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VER. 2010.06.12
copyrighted 2010

Prepared by Prof. Abelardo T. Domondon
(AB (Econ), BSC (Acctg), LLB, MA (Econ), LLM, DCL (Cand.).

Lawyer-CPA-Customs Broker, Management Consultant, Professor of Law
and Pre-Bar Reviewer)

How to use the “BAR STAR NOTES.” The “BAR STAR
NOTES” in the form of questions and answers as well as textual
discussion were specially prepared by Prof. Domondon for the
exclusive use of Bar Reviewees who attended his 2010 Lectures on
TAXATION held at the University of the Philippines. Included in the
presentation are doctrines contained in Supreme Court decisions up to
April 2010.

The purpose of the ‘BAR STAR NOTES” is to provide the Bar
Reviewee with a handy review material which serves as “memory-
joggers” for the September 12, 2010 Bar Examinations in Taxation. The
author tries to second guess what would be included in the Bar Exams
using statistical analysis. The actual Bar questions may not be
formulated in the same manner as the “BAR STAR NOTES”. However,
the doctrines tested in the Bar would in all probability be included in these

If pressed for time, the author suggests that the reader should
focus his attention on the following:

 Nice to know
 Should know
 Must know and master
It is further suggested that the reader should merely browse those

without stars.


These materials are copyrighted and/or based on the writer’s
books on Taxation and future revisions. It is prohibited to reproduce any

part of these Notes in any form or any means, electronic or mechanical,
including photocopying without the written permission of the author.
Unauthorized users shall not be prosecuted but SHALL BE SUBJECT
intellectual property of the author.




 1. State briefly and concisely the nature of taxation.
Alternatively, define taxation.

SUGGESTED ANSWER: The inherent power of the sovereign
exercised through the legislature to impose burdens upon subjects and
objects within its jurisdiction for the purpose of raising revenues to carry
out the legitimate objects of government.

 2. What is the nature of the State’s power to tax ?
Explain briefly.

SUGGESTED ANSWER: The nature of the state’s power to tax is
two-fold. It is both an inherent power and a legislative power.

It is inherent in nature being an attribute of sovereignty. This is so,
because without the taxes, the state’s existence would be imperiled.
There is thus, no need for a constitutional grant for the state to exercise
this power.

It is a legislative power because it involves the promulgation of
rules. Taxation is a set of rules, how much is the tax to be paid, who
pays the tax, to whom it should be paid, and when the tax should be

 3. What is the underlying theory of taxation ? Explain

SUGGESTED ANSWER: Taxes are the lifeblood of the nation.
Without revenue raised from taxation, the government will not

survive, resulting in detriment to society. Without taxes, the government

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would be paralyzed for lack of motive power to activate and operate it.
(Commissioner of Internal Revenue v. Algue, Inc. et al., 158 SCRA 8, 16-17)

 4. Marshall said that, “the power to tax involves the
power to destroy.” On the other hand, Holmes stated that
“the power to tax is not the power to destroy while the
court sits.”

Reconcile the statements.
In the alternative, what are the implications that flow

from the above statements ?
SUGGESTED ANSWERS: Marshall’s view refers to a valid tax

while the Holmes’ view refers to an invalid tax.
a. The imposition of a valid tax could not be judicially

restrained merely because it would prejudice taxpayer’s property.
b. An illegal tax could be judicially declared invalid

and should not work to prejudice a taxpayer’s property.

 5. Discuss briefly the basis/bases, or rationale of

SUGGESTED ANSWER: a. Reciprocal duties of protection and
support between the state and its citizens and residents. Also called
“symbiotic relation” between the state and its citizens.

b. Jurisdiction by the state over persons and property
within its territory.

 6. Discuss briefly but comprehensively the
objectives or purposes of taxation.

SUGGESTED ANSWER: The purposes or objectives of taxation
are the following:

a. The primary purpose:
1) Revenue purpose.

b. The secondary purposes
1) Sumptuary or regulatory purpose.
2) Compensatory purpose.
3) To implement the power of eminent domain.

 7. Distinguish a tax from a license fee.
SUGGESTED ANSWER: The following are the distinctions:
a. Purpose: Tax imposed for revenue while license fee for

regulation. Tax for general public purposes while license fee for
regulatory purposes only.

b. Basis: Tax imposed under power of taxation while license
fee under police power.

c. Amount: In taxation, no limit as to amount while license fee
limited to cost of the license and the expenses of police surveillance and

d. Time of payment: Taxes normally paid after
commencement of business while license fee before.

e. Effect of payment: Failure to pay a tax does not make the
business illegal while failure to pay license fee makes business illegal.

f. Surrender: Taxes, being the lifeblood of the state, cannot
be surrendered except for lawful consideration while a license fee may be
surrendered with or without consideration. (Cooley on Taxation, pp. 1137-
1138; Pacific Commercial Company v. Romualdez, et al., 49 Phil. 924)

 8. How may the power to tax be utilized to carry out
the social justice program of our government ?

SUGGESTED ANSWER: The compensatory purpose of taxation is
to implement the social justice provisions of the constitution through the
progressive system of taxation, which would result to equal distribution of
wealth, etc.

Progressive income taxes alleviate the margin between rich and
poor. (Southern Cross Cement Corporation v. Cement Manufacturers
Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)

In recent years, the increasing social challenges of the times
expanded the scope of the state activity, and taxation has become a tool
to realize social justice and the equitable distribution of wealth, economic
progress and the protection of local industries as well as public welfare
and similar objectives. (Batangas Power Corporation v. Batangas City, et
al., G. R. No. 152675, and companion case, April 28, 2004 citing National Power
Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003)

9. Explain the sumptuary purpose of taxation.
SUGGESTED ANSWER: The sumptuary purpose of taxation is to

promote the general welfare and to protect the health, safety or morals of
the inhabitants. It is in the joint exercise of the power of taxation and police
power where regulatory taxes are collected.

Taxation may be made the implement of the state’s police power.
The motivation behind many taxation measures is the implementation of
police power goals. [Southern Cross Cement Corporation v. Cement
Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3,
2005) The reader should note that the August 3, 2005 Southern Cross case
is the decision on the motion for reconsideration of the July 8, 2004
Southern Cross decision.

The so-called “sin taxes” on alcohol and tobacco manufacturers help
dissuade the consumers from excessive intake of these potentially harmful
products. (Southern Cross Cement Corporation v. Cement Manufacturers
Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)

10. Taxation distinguished from police power. Taxation
is distinguishable from police power as to the means employed to
implement these public goals. Those doctrines that are unique to taxation


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30. Destination principle under the VAT System.
As a general rule, the VAT system uses the destination principle as a
basis for the jurisdictional reach of the tax.

Goods and services are taxed only in the country where they are
consumed. Thus, exports are zero-rated, while imports are taxed.

This is also known as the “Cross Border Doctrine.”

31. Exception to the destination principle. The
law clearly provides for an exception to the destination principle; that is,
for a zero percent VAT rate for services that are performed in the
Philippines, "paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the [BSP]."

32. Rationale for zero-rating of exports. The
Philippine VAT system adheres to the Cross Border Doctrine, according
to which, no VAT shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial border of the taxing
authority. [Commissioner of Internal Revenue v. Toshiba Information
Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005] The “Cross
Border Doctrine” is also known as the destination principle.

Hence, actual or constructive export of
goods and services from the Philippines to a foreign country must be
zero-rated for VAT; while, those destined for use or consumption within
the Philippines shall be imposed the twelve percent (12%) VAT.

33. Zero-rated sale distinguished from exempt

a. A zero-rated sale is a taxable transaction but does not result
in an output tax WHILE an exempt transaction is not subject to the output

b. The input tax on the purchases of a VAT registered person
who has zero-rated sales may be allowed as tax credits or refunded
WHILE the seller in an exempt transaction is not entitled to any input tax
on his purchases despite the issuance of a VAT invoice or receipt.

c. Persons engaged in transactions which are zero rated being
subject to VAT are required to register WHILE registration is optional for
VAT-exempt persons.

34. Zero-rated sales by VAT-registered persons.
The following sales by VAT-registered persons shall be subject to zero
percent (0%) rate:

a. Export sales;
b. Considered export sales under Executive Order No. 224;

c. Foreign currency denominated sale; and
d. Sales to persons or entities deemed tax-exempt under

special law or international agreement. (Rev. Regs. No. 16-2005, Sec.
4.106-5, 2nd par., paraphrasing supplied)

35. Sale of gold to the Central Bank considered as
export sales. As export sales, the sale of gold to the Central Bank is
zero-rated, hence, no tax is chargeable to it as purchaser. Zero rating is
primarily intended to be enjoyed by the seller, which charges no output
VAT but can claim a refund of or a tax credit certificate for the input VAT
previously charged to it by suppliers. (Commissioner of Internal Revenue v.
Manila Mining Corporation, G.R. No. 153204, August 31, 2005)

36. Sales to ecozone, such as PEZA, considered
export-sale. Notably, while an ecozone is geographically within the
Philippines, it is deemed a separate customs territory and is regarded in
law as foreign soil. Sales by suppliers from outside the borders of the
ecozone to this separate customs territory are deemed as exports and
treated as export sales. These sales are zero-rated or subject to a tax
rate of zero percent. (Commissioner of Internal Revenue v. Sekisui Jushi
Philippines, Inc., G. R. No. 149671, July 21, 2006 citing various authorities)

37. “Ecozone”, defined. An ECOZONE or a Special
Economic Zone has been described as – [S]elected areas with highly
developed or which have the potential to be developed into agro-
industrial, industrial, tourist, recreational, commercial, banking,
investment and financial centers whose metes and bounds are fixed or
delimited by Presidential Proclamations. An ECOZONE may contain any
or all of the following: industrial estates (IEs), export processing zones
(EPZs), free trade zones and tourist/recreational centers. The national
territory of the Philippines outside of the proclaimed borders of the
ECOZONE shall be referred to as the Customs Territory. [Commissioner of
Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R.. No.
150154, August 9, 2005]

38. Zero-rated sale of service, defined. A zero-
rated sale of service (by a VAT-registered person) is a taxable transaction
for VAT purposes, but shall not result in any output tax. However, the
input tax on purchases of goods, properties or services related to such
zero-rated sale shall be available as tax credit or refund in accordance
with Rev. Regs. No. 16-2005. [Rev. Regs. No. 16-2005, Sec. Sec. 4.108-5
(a), words in italics supplied)

39. Service performed by American Express in
facilitating the collection of receivables from credit card


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members situated in the Philippines and payment to service
establishments in the Philippines in behalf of its Hong-Kong
based client is subject to VAT but zero-rated. This is so because
it meets all the requirements for VAT imposition, as follows:

a. It regularly renders in the Philippines the service of
facilitating the collection and payment of receivables belonging to a
foreign company that is a clearly separate and distinct entity.

b. Such service is commercial in nature; carried on over a
sustained period of time; on a significant scale with a reasonable degree
of frequency; and not at random, fortuitous, or attenuated.

c. For this service, it definitely receives consideration in foreign
currency that is accounted for in conformity with law.

d. It is not an entity exempt under any of our laws or
international agreements. (Commissioner, of Internal Revenue v. American
Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29,

40. While the service performed by American Express
is subject to VAT it is zero-rated, and BIR Revenue
Regulations that alter the legal requirements for zero-rating
are ultra vires and invalid. The VAT system uses the destination
principle which posits that the goods and services are taxed only in the
country where they are consumed,

However, the law itself provides for clear exceptions under which
the supply of services shall be zero-rated, among which are the following:

a. The service is performed in the Philippines;
b. The services are within the categories provided for under the

Tax Code; and
c. It is paid for in acceptable foreign currency of the Bangko

Sentral ng Pilipinas.
American Express renders assistance to its foreign clients by

receiving the bills of service establishments located in the country and
forwarding them to their clients abroad. The services are performed or
successfully completed upon send to its foreign clients the drafts and bills
it has gathered from service establishments here, Its services, having
been performed in the Philippines are therefore also consumed in the
Philippines. Thus, its services are exempt from the destination principle
and are zero-rated.

The BIR could not change the law. [Commissioner, of Internal
Revenue v. American Express International, Inc. (Philippine Branch), G. R. No.
152609, June 29, 2005]

41. A foreign Consortium composed of BWSC-
Denmark, Mitsui Engineering and Shipbuilding Ltd., and
Mitsui and Co., Ltd., which entered into a contract with

NAPOCOR for the operation and maintenance of two power
barges appointed BWSC-Denmark as its coordination
manager. BWSCMI was established as the subcontractor to
perform the actual work in the Philippines. The Consortium
paid BWSCMI in acceptable foreign exchange and accounted
for in accordance with the rules and regulations of the BSP.

Through a February 14, 1995 ruling the BIR declared
that BWSCMI may choose to register as a VAT persons
subject to VAT at zero rate. For 1996, it filed the proper VAT
returns showing zero rating. On December 29, 1997,
believing that it is covered by Rev. Regs. 5-96, dated
February 20, 1996, BWSCMI paid 10% output VAT for the
period April-December 1996, through the Voluntary
Assessment Program (VAP).

On January 7, 1999, BWSCMI was able to obtain a
Ruling from the BIR reconfirming that it is subject to VAT at
zero-rating. On this basis, BWSCMI applied for a refund of
the output VAT it paid.

a. Is BWSCMI subject to the 10% VAT or is it zero
rated ?

SUGGESTED ANSWER: Yes. BWSCMI is not zero rated and is
subject to the 10% VAT. It is rendering service for the Consortium which
is not doing business in the Philippines. Zero-rating finds application only
where the recipient of the services are other persons doing business
outside of the Philippines. BWSCMI provides services to the Consortium
which by virtue of its contract with NAPOCOR is doing business within
the Philippines. (Commissioner of Internal Revenue v. Burmeister and Wain
Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, January 22,

b. Could it obtain a refund of the VAT it paid through
the VAP ? Explain.

SUGGESTED ANSWER: Yes. BWSCMI is entitled to refund of
the 10% output VAT it paid the based on the non-retroactivity of the
prejudicial revocation of the BIR Rulings which held that it’s services are
subject to 0% VAT and which BWSCMI invoked in applying for refund of
the output VAT. (Commissioner of Internal Revenue v. Burmeister and
Wain Scandinavian Contractor Mindanao, Inc., supra)

a. Do not confuse the BWSCMI case with the

American Express case. American Express International, Inc.
(Philippine Branch)] is a VAT-registered person that facilitates the
collection and payment of receivables belonging to its non-resident
foreign client [American Express International, Inc. (Hongkong Branch)],


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subsidies from the government. So long as the money received is
devoted or used altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the persons
managing or operating the institution. (Lung Center of the Philippines v.
Quezon City, et al., etc., G. R. No. 144104, June 29, 2004)

26. Property that are exempt from the payment of
real property tax under the Local Government Code.

a. Real property owned by the Republic of the Philippines or any
of its political subdivisions except when the beneficial use thereof has been
granted to a taxable person for a consideration or otherwise;

b. Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, non-profit or religious cemeteries, and all
lands, buildings and improvements actually, directly and exclusively used
for religious, charitable and educational purposes;

c. Machineries and equipment, actually, directly and exclusively
used by local water districts; and government owned and controlled
corporations engaged in the supply and distribution of water and generation
and transmission of electric power;

d. Real property owned by duly registered cooperatives;
e. Machinery and equipment used for pollution control and

environmental protection.

27.Manila International Airport Authority (MIAA) it is
not a government owned or controlled corporation but an
instrumentality of the government that is exempt from

It is not a stock corporation because its capital is not divided into
shares, neither is it a non-stock corporation because there are no
members. It is instead an instrumentality of the government upon which
the local governments are not allowed to levy taxes, fees or other

An instrumentality “refers to any agency of the National
Government, not integrated within the department framework vested with
special functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. This term includes regulatory
agencies chartered institutions and government-owned or controlled
corporations.” [Sec. 2 (10), Introductory Provisions, Administrative Code
of 1987] It is an instrumentality exercising not only governmental but also
corporate powers. It exercises governmental powers of eminent domain,
police power authority, and levying of fees and charges.

Finally, the airport lands and buildings are property owned by the
government that are devoted to public use and are properties of the

public domain. (Manila International Airport Authority v. City of Pasay, et al., G.
R. No. 163072, April 2, 2009)

28. A telecommunications company was granted by
Congress on July 20, 1992, after the effectivity of the Local
Government Code on January 1, 1992, a legislative franchise
with tax exemption privileges which partly reads, “The
grantee, its successors or assigns shall be liable to pay the
same taxes on their real estate, buildings and personal
property, exclusive of this franchise, as other persons or
corporations are now or hereafter may be required by law to
pay.” This provision existed in the company’s franchise prior
to the effectivity of the Local Government Code. A City then
enacted an ordinance in 1993 imposing a real property on all
real properties located within the city limits, and withdrawing
all tax exemptions previously granted. Among properties
covered are those owned by the company from which the City
is now collecting P43 million. The properties of the company
were then scheduled by the City for sale at public auction.

The company then filed a petition for the issuance of a
writ of prohibition claiming exemption under its legislative
franchise. The City defended its position raising the

a. There was no exhaustion of administrative
remedies because the matter should have first been filed
before the Local Board of Assessment Appeals;

b. The company’s properties are exempt from tax
under its franchise.

Resolve the issues raised.
a. There is no need to exhaust administrative remedies as the

appeal to the LBAA is not a speedy and adequate remedy within the law.
This is so because the properties are already scheduled for auction sale.

Furthermore one of the recognized exceptions to the rule on
exhaustion is that if the issue is purely legal in character which is so in
this case.

b. The properties are exempt from taxation. The grant of
taxing powers to local governments under the Constitution and the Local
Government Code does not affect the power of Congress to grant tax

The term “exclusive of this franchise” is interpreted to mean
properties actually, directly and exclusively used in the radio or
telecommunications business. The subsequent piece of legislation which


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reiterated the phrase “exclusive of this franchise” found in the previous
tax exemption grant to the company is an express and real intention on
the part of Congress to once against remove from the LGC’s delegated
taxing power, all of the company’s properties that are actually, directly
and exclusively used in the pursuit of its franchise. (The City
Government of Quezon City, et al., v. Bayan Telecommunications, Inc.,
G. R. No. 162015, March 6, 2006)

29. The owner operator of a BOT and not the
ultimate owner is subject to real property taxes. Consistent with
the BOT concept and as implemented, BPPC – the owner-manager-
operator of the project – is the actual user of its machineries and
equipment. BPPC’s ownership and use of the machineries and
equipment are actual, direct, and immediate, while NAPOCOR’s is
contingent and, at this stage of the BOT Agreement, not sufficient to
support its claim for tax exemption. (National Power Corporation v. Central
Board of Assessment Appeals, et al., G, R. No. 171470, January 30, 2009)



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