no members, and vests in it the administration of a national airport whose lands and buildings are titled in the name of the Republic. The City of Bayanihan assesses the Authority for real property tax on the entire airport complex, and, upon non-payment, advertises the complex for public auction. Twelve percent of the terminal floor area is leased to airline lounges and retail concessionaires. Rule on the assessment and on the proposed auction. Explain, and identify the party liable, if any.

Problem 5. Sunrise Satellite Services Ltd., a non-resident foreign corporation with no office, employee or equipment in the Philippines, licenses cloud-based logistics software to Meridian Freight Corporation, a domestic corporation. The software runs entirely on servers located abroad; Meridian’s employees access it through an ordinary internet connection. The Bureau assesses Meridian for deficiency final withholding tax on its payments to Sunrise, invoking Aces Philippines and Revenue Memorandum Circular No. 5-2024 on the ground that the service is consumed in the Philippines. Meridian protests. Is the assessment valid? Explain, identifying any question you consider unsettled.

Problem 6. Pursuant to Republic Act No. 12316, and upon the recommendation of the Development Budget Coordination Committee and in coordination with the Secretary of Energy, the President issues an executive order suspending in full the excise tax on diesel and reducing by half the excise tax on gasoline, both for three months, the Department of Energy having certified that the average Dubai crude oil price based on the Mean of Platts Singapore exceeded eighty United States dollars per barrel for the preceding month. Senator Aguinaldo, joined by a taxpayers’ organization, assails the executive order and the enabling statute, contending (a) that Republic Act No. 12316 is an unconstitutional delegation because it supplies no standard for choosing among petroleum products or for fixing the magnitude of a partial reduction, and (b) that a suspension of an excise tax is in substance the grant of a tax exemption, which under Article VI, Section 28(4) requires the concurrence of a majority of all the Members of Congress in respect of each grant. Rule on each contention. Explain fully, identifying any question you consider unsettled.

End of Chapter 1. Chapter 2 takes up the lifeblood doctrine and its consequences and limits, the rules of construction, double taxation, escape from taxation, the five mechanisms of relief from a burden, and the taxpayer’s suit, building on the account of the taxing power and its limitations in this chapter.